ML20205Q923
| ML20205Q923 | |
| Person / Time | |
|---|---|
| Site: | Pilgrim |
| Issue date: | 04/15/1999 |
| From: | Silberg J SHAW, PITTMAN, POTTS & TROWBRIDGE |
| To: | NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM) |
| Shared Package | |
| ML20137K686 | List: |
| References | |
| NUDOCS 9904220117 | |
| Download: ML20205Q923 (25) | |
Text
-
o SHAW PITFMAN POTTSeTROWBPJDGE
- A FAS TNHSHF MWCNNG FROFIMONAL CERKXATEW5 2300 N street, N.W.
Washirgerm, D.C 20037 1128 202.663.8000 Fammde 202 663.8007 JAY E. SILBERG, P.C 202.663.8063 Jay.sdbergSohawptttman com ATTACllMENT A TO THIS LETTER CONTAINS PROPRIETARY INFORMATION April 15,1999 U.S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, D.C. 20555-0001 Docket No. 50-293 License No. DPR-35
Subject:
Boston Edison Company and Enterev Nuclear Generation Company Additional Information Provided in Support of the Request for Transfer of the Pilgrim Nuclear Power Station Facility Operating License and Materials License
References:
- 1. BECo Ltr. 2.98163 (ENGC Ltr. 98-01) dated December 21,1998
- 2. BEco Ltr. 2.99.009 (ENGC Ltr. 99-01) dated January 28,1999 Ladies and Gentlemen: / 1 l
/ l Attachments A and B are hereby provided in support of the request for transfer of the Pilgrim Station Facility Operating License and NRC Material License from Boston Edison Company (BECo) to Entergy Nu. lear Generation Company (Entergy Nuclear) as submitted in J Reference 1. This information is provided in response to a request by the NRC Staff at a / 4/
meeting held on. April 13,1999. / ,
Attachment A are the consolidated statements of financial position for Entergy l International Ltd. LLC for the years 1997 and 1998. Attachment A contains information that expands on previous information provided in Reference 1 of which portions were requested to be withheld from public disclosure pursuant to 10 CFR 2.790(a)(4) and 10 CFR 9.17(a)(4). The Affidavit in support of this request was included in Reference 1. Therefore, there are redacted and non-redacted versions of Attachment A of this submittal.
ved: tir Erd /
PDa d
j pytg#
9904220117 990415 PDR ADOCK 05000293
_ .I PDR
r f4 1-SHAW PITTMAN POTTSeTROWBPJDGE
' A PARTNEA$HIF INCLUDING PROFESEiONAL CC* PLAAflONS U.S. Nuclear Regulatory Commission April 15,1999
. Page 2 Attachment B is the report on audit of fmancial statements for the year ended December 31,1997 for Entergy International Ltd. LLC.
Please feel free to contact Mr. Jack Alexander at Pilgrim (508)830-8269 or Ms. Connie Wells at Entergy Nuclear (601)368-5345 if you have any questions or require any additional information.
Sincerely, A
yE. Silberg ounsel for Boston Edison Company Document #: 748042 v I
Boston Edison Comprny Dock t No. 50/293 Entergy Nuclear Generation Company Licensee No. DPR-35 cc:
Mr. Alan B. Wang, Project Manager Mr. Hubert J. Miller Project Directorate 1-3 Region i Administrator Office of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Mail Stop: OWFN 14820 Region i 1 White Flint North 475 Allendale Road 11555 Rockville Pike King of Prussia, PA 19406 Rockville, MD 20852 (10 copies)
U.S. Nuclear Regulatory Commission Senior Resident inspector Attention: Document Control Desk Pilgrim Nuclear Power Station J Washington, DC 20555-0001 !
)
Secretary U.S. Nuclear Regulatory Commission General Counsel Washington, D.C. 20555-0001 U.S. Nuclear Regulatory Commission ATTN: Rulemaking and Adjudications Staff Washington, DC 20555-0001 (fax: 301-415-1101) (fax: 301-415-3725)
, John M. Fuiton, Esq.
Asst. General Counsel Boston Edison Co.
l 800 Boylston Street Boston, MA 02199-8003 I
(fax: 617-414-2733)
Douglas Levanway, esq.
(counsel for Entergy) i Wise, Carter, Childs and Caraway
! PO Box 651 Jackson, Mississippi 39205-0651 (fax: 601 968 5519) i Mr. Robert Hallisey Mr. Peter LaPorte, Director Radiation Control Program Mass. Energy Management Agency Center for Communicable Diseases 400 Worcester Road Mass. Dept. of Public Health P.O. Box 1496 305 South Street Framingham, MA 01701-0313 i Jamaica Plain, MA 02130 I
ATTAQiMDTr B ENTERGY INTERNATIONAL LTD LLC (A WHOLLY-OWNED SUBSIDIARY OF ENTERGY CORPORATION)
REPORT ON AUDIT OF FINANCIAL STATEMENTS l
l FOR THE YEAR ENDED DECEMBER 31,1997 l
L____ . .
)
ENTERGY INTERNATIONAL LTD LLC (a wholly owned subsidiary of Entergy Corporation)
TABLE OF CONTENTS DESCRIPTION PAGE Report of te Accountants !
Consolidated Statement of Financial Potition 23 Consolidated Statement of 0;:=f.iera 4 Consolidated Statement of Cash Flows 5 Notes to Consolidated Financial Statements 6 - 22 I
l l
l
Coo 3ers
&Lyarand a professonal services firm REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Entergy International Ltd LLC:
We have audited the accompanying consolidated statement of financial position of Entergy International Ltd LLC, (a wholly-owned subsidiary of Entergy Corporation) and Subsidiaries ("the Company") as of December 31,1997, and the related consolidated statements of operations and cash flows for the year then ended. 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 audit.
We conducted our audit 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 statements are free of material misstatement. An audit includes examming, 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 audit provides a reasonable basis
' for our opinion.
In our opinion, the consolidated financial statements referred to above represent fairly, in all material respects, the financial position of Entergy Intemational Ltd LLC and Subsidiaries as of December 31,1997, and the results of their operations and cash flows for the year then ended, in conformity with generally accepted accounting principles.
New Orleans, Louisiana March 4,1998 Coopers & Lybrand LL P. is a member of Coopers & Lycrand iniomational. a hmited habihty association incorporated in Switzerland.
ENTERGY INTERNATIONAL LTD LLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS December 31, 1997 (In Thousands)
Current Assets:
Cash and cash equivalents:
Cash $ 13,561 Temporary cash investments - at cost, which approximates market 19,517 Total cash and cash equivalents 63,078 Notes receivable 7,363 Accounts receivable:
Customer (less allowance for doubtful accounts of $22.6 million) 155,555 Associated companies 1,278 Other 44,698 Accrued unbilled revenues 287,803 ,
Accumulated deferred income taxes 12,401 I Inventory 15,705 Prepayments and other 17,367 Total 605,248 Property, Plant and Equipment Electric 2,809,977 Construction work in progress 89,954
. Total 2,899,931 Less - accumulated depreciation and amortization 119,760 Property, plant and equipment - net 2,780,171 Other Property, Investments and Assets:
Investments,long-term 69,797 CitiPower license (net of accumulated amortization of $25.6 million) 486,153 London Electricity license (net of accumulated amortization of $31.1 million) 1,327,312 Long-term receivables 17,172 Prepaid pension asset 241,216 Other 28,757 Total 2,170,407 TOTAL $ 5,555,826 See Notes to Consolidated Financial Statements Page 2
ENTERGY INTERNATIONAL LTD LLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION LIABILITIES AND MEMBER'S CAPITAL December 31, 1997 (In Thousands)
Current Liabilities:
Currently maturing long-term debt S 33,814 Notes payable 240,794 Accounts payable l Associated companies 7,225 Other 378,774 Customer deposits 28,016 l Taxes accrued 114,449 ,
Interest accrued 40,580 Other 1,651 .
Total 845,303 Other Liabilities:
Accumulated deferred income taxes 1,010,024 Other 312,397 Total 1,322,421 Long-term debt 2,512,950 Company-obligated redeemable preferred securities of subsidiary partnership holding solelyjunior subordinated deferrable debentures 300,000 Member's capital 621,271 Cumulative foreign currency translation adjustment (46,119)
Total 575,152 TOTAL $ 5,555,826 See Notes to Consolidated Financial Statements Page 3
ENTERGY INTERNATIONAL LTD LLC 3 CONSOLIDATED STATEMENT OF OPERATIONS For the Year Ended December 31.1997 (In Thousands)
Operating Revenues $ 2,191,682 Operating Expenses:
Operation and maintenance:
Purchased power 1,351,778 Other operation and maintenance 365,001 Depreciation and amonization 154,067 Taxes other than income taxes 35,653 Total 1,906,499 i
Operating Income 285,183 i l
Other Income (Deductions):
Interest and dividend income 26,736 Gain on disposition of property 8,613 Miscellaneous - net (9,416)
Total 25,933 Interest Expense:
Distribution on preferred securities of subsidiary 3,019 Other interest-net 245,996 Total 249,015 Income Before Income Taxes 62,101 Income Taxes 182,109 Net Loss S (120,008)
See Notes to Consolidated Financial Statements Page 4
i ENTERGY INTERNATIONAL LTD LLC CONSOLIDATED STATEMENT OF CASH FLOWS For the Year Ended December 311997 (la Thousands)
Operating Activities:
Net loss 3 (120,008)
Noncash items included in net loss:
Depreciation and amortization 154,067 Defened income taxes (40,152)
Gain on disposition of property (8,613)
Changes in workms capital:
Receivables (21,480)
Accounts payable 103,469 Taxes accrued /5,192 Interest accrued 4,772 Other woriang capital accounts (24,523)
Provision for liabilities (439)
Other 38,433 Net cash flow provided by operating activities 160,718 Investing Activities:
Construction / capital expenditures (209,659)
Acquirition of Lendon Electricity, net of cash acquired (1,951,701)
Investment in nonregulated/nonutility properties 1,322 4 Net cash flow used in investing activities (2,160,038) r Financing Activities:
Proceeds from the issuance of:
Bank notes and other long-term debt 1,731,229 Preferred securities of subsidiary 300,000 Capital contribution 391,953 Retirement oflong-term debt (327,918)
Changes in short term borrowings - net (25,455)
Net cash flow provided by financing activities 2,069,809 Effect of exchange tatos on cash ar.d cash equivalents (10,245)
Net increase in cash and cash equivalents 60,244 Cash and cash equivalents athagi==ias of period 2,834 Cash and cash equivalents at end of period $ 63,078 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid dunns the penod for:
Interest 3 212,513 Income Taxes $ 119,335 See Notes to Consolidated Financial Statements Page 5
I ENTERGYINTERMW*> L LTD LLC NOTES TO CONSOLIDAP W GCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS Entergy Internatwnal Ltd LLC (formerly En up, Power Development Intemational Corporation and referred to herein as "&e Company" or "Entergy IL") is a wholly-owned subsidiary of Entergy Corporation (Entergy) which was formed for the purpose of holding other subsidiaries involved in foreign electric utility businesses. The principal subsidianes of the Company include Entergy London Investments plc ("Entergy London"), CitiPower Pty. ("CitiPower"), and Entergy Power Edesur Holding, Ltd ("Edesur"). London Electricity, Entergy London's sole asset, distributes and supplies electricity to customers in the London metropolitan area.
CitiPower supplies and distributes electricity to customers in Melbourne, Australia. Edesur owns a 5% interest in Distrilec, a consortium wiuch owns a 51% interest in distribution facilities serving almost 2 million customers in Buenos Aires, Argentma The shareholder's equity of CitiPower as of January 1,1997 represented the initial Member's Capital of ,
Entergy IL. During 1997, Entergy Corporation made additional capital contributions to Member's Capital, l consisting of its investments in Entergy London and Edesur. The companies combined were under common l control prior to the combination and therefore the consolidated statement of operations includes all income (loss) for 1997. !
NOTE 2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES ;
Basis of Presentation The consohdated financial statements of Entergy IL are presented in United States ("U.S.") dollars ($) and r in conformity with accounting principles generally accepted in the United States ("US GAAP"). The consolidated financial statements include the acounts of the Company and its consolidated subsidiaries. Significant intercompany accounts and transactions are eliminH in consolidation.
The Company is not subject to rate regulation, but rather is subject to price cap regulation in certain instances and to competitive market forces in other mstances, and, therefore, the provisions of Statement of Financial Accounting Standards No. 71, " Accounting for the Effects of Certain Types of Regulation", do not apply.
Use of Es*6=**= in the Frenaration of F:--->ial Statements The preparation of the Company's financial statements, in conformity with generally accepted accounting principles, requires management to make estunates and assumptions that affect the reported amounts of assets and liabilities and disclosure of = 2 y- 2 assets and liabilities and the reported amounts of revenues and expenses.
Adjustments to the reported amounts of assets and liabilities may be necessary in the future to the extent that future estimates or actual results are different from the estimates used.
Revenue Reconnition Entergy London and CitiPower distribute electricity to commercial, residential and industrial customers within the Iendon and Melbourns franchise areas, respectively. Additionally, both companies supply electricity to customers both inside and outside their franchise areas. Entergy London and CitiPower accrue estimated revenue for energy delivered since the latest billings and Entergy London records revenue not of value added tax. Both Page 6
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ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) comparues purchase power prunarily from the wholesale trading market for electricity in their respective countries. !
The wholesale tradmg markets monitor supply and demand between generators and suppliers, set prices for l generation and provide centralized =" lament of amounts due between generators and suppliers. l Renulation and Price Control j 1
The Company is a subsidiary of Entergy, which is a registered public utility holding company under the ]
Public Utility Holdmg Company Act of 1935, as amended ("PUHCA"), and is subject to the broad regulatory i provisions of PUHCA, which requires, among other thmgs, Securities and Exchange Commission ("SEC") l approval for certam transactions, except as exempted under the provisions of tlw Energy Policy Act of 1992.
Certain supply customen of Entergy London and CitiPower are subject to price control formulas through ;
December 1998 and December 2000, respectively, which allow a maxirnum charge per unit of electricity. !
Distribution customers are subject to price control formulas which allow a maximum charge per unit of electricity.
Differences in the charges, or in the purchase cost of electricity, can result in the under or over-recovery of revenues in a particular year.
For Entergy I-d- where there is an over-recovery of supply or distribution business revenues agamst the regulated maximum allowable amount, revenues are deferred in an amount equivalent to the over-recovered amount The deferred amount is deducted from operating revenues and included in other liabilities. Where there is an under-recovery, no asset is recorded in anticipation of any potential future recovery. At December 31,1997, Entergy London had balances of $12.5 million and $32.9 million related to distribution revenue and supply revenue overrocoveries,' respectively.
Property. Plant and Eauioment Property, plant and equipment is stated at original cost and includes materials, labor and appropriate overhead costs. The Company is entitled, under certain conditions, to collect cash contributions from consumers to )
fund improvements to the Company's distribution networks. Consumer contributions are credited against the l historical cost of the asset.
Depreciation is computed on the straight-line basis at rates based on the estimated service lives (which range from five to forty years) and costs of removal of the various classes of property. Consumer contributions are amortized into income at a rate of 2.5% for Entergy London and, for CitiPower, reduce the depreciation for the associated assets.
Gams or losses on disposal of property, plant and equipment are recorded in the period in which
- the property is disposed.
Income Taxes For U.S. tax purposes, the Company is an affiliate of Entergy, and as such, its operations are included in the filing of Entergy's U.S. consolidated federal income tax retum. U.S. income taxes are allocated to cenain of the Company's U.S. subsidianes in proportion to their coitribution to consolidated taxable income. SEC 1 regulations require that no Entergy subsidiary pay more taxes than it would have paid if a separate income tax l retum had been filed. 'the company's United Kingdom ("UK") subsidiaries are members of an affiliated group in l
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ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) the UK and are eligible for group relief. Group relief enables current losses to be surrendered by one affiliated company to another affiliated company. It is the policy of the Company's UK affiliated group to apply the group relief provisions in order to mimmize the UK corporation mcome tax of the group. In accordance with Statement of Financial Accounting Standards No.109, " Accounting for Income Taxes" ("SFAS 109"), deferred mcome taxes are recorded for all temporary differences between the book and tax basis of assets and liabilities and for certain credits available for evryforward.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portioa of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Distribution Licenses Distribution licenses represent the identifiable intangible assets related to London Electricity and CitiPower which exclusively permit distribution services to be provided within defined territories. These licenses are being amortized over forty years using the straight-line method Entergy IL's future net cash flows are expected to be sufficient to recover the amortization of the cost of the CitiPower and London Electricity licenses London Electricity's Public Electricity Supply (" PES") license will continue in effect until at least 2025 unless revoked Under ordmary circumstances, the license may not be revoked except on 25 years' prior notice, which notice may not be given until 2000. Otherwise, the Secretary of State may revoke a PES license by not less than 30 days' nonce in writing to the licensee in certain specified circumstances including any failure to comply with a final order of the Regulator requiring the license holder to comply with its license conditions or requirements, or the insolvency of the licensee CitiPower's license will continue in effect unless revoked. 'Ihe Office of the RagnI=W- General ("ORG")
may at any time give at least 20 business days notice of revocation to the licensee if the licensee does not comply with an enforcement order or an undertakmg, and the ORG decides that it is necessary or desirable to revoke the license in order to achieve the ORG's policy objectives.
Deferred Loan Costs The Company capitalizes direct costs associated with loan originations and amortizes such costs over the expected life of the loan facilities, rangmg from four to seven years.
Cash and Cash Eeuivalents The Company <==ders all unrestricted highly liquid debt instruments purchased with an original maturity of three months or less to be cash and cash equivalents.
IREtatatata The Company accounts for investments whose fair market values are readily determmable in accordance with Statement of Financial Accounting Standards No.115, " Accounting for Investments in Certain Debt and Equity Securities"("SFAS 115"). 'Ihese securities are considered available-for-sale securities under SFAS 115 Page 8
ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) and their fair values approxunate cost. Other securities whose fair market values are not readily deternunable and in which the Company does not have a sipificant interest are recorded at cost.
Investments in which the Company's ownership interest ranges from 20% to 50%, or which are less than 20% owned but over which the Company exercises significant influence over operating and financial policies, are accounted for using the equity methed. The following are the Company's principal equity method investments as of December 31,1997:
Investment Perc#ntmoe Ownership
'Ihames Valley Power Ltd 50 %
Iondon Total Energy Ltd 50 %
Barkmg Power Limited 13.5 %
The Company uses the cost method to account for Edesur's investment in the distribution facilities serving Buenos Aires, Argentina.
Foreien Currency Translation In accordance with Statement of Financial Accounting Standards No. 52, " Foreign Currency Translation"
("SFAS 52"), all assets and liabilities of Entergy IL's foreip subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenues and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are reflected in a separate component of member's capital. Current exchange rates are used for U.S. dollar disclosures of future obligations denonunated in foreign currencies. No representation is made that the foreign currency denommated amounts have been, could have been, or could be converted into U.S. dollars at the rates indicated or at any other rates.
Innairment of Lonn Lived Assets In accorsece with the provisions of Statement of Financial Accounting Standards No.121, " Accounting for the Impairment of long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), the Company periodically reviews its long-lived assets whenever events or changes in circumstances indicate that recoverability of these assets is u x:ertam Generally, the determmation of recoverability is based on the net cash flows expected to result from such operations and assets. Projected net cash flows depend on the expected future operatmg costs associated with the assets and expected future market prices over the remauung life of the assets.
Based on current estunates of future cash flows, management anticipates that future revenues from such assets end operations will fully recover all related costs.
Derivative FinancialInstruments
' Entergy IL uses a vancty of derivative financial instruments, including interest rate and foreign currency swaps, energy tradmg swaps, and contracts for differences, as a part of its overall risk management strategy. !
Entergy IL accounts for its derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 80, "Amana= for Futures Contracts", SFAS 52, and various Emerging Issues Task Force pronouncements If the interest rate swaps were to be sold or termmated, any gain or loss would be deferred and :
amortued over the remauung life of the debt instrument being hedged by the interest rate swap. If the debt I I
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ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) instmment being hedged by the interest rate swaps were to be extinguished, any gain or loss attributable to the swap would be recognized in the period of the transaction.
Entergy IL uses energy trading swaps and contracts for differences prunarily to hedge its UK and Australian supply businesses agamst the price risk of electricity p archases. Use of these instruments is carried out within the framework of Entergy IL's purchasing strategy and hedging guidelines. Risk of loss is monitored through establishment of approved counterparties and maximum counterparty limits and muumum credit ratings.
Entergy IL rocosmzes gains or losses on these instmments when settlement is made on a basis consistent with the treatment of the underlying energy customer contract being hedged.
Fair Value Disclosures
'Ihe MmW fair value of financial instruments was determmed using bid prices reported by dealer markets and by internationally recognized investment banking firms. The estimated fair value of derivative financial instruments is based on market quotes of the applicable interest or foreign currency exchange rates, or a survey of foreign wholesale tradmg market (" Electricity Pool") forward prices. Considerable judgment is required in developing the estunates of fair value. Therefore, estimates are not necessarily indicative of the amounts that Entergy IL could realize in a current market exchange. Entergy IL conside s the carrying value of financial mstruments classified as current assets and current liabilities to be a reasonable estimate of their fair values because of the short maturities of these instruments.
NOTE 3. REGULATORY MATTERS London Electricity
'Ihe distribution business ofIendon Electricity is regulated under its PES license in the UK, pursuant to which revenue of the distribution business is controlled by the Distribution Price Control Formula ("DPCF"). The DPCF determines the max 2 mum average price per unit of electricity (expressed in kilowatt hours) that a Regional Electricity Company (" REC") may charge. The elements used in the DPCF are established for a five-year period and are subject to review by the Director General of Electricity Supply for the UK (" Regulator") at the end of each period and at other times at the discretion of the Regulator. At each review the Regulator can adjust the value of certain elements in the DPCF. Followmg a review by the Regulator in August 1994, a 14% price reduction was set for London Electncity, effective April 1,1995. In July 195, a further review of distribution prices was concluded by the Regulator for fiscal years 1997 to 2000. As a result of this further review, Lon:lon Electricity's distribution prices were reduced an additional 11% effective April 1,19%; 3% effective April 1,1997, and will be reduced by a further 3% on both April 1,1998 and 1999.
The supply business of London Electricity is also regulated by the Regulator, and prices are established based upon the Supply Price Control Formula ("SPCF") which is similar to the DPCF; however, the SPCF currently allows full pass-through for all properly incurred costs and is set for a four-year period by the Regulator.
At present, London Electricity has an exclusive right to supply electricity to residential and small industrial and commercial customers in its franchise area with demand of less than 100 KW. In late 1998, this segment of the supply business will become open to competition, subject to a six-month transition period. 'Ihis means the market will be fully opened with all customers having access to competition by June 1999. Although the advent of competition for a!! customers will permit all RECS to compete on a national level, London Electricity Page 10 I
ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) may be more sensitive to comp:tition from its neighboring RECS due to its high concentration. London Electricity is in the process of developing its strategy to meet expanded competition in its supply business, which will focus on active marketmg and customer service to defend its residential customer base and expanding product oNerings to larger business customers Such strategy may include the development of strategic alliances in the provision of energy and related services and the increased use of hedgmg of electricity prices to mitigate the increased risk from the expansion of competition. There can be no assurance that this strategy will be successful in avoiding a significant loss of customers of London Electricity's supply business.
On October 16,1997, the Regulator published fmal proposals for new supply price restraints to apply for two years begmnmg April 1,1998. 'Ihe proposals were accepted on November 16, 1997. Among other thmgs, these proposals implement a price reduction for London Electricity's domestic and small business supply customers of 11.8% compared to the supply price tarisin effect in August 1997. A further 3% reduction is proposed to be effective on April 1,1999. "Ihe 11.8% price reduction to be effective on April 1,1998, would be decreased by the supply tariff reductions announced by London Electricity on September 29,1997, and effective from October 1, 1997, wtuch will retum over-recoveries experienced under the current SPCF. The license modifications which took effect December 31,1997, discontinued the automatic pass-through of all costs previous! / passed through to domestic and small business customers, including purchased power costs from the Electricity Pml.
London Electricity expects to incur approximately S49 million (a portion of which is expected to be capitalized) in fiscal year 1998 for re-engineering and technology costs to prepare infrastructure services for full F-th in supply from September 1998. London Electricity, along with the other PES license-holders, petitioned the Regulator to recover such costs from customers. In the Regulator's supply price restraint proposals published on October 16,1997, the Regulator proposed, within the SPCF, to provide for an annual allowance of 57.6 million for each PES license-holder over the 5 years ending March 31,2003, to cover data management services set-up costs plus an annual allowance of $1.6 million plus $1.60 per customer to cover operating costs for the penod 1998 through 2000. London Electricity estimates that these proposals will result in an aggregate allowance for London Electricity of approximately $12.6 million per annum for the period 1998 through 2000. On November 16, 1997, London Electricity accepted the Regulator's new SPCF to be applied beginnmg April 1, 1998, la its fiscal year 1998 (which ended March 31,1998), London Electricity expects to also incur a total of ,
58.2 million to procure settlement software for the Electricity Pool designed to interface with RECS' data management software. These costs are expected to be recouped through Electricity Pool settlement charges.
The non-franctuse supply market, which typically includes larger commercial and industrial customers, !'
was opened to competition for all customers with usage above 1 MW upon privatization of the industry in 1990.
The non-francluse supply markets of 100 KW or more were opened to full competition starting in April 1994.
CitiPower i On July 1 in each of the years 1997 through 2000 certain adjustments to CitiPower's allowed distnbution !
revenues have been made by CitiPower's regulator. Such distribution revenues have been and will be adjusted by l 1% less than the change in the consumer price index for each of the mspective years. CitiPower has implemented j certam cost efficiency and marketing initiatives to mitigate the impact of such revenue adjustments, j At present, CitiPower has an exclusive right in its franchise area to supply electricity to customers with annual usage ofless than 750 MWH In July 1998 and January 2001, CitiPower customers with annual usage of Page11
ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) between 160 MWH to 750 MWH and less than 160 MWH, respectively, will become open to supply business ;
competition.
Retail prices for CitiPower non-fracchise supply customers are subject to competitive market forces and are not regulated except for network tariffs, which are based on a maxunum average charge incorporating annual price changes of 1.5% less than the change in the consumer price index plus full recovery of transmission charges.
These prices will apply through the year 2000. i M l The Imdon Electncity and CitiPower supply businesses generally involve enteririg into fixed price contracts to supply electricity to customers who have become subject to competition. 'Ihe electricity is obtained primanly by purchases on a spot basis in which prices can be volatile. London Electncity and CitiPower are exposed to risks arising from differences between the fixed prices at which they sell electricity and the fluctuating prices at wiuch electricity is purchased unless such exposure can be effectively hedged 'Ihis risk will be extended to additional supply business customers as described above as they become subject to competition.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost, consists of the following at December 31,1997 (in thousands):
Transmission assets S 106,567 Distribution network assets 2,625,917 Land and buildings 162,959 Vehicles and mobile plant 269,304 Furniture, fixture i and equipment, including computer hardvezrc and software 40,808 Consumer contributions to construction (395,578)
Construction work in progress 89,954 2,899,931 Less accumulated depreciation and amortization 119,760 Total 5 2,780,171 Page 12
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ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
NOTE 5. INCOME TAXES:
The Company's income tax expense for the year ended December 31,1997 consists of the following (in thousands):
C urrent:
~
Federal S (13,369)
Foreign 235,630 ;
Total 222,261 l Deferred -- net (40,152) !
Recorded income tax expense S 182,109
%e Company's consolidated total mcome taxes differ from the amounts computed by applying the
- statutory mcome tax rates to mcome before taxes. The principal reasons for the differences for 1997 are (in thousands). )
l Computed at statutory rate (35%) S 21,736 Ine eases (reductions)in tax l resulting from:
UK windfall profits tax 234,080 Change in UK statutory rate (64,670)
Difference between foreign and U.S. (2,852) i I
statutory rate Foreign subsidiary basis difference (15,519)
Franchise fees 11,207 Interest on perpetual debentures 5,914 O ther-net (7,787)
Total income taxes S 182,109 Effective income tax rate 293.2 %
Page 13
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l ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Signincant w..W.;. of the Company's net deferred tax liability at December 31,1997 are as follows (in thousands):
Deferred Tax Liabilities:
Plant-related basis differences 5 (599,336)
Prepaid pension asset (74,777) j Distribution licenses (411,467)
Unbilled revenues (10,062)
Total (1,095,642)
Deferred Tax A ssets: l Distribution licenses 9,234 l Foreign tax credits (including !
foreign tax on unremitted earnings) 235,615 Other 87,250 Valuation allowance (234,080)
Total 98,019 Net deferred tax liability $ (997,623) l As a result of Parliamentary elections in the UK held on May 1,1997, the Labour Party gained control of the UK Government. On July 31, 1997, the British government enacted a one-time " windfall pronts tax" on privatized industrics, including regional electric utilities such as London Electricity. London Electricity's windfall pro 6:s tax liability is approxunately British Pounds Sterling (" BPS") 140 million (approxunately $234 million), . i which will not be deductible for UK corporation tax purposes Payment of the tax is required in two equal installments, the 6rst of which was paid on December 1,1997, and the second of which is due on December 1, 1998.
The UK Government also decreased the UK corporation tax rate from 33% to 31%, effective April 1, 1997. In awd r.r.4 with SFAS 109, this reduction resulted in a one-time reduction in income tax expense of approximately BPS 38 million (approximately $65 million). The liability for the windfall profits tax (with a correspondmg mcreann in income tax expense) and the reduction in London electricity's deferred income tax liability (with a correspondmg reduction in income tax expense) were recorded in July 1997.
On August 27,1997, the Federal Court of Australia upheld a decision by the Australian Commissioner of taxation that franchise taxes paid by a resident electricity distribution business were not deductible for Australian income tax purposes The impact of this decision on CitiPower, which also incurs such franchise taxes, is approximately $26 million. _ The provision for deferred income taxes was increased in December 1997 to reflect the impact of this decision.
'Ihe valuation allowance is provided primarily agamst foreign tax credit carryforwards and foreign tax credits on unremitted carmngs which can be utilized against future taxable income in the United States.
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ENTERGYINTERNATIONAL LTD LLC ;
)
I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) l NOTE 6. LINES OF CREDIT AND RELATED SHORT-TERM BORROWINGS )
London Electricity currently has $452.5 million of short-term commitments, of which $370.2 million was unused as of December 31,1997. "Ihe weighted average interest rate incurred on London Electricity's short-term borrowings was 7.64% for the period from February 1,1997 to December 31,1997. 'Ihe commitment fees for London E. uricity's $452.5 million credit facility range from .03% to .125% of the undrawn balance.
CitiPower currently has $22.8 million of short-term commitments, which had an outstandmg balance of
$11.2 million as of December 31, 1997. The weighted average interest rate incurred on such short-term borrowmgs was 5.72% for the year ended December 31,1997. The commitment fee related to this credit facility is
.10% of the undrawn balance In addition, CitiPower has a bank guarantee of $22.8 million for the purpose of satisfying the requirements of the Victorian Power Exchange. The fee related to this guarantee is .175% of the balance of $22.8 million.
NOTE 7. MEMBER'S CAPITAL 1 l
Member's Capital at December 31,1997 is comprised of the following components (in thousands)-
l Member's capital at January 1,1997 S 290,129 Capital contribution -
Edesur 59,197 Entergy London 391,953 4
Net loss for 1997 (120,008)
I Member's epital at December 31,1997 5 621,271 NOTE 8. COMPANY-OBLIGATED REDEEMABLE PREFERRED SECURITIES Entergy London Capital, L.P. (Entergy London Capital), a limited partnership, was established as a fmancing subsidiary of Entergy London for the purpose ofissuing preferred securities. On November 19, 1997, the limited partnership issued $300 million in aggregate liquidation preference amount of 8.625% Cumulative Quarterly Income Preferred Securities in a public offering. All of the proceeds from the sale of these preferred securities were invested by Entergy London Capital in the Perpetual Junior Subordmated Debentures issued by Entergy London to Entergy London Capital. Entergy London used the net proceeds from such investment, together with other funds available to Entergy London, to repay a portion ofindebtedness incurred in connection with the acquisition of London Electncity. Payment obligations with respect to these debentures will be payable in U.S.
dollars. Management's estunate of the fair value of these preferred securities at December 31,1997 was $303 million, based on the New York Stock Exchange closing price.
Entergy London has entered into currency exchange rate swap agreements to hedge the risk associated with exchange rate fluctuatens on the preferred securities. 'Ihe exchange rate swap agreements which hedge this risk involve the exchange of fixed rate U.S. dollars and BPS interest payments periodically over seven years for all Page 15
ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Enterav London ne 8% and 8 5/8% Eurobonds may become due prior to their stated maturity only upon the occurrence of certain events includmg default, liquidation or bankruptcy of London Electricity. The Company does not anticipate default under these agreements.
Entergy London executed a credit facility with several banks on December 17,19%, to obtain credit facilities in the aggregate amount of approximately BPSI.25 billion ($2.1 billion). Proceeds of this facility, which was in three tranches, were used, together with $392 million of cash provided by Entergy, to fund the acquisition of London Electncity and to provide working capital for London Electricity. De facilities were refmanced in November 1997. New or restated borrowmg facilities were negotiated and Cumulative Quarterly Income Preferred Securities were issued to partially replace one of the tiseaes. De restated credit facility is non-recourse to Entergy and is collateralued by assets of Entergy London, consisting of 65% of the shares of London Electricity.
) The maturity dates of the vanous tranches of the credit facility range from December 17,2001, to October 31, 2002. De interest rate on these facilities is the London Interbank Offered Rate plus up to 1.00% hpahg on the capitalization ratio of Entergy London and its subsidiaries.
Entergy London entered into interest rate swaps to reduce the impact ofinterest rate changes on its 6bt related to the London Electncity acquisition. The interest rate swap agreements involve the exchange of floating rate interest payments for fixed rate interest payments over the life of the agreements. Entergy London recogmzes interest expense currently based on the fixed rate ofinterest resulting from use of these swap agreements. If the counterparties to an interest rate swap agreement were to default on contractual payments, Entergy London could be exposed to increased costs related to replacing the original agreement. However, management does not anticipate nonperformance by any counterparty to any interest rate swap in effect as of December 31,1997. As of C+=kr 31,1997, Entergy Iondon was party to a notional amount of BPS 600 million of interest rate swaps with maturity dates rangmg from March 1999 to September 2001, which effectively fixed the rate of interest at 7.48%. De estunated fair value of the interest rate swaps, which represents the estimated amount Entergy London would pay to termmate the swaps at December 31,1997, based on quoted interest rates, is a net liability of $11 million.
CitiPower CitiPower established a variable rate revolving credit facility in the aggregate amount of 1.2 billion Australian dollars ($780 million) on January 5,1996. De facility is fully collateralized by all of CitiPower's assets and is non-recourse to Entergy. Borrowings have maturities of 30 to 185 days, and are continuously renewable for 30 to 185 day penods at CitiPower's option until the facility matures on June 30,2000. As of December 31,1997, the facility was drawn down to 1.1 billion Australian dollars ($715.3 million) at an average interest rate of 5.30%. Credit support is provided to facility banks in the form of a subordinated letter of credit supplied by the Commonwealth Bank of Australia. Tbc letter of credit facility matures on January 21,1999, and is for an amount of 70 million Australian dollars ($45.5 million). The letter of credit facility is fully collateralized by a second rankmg security interest in all of CitiPower's assets and the facility is non-recourse to Entergy.
CitiPower entered into several interest rate swaps to reduce the impact of interest rate changes on the borrowmss under its vanable rate line of credit. De interest rate swap agreements which hedge this debt involve the exchange of fixed and floatmg rate interest payments periodically over the life of the agreements. Interest is l recognized currently based on the fixed rate ofinterest resulting from use of these swap agreements. Market nsks Page 17 l
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i ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Aargements and Contracts Entergy London is subject to an agreement whereby the UK government is entitled to a proportion of I certain property gains ruh=1 by London Electricity as a result of disposals or events treated as disposals occurring aAer March 31,1990, of properties held at that date. His commitment is effective until March 31, 2000. I l
Entergy London has recorded approxunately BPS 100 million ($165 million) in reserves as of December 31,1997, related to unfavorable long-term contracts. nese reserves will be amortized over the remammg lives of the contracts which range from 14 to 18 years. The reserves recorded are based on the excess of estimated fair market value of these contracts over the present value of the future cash flows under the contracts at the applicable i discount rate and prices.
Some of the Company's distribution activities produce waste but the Company believes that it has taken and continues to take measures to comply with the applicable laws and governmental regulations for the protection of the environment. There are no material legal or admmistrative proceedmgs pending agamst the Company with respect to any environmental matter, i
NOTE 11. LEASES The Company has entered into operatmg lease agreements for the use of buildings and vehicles with nummum future rental payments as of Ds...ber 31,1997 as follows (in thousands):
X R.11 1998 $ 12,001 1999 10,906 2000 10,497 2001 9,931 2002 9,812 Y ears thereafter 124,398 M inim um lease paym ents $ 177,545 Rental expense incurred under these lease agreements in 1997 was $13.0 million.
NOTE 12. PENSION BENEFITS London Electricity participates in a defined benefit pension plan which provides pension and other related defined benefits, based on Anal pensionable pay, to substantially all employees throughout the electricity supply mdustry in the UK. Iondon Electricity uses the projected unit credit actuarial method for funding purposes.
Amounts funded to the pension plan are primarily invested in equity and fixed income securities.
CitiPower participates in the Victorian Electricity Superannuation Fund ("the Plan"), along with other electncity companies in Victoria. Most executives and employees hired after October 3,1994, are members of the Accumulation plan, or Division D, a defined contnbution plan. All other employees are members of Division B or Divisioe. C of the Plan, wiuch are defined benefit plans. Division B provides benefits in the form of pensions while Page 19
ENTERGYINTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Division C provides bene 6ts in the form of lump sum distributions upon retirement. CitiPower has no legal liability to fund de6ciencies in the Plan, however, CitiPower ensures that the Plan has sufficient assets to meet benefit payments ofits retirees as they become due. Investments incorporated in the Plan include: public and fixed-interest securities, convertible notes, and short-term deposits. No significant non-benefit liabilities are associated with the Plan.
Total pension income for 1997 included the followmg components (in thousands):
Service cost - benefits earned during the period S 19,247 Interest cost on projected benefit obligation 101,465 Actual return on plan assets (120,780)
Net pension income S (68) ,
l
'Ihe weighted-average discount rate, weighted-average rate ofincrease in future compensation levels used in deternuning the actuanal present value of the projected benefit obligation, and the expected long-term rate of return on plan assets for Entergy London were 9.0%,6.5% and 9.0%, respectively, for 1997. These rates for CitiPower for 1997 were 6.5%,5.0% and 7.5%, respectively.
The followmg table sets forth the plans' funded status and amounts rW~i in the Company's balance sheet at December 31,1997 (in thousands):
Actuarialpresent value of accumulated vested pasion benefit S 1,052,849 Plan assets at fair value 1,564,136 Projected benefit obligation (PBO) 1.163,298 Plan assets in excess of PBO 400,838 Unrecognized act gain (161,907)
S 238,931 Comprised of:
Prepaid pension asset - London S 241.216 Accrued pension liability CitiPower S (2.285)
NOTE 13. TRANSACTIONS WITH AFFILIATES l Entergy London and CitiPower receive technical, advisory, and adnunistrative services Ecm Entergy Services, Inc. and Entergy Enterprises, Inc., which are also wholly-owned subsidiaries of Entergy. Entergy London and CitiPower incurred approximately 55.3 million and $1.7 million, respectively, of expenses for such services in 1997.
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ENTERGY INTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 14. ACQUISITION OF LONDON ELECTRICITY Effective February 1,1997, Entergy IL, through a wholly-owned subsidiary, acquired London Electricity in a transaction accounted for as a purchase. Accordingly, the results of operations for the Company reported in its consolidated statements of operations and cash flows do not reflect London Electricity's results of operations for any period prior to February 1,1997. Based on the purchase method of accoanting, the Company has allocated the purchase price for London Electricity to London Electricity's assets and liabilities based on their estimated fair market value with the remamder allocated to London Electricity's distribution license which l
represents an other identifiable intangible asset. !
The assets and liabilities acquired at February 1,1997 were as follows (in millions): l Current assets S 518.2 Network assets 2,134.3 4 Other long term assets 1,601.2 Current liabilities (614.8)
Long term debt (333.9)
Otherlong term liabilities (1.285.9)
Total purchase price $ 2.019.1 Certain shareholders of London Electricity elected to receive Loan Notes issued by the Company in mhay for their shares as permitted by the terms of the Company's tender offer. Such debt mstruments are included in long-term debt in the above analysis.
In accordance with the purchase method of accounting, the results of operations for Entergy IL reported in its consolidated statements of operations and cash flows do not reflect London Electricity's results of operations for any period prior to February 1,1997. The pro forma combined revenue and net mcome of the Company j presented below give effect to the acquisition as if it had occurred on January 1,1997. The pro forma information - 1 is not necessarily mdicative of the results of operations that would have occurred had the acquisition been consum-H for the penod for which it is being given effect For the Year Ended December 31.1997 (In Millions of U.S. Dollars)
Operstmg revenues S 2,413 Netloss S (117)
NOTE 15. RESTRUCTURING CHARGES In 1995 and 1996, Imdon Electricity implemented a restructuring program to reduce the number of employees in the Network Sernces, Customer Services, Corporate and Information Technology groups. An imtial plan was approved by the Board of Directors in September 1994 and was based on a business plan deseloped subsequent to the 1994 Ryl-wy Renew of Distribution (the Distribution Review).
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ENTERGYINTERNATIONAL LTD LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Followmg the reopemns of the Distribution Review during 1995, a further plan was proposed leading to further rMiaa of employees in the same areas. This plan was approved by the Board of Directors in May 1996.
'the balance as of December 31,1997 for restructuring charges is shown below along with the actual termmaten benefits paid under the restructuring plan for the year ended December 31,1997 (in millions).
Provision for restructuring as of January 31,1997(date of acquisition) $ 41.7 i Adjustments to restructuring provision in 1997 13.3 Payments made in 1997 (29.7)
Cumulative translation adjustment 1.0 nalaar* as of December 31,1997 5 26.3
'Ihe restructuring charges shown above prunarily included employee severance costs related to the expected termmation of approximately 1,372 employees in various groups. As of December 31, 1997, 895 employees had either been termmated or accepted voluntary separation packages under the restructuring plan.
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