RBG-31029, Gulf States Utils 1988 Annual Rept

Gulf States Utils 1988 Annual Rept

ML20244B757
Person / Time
Site:	River Bend
Issue date:	12/31/1988
From:	Booker J, Draper E GULF STATES UTILITIES CO.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
RBG-31029, NUDOCS 8906130266
Download: ML20244B757 (49)

Text

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GULF STATES UTILITIES COMPANY P O S T O F F I C E B O X 2 9 51

• BEAUMONT, TEXAS 77704 AREACODE409 B 3 8 6 6 31 June 6, 1989 RBG- 310 2 9 File No. G9.5 U. S. Nuclear Regulatory Commission Document Control Desk Washington, D. C. 20555 Gentlemen:

River Bend Station Unit 1 Docket No. 50-458 Annual Report Enclosed are ten (10) copies of the Gulf States Utilities Company 1988 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 Cajun Electric Power Cooperative, Inc. 1988 Annual Report will be provided once it becomes available.

Sincerely,

[, ,

T J. E. Booker Manager-River Bend Oversight JEB/ p Enclosures cc: U. S. Nuclear Regulatory Commission 611 Ryan Plaza Drive, Suite 1000 Arlington, TX 76011 NRC Resident Inspector P. O. Box 1051 St. Francisville, LA 70775 hpp f si' 6906130266 SS1231 'lP PDR ADOCK0500gyB

g 9 e S GULF STATES UTILITIES 1988 ANNUAL REPORT s

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• W W Y W T M Q?'?0 % fW w R % b% w d Financial Highlights 1988 1987 Change Total Operating Kevenue (000) $1,520,477 $1,432,586 6.1 Operating Expenses and Taxes (000) $1,087,621 $1,055,966 3.0 Net income (000) $ 103,143 $ 241,101 (57.2)

Income Applicable to Common Stock (000) $ 40,079 $ 178,091 (77.5) tamings per Average Share of Common Stock Outstanding $0.37 $1.65 (77.6)

Dividends per Sharc - - -

Average Common Shares Outstanding (000) 108,055 107,995 .1 Number of Electric Customers (end of Year) 557,576 554,905 .5 Total Kilowatt Hour Sales (000) 27,196,591 26,620,287 2.2 System Peak Load - Kilowatts 4,910,000 4,991,000 (1.6)

Description of Business Oulf States Utilitics was Rouge, OSU supplies steam and incorporated in 1925 and is electricity to a large industrial About the Cover primarily in the business of customer through a " Dependable Public Sen' ice",

generating, transmitting and cogeneration facility. The the motto engraved on the Gulf distributing electricity to almost company also owns and States Utilitics' logo at the 558,000 customers in Southeast operates a natural gas retall company's founding, continues Texas and South Loulslana. The distribution system serving to serve as a guiding principle, service area extends 350 miles almost 83,000 customers. OSU's emblems have changed westward from Baton Rouge, As a member of the over the years, but the La., to a point about 50 miles Southwest Power Pool, the company's commitment to east of Austin, Texas. The company has the ability to providing service to its service area encompasses the interchange electricity with the customers remains strong.

northem suburbs of Houston 43 members (29 members and and major citics such as 14 associated members) serving Conroc, Huntsville, Port Arthur, cight states in the South and Orange and Beaumont Texas: Southwest. The company had a Lake Charles and Baton Rouge, peak load of 4,910 megawatts La. In 1988, while it had installed OSU also sells electricity to capacity and firm power municipalities and rural purchase agreements totaling electrical cooperatives in both 6,805 megawatts at the time of Texas and Loulslana. in Baton that peak load.

2

r Repo d

m=w'smm=rtsar to Shareholders e zn m m m mam m h e r m e e m

Dear fellow Shareholders:

a $149 mulion loss for 1987. That obviously is an improvement, but it's still a long way from being year ago, I told you that the test of a strong E SIlIVC' person is how he or she faces adversity- The wearying struggle to reflect the River Bend nd adversity was certainly in abundance at nuclear power plant in our rates continues, the time. This year, I cannot report any magic although in some respects 1988 was not as cures or major breakthroughs, but there has been arduous as the year before. The most positive important progress made. Your company has development occurred in a Louisiana state district taken the first steps down the long road to court, which in February of 1988 ordered a financial recovery and, barring some catastrophic $92 million first-year rate increase to begin event along the way, I believe we will be able to phasing in the $1.6 billion in River Bend costs that complete theJoumey. Our have been deemed prudent by destination: a state of , the Louisiana Public Service qppppwwpygg$

sustained financial health. It is W c- 'NWs S .m . ;q Commission (LPSC). The court a modest goal that recognizes ,

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'y\ L d also adopted a phase-in plan that called for four additional the serious nature of our > +

recent difficulties. I cannot give v -

revenue increases -

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three and four and $38 million in year five - that would l

It now appears that the L $  !#' '

complete the phase-in of all company will have sufficient '

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River Bend costs allowed by l

i revenues to cover day-to-day the LPSC.

operations in 1989, but we have significant debt payments Qn Feb. 28,1989, the LPSC coming due this year and in vgranted the company a succeeding years for which ,

$38 million rate increase. It provisions must be made and 4 appears the net effect of the we still have some serious Y LPSC's action is consistent with contingencies. Regrettably, the the intent of the court-ordered rates we currently are allowed b phase-in plan with certain to charge do not provide the fD adjustments. The court-ordered revenues needed to resume dividend payments. As you

[ j plan calls for additional increases in future years know, the preferred and  % ,

subject to the LPSC review.

preference dMdends that have Still to be decided by a been omitted since the first Louisiana state court, perhaps quarter of 1987 must be ( ,

s as soon as April, is the LPSC's satisfied before common stock agas mummzu,- disallowance of $1.4 billion in dMdend payments can be systemwide River Bend costs resumed. I know many of you E. Linn Draper Jr. (about $677 million on a have encountered hardships Louisiana jurisdictional basis).

since we were forced to suspend dividends. The The company's appeal of that aspect of the case is board of directors and the management of your pending in state district court, where Gulf States company are committed to reinstating dividends has proposed that this portion of'he plant be as soon as our financial health permits. I cannot placed in inventory and not incluc.ed in rate base give a date, but I assure you it will not be one day at the present time, longer than is necessary.

I believe a properly structured inventory plan is pamings for 1988 were 37 cents per share of a reasonable way to protect the interests of our Lscommon stock, compared to $1.6S per share shareholders without putting excessive burdens on in 1987. Despite the negative implications of the our customers who continue to struggle against year-to-year comparison, we believe we made poor economic conditions in our service area.

some forward progress in 1988 as rate decisions Such a plan would keep our rates competitive and in both states substantially reduced the level of minimize the possibility that industrial customers non-cash accounting items related to River Bend who account for about 44 percent of sales would reflected in net income. If all such non-cash leave our system. This approach would give OSU accounting items were disregarded, we would have shareholders an opportunity to cam a retum on suffered a $25.5 million loss in 1988 compared to their investment, as opposed to a permanent 3

amg Report to SharehoMers -

nw ' O Lg w y;6% mnwwww%iQ m W' MBCM@EM3"2WM disallowance which would climinate such a 7.5 million man-hours without a lost-time injury, a possibility. record dating back to 1979 when actual It is likely that all of the Loulslana rate issues construction began on River Bend, will eventually be decided by the state Supreme River Bend's importance to the company and its Court. In addition to obtaining badly needed customers is also evident when examining our revenues, a major challenge facing the company is 1988 fuel mix. River Bend accounted for to emerge from the court proceedings without a 21 percent of the power generated by the major disallowance and with a rate phase-in plan company during the year, with natural gas that meets utility accounting requirements. If we providing 65 percent, coal 13 percent and oil can achieve those objectives, a potentially 1 percent. I firmly believe that our fuel diversity--

devastating write-off can be avolded. the ability to produce electricity with gas, uranium, in Texas, our goals are the same. The Public coal and oil-will be an increasingly valuable Utility Commission (PUCT) granted us a one-time asset in the years to come.

rate increase of about $60 million in May of 1988 Diver Bend suffered one loss in 1988. Bill Cahill, to cover the $1.6 billion in constmction costs the 11the man most responsible for the successful PUCT said were prudently incurred. However, the commission held in abeyance about $1.4 billion of construction of the plant, retired. He was senior j River Bend construction costs, saying the company vice president of the River Bend Nuclear Group did not provide enough evidence regarding cost throughout the construction phase and his increases beyond the 1979 constructis estimate leadership was often praised by the NRC. It is a i

and disallowed $65 million as imprudent. The tribute to thejob he did for us that Texas Utilities costs held in abeyance will be the subject of a rate Electric Co. has since lured him out of retirement filing planned for the first quarter of 1989. to become executive vice president in charge of nuclear engineering and operations. Primary While the rate struggles dragged on, River Bend responsibility for River Bend is now in the very continued to improve upon its already outstanding capable hands of Jim Deddens, who has been operating record. During the year, River Bend had senior vice president of the nuclear group for two a capacity factor of 88.2 percent, which ranked it years, fourth among boiling water reactors in the United States. It also set the world record for continuous in addition to the River Bend-related rate issues' days of operation for reactors of its class during a another si 9nificant and lin9 erin 9 dispute facin9 second fuel cycle; the unit already held the record Gulf States involves purchased power contracts for a first fuel cycle continuous run. with the Southem Co. It is our contention that the Southem Co. voided the contracts, among other por the second time since the plant went into things, by refusing to renegotiate them in good I commercial operation in 1986, a Nuclear Regulatory Commission (NRC) team conducted a faith. The issue is before two different federal courts and will, in all likelihood, remain in comprehensive review of how the company is litigation for some time.

managing the River Bend p:oject. The resulting

" report card" was, for the most part, outstanding. Our business has suffered significantly from the in the cover letter accompanying the report, the economic downtum that affected our service NRC's regional administrator wrote that the territory so severely. Since the fortunes of Gulf 15 staff members who conducted the review States are tied closely to those of the region we "noted a strong management commitment to serve, bc>th the company and the communities in improving plant operations" and that "the overall which we operate have been hit hard. During performance at (River Bend) has continued on an 1988, it began to seem that better times may be improving trend." In three key categories- ahead.

emergency preparedness, engineering / technical support and safety assessment / quality flowatt-hour sales in 1988 increased by verification-we received Category 1 ratings, the 2 percent over the previous year. That is very highest, from the NRC team. A Category 1 significant because sales have declined annually means that ' management attention and since 1984 - one year by 8 percent. It was involvement are readily evident and place particularly encouraging to see that kilowatt-hour

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emphasis on superior performance of nuclear sales in the fourth quarter of1988 were up more safety or safeguards . . . . than 6 percent over the same period in 1987, Economists are predicting 1989 wl:1 be a better While the safe operation of River Bend to protect year for the region. Although the oil exploration, the public is paramount, no less important is the production and refining industries continue in a safety of our employees. I am extremely pleased slump, our area is benefitting from the fact that that our people at River Bend have worked almost the petrochemical and chemical industries are 4

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E323 EE7EEdEE322E3EECECEEU experiencing a mushrooming demand for their prove beneficial to our shareholders and products. customers alike.

It is clear to us that we can't depend solely on There has been one addition to the board of the chemical boom to revive the area economy directors since i reported to you last. In January of and provide sustained growth for the future. Just this year, I;ugene M. Owen of Baton Rouge was as Oulf States diversified its fuel mix, so mast our elected to the board. He is chief executive officer region diversify its industrial mix. That is one of the engineering firm Owen and White, Inc.;

reason Gulf States is putting greatly-increased chairman and president of Utility Holdings, Inc.;

emphasis on our own economic development and president of its two subsidiaries, Baton Rouge efforts. Working with local govemments, economic Water Co. and Louisiana Water Co. He brings to development groups, the private sector and state the board both a technical and a utility agencies, we are actively recruiting all types of background that should prove extremely valuable.

businesses and industries. We're teaching our communities to market themselves through our {t is traditional to use this space to recognize the innovative Team City program. We have identified I hard work and dedication of our employees. But and can provide at almost a moment's notice thejob that Gulf States employees pcrformed infomiation on buildings and sites throughout our during 1988 was not traditional. Their cost-cutting service area through our Computer Analysis of and cash conservation efforts played a signal role Building and Sites (CABS) program. in getting us through the year. Their work in the area of marketing and economic development Another is thearea that isofreceiving retention intense attention existing customers. We have holds the promise of better times ahead. Although had good success at keeping industrial users on ur employees consistently get high marks for the the Gulf States system rather than seeing them service they provide our customers, they are leave to enter the risky business of generating striving to do even better. Our employees' their own power. To the extent that we can keep dedication, their willingness to go the extra mile existing electric load - and add new load - all of when necessary, is remarkable considering the our customers benefit because there is a broader efforts demanded of them in recent years. They customer base to share in the company's fixed also are sensitive to the needs of our shareholders costs. because most of them also belong to that group.

1 With all of our legal and regulatory turmoll, it is Many difficult challenges remain. Yet, having sometimes easy to forget that we are in the seen the progress our employees helped us make business of making and selling electricity. I believe in the face of great adversity, I am more confident that our expanded efforts in the areas of than ever that Gulf States is headed in the right marketing, customer retention and economic direction and that we will be able to complete our development will help boost sales and thereby Joumey successfully.

Sincerely, b.

E. Linn Draper Jr.

Chairman of the Board, President and Chief fxecuth'e officer March 1,1989 S

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nu1988 In Review

-J 37hammgg3EggggDMEINIERBliWmnm ' mnwww#N4m Sales and Earnings There were no common, preferred or preference Electric sales for 1988 increased 2 percent over stock dividends paid during 1988 because of the 1987 levels, the first time since 1984 that Gulf continued poor financial condition of the company States has reported an improvement in sales stemming from the lack of adequate rate relief.

activity. The residential, commercial and industrial class sales were up while the wholesale class Gulf States has not been able to pay common remained flat. stock dividends since the second quarter of 1986 and suspended preferred and prefeente dividend Kilowatt-hour (kwh) sales for the year totaled payments beginning with the first quarter of 1987.

27.2 billion kwh, compared with 26.6 billion kwh No common stock dividends can be paid until all for 1987, preferred and preference dividend arrearages and sinking fund obilgations have been paid. At the sectric sales end of 1988, the accumulated arrearages on Blmons KWH preferred and preference stock totaled $125.4 million.

so , Financial Condition a

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_ Throughout 1988, Oulf States was able to meet k its financial obligations, with the disappointing 20 .X ..

cxception of dividend payments, primarily as a

@ i is _ pp@_. result of court-ordered rate relief in Loulslana in February and additional interim rate relief in Texas

% in March, made permanent in July. Slightly 10 -

increased kilowatt hour sales in the residential, 8- -

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commercial and industrial sectors and continued g cost-cutting measures on tbc part of employces

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were factors that allowed the company to end the ggggg year with a positive cash balance.

The company believes it will have cash needs of about $100 million more than current rates will Total operating revenues for the year ended generate during 1989. During the year, OSU has Dec. 31,1988, were $1.5 billion, up 6.1 percent over $200 million in debt and other maturities and from the $1.4 billion in operating revenues sinking fund obilgations duc. This means realistic reported in 1987. This can be attributed to rate regulatory treatment, increased sales and increases in Texas and Loulslana during the year continued efforts by employees to keep costs and to the increased sales of electdcity. down to enhance the cash flow are Just as critical Net income for 1988 was $103.1 million, which now s they have been for the past several years.

included $128.4 mi!Ilon attributable to .1ccountinD Gulf States will remain under great financial orders and amounts recorded in compliance with phase-in plans, net of related taxes. Excluding stress in 1989 because of the need to retire these effects, there would have been a $25.3 maturing obligations. On the positive side, once these obligations have been satisfied OSU will million loss recorded for the year. While net benefit from reduced interest obligations down the income for 1987 was $241.1 million, accounting road.

orders and phase-in plan amounts accounted for

$390.1 million. Excluding these effects, there in February 1989, Outf States concluded an would have been a $249 million net loss for 1987. agreement with a group of insurance companics Eamings per share of common stock for 1988 and other private investors to refinance the were 37 cents, compared with $1.65 per share for company's nuclear fuel. The nuclear fuel that will the previous year. be used at River Bend will be owned by a special-The camings and net income reported by Gulf purpose corporation established by a trustec. OSU States, because of pending court appeals, do not will then lease the fuel from that corporation.

include any provisions for the write-off of the The refinancing is enabling Gulf States to pay off disallowance of $677 million of the investment in the previous nuclear fuct lease of $58.3 million River Bend in the Loulslana retailJurisdiction or due in 1989 and to reimburse the company for for the write-off of the exclusion of the $575 $98.9 million of nuclear fuel costs which have million investment in the Texas retailjurisdiction, been paid by the company. This money will be or about $1.4 billion on a systemwide basis, used to meet a portion of our cash requirements.

6

l 2 M & w. 2 K I S E T S W'W US The $65 million secured line of credit Gulf OSU owns 70 percent of the 936 megawatt plant St.ates established in order to implement interim and Ca.lun Electric Power Cooperative owns 30 rates in Texas in early 1987 expires March 1, percent.

1989, and the company must cither renew it or The plant's statistics for 1988 are excellent.

obtain a similar credit line elsewhere. Negotiations River Bend's capacity factor for the year was 88.2 with banking institutions are now underway. percent, fourth among domestic bolling water reactors (BWR) of all classes. (The capacity factor Return on Total Earnings Per 3 hare is the actual generation as a percentage of Average Capitalization Percent Dollars average capacity factor for all domestic BWRs was "I 52.7 percent.

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97 7 2.004L The unit was available for service 90.1 percent 4} M d Q R  ? of the time, also an outstanding statistic when a h- # ' '

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t compared with a predicted industry equivalent availability factor of 63.6 percent for all domestic nuclear plants.

During the year, River Bend generated 7.2 billion

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pM l 2 M A 3 .so L first put power into the grid in December 1985, it fl fgg has generated 15.2 billion kwh.

]i]@]Q]Eif d dd B ]j s}d d na River Bend set another world record for g gggg E 2 2 E -

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continuous operations for reactors of its class, with a continuous run of 184 days during its second fuel cycle. It was also the world pacesetter

. during the first fuel cycle.

Electric Department The unit is scheduled to be off line for 60 days, customers beginning March 15,1989, for its second refueling Thousands and maintenance. River Bend will be available for service by summer, OSU's peak season. During 500_QdQR the refueling, more fuel bundics and higher

? M 3 M g enriched uranium will be added to the reactor

,og d 4 4 F3 core in order to enhance River Bend's capacity Q yi y g[ [ factor for the next 18-month cycle.

300_ ddd j p L. River Bend received the highest possible ratings 200 A d ]4 Jgjg l

] in three key categories in the latest " report card" issued in December by the Nuclear Regulatory

'q g y y Commission (NRC). This is the second 3ng h M A N* N comprehensive assessment of River Bend, g g }q4f prepared by the NRC's Systematic Assessment of Licensee Performance (SALP) team, since the plant

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. . . g $ Vj went into commercial operation in June 1986.

At a public meeting in mid-January 1989 between the NRC and River Bend's management, an NRC official said OSU will be used as "an example of good performance to other utilities" River Bend for the marmer in which it operates River Bend.

Oulf States' nucicar power plant continues its in its report, the SALP team gave GSU world class performance, with River Bend providing Category I ratings, the highest, for emergency 21 percent of the electricity generated by the preparedness, engineering / technical support and company in 1988. During the month of December, safety assessment / quality verification. A even though River Bend was in a coast-down Category I rating means OSU management mode to conserve fuel in preparation for the " attention and involvement are readily evident and refueling outage scheduled to begin March 15, the place emphasis on superior performance of plant accounted for 36 percent of the company's nuclear safety" and that "a high level of electric generation, performance . . . is being achieved."

7

mm71988 a n d ? g ;p mInWRevfew ~ g r g M 7 M M 7 M 2 2 5 M M . M B M C 'MM The NRC praised improvement in the area of The Loulslana Rate Case: The Loulslana Public emergency preparedness and called the plant's Service Commission (LPSC) on reb. 28,1989, 7

emergency preparedness program " excellent and granted the company a $38 million rate increase.

I meets the requirements to protect the health and it appears the plan is consistent with the intent of safety of the public." The federal agency also said a court-otdered phase-in plan with certain Gulf States "has demonstrated an aggressive adjustments. The court-ordered plan calls for oversight of the engineering programs and additional increases in future years subject to the described the training as ' effective'." In the safety LPSC review.

assessment / quality verification area, the NRC board found that " corrective actions have been thorough and management involvement evident . . . "

in three of the remaining four areas-plant tlurricane Ollbert Finds OSU Ready operations, radiological controls and maintenance / In mid-September 1988 as Hurricane Gilbert surveillance - the SALP team gave Category 2 - the most powerful and potentially the ratings, meaning that " management attention to most destruct!ve storm of this century -

and involvement in the performance of nuclear prowled the Gulf of Mexico looking for landfall safety or safeguards is good." - somewhere between Mexico and riorida, Outf States lost about 30 percent of its The only Category 5 rating, OSU's first since natural gas supply as production rigs in the River Bend went into operation, was for security, gulf were evacuated. On-shore production but OSU had voluntarily undertaken a self facilities were also imperiled.

assessment of security weaknesses before the report was issued. This rating means management But the River Bend nuclear power Ptant attention to and involvement in this one area were continued OSU's tradition of " Dependable insufficient. Public Service" to our customers.

River Bem u ne a full member of the Before natural gas from the gulf was National Aca-'" cor Nuclear Training in curtailed, River Bend was operating at about September when the final three of 10 training 75 percent power, conserving fuel until the programs were accredited by the Institute of March 1989 reload. Once the gas supply Nuclear Power Operations (!NPO). The plant had dwindled, the nuclear unit was quickly been a branch of the academy since August 1986 brought up to 100 percent power, ensuring when the first programs were certifled. The customers would have an adequate supply of program was created by INPO to recognize electricity.

accomplishments in the nuclear industry and to Hurricane Gilbert, which at times was ensure the safe operations of U.S. nuclear plants. predicted to slam into some part of the OSU Rates and Regulations service area with winds of 17S miles per hour, eventually swept into the upper Mexican Activity on Gulf States' rate cases in Texas and coast, leaving our region safe, but ready.

Loulslana moved from commission hearing rooms to state courtrooms during 1988, as the final rate The situation with Hurricane Ollbert was in decisions were appealed in both states. sharp contrast to the last powerful storm that threatened - but missed - the Gulf States in December 1987, Loulslana issued an order service area. Hutricane Allen in 1980, after that allowed only slightly increased revenues over considerable weakening, pummeled the Texas interim rates, disallowed a major portion of River coastal bend area, a good distance west of Bend construction costs and did not include a OSU's territory, shutting off the company's quallfled plan to phase-in even those costs of the gas supplies from ficids in that area. That plant the commission did allow. time, the company was forced to ask The Texas commission did not issue its final customers to curtall electricity use.

order in the rate case until May 1988 - about IS In 1988, some of the same fields had to months after hearings on the permanent rate case shut down as Hurricane Ollbert neared but, began. Texas regulators also granted inadequate this time, Oulf States was no longer rate relief and held in abeyance a large portion of completely gas-dependent.

the nuclear plant's costs until OSU proves they This time, River Bend, as well as two coal-were pmdently incurred. This finding means Oulf States will be filing another River Bend rate case in fired units, made the difference, providing dependable public service.

Texas as it pursues the appeal of the May rate order.

8

ME0BMX5$.OEISMSWMMSSWMV" EEN As background, on Dec. 15,1987, the LPSC The implementation of the phase-in plan and the ordered only $63 million in permanent rate relief, accompanying rates set by the court in february which included a $57 million emergency increase were appealed by the LPSC and the Louisiana approved in February 1987, with no qualified attomey general to the Loulslana Supreme Court.

phase-in plan; disallowed as imprudent $1.4 billion it is likely the court's decision on the disallowance of the company's total investment in River Bend; and other issues will also be appealed.

and set a 12 percent retum on common equity, in another matter, the Louisiana commission (The phase-in case to begin including River Bend costs in Loulslana's rate base was filed on July 25, ordered a management audit of OSU and hired 1986, and asked for a first-year increase of $194.3 Kennedy & Associates of Atlanta, the firm that had million.) served as consultant to the LPSC during Gulf States' rate case. In early August the compan)

The company appealed this decision on Dec. 30, asked a Baton Rouge district court to halt the 1987, and asked for immediate relief on rates and audit on the grounds it would be duplicative of other issues. It also asked the court to overtum one completed in early 1986 at the order of the the disallowance on a less immediate basis Texas commission. The earlier audit cost about because of its complexity. $650,000 and the Kennedy estimate for the On Feb.18,1988, State District Court Judge Loulslana audit is about $590,000. In the lawsuit, William H. Brown granted OSU a first-year $92 OSU asked that any costs associated with the million rate increase; adopted a quallfled 10-year audit cither not be assessed against the company phase-in plan that called for $50 million annual or that the company be allowed to recover them increases in years two, three and four and $38 through customer rates.

million the final year; and set the retum on common equity at 14 percent. The revenues not The Baton Rouge district court on Jan. 23,1989 (

recovered during the earlier years would be ordered Gulf States and representatives of the g

deferred for recovery during the later years of the plan when rates, as they apply to River Bend, prevent duplicating the Texas audit. Judge Robert would remain stable. Downing also ordered commission consultants to Still on appeal awaiting a decision from another fh c st f th udit districtjudge are the $1.4 billion disallowance of River Bend costs on a systemwide basis (about The LPSC heard one day of testimony on

$677 million on a Louisiana jurisdictional basis) Sept. 30,1988, on OSU's application for a $3.3 and other issues. Retired District Judge Paul million natural gas rate increase. The company Landry heard 23 days of testimony during June does not expect a decision until March or April and July 1988 and on Oct. 20 remanded the case 1989.

to the LPSC for further consideration. The company had proposed that the generating former State Rep. Kathleen Blanco of Lafayette capacity representing the $1.4 billion in River Bend was elected to the LPSC in November and took costs be inventoried, rather than disallowed. This othce in January 1989. She replaced Mrs. Ocorge approach would give OSU shareholders an Ackel who was appointed to the post on an opportunity to cam a retum on their investment, interim basis after her husband, an LPSC as opposed to a permanent disallowance which commissioner, died in April 1988.

would climinate such a possibility. The Texas Rate Case: The Public Utility As proposed in the inventory plan, the electric Commission of Texas (PUCT) issued its final order output from the inventoried portion of River Bend in the state's longest running rate case on May 16, would be sold to OSU customers at a rate of 4.6 1988, granting OSU a one-time permanent rate cents per kilowatt-hour or to others at negotiated increase of about $60 million with a return on prices. common equity of 13 percent. The increase is On Nov.15,1988, the commission reathrmed its based on including about $1.6 billion of the December 1987 decision to disallow the $1.4 company s systemwide River Bend costs in rate billion, but offered a settlement proposal that base and about $182 million of related Texas covered many aspects of OSU's inventory plan. deferred River Bend costs. The PUCT also ordered However, because of several financial, regulatory the company to refund overrecovered fuel costs of and accounting uncertainties associated with the about $?O million during a 12-month period which settlement offer, the company on Nov. 28 told the #9#" " '# OO' LPSC that it could not accept all the terms and As background, Oulf States filed the first year would have to continue the appeal. The decision $144.1 million Texas rate case in November 1986 will be made by thejudge, who Wu mic as early and asked for an immediate $82 million as April 1989. caergency rate increase because of its financial 9

arm

==a1988 In Review ammmmmmmmmmunzw m condition. On Feb. 3,1987, the PUCT granted office in August, replacing former PUCT Chairman

$39.9 million in interim relief, contingent upon the Dennis Thomas who resigned.

company demonstrating it had lines of credit or federal Regulation: Gulf States and its 11 other means of obtaining $250 million from sources other than Texas ratepayers. In late March wholesale customers have settled the rate case 1987 the commission accepted the company's that reflects River Bend construc. tion costs in rates.

financial package and interim rates were The case was filed in 1936 with the federal Energy Regulatory Commission (FERC) which has implemented in April 1987.

jurisdiction over wholesale rates. During 1987 The three hearing examiners who listened to three rural cooperatives and all seven testimony in the permanent rate case from municipalities in Texas and Loulslana reached March 23,1987, through Sept. 15,1987, agreements. Oulf States and the remaining co-op recommended in December 1987 a 10-year negotiated a settlement in January 1989, subject phase in plan with a first year increase of $86.8 to the approval of the FERC.

million to be followed by three smaller rate Although the settlement rates produce less increases. Recovery of deferred costs would be revenue than those the FERC would have allowed over the remaining six years of the plan. The the company to implement under bond in August examiners found that the decision to build Rivcr 1986, they do encourage the cities and Bend was prudent but that $253 million of the cooperatives to remain OSU wholesale customers.

construction costs should be disallowed as As part of the settlemert, the wholesale customers imprudently or inefficiently incurred. are entitled to purchase a large portion of their The commissioners, however, raised additional load at rates lower than the standard rate. Also, questions in early 1988, primarily concerning incentive rates offered in the settlement give various tax treatments, and conducted more wholesale customers another tool to use in hearings until May. In connection with the delay in attracting new businesses and industries.

rendering a final decision, the commission granted The Southern Co. Sult: Oulf States entered into an additional $22.5 million in interim relief contracts with the Southem Co. In 1982 and 1983 effective April 1988. The commissioners voted on to purchase capacity and energy from coal-fired May 9 and issued the written order May 16,1988, units owned by the Southem Co. OSU attempted The commission did reaffirm its preliminary unsuccessfully to renegotiate the terms of the ruling made in February 1988 to disallow as contracts because of changed conditions and, on imprudent about $63 million of River Bend costs the advice of legal counsel, believes the contracts systemwide (about $25 million on a Texas have been terminated.

Jurisdictional basis) and to hold in abeyance, with in a written order issued April 1,1988, the FERC no finding as to prudency, about $1.4 billion affirmed an administrative lawjudge's May 1987 systemwide (about $5S0 million on a Texas determination that OSU's purchased power jurisdictional basis) and $157 million in deferred contracts with the Southern Co. were reasonable costs associated with the portion held in and valid. While the FERC found in favor of the abeyance. Southern Co. In this case, it also said that certain The PUCT, very importantly, did flnd that Gulf s ea g to es ve.

States' decision to build River Bend was prudent.

Both the Southem Co. and Gulf States had filed The company, on May 31,1988, illed a motion complaints with the FERC in July 1986, with the for rehearing, asking the commission to reconsider Atlanta-based holding company seeking a its decision to set aside a portion of the plant's declaratoryjudgment upholding the agreements costs and other issues. However, the PUCT failed and OSU asking the contracts be voided on to take action on the motion and it was effectively several grounds. Oulf States also filed a lawsuit in denied on June 29. The company appealed the federal district court in Beaumont alleging, among final order to state district court in Austin. A other things, breach of contract.

briefing schedule has been established and oral arguments are currently set for this spring. After the FERC denied the company's motion for a rehearing, Oulf States on July 29,1988, Outf States plans to file a rate casejustifying the appealed to the U.S. District Court of Appeals, prudency of the costs now held in abeyance District of Columbia Circuit, where it is still during the first quarter of this year. pending.

Almost three months after the conclusion of Discovery is proceeding in the breach of contract OSU's ratt case a new member was appointed to lawsuit OSU filed against the Southem Co. In the the PUCT. Nouston attomey William Cassin took U.S. District Court in Beaumont, but no trial date 10

E57fENISEnsE23E.LNEmmETCTREEZLED Total utsty Plant Other Eftfgation: In another legal matter, the Mimons Sam Raybum O&T Electric Cooperative (SRO&T),

5,500 - a OSU wholesale customer, filed a four-count anti-5,000 _f$O_dC_ trust lawsuit against Oulf States in the U.S. District 4,500 pNM i M Court in Austin on June 17,1988. SRO&T alleged 4,mo;ig g Q QM- the company refused to transmit power from f companies other than Outf States to the co-op's 3,500 pH J J &. d%- service area, although OSU had been negotiating 3,000 2 20 h # Mbfip

$d.3 h the issue and had submitted a proposal on June 1,1988. In September, Oulf States asked the 20% @ d F RC to decide certain issues involved in the pyy dispute and petitioned the federal district court to 1.5M 1,000 hp bQ Q h" dismiss the lawsuit or take no action until FERC

,. AF* acts.

500 k2 Ek U b$a Y; General Operations W

-mb+d QML g

S S S S g g ;; g -

Although rate cases that began in Texas and Loulslana in 1986 continued as a major focus of l company attention during 1988, there were other issues and matters that commanded attention.

Average Residential Construction Outf States has never lost sight of the fact it is in Electric Use (Per Customer) UPenditures g g l t2w0 A woJ3h Community Affafrs: In August 1988 the l

M{mmmMgy W N i Wgb3 Community Affairs Department was created to l ,ongo G 'a Q 3ng handle the special problems of certain utility

(

8000 y) egyib f

p g" 400 fd Q customers. The department offers programs for customers who need assistance in various areas, hh %t 600044*!h[f[/

d 300 I h ..D,h including inability to pay bills, credit and collection policies and the eflicient use of electricity; 1

p% N? .4.4..t 4000 1 1 p/ 4L 200 ?y dp pdk provides energy education to the public and to schools and educators; oversees administration of 20m 3<,- N d [] h -

)jj j govemment-mandated energy audits; and coordinates community volunteer efforts of OSU 100-h

+

t bbbhh Nhgg employees, retirees and their families.

g=E 0; g i ylE$ Fari Tech: The creation of a division of Varibus,

- 2 S E - " """"

QSU's non-utility subsidiary that operates pipelines and owns rights to lignite reserves, has the potential of being a plus for shareholders. Varl Tech, which was created in August 1988, is in the has been set. The s. tit, als ) filed in July 1986, business of marketing computer aided engineering contends, among othe things, that the and drafting technologies primarily to engineering, drafting and industrial concems, as well as other Southem Co. volded the contracts by refusing to negotiate in good faith when Gulf States requested utilities. Vari Tech, which has already negotiated modifications because of changed conditions. Several conkacb, sells computer work stations, writes software programs and converts existing Both the Texas and Louisiana commissions in paper drawings into electronic data bases. The 1986 barred OSU from passing on to customers copyrighted package is considered a cost-effective the costs of power purchased from the approach to computer-aided drafting and Southem Co. engineering.

On June 27,1988, the Southem Co. requested Power Plants: The equivalent availability of Gulf FERC approval to suspend the contracts and on States' power plants-the percentage of time the Aug.26,1988, the FERC granted the suspension, power plants were available to generate power at On Dec. 5,1968, the Southem Co. file-d a 100 percent-has remained at or above the 80 counterclaim against OSU and an amended motion percent level since 1984. During 1988, the to dismiss Oulf States' lawsuit. The counterclaim equivalent availability of OSU's power plants was seeks to enforce the purchased power contracts 84.3 percent, up from the 79.8 percent recorded and to recover an unspecified amount of damages. during the previous year when River Bend was out 11

men mb 1988 In Revlew GZ2 M22CH?m rR D E C M M DCM E WEBLM252 of senice for a period of time for maintenance circulating fluidized-bed combustion boilers that and refueling. will use locally produced petroleum coke. OSU fuel: Despite the fact that natural gas and coal personnel will continue operating the power plants, prices were higher in 1988, overall fuel costs were selling electricity and steam to the industries, By reduced slightly during the year because the entering into the venture, OSU is retaining about nuclear plant provided almost 48 percent more 175 megawatts of load the three industrial generation than in the previous year, partners represent.

During 1983, Oulf States entered into an eight. Project CARE: Project CARE (Community year gas supply agreement with Stbinc Oas Assistance Relating to Energy) is the company's Transmission and a six year agreement with program to assist those 60 and older with meeting liouston Pipe Line to provide part of the natural their energy bills during emergencies. During 1988, gas requirements at the Sabine powcr plant in money contributed by OSU customers and Texas, employces helped a!most 4,900 ciderly Early in 1989, Eastcx Energy Inc. signed a long- households in Texas and Louisiana pay their term gas sales agreement with Gulf States and electric, natural gas, propanc and butane bills, as with Rotherwood Eastex Gas Storage Services. The well for minor repairs to heating and cooling equipment and for weatherization. Contributions agreement calls for Rotherwood Eastex to supply OSU with an average 50 million cubic feet of from all sources during the year totaled more than

$309,000.

natural gas a day over the five-year primary term of the contract. The agreement also allows the Employees: In June the company and the company to store up to 750 million cubic feet of Intemational Brotherhood of Electrical Workers, gas in the Rothetwood Gas Storage facility. Local 2286, s8gned a new two-year labor contract These contracts are part of a strategy to replace that called for a 3 percent wage increase during other long-term contracts that are expiring and to the first year and a 20-cents-an-hour raise the increase OSU's commitment to long-term contracts second year. Employees covered by the labor because of the changing gas market. agreement, as well as management employees, Reorganizaffon: Under review by the OSU board of directors and management is the possible than t o cars.

reorganization of the company. They have been Employment practices for the 4,800 Gulf States weighing the advantages and disadvantages of employces are guided by the principics of equal restructuring OSU since the Loulslana commission opportunity for all. Affirmative action programs entered a disappointing rate order in late 1987. have helped the company obtain skilled personnel Legal counsel with expertise in reorganization from 11 community sectors, and fair employment was hired by directors in early 1988 and OSU is policies are one way OSU develops its human continuing to review primarily the possibility of resources to serve customers more effectively.

establishing a parent holding company, with operating units in the two states. Redfish Project: A pilot program by the Texas Agricultural Extension Service, with the assistance in addition, the company, through its attorneys, of Gulf States and others, could lead to is monitoring the restructuring eff' orts recently commercial redfish farming in Southeast Texas.

proposed by the Public Service Co. of New Once redfish dictary requirements, stocking rates llampshirc, which filed for bankruptcy last year, and production rates are determined, the fisheries and is studying other related legal developments expert heading the program estimates this during 1988. Company officials and board industry could eventually add as much as $300 members have also visited with executives of million a year to the economy of the. region. Oulf other beleaguered utilities. States' participation in the experimental program Joint Fenture: Oulf States and three of its major inv Ives making availabic warm water tanks at the industrial customers near Lake Charles, La., have S bine power plant near Bridge City, Tcxas, where entered into a joint venture, forming a company the small fingerlings spend the winter before being that will convert two of OSU's gas-fired units at the transferred to grow out ponds.

Nelson Station to burn low-cost petroleum coke. Marketing Efforts Outf States' contnoution to the Nelson Industrial Steam Co., NISCO, was the two units. The Additional increases in the level of customer industrial partners, CITOO Petroleum Corp, rates are absolutely necessary to retum Gulf Conoco inc. and Vista Chemical Co., will pay the States to financial health. At the same time, the cost for replacing the gas-fired boilers with company is very sensitive to the economic 12

rymmmmxgmmmy:awwwkwuGwulwamuunaWLa&Guia k w a.z w ~ ~wasm nyn m m w w w.m m m y r m w w m~~m Residential Cost Per The poor economy in the Gulf States service 1,000 KWHs*

area has been a significant contributor to the financial problems the company has been

$123.98 experiencing for the past several years. Most 7 y economists now see the Gulf Coast area emerging i n slowly from the recession that has taken jobs and f 1 people away from the region.

N mn 1 v$83.23 The brightest example is the petrochemical l, Q ' A -; Myb

[ 4; k industry which is faced with the happy dilemma of p 1 (  !"

.j not having enough capacity to meet demand. This M w a ,d has caused a trickle-down upswing in business for f[ d M, i M , M $42.47 industry suppliers and, temporarily, for the

[W ,;% h h l1QN g' 4 N% i N9 ' ,

Z construction industry as the chemical complexes add capacity. The regional chambers of commerce

,j ,2 / ,Q in Beaumont, Texas, and Lake Charles and Baton (Q n} 4p / u g9 4 n ,

d Rouge, La., report announced expansions by the b +[ 4b d

refining and petrochemical industry in excess of Nationally National GSU Nationally

$1.2 billion.

Most Mean System Least foreign investors are increasingly interested in Expensive Average Expensive the U.S. petrochemical business, most of which is

.%, located along the Gulf Coast where the infrastructure-pipelines, feed stock sources, etc. -is already in place. Oulf States expects a good portion of the foreign investments in this q conditions within the service area and for this energy-intensive industry will be made in its .

reason, OSU has committed itself to playing a service area.

major role in the economic growth of the region in order to meet a pottion of its revenue Gulf States' economic development efforts are requirements with increased sales, rather than with concentrating on a diversified industrial base -

hiaher customer rates alone. everything from research facilities, to small manufacturers, to airplane maintenance Oulf States is providing leadership throughout companics. The strategy is to " sell" the entire the service area in mobilizing economic area between Houston and New Orleans which development and diversification efforts by the comprises the OSU service territory.

cities, towns and communities it serves. Through a program the company is calling " Team Cities," To date, the Houston Area Research Center, a OSU is helping teach local communities how to large facility involved in science and engineering market their areas to new businesses and research, has located in the Woodlands, north of industries. It also helps these communities Houston in OSU's service territory; the Pennington develop an awareness of what they can do to help Research Center, which does biomedical research, their existing firms expand. is operating in Baton Rouge; the Ball Manufacturing Co. Is making aluminum cans in The name of the game for the OSU communities Conroe; and, sometime in 1989, the Ramcor is morejobs and an expanded tax base. For OSU, Airline Maintenance Corp. will begin providing it,s increasing sales through more large and small businesses using more kilowatt hours. maintenance service for commercial aircraft near Beaumont. The Boeing operation in the Lake Today, the competition for new businesses and Charles area continues to expand. Seafood newjobs is tougher than ever, with every region processing businesses are becoming bigger attempting to attract its share. When a company businesses along the coastal section of the OSU wants to know what a community in Southeast service area. Every newjob created, every Texas or South Central Louisiana can offer, OSU's additional kilowatt-hour sold benefits the company, Team City program has prepared community its shareholders and its customers.

leaders with the answers.

13

unwq;]1988 In RevicW unnW LC M EGL? 2 MEPn"m M W W A~2aw zEC M iC M c M L e wa7 OSU's aggressive industrial marketing program During 1988, a refinery that has always which features rates that make it economical for generated all its own power was connected to the the largest customers to remain on the Gulf States system has, for the time being, apparently staved OSU grid. The refinery in Beaumont has a large off the switch to cogeneration or self generation. modemization project under construction and will Only one customer installed cogeneration require more electricity than it can self-generate.

equipment during 1988, displacing about 35 OSU is gaining about 7.5 megawatts of load, with megawatts of OSU electricity. the potential for additional load later.

The foregoing portion of this report is intended to present information the company believes may be of interest to shareholders. For purpot,es of making investment decisions, the more complete information contained in the company's Annual Report of form 10-K and other current reports filed with the securities and Exchange Commission should be consulted.

14

==== Financial Information -==--=====a sa m m a m w a ter m ,.y, .~ .ms .

FINANCIAL SECTION Contents Management Responsibility for Consolidated financial Statements . . 15 Common Stock Prices and Cash Dividends Per Share . 15 Selected Consolidated Financial Data 16 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Consolidated Statement of income . 22 Consolidated Statement of Cash flows . . 23 Consolidated Balance Sheet. . 24 Consolidated Statement of Changes in Capital Stock and Retained Eamings. 25 Consolidated Statement of Capitalization . 26 Notes to the Consolidated financial Statements. . 28 Report of independent Accountants . 44 Statistical Summary . . 45 1 --,

Management Responsibility for with generally accepted auditing standards, the Consolidated Financial Statements financial statements of the Company and issue Management is responsible for the preparation, their report thereon, which appears on page 44.

Integrity, and objectivity of the consolidated Their opinion, including explanatory paragraphs, is financial statements of Oulf States Utilities based on procedures believed by them to provide Company. The statements have been prepared in reasonable assurance about whether the conformity with generally accepted accounting consolidated financial statements are free of principles and, in some cases, reflect amounts material misstatement.

based on estimates and Judgment of management, The Board of Directors, through its Audit gh'ing due consideration to materiality.

Committee, has general oversight of The Company maintains an adequate system of management's preparation of the financial intemal controls to provide reasonable assurance statements and is responsible for engaging, that transactions are executed in accordance with management's authorization, that financial subject to shareholder approval, the independent statements are prepared in accordance with accountants. The Audit Committee, comprised generally accepted accounting principles and that entirely of outside directors, reviews with the the assets of the Company are properly independent accountants the scope of their audits safeguarded. The system of internal controls is and the accounting principles applied in financial documented, evaluated, and tested by the reporting. The Audit Committee meets regularly, Company's Intemal auditors on a continuing basis. both separately and jointly, with the independent No internal control system can provide absolute accountants, representatives of management, and assurance that errors and irregularities will not the intemal auditors, to review activities in occur due to the inherent limitations of the connection with financial reporting. The effectiveness of intemal controls; however, independent accountants have full and free access management strives to maintain a balance, to meet with the Audit Committee, without recognizing that the cost of such a system should management repre ";ntatives present, to discuss not exceed the benefits derived. the results of their examination and their opinion Coopers & Lybrand, independent certifled public on the adequacy of intemal accounting controls accountants, are engaged to audit, in accordance and the quality of financial reporting.

Common Stock Prices and Cash Dividends Per Share for the years ended Decemben 31 fe" A T ; f/JAT3; 1988 RHgh im rer Shere 1987 tilgh Emw Fer Share first Quarter . $ 6% $5 $- first Quarter . $10 $7% $-

Second Quarter. 6% 4% -

Second Quarter. 8% 7% -

Third Quarter 7% 5 74 -

Third Quarter 8% 7 -

rourth Quarter . 9% 7 -

Tourth Quarter 7% 4% -

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 3L 1988, was 69,235, 15

====a Financial Information -

ammmmmannansmaanmannummmaammmmwananammmmmmeramar-

-==m=====m===

- -+mm mmummmmmmmaxx Selected Consoildated Hnancial Data *

(in thoubands except per share amounts and ratlos) for the Years Ended December 31 1988 1987 1986 1985 1984 Ope ra tin g Reve n u e . . . . . . . . . . . . . . . . . .. . . $1,520,477 $1,432,586 $1,478,388 $1,858,436 $1,547,041 income from Continuing Operations Before the Cumulative Effect of Accounting Change ............................ 117.512 240,804 271,872 276,464 259,393 Income Applicable to Common Stock . . . . . . 40,079 178,091 181,854 205,362 202,511 Earnings Per Average Share of Common Stock Outstanding from Continuing Operations Before the Cumulative Effect of Accounting Change . . . . . . . . . . . . . . . . .50 1.65 1.97 2.21 2.31 Dividends Per Share of Common Stock . . . . - -

.67 1.64 1.64 Return on Average Common Equity . . . . . . . 1.95 % 9.29% 10.49% 13.05 % 14.42 %

Ratio of Earnings to fixed Charges . . . . . . 1.50 1.84 1.92 2.18 2.38 As of December 31 Total Assets . . . . . . . . . . . . . . . . . . . ...... $ 6,858,086 $6,821,866 $6,492,582 $5,937,126 $5,234,551 Long Term Debt and Preferred Stock 5ubject to Mandatory Redemption . . . . . . . 2,990.934 3,090.977 3,134,950 2,794,112 2,361,648 Capital Lease Obligations (Current and Non-cu rre nt ) . . . . . . . . . . . . . . . . . . . . . ...... 98,852 187,640 228,270 223,734 197,593 Book Value Per Share . . . . . . . . . . . . . . . . . . 19.32 18.70 16.79 16.02 15.79 Capitalization Ratios:

Common Shareholders' Equity . . . . . . . . 39.3% 37.8% 35.0% 35.4% 36.5%

Preferred and Preference Stock . . . . . . . 11.7 11.1 10.8 11.3 11.7 Long Term Debt . . . . . . . . . . . . ....... 49.0 51.1 54.2 53.3 51.8 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

See Notes 1 and 3 to the Consolidated financial Statements regarding contingencies, current rate matters involving possible disallowances and write-offs and accounting standards.

• Restated for accounting change - see Note 2 to the Consolidated financial Statements.

Management's Discussion and Analysis of Note 3 and Note 15 to the Consolidated financial Hnancial Condition and Results of Operations Statements for a detailed description of rate in reviewing this Management's Discussion and matters.

Analysis of financial Condition and Results of Operations and the Consolida*cd Financial Texas Retall Jurisdiction (Regulator - Public Statements of the Company, special attention Utility Commission of Texas (PUCT))

should be given to the disclosure that the - Effective June 16,1986, the commercial in-Company may have to seck relief from its service date of River Bend, the Company creditors under the Bankruptcy Code. This report received an accounting order from the PUCT was based upon information available at the time which allowed the Company to defer, for it was released for printing. Litigation and retail financial reporting purposes, those expenses rate proceedings continued in an active status at incurred in connection with the operations of such time. Significant developments may occur River Bend and the cost of buying back during the printing and distribution period as well power from Cajun Electric Power as thereafter. Readers are urged to investigate and Cooperative, Inc. (CEPCO) and to record a consider such subsequent developments. non-cash carrying charge on the Company's Summary of Rate Matters investment in River Bend not already reflected in rate base.

As of December 31,1988, the Company's rate situation remained in an uncertain state. The - In April,1987, the Company received a Company has received varying rate treatments $39,900,000 annualized interim rate increase conceming River Bend Unit 1 (River Bend) in the from the PUCT.

different regulatoryjurisdictions in which the - In April,1988, the Company received a Company operates. Detailed below is a summary $22,500,000 annualized interim rate increase of significant River Bend rate related events. See from the PUCT.

16

mum =rmmmm;mmuseauxan;mzuwmemw'"*7 Gulf States Utilities Co.

remrmwasmw=xmmaamm.mmmunawammm!M"ggg[r7;mmrgg (The Company was required to reduce the the guidelines set forth in Statement of deferred River Bend costs by $1.50 for each Financial Accounting Standards (SFAS)

$1.00 of revenue received while the interim No. 92 for a qualified phase in of the prudent rate increases were in effect.) costs of the Company's River Bend

- On May 16,1988, the PUCT adjusted the two investment as determined by the LPSC. As a previous interim rate increases to a total result, the Company recorded in 1988, for level of $59,900,000, ordering a one-time financial reporting purposes, the deferred permanent rate increase of that amount, set revenue requirement associated with such aside $1.4 billion (approximately plan.

$550,000,000 on a Texas retailjurisdiction Ifholesale Jurisdiction (Regulator - Federal basis) with no finding as to prudency, and Energy Regulatory Commission (FERC))

disallowed as imprudent $63,468,000 - On August 22,1986, the FERC issued an (approximately $25,175,000 on a Texas retail order permitting the proposed first year rates jurisdiction basis), to become effective on August 25,1986, and

- On July 23,1988, the retail rates set in the the proposed second and third year rates to May 1988 ruling became effective. The become effective on July 1,1987 and July 1, Company ceased accruing amounts under 1988, respectively, under the Company's the accounting order received in 1986, and proposed phase-in plan.

began amortizing the allowed portion of the (At the time of the order, the Company had deferred River Bend co.Ms recorded pursuant already commenced negotiations with its to the accounting orders, over a 40-year wholesale customers regarding altemative period.

rates.)

- On July 29,1988, the Company filed an - The Company filed a motion with the FERC appeal of the May 1988 rate order in a state district court seching to overtum hey for authorization to collect the settlement portions of the order. rates effective as of August 25,1986, and was permitted to implement such rates I.oulslana Retall Jurisdiction (Regulator - effective as of that date. Under the Loulslana Public Service Commission [LPSC)) settlement, the phase-in plan period is ten

- Effective June 16,1986, the Company years, and the rate increases from 1986 receiveo an accounting order from the LPSC through 1989 to the applicable customers for (sim!!ar to the one described above from the purchases on the standard wholesale rate PUCT). will be 24 percent,14 percent,10 percent,

- In March 1987, the Company received and 7.4 percent, respectively.

$57,000,000 of emergency rate relief. Financings and Capital Resources (The Company was required to reduce the deferred River Bend costs by $1.00 for each During 1988, the Company's cash position was

$1.00 of revenue received while the under severe pressure due primarily to inadequate emergency rate increase was in effect.) rate relief and the maturity of substantial debt obligations. While manaqcment presently believes

- On December 15,1987, the LPSC issued a that rate relief granted to date and the nuclear fuel permanent rate order granting a $63,000,000 refinancing, as discussed below, will improve its rate increase (including the $57,000,000 of cash position in 1989, significant litigation, previously granted emergency rate relief), regulatory, and operational contingencies exist while also disallowing $1.4 billion of the which, if adverse results occur, could necessitate Company % total River Bend plant investment financing from extemal sources.

(approximately $677,000,000 on a Loulslana retailjurisdictional basis) as having been During 1988, the Company had available imprudently incurred. $65,000,000 under a short-term credit facility described in Note 12 to the Consolidated financial

- On December 30,1987, the. Company Statements. Such facility expires on March 1, appealed the LPSC's action in a state district 1939. The Company is currently negotiating the court- extension or replacement of this facility, but there

- On February 18,1988, the Loulslana state can be no assurance of its ability to do so. The district courtjudge issued a preliminary existing and proposed new credit facility contain injunction ordering the immediate restrictions upon additional borrowings, paymer.t implementation of a $92,000,000 rate of dividends and other actions of the Company increase (which included tbc $63,000,000 (See Note 12 to the Consolidated finandal granted by the LPSC on December 15,1987) Statements). On February 7,1989, the Company and adopted a phase-in plan which meets entered into a new nuclear fuel financing 17

g- Financial Information --- -======

arrangement which provided the Company with mortgage bonds, subject to the receipt of

$98,893,000 of cash, in addition to $58,254,000 necessary legal opinions and any requisite consent which was used to repay its previous nucicar fuel of other lenders to the Company. However, the financing. The proceeds of this new financing are Company is unsure whether such bonds could be anticipated to satisfy the Company's extemal cash marketed regardless of whether or not coverage requirements for 1989, but there can be no requirements are met.1:xtemal intermediate or assurance that operating results, regulatory long-term financing may only be available through actions, court decisions, or other developments the issuance of unsecured or subordinated lien will not necessitate additional extemal financing. debt securitics if, and to the extent, they can be The Company's ability to arrange extemal marketed.

financing has been and continues to be materially Due to the uncertainties about the Company's affected by its weak financial position. The credit ability to obtain funds if and when needed, there ratings assigned by credit rating agencies to the can be no assurance that the Company would Company's long-term debt and preferred and have available funds to meet its needs, in which preference stock have been reduced to event the Company may have to seck relief from

" speculative" grade. The failure to pay dividends its creditors under the Bankruptcy Code.

on preferred and preference stock during 1987 and 1988, and the omission of the common stock Results Of Operations dividend since the second quarter of 1986, make The Company's 1988,1987, and 1986 net it highly uni!hely that additional equity securities income has been affected by amounts recorded in could currently be marketed. The Company's accordance with phase-in plans and amounts Mortgage Indenture contains an interest coverage recorded in accordance with accounting orders covenant which limits the amount of first mortgage issued in 1986 by regulators pending completion bonds which the Company may issue. Based upon of the Company's retail rate cases currently on the results of operations for the twelve months appeal. These items (nct of the related tax effects) ended December 31,1988, and existing have increased the Company's 1988,1987,and circumstances, the Company believes it has 1986 net income and camings per share as sufficient coverage to issue additional first follows:

1 1988 1987 1986 Effect on Effect Effect on Efict I flect on 7ffect Net income on EPS Net income on EPs het income on i Ps (in thousands estept per share amounts)

Deferred River Bend expenses $ 31,503 $ .29 $168,573 $1.56 $ 93,821 $ .88 Deferred revenue requirement 130,516 1.21 15,862 .15 7,264 .07 Amortization of accumulated deferred River Bend costs (27,754) (.26) (1,431) (.01) - -

River Bend carrying charges . 24,723 .23 263,988 2.44 132,768 1.25 Reduction of deferred River Bend costs . (30,576) (.28) (56.938) (.53) - -

-$128,412 -

$1.19 -$390,054 $3.61

$233.

yn

,8_53._

. _$2. 20 Without the inclusion of the above items in the Company's Consolidated Statement of Income, the Company would have reported net losses in 1988 and 1987 of $25,269,000 and $148.953,000, respectively, and net income of $11,128,000 for 1986. The deferred items described above include substantial cash expenditures which were only partially recovered in 1988 and 1987, and there can be no assurance that all of such expenditures will ultimately be recovered. The Company is cunently not recovering in rates the depreciation and retum associated with the portion of Fdter Bcnd disallowed in the Louisiana rate order and the portion of River Bend excluded in the Texas rate order and, as discussed in Note 3 to the Consolidated financial 5'atements, and during 18

mammnummmmaramrmnamawam" mm:wm.azzawaxammaamtmaww - = { Gulf States Utilities Co.

yyyyqqgg333 1988 has recorded a write-down of the wholesale economy in the Company's service area during and Texas retail portions of the unamortized River 1987, as wcll as the loss of certain industrial Bend LJnit 2 cancellation cost and ceased accruing customers which had converted to cogeneration.

the equity component of River Bend carrying The Company's 1986 kilowatt-hour sales charges. The discussion below provides declined by 7 percent as compared to the prior information on significant items which also year. Kilowatt-hour sales to industrial and affected the Company's results of operations wholesale customers accounted for most of the during the period from 1986 through 1988. sales decline. The decline in industrial sales Operating Revenue originates from the reasons previously described.

The decline in wholcsale sales has resulted Operating revenue increased by 6 percent during primarily because of the transfer of certain 1988, when compared to 1987. This increase wholesale customers to a transmission scrsice followed declines of 3 percent and 20 percent for rate scheduic.

1987 and 1986, respectively. The components of the changes in operating revenue are detailed Operating Expenses and Taxes below: l'uel and Purchased Power. Vuel cxpense omrou muruwi rr-n rra.' '"'

" " increased 3 percent during 1988, when compared o,, [,7 ,,,y with 1987. The increase in fuel resulted from the change in base rates. $ 87.150 $ 68A33 $ (49,120) increasCd utilization of Company-owncC generating units, primarily River Bend, to meet Its energy Ne'sNuIcYnbther. 3 3

$ 87,891 $ (45,802) $ (380,048) requirements. A s'ight decrease in the Company's average fuel cost, due to increased utilization of Rates. The changes in base rates shown above low cost nuclear fuel, offset in part the increase reflect rate orders, settlement agreements, and described above. Fuel expense decreased rate changes implemented during the period from 10 percent during 1987, when compared with k 1986 through 1988. '1986. The decline in fuel resulted from lower fuel As discussed above, the Company impicmented prices, offset slightly by increased generation. The interim /cmcrgency and permanent rate increases 10 percent decrease in the Company s average in 1987 and 1988. fuel cost in 1987 highlighted the dech,ne in the pnce of natural gas as well as the low cost of During 1986, the Company placed into effect an

$80,000,000 base rate decrease as part of a nuclear fuel, which was utilized more extensively settlement agreement with its Texas retail in 1987 than in 1986. Fuci expense declined by customers. Additionally, in August,1986, the FERC 21 percent during 1986. The decline in fuct granted the Company a $26,000,000 wholesale expense was the result of lower fuct prices rate increase. However, as more fully detailed in partially offset by increased generation. During Note 3 to the Consolidated financial Statements, 1986, the Company's overall system fuel cost the Company subsequently reached a settlement declined by 34 percent, primarily as a result of the agreement with its wholesale customers, and decline in the price of natural gas, the Company's placed into effect rates which have resulted in primary fuel source. Kilowatt-hour generation increased 19 percent during 1986, and reflected revenues lower than those onginally authorized by the FERC. the increased utilization of River Bend and the decreased utilization of purchased power to meet XIlowatt.11our Sales. The Company's 1988 load requirements.

kilowatt hour sales increased 2 percent when compared with 1987. The increased sales were in Purchased power expense decreased 29 percent the residential, commercial, and industrial classes. during 1988, due primarily to reduced capacity This increase represents the first increase in sales payments to CEPCO under the buyback agreement after three years of consecutive declines. See as discussed in Note 13 to the Consolidated financial Statements, as well as increased Statistical Summary on Page 45 for information on utilization of Company owned generating units.

kilowatt-hour sales and related revenues by Purchased power expense decreased 7 percent customer class. during 1987, gnarily as a result of decreased The Company's 1987 kilowatt-hour sales kitowatt-hour purchases reflecting reduced load declined by 1 percent compared with 1986. A requirements, cessation of capacity payments to decline in sales to industrial customers accounted the Southem Company during 1986, and the for virtually the entire 1987 decline, however, incrcased utilization of River Bend to meet cxisting partially offsetting the total dccline was a load requirements. This decrease was offset in 1 percent increase in sales to residential part by increased capacity costs associated with customers. The industrial sales decline reflected the CEPCO buyback. As discussed in Note 3 to the the depressed condition of the petroleum-based Consolidated financial Statements, the CEPCO 19

e===

rmmumc.mmmmuammmuummmrarmmmmmmmmmmmmmwarwmmmu m Financia1 Inforniation =-m=m-===m m a buyback costs were generally deferred under The increase in depreciation and amortization accounting orders prior to receipt of permanent expense from 1986 to 1987, of $25,187,000 is rate orders. Purchased power expense declined by primarily associated with a full year of depreciation 23 percent during 1986, primarily as a result of expense recorded for River Bend in 1987, decreased kilowatt hour purchases reflecting compared to the 1986 commercial in-scrtice year reduced load requirements, cessation of certain of the unit. River Bend is being depreciated over a payments to the Southern Company during the 40-year life at 2.50 percent annually.

last half of 1986, as discussed in Note 1 to the Taxes. Deferred income taxes increased almost Consolidated financial Statements, the availability 150 percent during 1988, despite a decrease in of lower cost natural gas for use in Company- the statutory rate from 40 percent to 34 percent.

owned units, and the increased utilization of River The increase resulted primarily from lower tax Bend to meet load requirements, losses and permanent differences related to River Other Operations and Maintenance f.xpense. Bend. Dcierred income taxes increased Other operations and maintenance expense, dramatically during 1987, due to the tax effect of including those associated with River Bend, deferring certain River Bend-related operations and decreased 4 percent during 1988, as a result of maintenance expenses and capacity buyback costs the Company's continued effort to reduce such for the entire year of 1987, in accordance with expenses. During 1988, in accordance with the regulatory accounting orders, versus capitalizing PUCT and LPSC rate orders, the Company the operations and maintenance expenses in recorded a deferred charge and reduction to 1986, prior to commercial operation and deferring operations and maintenance expense of them subsequent to June 16,1986. Capacity

$7,797,000 associated with the retall portion of buyback costs were not incurred prior to the early retirement plan. Other operations and commercial operation. Deferred income taxes maintenance expense, excluding those associated decreased by 105 percent durMg 1986. The with River Bend, decreased 6 percent during 1987. declines during 1986 reflect lower taxable income.

Other operations and maintenance expense, Other taxes have increased as a result of higher excluding those associated with River Bend, franchise and revenue-rclated taxes.

Increased approximately 1 percent, during 1986. Non Operating Items The 1986 increase was primarily the result of an

$8.9 million provision for pension benefits Allowance for thnds Used During Construction recorded in connection with the Company,s early (AfUDC) and River Bend Carrying Charges. AFUDC retirement plan offered during 1936, offset by a increased slightly during 1988, due to the reduction in the amount and price of gas Company's increased ownership of nuclear fuel.

purchased for resale and the efforts of the River Bend carrying charges decreased due Company to sate cash, ph b h MW of M carrying charges upon receipt of permanent rate Other operations and maintenance expense orders. The total of AFUDC and accrued carrying related to River Bend increased during 1987, as charges on the River Bend investment increased compared to 1986, due to the full year of by 10 percent during 1987, as compared to 1986.

commercial operation and the fuel reloading This comparcs to increases of 16 percent during outage which occurred in the last part of 1987. 1986. That increase was primarily the result of Other operations and maintenance expense AFUDC on increases in the amount of River Bend's related to River Bend increased during 1986, due construction work in progress (CWIP) prior to its to the commercial operation of River Bend in commercial operation date and the subsequent 1986. As discussed previously and in Note 3 to recording of carrying charges on both the plant the Consolidated financial Statements, these investment not allowed in the Company's rate expenses were also generally deferred under base by the PUCT and LPSC and the cash portion accounting orders prior to receipt of permanent of deferred expenses recorded pursuant to rate orders. accounting orders.

Depreciation and Amortization. The reduction in Reduction of Deferred River Bend Costs. As a depreciation and amortization expense from 1987 result of the interim rate relief granted in both to 1988, of $10,034,000 was attributable to a Texas and Louisiana retailJurisdictions in 1988 reduction in the depreciation rates in the and 1987, the Company has reduced the amount Loulslana and Texas retailjurisdictions in of deferred River Bend costs being recorded in accordance with the commissions orders, and an accordance with accounting orders issued in 1986 adjustment to decommissioning expense which by the regulatory commissions. This amount resulted from revised assumptions and 38 year reflects a reduction of $1.50 (Texas) and $1.00 nuclear decommissioning funding approved by the (Louisiana) for cach $1.00 of revenue received as PUCT and LPSC. a result of the interim /cmcrgency rate increases.

20

n:xus '  :

. zunm a maxw w=wmm:a:LGf mmumam mcmussmumunmemm.a Gulf States Utilities Co.

ggggggggggy Such adjustment is required since the Prudential Oil and Gas, Inc. (Prudential), a wholly-commissions, as a result of granting owned subsidiary of the Company. These losses interim /cmergency rate relief, have allowed some resulted from the write-off of costs recorded in the I iver Bend costs (on a non-specific basis) to be subsidiary's fuil cost pool of oil and gas reserves.

collected through rates rather than being deferred. Such write-offs were necessitated by declines in Other - Net. Other - net increased during the price of oil and gas during 1986. For 1988, <tue to increased interest income and tax information regarding the sale of Prudential's oil benefits related to the sale of Nelson Units 1 and and natural gas reserves in 1987, see Note 7 to 2 to a joint venture. See Note 14 to the the Consolidated financial Statements.

Consolidated Financial Statements for additional information regarding the venture. Other - net Effects of inflation decreased during 1987, as compared to 1986, due to decreased interest income camed on temporary The effects of inflation upon the Company have cash investments. During 1986, other - net been less in the period 1986 through 1988, than increased due to increased interest income camed in the preceding three year period because the on temporary cash investments. rate of inflation has declined. This decline is evidenced by the minimal growth in the Consumer Interest Charges. Interest charges decreased Price Index over the period from 1986 to 1988.

slightly during 1988, due primarily to the retirement of maturing debt. During 1987, interest flowever, over the longer term, inflation has had on long-term debt increased due to the annual serious effects on the Company's financial interest requirement on first mortgage bonds position. During periods of high inflation, issued during 1986. Interest on short-term debt provisions for depreciation become inadequate as and other interest expense increased due to the construction costs increased. The rise in required payment of interest on inventoried construction costs, in tum, results in the need for nuclear fuel. Prior to 1987, such interest was larger amounts of capital and increased external capitalized as part of the Company's nuclear fuel financing. The effects of inflation have been further lease. For additional information regarding the exacerbated by slower sales growth.

Company's nuclear fuel lease, see Note 6 to the Consolidated financial Statements. New Accounting Standards Interest on long-term debt increased during The financial Accounting Standards Board 1986, due to interest requirements on new (FASB) has issued several SFAS's which may affect borrowings made to refund short and the Company's results of operations and financial intermediate-term debt incurred in connection with position when adopted.

the Company's construction program. These increases were offset in part by lower interest rates SIAS No. 96. See Note 4 to the Consolidated on short and intermediate-term debt. Financial Statements.

Discontinued Nonutility Subsidiary Operations. STAS No.101. See Note 3 to the Consolidated The losses recorded in 1986 were incurred by Financial Statements.

21

==== Financial Information =========uc==ce=aa mm-mamummmmonwm===um umamumm==n-=mumme-ummamm---

Consolidated Statement ofIncome FOr the years ended December 31 (in thousands except per share amounts) 1988 _ 1987 1986 Operating Revenue Electric . , , , .

$1,415,713 $1,330,106 $1,367,480

$ team, , , 70,728 69,056 77,783 Qas. , , , , , 34,036 33,424 33,125 1,520,477 1,432,586 1,478,388 Operating Expenses and Taxes Puel . . .

417,030 406,139 449,2D Purchased power . 228,330 322,732 347,075 Other operations , , , 234,320 240,788 232,032 Maintenance, , 100,270 108,797 83,684 Depreciation and amortization . 177.425 187,459 162,272 Deferred River Bend expenses (57,670) (292,845) (175,236)

Deferred revenue requirement - River Bend phase-in plans. (197,752) (2fL436) (13,452)

Amortization of accumulated deferred Rher Bend costs 38,575 1,793 -

Income Taxes f'cderal , 59,517 24,291 5,473 State , , 272 (275) (7,496)

Other taxes 87,304 83,523 81,017 1,087,621 1,055,966 1,164,582 Operating income. . 432,856 376,620 313,006 Other Income and Deductions Allowance for equity funds used during construction . 3,115 259 77,447 River Bend carrying charges . . 24,723 263,988 132,768 Reduction of deferred River Bend costs. (46,266) (94,896) -

l Other - net , , B,355 3,943 6.975 income Before Interest Charges. 422,783 *i49,914 530,996 Interest CharDes L.ong-term debt 298,009 299,931 285,946 Short term debt and other 14,302 17,358 9,741 Allowance for borrowed funds used during construction (7,040) _

(8J/9) (36,563) 305,271 309.110 259,124 income from Continuing Operations Before the Cumulative Effect of Accounting Change 117.512 240,804 271,872 Discontinued Nonutility Subsidiary Operations -

297 _ 26,891)

(

Income Before the Cumulative Effect of Accounting Change 117,512 241,101 244,981 Cumulative Effect on Prior Years of the Write-down of River Bend 2 (net of income taxes) (Note 3) (14,369) - -

Net income . 103,143 241,101 244,981 DMdends on Preferred and Preference Stock (unpaid in 1988 and 1987). . . 63,064 63,010 63,127 income Applicable to Common Stock . $ 40,079 $ 178,091 $ 181,854 Average Shares of Common Stock Outstanding 108,055 107,995 106,U2 Earnings Per Average Share of Common Stock Outstanding hem Continuing Operations Before the Cumulative Effect of Accounting Change , $ .50 $ 1.65 $ 1.97 EarninDs Per Average Share of Common Stock Outstanding $ .37 $ 1.65 $ 1,71 DMdends Per Share of Common Stoch $ -

$ - $ .67 The accompanying notes are an integral part of the consolidated financial statements.

22

naa ng w m m suw a m a m _ . A M Yb -

37 Gulf States Utilities Co.

-m, e -mum _ _ _ y ggg gggg Consolidated Statement of Cash Flows-For the years ended December 31 (in thousands) 1988 1987 1986___

Provided From Operations

.... . . . . t 1C3,143 $ 241,101 $ 244,981 Net Items income . . . . ' c, as,h:

not requiring Deferred fuel and purchased power expense - net . . . (5,084) 5,305 13,370

' Amortization of nuclear fuel . . . .. . .

44,393 34,450 23,232 Depreciation and amortization . . ..,, ...... ..... . 179.947 191,859 165,863 Deferred River Bend expenses, revenue requirement, and carrying cha.ges.. .... ..................,........... (280,145) (5C3,269) (321,456) -

Amoruzation of accumulated deferred River Bend costs. . .

38,575 1,793 -

Reductlon of deferred River Bend costs . . . 46,266 94,896 -

Deferred income taxes - net. . . . . . . 71,594 35,418 40 investment tax credits - net . . ... ..... . . . (4,118) (3,703) (3,611)

Allowance for funds used during construction . . . . . . . . . . . . . (10,155) (8,438) (114,010)

Cumulative effect of the write-down of River Bend 2 (net of income taxes)... . ... .......... . . .

14,369 - - --

farly retirement pension benefits . - - 8,938 _

Disputed amount . . .

3,624 25,570 -

Other . . . .. . ,. (9.257) 10,876 9,432 Changes in:

Receivables - net of disputed amount . (756) 6,076 27,302 Fuel inventories . . . . .

1,920 3,277 8,094 Materials and supplies. .. .... . 237 130 2,755 Prepayments and other current assets . (7,496) (7,890) (15,711) L Accounts payable - trade . . .

4,197 37,596 (34,123) _ _ _

Customer deposits. . 1,053 444 (781)

Taxes accrued . . .

14,704 (623) (1,002)

Interest accrued . . . . . (7,353) 1,478 11,434 ,

Other current liabilities . . 3,656 11,191 (8,664)

Net cash flow provided by operating activities. 203,314 97,537 16,083 l

Financing Activit.les ~

i Sale of common stock . . . . . . . . .... ... ..

- 1,145 47,070 W" l Sale of preferred stock subject to mandatory redemption . - - 75,000 .'

l Sale of first mortgage bonds (principal amount) ... - - 200,000 l Sale of pollution control bonds (principal amount) - - 20,000 l Pollution control funds held by trustees . - 20,019 12,001 -

, Net change in revohing credit agreement . . .. . . . . - -- 80,000 l Change in escrow deposit - guaranteed debentures . . . . ...

- - 24,000 l Increase in deferred River Bend construction and continuing services

! commitments . .. .... ..... . 4,428 13,779 46,750 Increase in other long tenn debt ... ... ... ... 680 679 -

Payment of deferred Illver Bwd construction commitments (8,400) - -

Payments of lease obligations . . (38,188) (37,454) (20,085)

Retirement of long-term debt . . . ..... .... ... .... (107,320) (32,570) (46,015) _

Retirement of pre.ctred stock subject to mandatory redemption. .

- - (48,148)

Payment of preferred and preference dhidends . - - (63,127)

Payment of commcet dhidends .

(70.319)

Net cash flow provided by (used by) financing actMtics. (148,800) (34,402) 257,127 Investing Activities Construction expenditures (38,654) (48,721) (339,578)

Nuclear fuel expenditures . . . . .. ... (75,530) (20,331) -

Allowance far funds used during construction . 10,155 8.438 114,010 Deposit to escrow account . . . . . (12,000) - -

Other property and investments. , , (4,157) 21,562 28,029 Net cash flow used by investing activitics (120,186) (39,052) (197,539)

Net change in cash and cash equivalents (65,672) 24,083 75,671 Cash and cask equivalents, at January 1 168,0G5 143,982 68,311 C, ash and cash equivalents at December 31. . $ 102,393 $ 168,065 $ 143.982 -

Supplemental Cash Flow Disclosure

' Cash paid during the period for:

Interest.. .

$ 299,665 $ 293,084 $ 275,100 income Taxes ...... ....... 2,406 1,291 6,732 Iricrease in nuclear fuel lease obligations . - 8,824 24,621 The accompanying notes are an integral part of the consolidated financial statements.

23

-mm Financial Information mmmmm===cm-2=ma-*m=a amammzemanwamammummama-aw - mammwaammmmmemammasm Consolidated Balance Sheet December 31 (in thousands) 1988 1987 Assets Utility and Other Plant, at original cost Plant in service . . . .... ..... .... . . $ 6,579,622 $ 6,589,893 Less: Accumulated provision for depreciation . .

1,523,229 1,387,185 5,056,393 5,202,708 Construction work in pror,ress . . ..... , 7,690 7,393 Nuclear fuel, net of accurnulated amortization . . 161,688 181,151 5,225,771 5,391,252 Other Property and Investments , , . 50,988 30,038 Current Assets Cash and cash equivalents . 102,393 168,065 Receivables Customers . . . 147,913 123,860 Other . . . . . . . 11,289 15,110 Fuel inventories . . . . 27,387 29,307 Materials and supplies. . 6,005 6,242 Prepayments and other . . 39,703 32,207 334,690 374,791 Defencd Charges and Other Assets Unamortized debt expense . . . 22,506 24,148 --

Unamortized project cancellation costs 94,848 118,755 Accumulated deferred income taxes. . 61.899 59,095 Deferred River Bend costs . 997,079 808,036 Long-term receivable . 47,220 -

Other , 23.085 _

15,751 1,246,637 1,025,785

$ 6,858,086 $ 6,821,866 Capitalization and Liabilities

, Capitalization (See Statement of Capitalization)

Common shareholders' equity , $ 2,088,055 $ 2,020,308 Preference stock. , , 100,000 100,000 Preferred stock Not subject to mandatory redemption . . 136,444 136,444 Subject to mandatory redemption , 387,189 356,522 Long-term debt , 2,603,745 2,734,455 5,315,433 -5,347,729 Current Liabilities Long-term debt due within one year. . . . . . . . . . . ... .._ , 84,333 80,000 Preferred stock and long-term debt sinking fund requirements . . . .. 36,967 32,266 Deferred River Bend construction and continuing services commitments 29,170 13,216 Accounts payable - trade 107.465 103,268 Customer deposits . 16,646 15.593 Taxes accrued . . 34,993 20,289 Interest accrued . . 86,327 93,680 Capital leases - current.. 79,074 92,698 Over-recovery of fuel costs 14,602 -

Other 41,187 37,531 530,764 488,541 Deferred Credits and Other Liabilities Investment tax credits . . ... . 109,907 114,025 Accumulated deferred income taxes. 576,312 508,209 Capital leases - non-current . .... 19,778 94,942 Deferred River Bend financing costs . 135,764 142,024 Over-recovery of fuel costs 19,062 38,748 Disputed amounts .. ...... ... 72,793 49,694 Deferred income from sale of utility plant. 46,283 -

Other 31,990 37,954

• 1,011,889 985,596 Commitments and Contingencies (Note 1) .

$ 6,858,086 S 6,821,866 The accompanying notes are an integral part of the consolidated financial statements.

24

tammx:rxxmmumaramaz msmammmMMTg" Gulf States Utilities Co.

nez.m:xemnacuramtmaxazarmuxmzuw.maxmammmhal]g3g73333333 Consolidated Statement of Changes in Capital Stock and Retained Eamings for the years ended December 31 (in thousands)

"C""

EEd. *:"at" [7$ $$I5, 0"l";!

Balance: January 1,1986. . . . $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:

DMdend reinvestment and stock purchase plan (3,792,949 shares) , ,. 40,456 Employee benefit plans (699,295 shares) . . 6,599 Conversion of debentures (1,131 shares) . 15 DMdends declared:

Preferred and preference . (63,127)

Common . .

(70,319)

Capital stock expense . .

(357) (372)

Balance December 31,1986. 323,313 1,194,003 (3.869) 26,130 595,964 Net income - 1987 . 241,101 Common stock sold:

Employee benefit plans (149,365 shares) . 1,145 Reacquired capital stock . . . 31 Preferred stock sinking fund requirements (2,946)

DMdends in arrears on preferred stock subject to mandatory redemption 36,155 (34,160)

Capital stock expense . (37)

Balance December 31,1987. 356,522 1,195,148 (3,906) 26,161 802,905 Net income - 1988 . . 103,143 Reacquired capital stock. .

2 Preferred stock sinking fund requirements (4,701)

DMdends in arrears on preferred stock subject to mandatory redemption 35 368 (35,368)

Capital stock expense . (30)

Balance: December 31,1988. . $387,189 $1,195,148 $ (3,936) $26,163 $ 870.680 The accompanying notes are an integral part of the consolidated financial statements.

25

===== Financial Information -

_m,.m-____.---_.--,------ ,================

Consolidated Statement of Capitalization Decernher 31 (in thousands) 1988 1987 Common Shareholders' Equity Common stock Authorized 200,000,000 shares without par value Outstanding 108,055,065 shares . . C 1,195,148 $1,195.148 l Premium and expense on capital stock (3,936) (3,906)

Other paid in capital ,

26,163 26,161 Retained earnings. , . 870,680 802,905 2.088.055 2,020,308 Preference Stock Authorized 20,000,000 shares without par value, cumulative Outstanding 4,000,000 shares Cumulative Redemption Per Share Price as of Dividends Shares December 31, Dividend Series in Arrears Outstanding 1988

$4.40 . . $ 8.98 2,000,000 _ $ 30.45 50,000 50,000 3.85, . 7.86 2,000,000 30.15 50,000 50,000 100,000 100,000 Preferred Stock Authorized 6,000,000 shares, $100 par value, cumulative Outstanding 4,617,568 shares Cumulative Shares Hedemption Per Share Outstanding .at Price as of Dhidends December 31. December 31, Dividend Series in Arrears 1988 1988 Not subject to mandatory redemption

$ 4.40. $ 8.98 51,173 $108.00 5,117 5,117 4.50 . . . . . 9.19 5,830 105.00 583 583 4.40-1949 8.98 1,655 103.00 166 166 4.20. 8.58 9,745 102.818 975 975 4.44. 9.07 14,804 103.75 1,480 1,480 5.00. 10.21 10,993 IG4.25 1,099 1,099 5.08. 10.37 26,845 104.63 2,685 2,685 4.52. ... 9.23 10,564 103.57 1,056 1,05f, 6.08. A. 12.41 32,829 103.34 3,283 3,283 7.56. 15.44 350,000 101.80 35,000 35,000 8.52 . 17.40 500,000 104.43 50,000 50,000 9.96. 20.34 350,000 106.64 35,000 35,000 136,444 136,444 Subject to mandatory redemption 8.80. 17.97 301,029 103.00 30,103 30,103 9.75. 19.91 29,636 103.00 2,963 2,963 8.64 . 17.64 302,465 105.00 30,247 30,247 11.48. 23.44 480,000 105.00 48,000 48,000 13.64 . 27.85 40,000 105.00 4,000 4,000 12.92 . 26.38 600,000 112.92 60,000 60,000 11.50 . . . . . . . . 23.48 750,000 111.50 75,000 75,000 Adjustable Rate 19.12 300,000 103.00 30,000 30,000 Adjustable Rate . . . . 19.25 450,000 104.90 45,000 45,000 Preferred dividends in arrears . 71,523 36,155 396,836 361,468 Preferred stoch sinking fund requirements (9.647) (4,946) 387,189 356,522 (statement continued on following page.)

26

e m w w = m r a r m . m a r m a m a z a n c a m r m m,D arme==mwramamarmarmwammnenemumazzar.rdr'?fgggggggrg Gulf States Utilities Co.

1988 1987 Long Term Debt first mortgage bonds Maturing 1989 through 1993 -

4%% due January 1,1989 . .

- 10,000 5%% due December 1,1989 , , , ,

- 16,000 4%% due July 1,1990 . 17,000 17,000 14%% due May 28,1991 . 56,250 75,000 17W% due January 13,1992 , 100,000 100,000 4%% due May 1,1992 . 17,000 17,000 16.8% due September 23,1993. . . 42,860 51,430 Maturing 1994 through 1998 - 5% through 13%% 220,000 220,000 Maturing 1999 through 2003 - 7%% through BW% . 195,000 195,000 Maturing 2004 tl. rough 2008 - 8%% through 10.15% . 220,000 220,000 Maturing 2009 through 2013 - 10%% through 15% 525,000 525,000 Maturing 2014 through 2016 - 11% % through 12%% . 300,000 300,000 first mortgage bond sinking fund requirements (27,320) (27,320) 1,665,790 1,719,110 ._

Pollution control and industrial development bonds 7% duc 2006 . 25,000 25,000 5.9% due 2007. 25,000 23,000 10%% due 2012 . 48,285 48,285 9W% due 2013. 17,450 17,450 10%% duc 2014. . 50,000 50,000 12% duc 2014 52,000 52,000 Variable rate duc 2014 94,000 94,000 Variable rate due 2015 154,000 154,000 Variable rate due 2016 20,000 20,000 Debentures Quaranteed .:lebentures - 16% due April 15,1990 60,000 60,000 Euro-debentures - 13% due 1992. , 75,000 75,000 Convertible debentures - 7%% due 1992. 2,003 2,003 Revolving credit agreement . 291,667 350,000 Deferred River Bend construction and continuing services commitments (variable rate through 1991). 27,387 47,313 Other long-term debt . 1,359 679 2,606,941 2,737,840 Unamortized premium and discount on debt - net. (3,196) (3,385) 2,603.745 2,734,455

$ 5,315,433 $5,347,729 The accompanying notes are an integral part of the consolidated financial statements.

27

ex=r= Financial Inforniation e===============

axemacommmmm:mmmmawmummmmmmewwmma=rmammurzmnum=mm Gulf States Utilities Company substantial adverse effect on the financiai condition of the Company.

notes 10 the Consolidated southem Company titigation. The Company Financial Statements and the Southem Company entered into purchase power contracts providing for purchases by the

1. Commitments and Company of capacity and energy from the Contingencies S uthern Company. In management's opinion, based on advice from legal counsel, such Mnancial Condition. The Company's financial contracts have been terminated by reason of condition has been strained by the large financing breach of contract by the Southern Company and requirements of its construction program, resulting for other reasons and its obligations under the primarily from the construction of the River Bend contracts have been discharged and excused.

Unit 1 (River Bend) nuclear unit which was As of December 31,1988, the Company had not completed in 1986. Although the Company has recorded as a liability and had not paid an received some rate relief during 1987 and 1988, it estimated $313,000,000 of charges related to the has been unabic to obtain permanent rate relief Southern Company contracts. If the Company had adequate to meet its needs, it is still experiencing not been discharged and had recorded the strong regulatory, political, and consumer charges as if they had not been discharged and resistance to rate increases, and it faces the excused, net income for the twelve months ended prospect of continued inadequate rate relief. December 31,1988,1987, and 1986 would have issues to be finally resolved in the Loulslana decreased by approximately $112,000,000, Public Service Commission (LPSC) and the Public $73,000,000, and $12,000,000, respectively. The Utility Commission of Texas (PUCT) rate Company has also withheld payment of proceedings and appeals thereof, combined with $29,193,000 which is recorded as an amount in the application of accounting standards, may dispute on the balance sheet resulting from result in substantial write-offs and charges that differences in certain amounts billed by the could result in substantial net losses being Southem Company and amounts paid. The reported in 1989 and subsequent periods with Company has estimated that minimum payments resulting substantial adverse adjustments to for capacity which would be due under such l common shareholders' equity and to the contracts from January 1,1989, through their Company's ability to purchase its stock to satisfy termination in 1992, would aggregate sinking fund requirements and reinstate dividends approximately $609,000,000 and that payments for in the future. While management presently believes energy would be approximately $301,000,000.

that the rate relief granted to date and the nuclear On July 2,1986, the Company filed suit against fuel refinancing concluded in february 1989 have the Southem Company in U.S. District Court improved the Company's financial position, requesting that the Company be excused and significant litigation, regulatory, and operational discharged from the contracts and for other relief.

contingencies exist which, if adverse results occur, Additionally, the Company and the Southem could force the Company to seek relief from its Company each filed applications with the federal creditors under the Bankruptcy Code or to attempt Energy Regulatory Commission (FERC) sccking to negotiate such relief, and there can be no findings and actions, respectively, to void or assurance that any such negotiations could be reform the contracts and to support and continue timely or successfully concluded. such contracts. The FERC accepted Jurisdiction The Nuclear Regulatory Commission (NRC), over certain issues but refused hearing on state which regulates the operation of River Bend, has law contract issues.

expressed to the Company its concem that the On March 30,1988, the FERC held "the Company's financial condition could negatively presiding lawJudge's determination that grounds impact activities associated with River Bend. The for modification of the purchase power contract NRC requested that the Company evaluate its pursuant to Section 206(a) of the federal Power plans to assure that continued safe operation and Act have not been established." The FERC also fulfillment of commitments to the NRC will not bc ordered the Company s " complaint for relief under affected, report the results of the evaluation, and Section 206(a) of the federal Power Act" be continue to keep them informed of developments. dismissed, that the Southem Company's petition if the Company's financial condition deteriorates, for declaratory order be granted as to certain what action the NRC may take and its financial issues, and that the dockets involved ate impact upon the Company cannot be predicted, terminated. The l'ERC found no basis within its but such action could include suspension of jurisdiction to relieve the Company of its operation of River Bend, which could have a obligations under the contracts, but reconfirmed 28

camawwwawn==w=mxm Ammmnwwpp Gulf States Utilities Co.

nes:mmmumzmwmwenea amanesmai 1 ygE7Zy g$g]g that certain state law contract issues remain open CEPCO is in arrears in payment of some of its for the court to resolve. The Company's debt service, has employed bankruptcy counsel application for rehearing has been denied, and the and has been sued by one of its major creditors.

Company has appealed the FERC order. Additionally, one of its member cooperatives has On June 27,1988, the Southem Company filed bankruptcy. Further, deterioration of CEPCO's requested TERC approval of a suspension of financial cor.dition and its bankruptcy could have performance by the Southern Company effective significant adverse effects on the Company, July 1,1988, under its Unit Power Sales including but not limited to possible NRC action as '

Agreement and certain other service schedules described above and a need to bear additional with the Company. On August 26,1988, the TERC costs associated with the co-owned facilities, granted such suspension, denied an intervenor's CEPCO has also threatened to sue the Company request to cancel the rate schedules, and noted for alleged mismanagement of the construction of that the Southem Company had not waived any of River Bend and for fraud in the inducement to their legal rights, remedies, and claims for enter into the River Bend agreements.

damages available against the Company. The The Company and CEPCO are parties to FERC effect of such a suspension upon the ultimate proceedings regarding certain long-standing outcome of the ongoing litigation cannot yet be disputes relating to transmission service charges.

predicted. Hearings before the FERC were completed in On December 5,1988, the Southem Company December 1988. At December 31,1988, the filed with the district court an amended motion to Company claimed CEPCO had underpaid dismiss and counterclaim. The counterclaim seeks transmission charges in the amount of to enforce the power sales contract and recover an $43,600,000. Such amount was recorued on the unspecified arnount of compensatory and punitive balance sheet as an account receivable and --

damages, including the amounts equal to the offsetting amount in dispute, with no effect on net contractual payments due to date and the present income. The Company and CEPCO are also in value of the remaining payments alleged to be due dispute over certain billings related to thejointly-under the contracts, interest, and attomeys' fees, owned facilitics, River Bend and Big Cajun 2 The countercialm a!!eges, among other things, that Unit 3. The Company and CEPCO have reached a the Company has been in breach of the contract preliminary agreement regarding disputes under since July 1986, and has been guilty of fraudulent the River Bend buyback arrangement, which must conduct in relation to service taken since July be ratified by the Rural Electrification 1986, but not paid in full. On January 24,1989, Admir 1stration. The Company has previously the district court over-ruled the Southem advised CEPCO that it may need to renegotiate Company's amended motion to dismiss. the River Bend buyback agreement if adequate Also, the Company's appeals to the appropriate and timely permanent rate relief is not received.

state courts of the actions of the PUCT and the NucIcar Insurance. Ownership and operation of LPSC in 1986, disallowing pass through of a nuclear generating unit subjects a company to Southem Company capacity charges under the significant special risks. The Company is insured contracts, are pending. to an extent as to its interest in River Bend for The Company cannot predict the outcome of the property damage and decontamination, liability to various proceedings; however, if the Company employees and third parties, and incremental were ultimately unsuccessful in the pending replacement power costs, as described below, litigation and were required to make substantial However, some potential liabilities, including but payments to the Southem Company and not not limited to liabilities relating to the release or permitted to pass these costs through to escape of hazardous substances into the customers in its rates, the Company would environment to which the Company may be probably be unable to make such payments and subject, may not be insurable, and the amount of would probably have to seek protection from its insurance carried as to the various risks may not creditors under the Bankmptcy Code. be sufficient to meet potential liabilities and Cajun EIcctric Ibwcr Cooperattue, Inc. (CEPCO). losses. There is also no assurance that the The Company has significant business Company will be able to maintain insurance relationships with CEPCO, including co-ownership coverages at their present levels. Under those of River Bend Unit 1 and Big Cajun 2 Unit 3. The circumstances, such losses or liabilities would Company and CEPCO cwn 70 percent and have a material adverse effect on the financial 30 percent of River Bend, respectively, while Big condition of the Company.

Cajun 2 Unit 3 is owned 42 percent and Public liability in case of a nuclear incident at 58 percent by the Company and CEPCO, any licensed nuclear facility in the United States is respectively. The Company has been informed that cunently thnited to $7.7 billion under provisions of 29

eramm Financial Information summaemmerammemersanwememmmme-amemwammme.memmema wr======--====

the Price Anderson Act (Act) which was renewed Disposal of Spent Nuclear fuel and Nuclear and revised in 1988 and extends through Decommissioning. As provided in the Nucicar August 1,2002. The Company insures River Bend Waste Policy Act of 1982, the Company has for this exposure through a combination of private entered into contracts with the United States insurance and the industry wide secondary Department of Energy (DOC) for disposal of spent financial program. The changes to the Act will nuclear fuel from River Bend. Under the terms of necessitate modifications to the secondary the contract, the Company is required to pay a financial protection, such that the Company will be quarterly fee to the DOE of one mill per net subjected to a potential retrospective assessment kilowatt-hour generated by River Bend. The of approximately $66,150,000 per incident with a Company is currently recovering such costs in all maximum amount of $10,000,000 per incident jurisdictions.

payable in any one year for losses in the event of The Company has received approval from the a nuclear incident at its facility or any other FUCT, LPSC, and FERC to collect in rates amounts licensed nuclear reactor facility. Any retrospective necessary to decommission niver Bcnd when it assessments pertaining to this liability are subject reaches the end of its service life.

to the 70/30 percent ownership interest in River Decommissioning costs are subject to the 70/30 Bend between the Company and CEPCO. percent ownership interest in River Bend between i

The Company maintains $500,000,000 property the Company and CEPCO. In 1988 dollars the l damage insurance and $400,000,000 of such Company's share of decommissioning costs is excess insurance for River Bend is from the private approximately $158,600,000, which at the end of

, insurance market. Additionally, the Company has the life of the unit, may be well over l acquired $825,000,000 of excess property $700,000,000. To provide for these future  ;

insurance coverage on River Bend through decommissioning costs, the amounts collected participation in the Nuclear Electric insurance through rates from customers will be placed in a Limited (NEIL) 11 program. Under NEIL 11, the master trust fund where the contributions plus Company is subject to a maximum assessment of interest v.ill provide amounts needed in the future.

approx!mately $7,750,000 in any one policy year. The Company has elected the provisions of Although the Company has continued to increase section 468A of the internal Revenue Code to the limits of such insurance as capacity becomes qualify for an annual tax deduction for payments available, no assurance can be given about the made to the nucicar decommissioning fund, adequacy of such insurance limits in the event of a major accident. The property damage insurance Dividend S.uspension. The Board of D.irectors policy limits are substantially less than the did not declare any dividends on the Company's replacement cost of the River Bend facilities, common stock for the third quarter of 1986, and no dividend on common stock has been declared The Company maintains a Nuclear Workers' through December 31,1988. The Board of Liability policy which covers liability for tort claims Directors did not declare the dividends on the by on-site workers first employed at a nuclear preferred and preference stock of the Company facility after January 1,1988, for non-catastrophic payable on March 15,1987, and has continued nuclear related injury such as the exposure to not to declare them through December 31,1988.

longderm, low-level radiation. Nuclear related Unicss the financial condition of the Company claims by workers employed in a nuclear facility improves, the Company expects to continue to be prior to January 1,1988, will continue to be unable to pay dividends on such stock. Dividends covered under the Nuclear Energy Liability policy on all series of the Company's preferred and provided the claim is made by December 31, preference stock are cumulative. Since the 1997. Under the Nuclear Workers' Liability policy, Company has failed to pay such dividends, the the Company is subject to a maximum bolders of preferred stock became cligibic, as of retrospective premium assessment of $3,200,000. March 15,1988, to elect a majority of the Board of Some extra expense for River Bend replacement Directors and did so at the annual meeting on power is insured through the NEIL 1 program. May 5,1988, The holders of preference stock following an insured property loss which results in became eligible as of September 15,1988, to elect the unit being unavailable for generation and a two directors at the 1989 annual meeting. The 21 week waiting period, the NCIL I program will Company may not pay any dividend or distribution pay the Company a specified weekly indemnity for on any of its common stock, or purchase or 52 weeks followed by one-half the specified weekly otherwise acquire common stock, unicss all indemnity for an additional 52 week period. Under cumulative dividends and sinking fund obligations the NEIL 1 program the Company is subject to a have been paid on preferred and preference stock.

maximum annual retrospective assessment of Under its Restated Articles of incorporation approximately $1,100,000. (Articles), as amended, the Company may not pay 30

ummmandom.mxmrm'ammmmmmammicw"WJ ummmmmmmmewatemmarr.=m=rnmmeAf')Sggg35lyggg Gulf States Utilities Co.

any dividend or distribution on any of its cost of depreciable plant over the estimated preference stock, or otherwise acquire preference remaining senice life.

stock, unicss all sinking fund obligations have Composite depreciation rates were as follows:

been paid on prefened stock. As of December 31, 1988 1987 1986 1988, the Company has not met four sinking fund obligations totaling $4,945,900. Under the terms of tiectric 2.72 % 5% s.31%

steam A.05 4.55 2.47 its credit agreement with Irving Trust Company, as cas s.52 3.52 3.52 discussed in Note 12, the Company is also Total Company . 2.74 2.96 5.30 restricted from paying dividends on any of its classes of stock while such credit agreement Decommissioning. The Company is accruing the decommissioning costs of River Bend in remains outstanding. The Company's ability to pay dividends and redeem and purchase outstanding accordance with the Commissions orders over a 38-ycar to 40-year period.

Stock (as is necessary to mcct its preferred stock sinking fund obligations) will be adversely affected, Allowance for l'unds Used During Construction and possibly foreclosed for an indeterminate (Af11DC) and Capitalization ofInterest. The accrual period of time if significant write-offs result from of AFUDC is a utility accounting practice calculated under guidelines prescribed by the FERC and regulatory actions, Judicial actions, or capitalized as part of the cost of utility plant requirements of accounting standards. representing the cost of servicing the capital The Company has accrued dividends on and invested in construction work in progress (CWIP).

Increased the balance of mandatory redecmable Such AFUDC has been segregated into two preferred stock with an offsetting decrease to comp nent parts - borrowed and equity funds.

retained camings.110 wever, since dividends on all That portion allocated to borrowed funds is series of the Company's preferred and preference reflected as an adjustment to interest charges, stock are cumulative (the aggregate amount of while that portion applicable to equity funds is accumulated and unpaid preferred and preference shown as a source of other income. Both the

' stock dividends as of December 15,1988is equity and the borrowed portions of AFUDC are 5125,440,000), income applicable to common n n<a ems wM have me eh M inacaMng the Company s reported net income. When the stoch and eamings per average common share related utility plant is placed in service, a retum outstanding have been computed assuming that on and recovery of these costs generally have all such dMdends through December 31,1988, been permitted by regulators in determining the were accrued- rates charged for utility service (see Nctes 3 and Other Litigation. The Company is involved in 15 for information regarding recent and current litigation arising in the normal course of business. rate actions). The Company computed AFUDC at While the results of such litigation cannot be the following net of tax rates compounded predicted with certainty, management believes that senMannuaur the final outcome will not have a material adverse Janua gp 1,1 g6 3 cffect on its consolidated financial position. July 1,1986-December 31,1986 9.50

2. Summary of Significant in 1987, due to the construction interest capitalization provisions of the Tax Reform Act of Accounting Policies 1986, the Company began accruing AfDDC at pre-System of Accounts. The accounting records of tax rates. These rates were as follows:

January 1,1987-March 31,1987. 12.00%

the Company are maintained in accordance with April 1,1987 september 30,1987 12.25 the Uniform System of Accounts as prescribed by October 1,1987-March 31,1988. 12.50 the TERC and adopted by the LPSC and the PUCT. April 1,1988-December 3L 1988 . 12.25 Utility 1%nt and Depreciation. Utility and other Rcuenue, thct, and htrchased Power. The plant is stated at original cost when first dedicated Company records revenue as billed to its -

to public service. Costs of repairs and minor customers on a cycle billing basis. Revenue is not replacements are charged to expense as incurred. recon: led for energy delivered and unbilled at the The original cost of depreciable utility plant retired end of cach fiscal period. The Company's and cost of removal, less salvage, are charged to wholesale and Louisiana retail rate schedules accumulated provision for depreciation. The provide for adjustments to substantially all rates provision for depreciation is computed using the for increases or decreases in the costs of fuel for straight-line method at rates, approved by the generation, purchased power, and gas distributed, commissions, which will amortize the unrecovered The Company's Texas retail rate schedules include 31

mmua Financial Inforniation ======-h==

nmmmmmumewauwmemmummam.m wxmmammauwm.mzw.wmmmmam a fixed fuel factor approved by the PUCT. Such The Company's policy is to fund the actuarially factor remains the same until the Company files computed pension contribution annually. Past and for a general rate increase or fuel reconciliation or prior service costs are being funded by the until the PUCT orders a reconciliation for any over Company over periods of up to forty years.

or under collections of fuel cost fuel and in addition to the pension plan, the Company purchased power costs in excess of those included provides retired employees with life and health in base rates or recovered through fuel adjustment care insurance benefits. All of the Company's clauses are deferred (or accrued) until such costs employees may become eligible for benefits upon are billed (or credited) to customers. reaching normal retirement age. The annual cost Inventories. The Company's fuel inventories are of such benefits of approximately $3,736,000 is comprised of fuel oil, valued at weighted average recognized as claims are actually paid, cost, and coal, valued at last-in, first-out (Lif0)

Consolidated Statement of Cash Dows. The cost. Materials and supplies are valued at weighted Company adopted the provisions of SPAS No. 95, average cost. Statement of Cash riows, in its financial income Tues. The Company and its statements during 1988, and replaced the subsidiaries file a consolidated federal income tax previously reported Statement of Sources of funds retum. Income taxes are allocated to the Invested in Utility and Other Plant for 1987 and indh'idual companies based on their respective 1986. For the purposes of the Statement of Cash taxable income or loss and investment tax credits. Flows, the Company considers all highly liquid investments with original maturities of three The Company follows a policy of comprehensive months or less to be cash equivalents.

Interperiod income tax allocation where such treatment is permitted for ratemaking purposes by Reclassi/lcation of Mnanclaf Statements. In regulatory bodies. Deferred income taxes result Se tember,1988, the Company reclassified

$142,024,000 from " UTILITY AND OTHER PLANT, from timing differences in the recognition of revenue and expenses for tax and accounting at original cost" to " DEFERRED CREDITS AND purposes. OTHER LIABILITIES - Deferred River Bend Financing Costs." This reclassification was in Investment tax credits have been deferred and accordance with the Company's interpretation of l are being amortized ratably over the useful lives of the May 16,1988 PUCT rate order (see Note 3) of the related property. Texas retailjurisdictional amounts (which had Subsidiary Companics, for financial statements been recorded as a reduction in net plant in prior to December 31,1988, the Company service) related to the previous inclusion of I

l accounted for its investments in its wholly-owned portions of River Bend in rate base during the nonutility subsidiary companies, Prudential Oil and c nstruction period of the unit. The Company i,s l Gas, Inc. (Prudential) and Varibus Corporation amortizing the reclassified amount over a 10 year (Varibus), on the equity basis, in October,1987, Period.

the financial Accounting Standards Board (FASB) Prior year financial statements have been issued Statement of Financial Accounting reclassified in order to be consistent with current Standards (STAS) No. 94, Consolidation of all year presentation with no effect on net income or Majority-Owned Subsidiaries, which required common shareholders' equity.

i consolidation of Varibus and Prudential for l financial statements presented at December 31, 3. Rates and Accounting i 1988, and restatement of prior years financial l statements, which effect was immaterial. Two Rate Matters additional subsidiaries, GSO&T, Inc. (OSO&T), Texas. On November 18,1986, the Company discussed further in Notes 6 and 12, and Gulf flied a rate increase request with the PUCT and States Overseas finance N.V. have been previously applicable cities. The request proposed a phase-in presented on a consolidated basis. See Note 7 for plan for River Bend costs.

Information regarding the sale of Prudential's natural gas and oil reserves. Varibus operates On May 16,1988, the PUCT granted the pipelines and owns rights to lignite reserves. Company a one-time permanent rate increase of

$59,900,000. The increase is based on including in Ectfrement Plan and Other Post Employment rate base approximately $1.6 billion of the Senefits. The Company has a noncontributory Company's system-wide River Bend plant pension plan which covers all employees meeting investment and approximately $182,000,000 of certain age and service requirements. Benefits are related Texas retailJurisdiction deferred River l

based on years of service and employees' Bend costs ruled prudent. The PUCT also ordered compensation during the last 10 years of service. the Company to refund $27,462,000 of fuel 32

nm=mm=wmummmmtmmmmrmzumf3 tammmannmmma=mmmmmmemaruw 57333333g Gulf States Utilities Co.

overrecoveries plus accrued interest to its incurred in connection with the Company's customers over a twelve month period beginning investment in its cancelled River Bend Unit 2 in July 1988. Additionally, the PUCT affirmed its which amounts to $61,979,000 as of December 31, preliminary rulings made in February 1988 to 1988. The LPSC order also approved the form of a disallow as imprudent $63,468,000 of the phase-in plan but required evidentiary hearings Company's system-wide River Bend plant costs and subsequent approval by the LPSC of any (approximately $25,175,000 on a Texas retail future increases to be granted under the phase-in jurisdiction basis) and set aside in abeyance plan. The LPSC order failed to specify the level of approximately $1.4 billion of the Company's revenue requirements deferred under the plan as system-wide River Bend plant investment well as the timing of recovery of the deferred (approximately $550,000,000 on a Texas retail amounts.

jurisdictional basis) and approximately

$157,000,000 of Texas retailjurisdiction deferred On December 30,1987, the Company appealed River Bend costs with no finding as to prudency. the LPSC's action in a state district court. The The PUCT afflrmed that the ultimate rate treatment Company's appeal requested, among other things, of such amounts will be subject to future injunctive relief conteming the failure of the demonstration by the Company of the prudency of Commission's phase-in plan to meet the criteria such costs. River Bend costs deferred subsequent set forth in generally accepted accounting to December 31,1987 were not specifically principles for such plans and the decrease in addressed by the PUCT. retum on common equity from the 14 percent recommended by the Commission's consultants to On May 31,1988, the Company filed a motion the 12 percent granted in the rate order and the for rehearing of the PUCT's order of May 16,1988. resulting impact from this decrease on the amount On June 29,1988, the PUCT failed to take action of rate relief granted by the LPSC. The Company's on the Company's request for rehearing and it was appeal also covered the LPSC's ordered denied as a matter of law on June 30,1988. On imprudency disallowance related to River Bend July 29,1988, the Company filed an appeal of the and the disallowance of any recovery of the May 16,1988 order in a state district court which cancelled River Bend Unit 2.

is currently set for hearings in early May 1989. The appeal included, among other things, a request On February 18,1988, the Louisiana state that the $1.4 billion of River Bend plant district court judge issued a preliminary injunction investment which was set aside with no finding as ordering the immediate implementation of a to prudency be included in rate base, as well as a $92,000,000 rate increase (which included the request that approximately $27,000,000 in $63,000,000 granted by the LPSC on December additional rate relief be granted. The Company's 15, 1987) and setting the return on common appeal also covers the imprudency disallowance equity at 14 percent. The judge also adopted a related to River Bend. Pending resolution of this phase-in plan which meets the guidelines set forth case, the Company has not recognized the alleged in SPAS No. 92 for a qualified phase-in of the imprudency disallowance of $63,468,000. The prudent costs of the Company's River Bend Company believes the denial of its request for investment as determined by the LPSC. As a rehearing of the rate case will, under the terms of result, the Company began recording in 1988, for the PUCT's final order, allow it to submit financial reporting purposes, the deferred revenue additional River Bend cost information in a future requirements associated with such plan subject to rate proceeding, which the Company plans to file the outcome of the appeal. The Company believes in March 1989. No assurance can be given as to that the first-year $92,000,000 increase will remain the timing or outcome of the court appeal. In effect until the appeal of the LPSC's December 15,1987 order on the merits is decided. The Loulslana. On July 25,1986, the Company filed court's plan provides for 4 additional increases an electric rate increase application including a and level rates for 5 years thercafter. The phase-in plan with the LPSC for River Bend costs. Increases are subject to LPSC review.

On December 15,1987, the LPSC issued a permanent rate order granting the Company On July 27,1988, the Supreme Court of

$63,000,000 in rate relief (including $57,000,000 Louisiana agreed to hear the LPSC's and the of previously granted emergency rate relie0 and a attomey general of Louisiana's appeal of the 12 percent retum on common equity and injunctive relief granted the Company. As of disallowed $1.4 billion of the Company s total December 31,1988, no hearings have been scheduled' River Bend plant investment (approximately

$677,000,000 on a Loulslana retailjurisdictional On October 20,1988, the Louisiana state district basis) as having been imprudently incurred. The court judge presiding over the Company's appeal l order also disallowed any recovery of costs of the December 15,1987 rate order issued an 33

menu Financial Infonnation =========m-u===

smemwremmwmaramaxmumwwwmmramemwnewmanemwamewnemmmamawamwamm order remanding the case back to the LPSC for motion with the FERC for authorization to collect further consideration. On November 15,1988, the the settlement rates effective as of August 25, LPSC issued an order on the casc remanded to it 1986, and was permitted to impicment such rates by the Loulslana district court. The LPSC cffective as of that date. Under the settlement, the reaffirmed its finding that the Company was phase-In plan period is ten years, and the rate imprudent in deciding to restart construction of increases from 1986 through 1989, to the River Bend in 1979, Instead of constructing a applicable customers for purchases on the lignite-fueled generating unit and that $1.4 billion standard wholesale rate will bc 24 percent,14 of the Company's $3 billion investment should be percent,10 percent, and 7.4 percent, respectively.

excluded from rate base as imprudent. However, tiowever, the settlement provides that for several the LPSC ofIered an altemative rate treatment for years substantial portions of such customers' the $1.4 billion of River Bend investment in settlement of the pending rate case and appeal. loads may be served from powcr purchased from o h M Cg g mim After studying the alternative rate treatment and transmission charges or, depending on relative implications thereof, the Company informed the costs of such other power, from the Company at a Commission and the district court on November rate lower than the standard rate. The Company 28,1988, that it could not accept the settlement believes that currently no write-off of the wholesale offer and would, therefore, continue its court portfon of the River Bend investment is required.

appeal of the LPSC's December 15,1987 rate However, there can be no assurances that, as a decisions because of several financial, regulatory, result of the future loss of wholesale customers or and accounting uncertainties associated with the rate reductions to meet competition or accounting LPSC's settlement proposal. The case now reverts standards as discussed below, a write-off of some to the court for its decision. The Company cannot predict the ultimate outcome of these proceedings portion or all of the remaining unrecovered River or when they will finally be concluded. Pending Bend investment allocable to the wholesale resolution of this case, the Company has not jurisdiction, or an adjustment to the deferred recognized the alleged imprudency disallowance of revenue requirement recorded by the Company River Bend and the disallowance of recovery of the with respect to the phase-in plan for such cancelled River Bend Unit 2. customers, will not be required at a future date.

On December 27,1988, the Company filed a Accounting Developments request with the LPSC for the second step, a

$50,000,000 rate increase, of the phase-in plan STAS No. 90. In December,1986, the FASB adopted as part of the preliminary injunction issued SFAS No. 90, Regulated Enterprises -

issued by the Loulslana state district court on Accounting for Abandonments and Disallowances February 18,1988. For recent developments in the of Plant Costs, which amends certain accounting Loulslana rate proceedings, see Note 15. standards for rate regulated enterprises, and was Wholesale. On June 24,1986, the Company dopted by the Company during the first quarter filed a wholesale electric rate increase request with of 1988. SFAS No. 90 specilles the accounting for the TERC to phase in the River Bend costs. the effect of disallowances of costs of newly completed plants and plant abandonments and On August 22,1986, the TERC issued an order requires an immediate charge to operations for permitting the proposed first year rates to become any portion of the cost of River Bend permanently effective on August 25,1986, and the proposed excluded from rate base. Additionally, it requires second and third year rates to become effective on the Company to reduce its investment in the July 1,1987 and July 1,1988, respectively, under abandoned River Bend Unit 2 to an amount equal the Company's proposed phasc-in plan. to the present value of the probable future At the time of the order, the Company had revenues expected to be provided over the already commenced negotiations with its amortization period authorized by regulators. In wholesale customers regarding altcmative rates. A subsequent periods, the Company is recognizing settlement regarding attemative rates has been interest income to the extent of the difference finalized with all but CEPCO. The Company and between amortization allowed for regulatory CEPCO have reached a setticment on this matter purposes and the reduced amortization recorded contingent on the ultimate resolution of the for financial reporting purposes. The effect of the dispute over the River Bend buybach, as discussed accounting change on 1988,1987 and 1986 of in Note 1. The settlement of this wholesale rate $2,147,000, $2,027,000 and $1,900,000, will require TERC approval. The Company filed a respectively, is included in net income for 1988.

34

aw.mmMMMMMw wuamuMMWF Gulf States Utilities Co mamammamammmmummansm--mummmmaammMpygggggg.gg The following table illustrates STAS No. 90's service but not yet reflected in rates. This cumulative effect of the River Bend Unit 2 plant provision does not require the reversal of such write-down: equity charges accrued prior to January 1,1988.

1988 STAS No.101. In December 1988, the FASB

,[c,$*p"**,"[,*,, issued SFAS No.101, Regulated Enterprises -

amounts) Accounting for the Discontinuation of Application Property Abandonment - River Bend of SFAS No. 71.

Unit 2 Texas retailjur'sdiction STAS No.101 specifies how an entegrise that Retum disallowance - ceases to meet the criteria for application of SFAS discounted $19,277 No. 71, Accounting for the Effects of Certain Types Related income taxes . (6.554) of Regulation, to all or part of its operations Wholesale jurisdiction should report that event in its general-purpose

• " ~

"T3cofnYe 2,494 extemal fironcial statements.

Related income taxes (848) An enterprise's operations can cease to meet cffect of srAs No. 90 $14.369 those criteria for various reasons, including tamings per average share of deregulation, a change in the method of common stock outstanding from regulation, or a change in the competitive gyinugggrgtpngbefore the $ .50 environment for the enterprise's regulated services or products. Regardless of the reason, an tamings common perstock averahe share c ect of of srAs enterprise whose operations Cease to meet those No 90 - 013) criteria should discontinue application of SPAS tamings per average share of No. 71 and report that discontinuation by common stock outstanding . $ .37 eliminating from its balance sheet the effects of any act!ons of regulators that had been recognized During 1984, the Company began amortizing the as assets and liabilities pursuant to SFAS No. 71 cost of the River Bend Unit 2 cancellation but would not have been recognized as assets and applicable to its wholesale and Texas retall liabilities by enterprises in general.

operations over 10 and 15 year periods, While no application of SFAS No.101 is respectively. currently required, there can be no assurances if the LPSC rate order of December 15,1987 that, as a result of the loss of wholesale had not been appealed at December 31,1988, the customers or rate reductions to meet competition, Company would have been required to record a a write-off of some portion or all of the remaining write-off of approximately $524,000,000 (net of unrecovered plant investment allocable to the tax) related to the River Bend Unit I disallowance wholesale jurisdiction, or an adjustment to the and an additional $42,111,000 (net of tax) write-off deferred revenue requirement recorded by the related to River Bend Unit 2. Company with respect to the phase-in plan for Additionally, if the PUCT rate order of 11ay 16, se cuMomers, or other adjustments required by

, will n t be required at a future N.

1988 had not been appealed, at December 31, '

1988, the Company would have been required to record a write-off of approximately $19,765,000 Additionally, there can be no assurances that, as (net of tax) related to the River Bend disallowance. a result of new rate orders or settlements, a write--

STAS No. 92. In August,1987, the FASB issued off of some portion or all of the remaining STAS No. 92, Regulated Enterprises - Accounting unrecovered River Bend investment and other for Phase-in Plans. This statement prescribes the adjustments required by SFAS No.101 will not be criteria which must be met by a phase-in plan required at a future date for otherjurisdictions in ordered by a regulator in order for the regulated which the Company operates.

utility receldng such order to be able to record, SPAS No.101 is effective for discontinuations of for financial reporting purposes, the deferrals of application of STAS No. 71 occurring in fiscal expense or revenue requirements included in the years ending after December 15.1988, but its phase-in plan. adoption may be delayed until the issuance of An additional provision of STAS No. 92 is the annual financial statements for the fiscal year that includes December 15,1989.

prohibition, effective January 1,1988, of the reccanition of the equity portion of carrying Deferred Revenue Requirements - River Send charges, accrued in accordance with an accounting Phase-in Plans. In accordance with the terms of order granted by a regulator, on a recently the phase-in plan approved by the FERC and the completed generating plant that is in commercial phase-in plan authorized by the court in Loulslana, 35

==== Financial Inforniation mam mswwwmamarmwaranummauemmmmwammummmamarmn.uwsemammamme

=mr=============n as described above, the Company is recording a satance at deferred revenue requirement representing those Decem r 31, Dece r 31, River Bend costs which have been deferred for g ,, ,,,,,, ,, ,3 future recovery. DertRRtn Revraut Elver Send Cost Deferrals. Pursuant to Q Q $S {3n3RIYER accounting orders received in 1986 from the LPSC Louisiana retail and the PUCT, the Company deferred recognition, jurisdiction . $173,461 $ -

for financial reporting purposes, of the retail Wholesale jurisdiction . s5,506 39,888 portion of the operating costs associated with steam jurisdiction . 8.673 -

River Bend and costs of purchasing capacity from 237,640 39,888 CEPCO's portion of the unit incurred subsequent ACCoUNTINo ORDER to the unit's commercial in-service date and DtrtRRALs accrued carrying charges upon the retail portion of Texas retailjurisdiction both the cash portion of the deferrals and the Deferred River Bend investment in the unit not included in the *$$rg"e's#* 377,329 339,456 Company's rate base. The rate used in computing Amortization of the carrying charges was 9.75 percent during the accumulated deferred period from January 1 to March 31,1987, River Bend costs (2,010) -

10 percent from April 1 to December 31,1987, " " ' " "

and 10.25 percent from October 1,1987 to

'Ju"Ni on Deferred River send July 22,1988. The deferral of costs and accrual of expenses and carrying carrying charges associated with River Bend was charges. 408,854 410,532 terminated in the Loulslana retailjurisdiction on ^*3 NIS$c"d cu eferred December 15,1987, upon receipt of the River Bend costs (42,549) (1,710) permanent rate decision and terminated in the steam jurisdiction Texas retailJurisdiction on July 22,1988, the Deferred River send effective date of rates authorized by the PUCT rate

• es and carrying c$$fg"c'3 order or. May 16,1988. Amortization of The Company has capitalized $43,764,000 of RC"*N#!osN*"*

cr o (2,069) (83)

River Bend equity carrying charges in 1988 for 759,439 ratemaking purposes that have not been recorded 768.148 in the Consolidated Statement of income. DE c Q D RIVERBEND gg g3 The following table details balances of amounts DtrtRRtD RivtR BcND deferred and accrued under accounting orders Sr"^AM"c gogNET 135,764 142,024 issued by regulators, net of amortization of such m1,31s S m O12 amounts, and deferred revenue requirements related to phase-in plans recorded for financial reporting purposes, net of deferred River Bend The deferred income taxes related to the financing costs (discussed in Note 2). amounts detailed above at December 31,1988 and 1987 of $251,366,000 and $184,475,000, respectively, are included in " DEFERRED CREDITS AND OTHER LIABILIT!ES - Accumulated Dcferred Income Taxes" on the Consolidated Balance Sheet.

Reduction of Deferred River Bend Costs. As a result of the interim rate relief granted during 1987 and 1988 in the Texas and Loulslana retail jurisdictions, the Company has reduced by

$46,266,000 and $94,896,000 for the twelve months ended December 31,1988 and 1987, respectively, the amount of defe:Ted River Bend costs being recorded in accordance with accounting orders issued in 1986, by the regulatory commissions. This amount reflects a reduction of $1.50 (Texas) and $1.00 (Louisiana) for cach $1.00 of revenue received as a result of the interim rate increases. Such adjustment was required since the commissions, as a result of 36

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granting interim rate relief, have allowed some The components of federal income taxes are as River Bend costs (on a non-specific basis) to be follows:

1988 M87 1986 collected through rates rather than being deferred.

The reduction of deferred River Bend costs was Charged to operating terminated in both jurisdictions upon receipt of expenses:

Current federal income tax the permanent rate orders. provision . , $ - $ - $ (1,120)

Deferred federal income Recovery of Costs - Amortization of taxes - net

• • d

• Accumulated DeferreC River Bend Costs. The c,pgj'eg Unst"&d5n

,ompany was ordered by the LPSC, as part of the costs . . . . . . . . ... (472) 1,333 4,634 December 15,1987 rate order, to amortJze the

^* # "" '

cance!!aYion Nos*ts . (2,104) (1,827) (1,668) deferred costs and accrued canying charges nudear unit cancellation costs . . .......

200 100 related to the accounting order over a ten-year ruel and purchased power costs accrued. . 4,704 (1,662) (6,106) period, in July 1988, the Company began Expenses deferred for tax amortizing over a 40-year period approximately purposes. ...... (1,094) (5,447) (1,257)

$182,000,000 of defened costs and accrued N'tg[tjngxN" a n canying costs associated with the portion of River recognized currently . (56.581) (140,955) (212,680)

Bend ruled prudent by the PUCT in accordat:ce R er 8en P ""

xpe ses def cd or with the May 16,1988 rate order, anandal reporting.

expensed for tax purposes . 64,517 74,040 68,777 unbliied revenues. (3,665)

4. Federal Inconte Taxes Other . 1,638 (2.343)

(1,059)

(697)

Total deferred federal The provisions for federal income taxes were 'mcome taxes - net . 63,635 27,994 10,214 different from the amounts computed by applying '"v stment tax credits -

net the statutory federal income tax rate to net Total federal income taxes income before federal income taxes. The reasons ged to ,e,operating for these differences are as follows: Charged to other income -

net 1.392 7,699 (3,165) 88 M87 M86 Total federal income (in thousands taxes $ 60,909 $ 31,990 $ 2,508 except percents) lncomNaxIs . $164,052 $275,091 $247,289 Timing differences exist for which deferred taxes statutory tax rate 34 % 40% 46% have not been provided and, therefore, have not rederal income taxes at been recovered through rates. The cumulative statutory tax rate . . . . . 55,778 109,236 113,752 amount of timing differences for which no deferred

^dgra"InNe ge *bx"es) " taxes have been provided was approximately resutung from: $128,000,000 at December 31, 't988. The tax Exdusion of ArUDC and effect of the Company's 1988 federal tax loss has

$3,'es n

rom ta a!ie been recorded as a reduction of deferred income income . . . . . . . . . . . . . . . (305) (105,325) (113,863) taxes. At December 31,1988, for tax purposes, Items capitalized for book the Company had tax loss carryforwards of xp nsed for

$"x'P $se"r pu (5,779) 542 (14.523) approximately $928,000,000 and investment tax Non-deferred depredation credit carryfonvards for book and tax purposes of differences . . .. 6.040 3,249 6,066 approximately $180,000,000. These will be used to

^!x"c's t a "f o$cr regSt ry reduce income taxes in future years and, if not ad.justments . . . (91) 693 (3,732) used, will expire through the year 2003.

Non-deferred differences of...

nonuulity subsidiaries (53) 584 8,484 in December 1987, the FASP, issued STAS Deferral of nuclear fuel No. 96, Accounting for income Taxes, which must Am rtl Uon of' investment be adopted by the Company beginning in 1990.

tax credit (4,118) (3,712) (3,530) STAS No. 96 significantly changes accounting for Other items 1,811 4,526 (1,313) income taxes and supersedes aimost aii existing Total federal income authoritative accounting iiterature on accounting taxes $ 60,909 $_31,99, 0 $ 2,308 for income taxes. While the Statement retains tacctive federal Income tax rate. 37.1 % 11.7 % .9% r(with equirementthe exception to recorddescribed dererred taxes below) forthe existing 37

==== Financial Inforn1ation======c- = = = = =

mummmmmmmmmmmmmmaamawa.uumnamnwmmarmammummmen - - mmwwww transactions that are reported in different years for The obligations for plan benefits and the amount financial reporting and tax purposes, it revises the recognized in the Company's Consolidated computation of deferred income taxes so that the Balance Sheet at December 31,1988,1987, and amount of deferred income taxes on the balance 1986, are reconciled as follows:

sheet 13 adjusted whenever tax rates or other 1988 1987 1986 provisions of the income tax law are changed.

Adoption of SPAS No. 96 is expected to have a (in thousands)

Actuarial Present value of significant impact on the Company's balance of senefit obi;gations:

deferred income taxes through reclassifications. Accumulated benefit The impact on the Company's Consolidated c$'tNIe"nN"of"N Statement of Income for future years cannot be $123125, $127,384, determined at this time, and $129.055. $ 135,279 $ 139,308 $ 140,869 The statement also changes current practice by Pg,ected significantly limiting the ability to recognize net 9 onbenefit $067,509) $ O73487) $ O78E2)

Plan assets. at fair deferred tax assets, the net deferred tax effects of market value 217,559 200,762 202,786 expenses or losses repotted later for tax purposes Plan assets in excess of than for financial reporting purposes. projected benefit obhgation . 50,050 27,075 24,574

5. Retirement Plan Unrecognized net gain . (39,253) (15,659) (14,494)

Unrecognized net assets, The Company's pension provision for the twelve betn amortized over 5

months ended December 31,1988,1987, and unrecognized prior 1986 was $691,000, $798,000, and $(614,000), service cost 19,003 21,462 22,869 respectively. Of such amounts, $608,000, Other - primarily

$703,000, and $(446,000), respectively, were benefit payments charged /(credited) to income with the balance of #hn"tEnId c n cYmputing such costs for each period charged /(credited) to the projected benefit construction and other accounts. obligation . - -

3,114 The components of the pension provision for O"Io#

cns n iostsincNuded 1988,1987, and 1986, are summarized as follows: n defened assets $ 1,151 $ 1,842 $ 2.640 1988 1987 1986 (in thousands) The accumulated benefit obilgation is the service cost . $ 6,742 $ 6,690 $ 7,114 present value of future pension benefit payments Interest cost on projected and is based on the plan's benefit formulas benefit obligation. 11.933 11,330 10,589 without considering expected future salary Actual retum on plan assets (26,869) (8.356) (30.423) increases. The projected benefit obligation unrecognized net gain (toss) 11,812 (6,853) 14,494

(' ) I considers future salary increases. The assumed of rio senice discount rate and long term return on pension cost 730 730 - assets was 8'4 percent and 7W percent, Amortization of net transition respectively. The expected rate of increase in asset (2,387) (2,387)

(2,388) future salary levels averaged approximately Net pension cost . $ 691 $ 798 $ (614) 6.1 percent.

At December 31,1988, 62.3 percent of plan assets were invested in equity securities, 25.3 percent in bonds, and 12.4 percent in cash or cash equivalents.

Early Retirement I'lan, During 1986, the Company initiated an early retirement plan for employees meeting certain qualifications. The cost of the early retirement plan was $14,417,000, of which $8,938,000 was charged to operating expense, with the balance charged to construction.

During 1988, in accordance with the PUCT and LPSC rate orders, the Company recorded a deferred charge of $7,797,000 associated with the retail portion of the early retirement plan and began amortizing the Texas retail portion of 38

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$3,778,000 over 23 years and the Loulslana retail lease and to reimburse the Company for nuclear portion of $3,969,000 over five years. fuel costs incurred during 1987 and 1988. The balance will be used to pay future nuclear fuel

6. Leases costs. The agreement calls for the Company to make quarterly payments for the cost of fuel The Company has existing agreements for the leasing of certain vehicles, coal rail cars and other consumed during the previous quarter, including equipment, buildings, and nuclear fuel. Lease capitalized interest, and additional payments, if charges were $75,398,000, $67,367,000, and necessary to pay costs related to the fuel or

$20,119,000 for the twelve months ended reduce related debt.

December 31,1988,1987, and 1986, respectively. The Company is leasing the Lewis Creek Of such amounts, $74,431,000, $65,925,000, and generating station from its wholly-owned

$17,466,000, respectively, were charged to consolidated subsidiary, OSO&T.

Income.

Future minimum lease payments under 7. Discontinued Nonutility noncancellable capital and operating leases Subsidiary Dperations (including amounts due under a new nuclear fuel lease as discussed below) for each of the next five I;ffective July 1' 1987, the Company sold the years and in the aggregate at December 31,1988, are estimated to be (in thousands): natural gas and oil reserves belonging to Prudential, a wholly-owned subsidiary, for 1989. . . . . $ 60,237 approximately $23,000,000. Operating results 1990.. . 67,899 related to the discontinued operations of 1991. 59,743 Prudential, as shown below, are included in 1992. . . . 56,247 nonutility subsidiary operations in the 1993. . . 39,589 Consolidated Financial Statements. Included in the Remaining years 176,812 loss on disposition is a pre-tax provision of

$757,000 related to the costs of disposal of the oil

$460,527 and gas operations.

At December 31,1988, the Company had a M87 1986 nuclear fuel lease with a non affiliated third party ed",p p",7*,"harc fuel corporation (the Lessor), which provides for amounts) the Lessor to finance nuclear fuel for future use at operating income poss) from River Bend. During 1987, the Company and $5ygyne

, geens we m $ 1.570 $(35,844}

participating banks agreed to an amendment that income tax provision. - 8,953 reduced the banks commitment to the outstanding operating income ooss) from lease balance each time the Company makes a discontinued operations 1,570 (26,891) quarterly payment for nuclear fuel used and an Loss on disposition of oli and gas amendment that the Company would pay properties . (1,273) -

$4,600,000 per month, in addition to the quarterly income tax provision. - -

fuel use payments, to reduce the unpaid lease Net loss on disposition . (1.273) -

balance.

Income Ooss) from discontinued On February 7,1989, the Company completed a operations. $ 297 $ (26,891) new nuclear fuel financing agreement. The Loss per average common share proceeds of $160,000,000 was used to retire the outstanding from discontinued perati ns. $ $ (.26) outstanding balance of the previous nuclear fuel 39

r-u== Financial Information ==-=u--- b- ==

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8. Jointly Owned Facilities As of December 31,1988, 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 Company Share of Investrnents:

Plant in service . . . . . . .

$3,056,859 $404,831 $219,193 Accumulated depreciation . . . . . 192,654 84,011 29,788 Total plant capability . . . . . 936 MW 550 MW 540 MW Fuel source . ... .. .... . Nuclear Coal Coal Ownership share .. .. .. . .... ... .. 70 % 70 % 42 %

The Company's share of operations and maintenance expense agreements between the Company and the participants in River rdated to the jointly owned units is included in operating Bend and Nelson Unit 6. The amounts above do not reflect expenses. see Note 13 for information relating to buyback costs previously recovered through CWIP included in rate base.

9. Capital Stock and Retained preferred dividerCs are imposed by the Articles Earnings up n the issuance of additional preferred stock.

Based upon the results of operations for the year The Company offers its common, preference, ended December 31,1988, and existing and preferred shareholders the opportunity to circumstances, the Company is unsure whether it reinvest their dividends and to make additional is able to issue any additional preferred stock.

cash payments to acquire shares of the Company s common stock through its Dividend Certain limitations on the payment of cash Reinvestment and Stock Purchase Plan (DRIP).

dividends on common stock are contained in the (However, see Note 1 for information on the Articles, indentuir.A and loan agreements. Under omission of common, preferred, and preference existing limitations, as discussed in Notes 1 and stock dividends during 1986,1987, and 1988.) 12, the Company may not pay dividends on such stock. If such restrictions did not exist, the most The Company also offers all employees meeting designated service requirements the option to restrictive limitation at December 31,1988, as to participate in benefit plans which provide an the amount of such dividends which might be opportunity to obtain common shares of the p id, was contained in the Tmst Indenture. Based Company. At December 31,1988, the Company on such limitation, the retained camings available had reserved 5,562,503 shares of common stock for payment of dividends as of December 31, 1988, amounted to $714,523,000. Preferred and to be issued in connection with its DRIP and employee benefit plans. The Company currently preference dividend requirements, as well as intends that the DRIP and employee benefit plans preferred stock sinking fund requirements, have purchase shares of common stock in the open priority over the payment of cash dividends on market rather than offering unir. sued shares which c mmon stock.

would have a dilutive effect on camings per share Payment of dividends on preference stock is and book value. subordinate to payment of dividends on preferred At the Company's option, the Articles provide stock and preferred stock sinking fund obilgations.

that all or part of its preferred and preference There are no limitations in the Articles on the stock may be redeemed at stated prices. Certain issuance of preference stock.

Issues are subject to restrictions in the Articles which prohibit redemption for a period of time, 10. Preferred Stock Subject to directly or indirectly out of the proceeds of or in Mandatory Redemption anticipation of borrowings or issuance of additional stock of equal or prior rank having a The series of preferred stock subject to lower interest cost or dividend rate. See additional mandatory redemption are entitled to sinking restrictions under the $65,000,000 credit facility in funds which provide for the annual redemption of Note 12, shares (varying in amount from 3 percent to At December 31,1988, the Company had 5 percent of the number of shares originally authorized 10,000,000 shares of preferred stock issued) at $100 per share, plus any dividends in without par value (none issued) and authorized anears on such stod (see Note Ib 6,000,000 shares of preferred stock $100 par As discussed in Note 1, as of December 31, value (4,617,568 issued). Limitations based on the 1988, the Company has failed to satisfy ratio of after-tax camings to fixed charges and $4,945,900 of preferred stock sinking fund 40

camrmuumanamuzw=mmumwamunummQ emammammummca-me=mmmmmmma gggg.3gggry Gulf States Utilities Co.

requirements. See Note 1 for the consequences of Revolving Credit Agreement. At December 31, such failure. 1988, the amount outstanding under the Company's revol ing credit agreement consisted of During ~1986, the Company purchased in the $200,000,000 bearing an interest rate of 10 open market, shares of the applicable series of percent and $150,000,000 at 10% percent.

preferred stock in excess of the amount needed to Amounts outstanding under the agreement are satisfy the 1986 sinking fund requirement. At repayable over a three-year period with payments December 31,1988, assuming that the additional of $29,166,000 due on March 12,1989 and shares purchased during 1986 are used to satisfy September 12,1989.

future sinking fund requirements, minimum redemption requirements amount to $4,701,100, Deferred River Bend Construction and Continuing

$7,679,700, $11,066,700, $14,816,700, and Services Commitments. Certain post-completion

$14,816,700 during the years 1989 through 1993, costs relating to the construction of River Bend respectively, exclusive of the $4,945,900 remain unpaid to Stone & Webster Engineering unsatisfied provision discussed above. Corporation, the general contractor for River Bend.

As of December 31,1988, the Company s share of See Notes 1 and 12 for limitations on payment such costs amounted to $41,724,000. The of dividends on and purchases of preferred stock. Company and CEPCO began making monthly installments of $2,000,000 on July 1,1988, and

11. Long-Term Debt will continue until the principal amount due and related accrued interest is paid. At current interest The Company's Mortgage indenture contains rates, these monthly payments would continue for sinking fund provisions which require, generally, approximately 31 months, through July,1991. The that the Company make annual cash deposits Company and CEPCO own 70 percent and 30 equal to 1.2 percent of the greatest aggregate percent of the unit, respectively.

principal amount of first mortgage bonds outstanding or, in lieu thereof, to apply property An agreement was reached regarding the additions or reacquired first mortgage bonds for payment of costs relating to a continuing services that purpose. The Company has satisfied the agreement with Stone & Webster. Under the mortgage requirements in past years and plans to agreement, the Company's portion of the accumulated charges accrued at December 31, meet current and future requirements by certifying 1988, of $14,833,000, was paid in full on available net additions" to the trustee. Those January 1,1989.

series of the Company's first mortgage bonds which were privately placed require cash sinking American Municipal Bond Assurance Corporation funds. First mortgage bond sinking fund (AMS4C). The Company has agreements with requirements, along with long-term debt maturities AMBAC which guarantee the payrnent of principal (including those amounts to be due under the and interest on $65,735,000 of pollution control revolving credit agreement as discussed below), revenue bonds. Such agreements require the for each of the next five years are detailed below Company to make cash reserve deposits (or, (in thousands): altematively, sign a promissory note for 200 percent of the cash reserve deposit then payable)

$"j'g"M,","d upon the occurrence of a material development as sationed by  %.7,, defined in the agreements.

Cash A t ons Ma u ties ng January,1988, the Company and AMBAC 1989' $27,320 $17,928 $113,503 mended the orig, mal agreement. As part of the 67,320 17,724 150,856 settlement, the Company agreed to deposit 1990[

1991 48370 17J24 263,949 $12,000,000 in an escrow account which may be 1992. 8,995 17,520 114,003 retumed to the Company, based on the flxed 1993. 425 17,520 8,580 charge coverage ratio at and subsequent to April, 1990, while AMBAC acreed to cancel notes totaling The Company's Mortgage Indenture contains an ~

$110,000,000 and agreed that no further cash interest coverage covenant which limits the deposits would be required through April,1990.

amount of first mortgage bonds which the During 1988 the Company executed an additional Company may issue. Based upon the results of $49,934,000 of notes which are due in April 1990.

operations for the twelve months ended December 31,1988, and existing circumstances, 12. Notes Payable

! the Company believes it has sufficient coverage to issue additional first mortgage bonds subject to As of December 31,1988, the Company had the receipt of necessary legal opinions and agreements with banks and banking institutions consent of Irving Trust Company under the credit which provided for short-term lines of credit agreement described below, totaling approximately $67,400,000 of which 41

l l

- Financial Information =m-a=========-=

$65,000,000 is collateralized as described below. Bend. The variable costs associated with such There can be no assurance that the remaining buybacks are composed of fuel costs and unsecured sources of short-term funds may be operations and maintenance expenses, while the accessed at this time, or will remain available, or fixed costs are based upon gross plant investment

, that new sources can be arranged. Interest rates and other factors.

I associated with these lines are based t>n the prime rate. Commitment fees on the collateralized line of fielson Unit 6. For the twelve months ended December 31,1988,1987, and 1986, variable credit range from % of 1 percent to % of 1 percent of the amount of available credit. In Ifri of costs applicable to the Nelson Unit 6 buybacks commitment fees on the uncollaterallud lines, were $13,285,000, $12,829,000, and $16,441,000, certain banks require a nonrestricted cash balance respectively, while the fixed costs associated with be maintained equal to 5 percent to 10 percent of such buybacks were $16,542,000, $17,945,000, the commitment. and $20,892,000, respective!y. Based upon current Information, the Company estimates that the Infomtation regarding short-term debt annual fixed costs incurred in connection with the outstanding is detailed below: Nelson Unit 6 buybacks will range in declining 1988 1987 1986 amounts from $11,860,000 in 1989 to $5,208,000 (in thousands except in 1993. From 1994 through 1996, aggregate fixed percents) cost payments for the buybacks of power of such Maximum amount un!t are estimated to be approximately Nk notes"'s na W $ _ $ _ $9,000 $9,061,000.

N # "!

outstand 1kg

• River Send. The Company and CEPCO have a Bank notes - -

37 five year agreement which began on June 16, Weighted average interest 1986, whereby the Company will buyback power ratNn*g$t end of ou from CEPCO for declining amounts of CEPCO's period share of River Bend. The fixed costs incurred in Bank notes - -

- connection with the buybacks were $100,688,000, Weighted average annual $150,382,000, and $92,494,000 for the twelve

's"Nk no$ '"' - - 7.87% months ended December 31,1988,1987, and 1986, respectively, and will amount to $70,155,000 (a) Calculated by dividing the sum of the effective inttrest for in 1989, $46,117,000 in 1990, and $17,145,000 in the year by the average daHy short term e bt outstanding.

1991. For the twelve months ended December 31, included in the total short-term lines of credit is 1988,1987, and 1986, variable costs applicable to a $65,000,000 credit facility to be terminated and the River Bend buyback were $34,233,000, paid on or before March 1,1989. The facility is $49,658,000, and $14,892,000, respectively.

fully underwritten by Irving Trust Company and is collateral! zed by a pledge of the Company's Southem Company. As discussed in Note 1, the accounts receivable and the Lewis Creek Company entered into contracts, some of which it Generating Station (the Station), a 530 megawatt asserts are terminated and on which it is currently gas-fired generating facility. The Station is owned withholding payment, with the Southem Company by OSO&T, a wholly-owned subsidiary. The providing for power purchases by the Company.

Company is leasing the Station from the The fixed costs applicable to the power purchases subsidiary and will continue to operate the Station, from the Southem Company are based on costs of The credit agreement contains negative covenants existing and future generating units and other which, among other restrictions, restrict the factors. For the twelve months ended incurrence of additional debt, creation of liens, December 31,1988,1987, and 1986, the fixed payment of dh'idends, purchase of stock to satisfy costs associated with the power purchases totaled sinking fund requirements, sale of assets, and $11,996,000, $19,442,000, and $112,593,000, acquisition of assets. The Company is presently respectively. Under the terms of the contract, if negotiating the extension or replacement of this determined to still be effective, the Company facility which will result in continuation of such would be required to make, on a take-or-pay covenants or similar ones. basis, annual payments for fixed costs currently estimated to range in amounts from approximately

13. Purchase Power Agreements $167,000,000 to approximately $82,000,000 during the period from 1989 through 1992. The variable The Company has agreements with the costs associated with such purchases are participants in Nelson Unit 6 and River Bend (see composed of fuel costs and operations and Note 8) to buy back declining amounts of their maintenance expenses. For the twelve months share of the capacity of these units for periods ended December 31,1988,1987, and 1986, such ranging from seven to fourteen years in the case variable costs totaled $17,594,000, $60,337,000, of Nelson Unit 6 and five years in the case of River and $58,597,000, respectively.

42

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14. Joint Venture 15. Subsequent Events The Company entered into a joint venture with On February 28,1989, the LPSC authorized an Conoco, Inc., Citgo Petroleum Corporation, and immediate $38,000,000 rate increase as the Vista Chemical Company (the participants) second step in the Company's court-ordered whereby the Company's Nelson Units 1 and 2 phase-in plan. The LPSC order, among other (100 MW each) were sold to a partnership things, modified certain aspects of earlier consisting of the participants and the Company, decisions by reversing the prior denial of recovery of the Company's investment in the canceled River On September 1,1988, the Company recorded Bend Unit 2, reduced the appropriate level of the sale of the units by recording a $48,490,000 return on common equity from the 14 percent receivable, the present value of 240 monthly ordered by the court to 23 percent, and made payments of $529,000 to be made by the other adjustments. The Company is in the process participants in payment for the units. The gain of of evaluating the LPSC order which may result in

$47,020,000 on the sale is being amortized over the appeal of certain aspects of the order. As 20 years, the primary term of the joint venture. discussed in Note 3, the court-ordered phase-in plan provides for additional increases in future The participants will supply the fuel for the units, years, which are subject to LPSC review.

while the Company will operate the units and purchase the electricity produced by the units. The Company will continue to sell electricity to the participants.

l

16. Quarterly Financial Infortnation (Unaudited)

(in thousands except per Share arnounts) 1 Earnings Per Average Share of Common Stock Income Outstanding from from ConUnuing Continuing Opensions Operations Before the Before the Earnings Per Cumulative Cumulative Average ENect of ENect of Share of Operating Operating Accounting Net Accounting Common Stock 1988 Hevenue Income Change _ Income Change Outstanding First Quarter . . . . . . . . . $353,857 $102,081 $22,819 $ 8,450 $.06 $ (.07)

Second Quarter . . . . . . . 362,610 116,265 30,082 30,082 .14 .14 Third Quarter . . ..... 437,183 138,649 57,005 57,005 .38 .38 Fourth Quarter . . . . . . . 366,827 75,861 7,606 7,606 (.08) (.08) 1987 first Quarter. $302,835 $ 53,607 $40,787 $41,110 $ .23 $ .23 Second Quader 364,114 100,633 62,630 61,524 .43 .43 Third Quarter . 429,387 134,119 89,961 90,260 .69 .69 l Fourth Quarter . 336,250 88,261 47,426 48,207 .30 .30 l

43

Financial Inforntation ====--=====

__,_amawammauw-~~an- =

- -e --- - - - - - - -

Report ofIndependent Accountants To the Shareholders of Gulf States Utilities Company:

We have audited the accompanying consolidated balance sheets of Oulf States Utilities Company and subsidiaries as of December 31,1988 and 1987, and the related consolidated statements of income, cash flows and changes in capital stock and retained eamings for each of the three years in the period ended December 31,1988. These financial statements are the responsibility of the Company's management Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial i statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. >

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gulf States Utilities Company and subsidiaries as of December 31,1988 and 1987, and the results of its operations and its cash flows for each of the three years in the period ended December 31,1988, in conformity with generally accepted accounting principles.

As of December 31,1988 and 1987, the Company has capitalized approximately $3 billion of construction costs related to its River Bend Nuclear Ocnerating Plant and has capitalized, in accordance with regulatory orders, $997 million and $808 million respectively, of deferred charges representing plant operating and carrying costs incurred subsequent to commercial operation. Without regulatory orders prescdbing the deferral and capitalization of such charges, net income for 1988,1987 and 1986 would have been reduced by $128 million ($1.19 per share), $390 million ($3.61 per share) and

$234 million ($2.20 per share), respectively. During 1986, the Company flied requests with regulatory commissions in Texas and Loulslana requesting rate increases for recovery of River Bend construction costs and deferred charges and subsequently was granted increases covering a portion of such costs.

As discussed in Note 3, if current regulatory orders are not modified a significant write-off of capitalized costs associated with River Bend may be required, however the extent of such write-offs, if any, will not be determinable until appropdate rate proceedings, including court appeals, have been concluded.

Management can provide no assurance that the Company will ultimately cam a retum on or fully recover its investment in River Bend.

As discussed in Notes 1 and 3, the Company is involved in legal proceedings relating to contractual disputes and rate issues. The ultimate outcome of the proceedings cannot presently be determined.

Accordingly, no provision for any liability that may result from the resolution of the proceedings has beer; made in the accompanying consolidated financial statements.

As discussed in Notes 1 and 3, significant legal proceedings, rate issues and operational contingencies exist which raise substantial doubt about the Company's ability to continue as a going concem. The consolidated financial statements have been prepared assuming that the Company will continue as a going concem and do not include any adjustments that might result from the outcome of these uncertainties.

As discussed in Note 3, in accordance with recently issued statements of the financial Accounting Standards Board, during 1988 the Company changed its method of accounting for plant alnndonments and equity carrying charges.

/

Houston, Texas "!

I ebruary 28,1989 44

cwwmmmmmw . m a ammam=M2 ren ----w--mmm_mm g mmmmmm. W g Gulf States Utilities gymqgCo.

Statistical Summary For the years ended December 31 1988 1987 1986 1985 1984 ELECTRIC DEPARTMENT Number of customers at year end:

Residential . . . . . . . 486,993 484,838 484,608 485,825 485,711 Commercial . .. . .. .. . . .

61,958 61,861 62,059 61,712 60,372 Industrial . . . . . . . . . . . . . . 4,563 4,319 4,322 4,398 4,302 Temporary construction . . ..,. . .. 1,477 1,442 1,656 2,188 2,924 Other . .. . . .. . . .

2,585 2,445 2,430 2,333 2,182 Total Customers. . . . . .. . 557,576 554,905 555,075 556,456 555,491 Sales - Kilowatt-hours (thousands):

Residential . . . . . . . .

6,326,089 6,208,931 6,174,567 6,224,555 6,209,347 Commercial . . .... .. .. . . 5,023,755 4,911,378 4,920,882 4,964,416 4,745,055 Industrial . . ...... . .. ,.. . 12,072,078 11,811,676 12,158,762' 13,590,004 15,924.402 Temporary construction , . . 13,133 16,241 42,498 47,475 57,354 Other . ....... ... .. . ... .... . ~ 1,482,652 1,485,242 1,508,245 1,890,700 2,152,052 Total Sales . . .... .

24,917,707 .74,433,498 24,804,954 26,717,150 29,088,210 Revenue - (thousands)

Residential . . . . . .. .. . .. $ 452,538 $ 450,392 $ 425,206 $ 528,593 $ 434,946 Commercial . . . . .. ... . . . 331,178 312,544 309,440 358,882 278,155 Industrial . ...... .. .

510,354 476,871 500,026' 680,755 573,839 Temporary construction .

1,130 1,364 3,066 3,666 3,702 Other . . 120,513 108,935 120,690 142.509 120,059 I Total Revenue . . , . $1,415,713 $1,330,106 $1,358,428 $1,714,405 $1,410,701 Average Annual KWM Use Per Customer:

Residential . . . . 13,029 12,818 12,731 12,806 12,901 Commercial . . . . . .

81,339 79.180 79,416 80,951 80,264 IndustriaI . . . . . . ........ 2,717,101 2,744,986 2,781,053 3,110,553 3,725,006 Revenue Per KWM - (cents):

Residential . . . .. 7.15 6.93 6.89 8.49 7.01 Commercial . . . . 6.59 6.36 6.29 7.23 5.86 Industrial . ....... .... .......... . 4.23 4.04 4.11 5.01 3.60 Electric Energy Output - Thousands of KWM:

Net Oenerated . . . . . . . . . . . ... . 25,146,780 23,421,700 25,009,283 19,286,014 26,218,067 Net Purchased and Interchanged 3,570,812 4,593,232 5,281,404 11,340,923 6,953,777 28,717,592 28,014,932 28,290,687 30,626,937 33,171,844 System Peak Load - Including Interruptible Load - Megawatts . . . . . . . . . . . . . . . . 4 910 4,991 5,089 5,139 - 5,475 Total Capability, including Contract Purchases at Time of System Peak Load (MW) . 6,805 6,871 7,548 6,610 6,780 Load ra ctor . . . . . . . . . . . . . . . . . 66.6 % 64.1 % 63.5 % 68.0% 69.0 %

STEAM PRODUCTS DEPARTMENT Steam Revenue (thousands) . . . . $ 70,728 $ 69,056 $ 77,783 $ 102,576 $ 83,165 Steam Sales - KWM (millions) . . . 2,279 2,187 2,144 2,288 2,606 Steam Sales - millions of pounds . 10,494 8,593 7,516 7,695 8,466 OAS DEPARTMENT Oas Revenue (thousands) .... $ 34,036 $ 33,424 $ 33,125 $ 41,455 $ 53,175 Number of Customers at year end .... 82,510 83,003 83,994 85,039 85,665 i

Output - MM cu. ft, of natural gas purchased... 7,320 7,505 7,086 8,454 8,252 l

Sales - MM cu. ft. . 7,134 7,489 7,065 7,946 9,140 WEATHER DATA Cooling degree days (Normal 2,696) . .

2,716 " 2,660 2,935 2,877 2,654 Percentage change from normal . . . . . .7 (1.3) 8.9 6.7 (1.6)

Heating degree days (Normal 1,830) . 1,771 " 1,892 1,636 1,565 2,062 Percentage change from normal (3.2) 3.4 (10.6) (14.5) 12.7

• Excludes 182,580 MWM and $9,052 epplicable to prior periods, related to capitalized River Send construction energy.

" Estimated.

45

remur===

__, Offi c e_rs ====_================__=======

, = _ _ =-

Chairman, President and CEO E. Linn Draper Jr. (9) 46 Bobby J. Willis (26) 52 Chairman of the Board, President V!ce President & Controller and Chief Executive Officer Jasper P. Worthy (32) 59 Special Advisor to the Chairrnan Vice President-General Services Division Vice Presidents

• " (0} John W. Conley (30) 57 Special Advisor to the Chairman Division Vice President Westem Senior Executive Vice Presidents Arden D. Loughmiller (27) 50 Division Vice President-Beaumont l Joseph L. Donnelly (9) 59 Ronald M. McKenzie (22) 48 Senior Executive Vice President Division Vice President-Port Artimr and Chief Financial Officer J. Ted Meinscher (38) 56 Edward M. Loggins (30) 58 Division Vice President Lake Charles Senior Executive Vice President James D. Watkins (30) 57 Senior Vice Presidents Other Officers James C. Deddens (5) 60 Lestle D. Cobb (33) 53 Senior Vice President- Secretary River Bend Nuclear Group Clyde W. McBride (11) 36 Calvin J. liebert (26) 54 Assistant Treasurer Senior Vice President-Extemal Affairs Timothy L. Morris (9) 37 y p ,

Assistant Secretary

( ) Years of service Janes R. Aldridge (8) 58 ^9#8 "" # ### I'### ##

1. 8 ##*

Vice President Muman Resources William E. Barksdale (31) 57 Vice President-Engineering and Technical Services Amery J. Champagne (15) 45 Vice President-Energy Resources Anthony P. Gabrielle (8) 61 Vice President-Corrputer Applications Charles D. Glass (39) 60 Vice President Operations William J. Jefferson (8) 59 Vice President-Rates and Regulatory Affairs Cecil L. Johnson (12) 46 Vice President-Legal Services James E. Moss (30) 52 Vice President-Marketing Jzck L. Schenck (7) 50 Vice President & Treasurer 46

===== Directors =$==-

Directors Stockholder Information

• Robert M. Barrow ' Bismark A. Steinhagen Stock Listing General, Retired Commandant Chairman of the Board- Gulf States Utilities Company's United States Marine Corps Steinhagen Oil Company, Inc. common stock is traded under the St. Francisville, LA (1984) Beaumont, TX (1974) symbol OSU on the New York,

• • John W. Barton James E. Taussig 11 Midwest and Pacific Stock Vice President-Loulslana President-Taussig Corporation Exchanges.

Aircraft, Inc. take Charles, LA (1975)

Baton Rouge, LA (1970) . Executive Committee

• • Chairman, Executive Committee u SL e  !!! C mpany Joseph L. Donnelly Beaumont, Texas Senior Executive Vice President ( ) Year Elected and Chief Financial Officer Morgan Shareholder Services Beaumont, TX (1986) Tmst Company

• E. Linn Draper Jr. New York, New M Chairman of the Board, President and Chief Executive CU 8 8 Beaumont, TX (1985) Beaumont Principal Offices Beaumont, Texas Martin Ooland President-Southwest 350 Pine Street Morgan Shareholder Services Research Institute Beaumont, Texas Trust Company San Antonio, TX (1983) 77701 New York, New York Edwin W. Hiam Divisions investment Consultant DMdend Reinvestment Plan Agent Boston, MA (1959) 285 Liberty Avenue Gulf States Utilities Company

} Beaumont, Texas P.O. Box 1671 William H. LeBlanc Jr. 77701 Beaumont, Texas Chairman of the Board 77704 Baton Rouge Supply Co., Inc. 1540 Mnth Avenue Port Arthur, Texas Baton Rouge, LA (1974) Form 10-K 77640 Charles W. McCoy Highway 75 North Chairman of the Board Conroe, Texas The Form 10-K Annual Report to Premier Bancorp Inc. 77501 the Securities and Exchange Baton Rouge, LA (1985) Commission and OSU's 1988 f 446 North Boulevard Pinancial and Statistical Report can

, Paul W. Murrill Baton Rouge, Loulslana be obtained without charge from Special Advisor to the Chairman 70802 Beaumont, TX (1978) Leslie D. Cobb, Secretary 314 Broad Street P.O. Box 2951, Eugene H. Owen Lake Charles, Louisana Beaumont, Texas 77704.

Chief Executive Omcer 70601 Owen & White, Inc. Notice of Annual Meeting Baton Rouge, LA (1989)

Monroe J. Rathbone Jr. The 1989 Annual Meeting of Medical doctor and partner. shareholders will be held at 2 p.m.,

The Surgical Clinic Thursday, May 4,1989, in the Baton Rouge, LA (1975) company's headquarters,350 Pine Street, Beaumont, Texas. Formal e ec ng, proxy n es etired C irman-Pirst City Dancorporation of Texas, Inc. s emen an pmxies W M Mouston, TX (1978) *#

• C **U" shareholders on or about March 14, Sam P. Segnar 1989. Shareholders are invited to Chairman of the Board attend, but if tney cannot, they are Collecting Bank, N.A. urged to Illi out and retum their Houston, TX (1988) proxies.

47

l' l

Gulf States Utilities Co. Bulk Rate P.O. Box 2951 U.S.POSTAot Beaumont, Texas 77704 PAID Houston, Texas i

Permit Number 427

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