ML20203J430

Annual Rept 1985,Mississippi Power & Light Co

ML20203J430
Person / Time
Site:	Grand Gulf
Issue date:	12/31/1985
From:	Cavanaugh W, Lutken D MISSISSIPPI POWER & LIGHT CO.
To:
Shared Package
ML20203J429	List: AECM-86-0222, Forwards Middle South Energy,Inc Financial Statements for 1984 & 1985 & South Mississippi Electric Power Assoc & Util Annual Financial Repts for 1985 ML20203J430 ML20203J444
References
NUDOCS 8608050276
Download: ML20203J430 (74)

Text

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l Western Mississippi is a rich land. A f.ertile land. An M=___ _g_g__. -=; .

area poised f,or econonu.c growth. .Through the veais we've nurtured growth in our service area by providing abundant energv. We've cultivated industrv. We've planted seeds of hope for our customers through aggressive industrial development activities. That's our heritage. Through the vears we're recognized thr one thi ig. Reliable electricitv. But there's more. We're also helping build the economic future of Mississippi.

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'dhpnahk rok in tir pmpmn andjrmrth of tin ;

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l A Responsive Program For Economic Development t

l n 1985, A1P&L made a renewed Since the succe gram to This is our home, and from its there will be national advertising include major site studies and target strength comes our own. pn> grams to develop these leads. industry studies.

This renewed commitment is the Industrialists who visit western We will be holding existing industry ENERGY PLUS program, a new and Alississippi tell us that our senice area seminars in key h> cations to infbrm far-reaching cilbrt to artract new is one of the nation's best kept smaller industries of senices and industry to Alississippi, and encourage secrets. incentives available to them in their l existing industry to expand operations it is our intent in the coming ellbrts to grow and expand.

I within the state. months and years to unveil all that we And early in 1986, A1P&L will We are not newcomers to economic have to otter. sponsor Alississippi's first statewide t

development activities in our senice We are otTering Alississippi's first Economic Development Forum to area. Our fint area development incentive rate structure thr industry bring key business and professional department was organized in 1928. which creates new job opportunities leaden, as well as economic develop-i Tbgether, in cooperation with many in western Alississippi. ment professionals, together to plan others, our work has created over To assist the more distressed com- thr our state's economic future.

64,000 new industrial jobs in munities in our senice area, we have Ontv by such planning, and through

~

Alississippi. developed a unique three-phase renewed 'ellbrts in the total economic Enterprise Zone pmgram, including: development concept, tan we have a A Geal Of 14,000 *special rates, positive impact on the future of Nsw Jobs By 1990 *a fbrmal training program tbr h> cal Alississippi's economy.

community development volunteen, We call it ENERGY PLUS.

Our goal tbr ENERGY PLU$. .is to

~

and increase the rate of growtl

, 3 of new *a targeted marketing etlbrt between jobs in western Al ssissippi by 2a per- these communities and our Company. whik twimr ownn h/? unen ,m pmni,ur. its cent over the next live years. That Thniugh ENERGY PLUS, we are ~ ors:<ns air aha entrimri,ur industrr-pwn linn r means we must create 14,000 new job planning a training program thr "'""l * #'NI' '""" '" 'l l'""d"d a"" I planncd induinul sires a4."ur the at,ss,mpf,"niwr opportunities tbr Alississippians by the All,&L local managers and key g..,. rrmlih3/ icd iridiatry, farrotsde Jfarinc, liuilds marketmg personnel m econom,iC and trpain lay rnyr (=nn and lunn.

Achi:vable Goals - -

The ENERGY PLUS goals are ,

achievable because we have what in- ~

dustrv must have: an adequate and .~ .

, reliable source of electric energy .'. .

A M"Jn W ;' ' -  : :; .

9 .;; ~

PLUS people with proven records of '

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high productivity in industrial jobs. .

. m&4 And, all of the other PLUSES that .-[4 -'

Alississippi ollen new and expanding #"

industry: abundant natural resources-strong public educational systems; e cultural opportunities; a state- -g "

sponsored job skills training program g

thr industry; and towns where local people are " selling their communi- 1 ..

ties" to industrial prospects through ,

.: n s long-range planning cilbrts. -

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How ENERGY PLUS Works .

• 7 l

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M.e are intensifsing our ell. orts m all facets of economic and community ,

development, particularly with respect to making penonal contacts with -

industrial and commercial prospects. - - - - -

These new recruitment pn> grams already have taken our people overseas and into international recruiting etlbrts.

1 l E i E

Dear Stockholders:

Turning Point Rate Relief For the past tuu years we have been talking alx>ut reaching that big plateau wh v new base In the latter part of June, the first While the n.de was turning in the load generating units, the Inde- of a number of pwinn events Company's favor, there still remained occumd which signaled the beginning the major problem of rate relief pendence coal plant and the first unit of the Grand Gulf Nuclear Station, "f '"*

'"*".d tbr the Company-a associated with the Company's would be completed and reflected in *#I'""","E P""'- Imrtion of Grand Gulf Unit 1, and h usuhs of the G, rand Gulf con- mdeed, this was a major problem retail rates. The year 1985 uill be remembered as tiie year in which our a crion audit were made pubhe, and because the monthly bill to AIP&L.

the report card was so favorable that was about $28 milhon.

climb toward this goal was begun, Amidst the flurry of acn,vities befbre and hopefuHv, was placed on 'the path banner IwaWinn m the state s largest to completio'n. "C"?P'PC#I Audit Clears A1P&L the AIPSC and the federal court, m Cost Overruns., issues were raised by public otlicials n 1, rand Gulf Unit I was and others concerning the possible Period of Uncertainty placed mto commercial operation, and bankruptev or state takeover of the Let's look back brictly at how far besides being the successful culmina- Companv. '

we have come during 1985. As the tion of many years of hard work, it year began, you, as shareholders in helped A1P&L reach its goal of fuel Customer Support our Company, may remember we divenification, or shifting from natural were involvell in a' number of projects gas and oil to coal and nuclear.

In September, it was this k. m d of where the outcome was in someone Electricity from coal and nuclear will ta that tnggend a umng reponse else's hands, and therefore, verv aden, w ho help stabilire electric energy supplies from Altwiwippi businew)SL, advo-uncertain. thr many years, and will re'sult in wnt a mewage to the All caring the need fbr more jobs and We were in the midst of a pro- long-range savings to customers when longed and controversial rate case compared to the proiccted cost of oil- economic development and not a and gas-powered generation in the bankrupt utdity.

betbre the Alississippi Public Service Fortunately t'or our customers, our Commission (AIPSC), the Grand Gulf years ahead.

In mid-July the management audit employm and you, rius rah of and system agreement cases belbre the support, and the real acknoiledge-Feder'al Energy Regulatory Commis- report of A1P&L was made public. ,

sion (FERC), a A1PSC-mandated While pointing out opportunities for nwnt of potent al bankruptcy helped wt the nage for a decision by the construction audit of Grand Gulf, and improvement, the review g.we A1P&L , ,

AIPSC in mid-September when it a A1PSC-mandated management audit generally 6vorable marks. The con-of the Company, sultants determined that the A1P&L iwup a rate mder aHowinh nwery "I b'#"d C"If U*,*

Coupled with' this uncertainty was a organization is basically sound with I '" "VC' .a ,

management accountai)ility tools in per od of ycan. The A1PSC decision is barrage of publiclv-aired rumor's, com-place.'The review stated tilat not fmal, s,nai ,t has Nen appaled meats, and advene speculation. The Company was under attack, and all of " Company otlicials have attempted to by t!w Anonig Genal andi Legal, us were im the defensive, maintain c'ost control over ongoing Sen m Coalinon to the Al,w,wippi i ,

Supreme Court. The Compmy is In June, the environment was put operations, while at the same time into additional turmoil by a FERC presently collecting the rates allowed attempting to insure system reliability by the decision.

decision which gave the Company to its ratepayers and cimduct a majo'r significantly more of Grand Gulf Unit power plant construction." The management audit pointed out some Other Positive Developments I than any'one expected, a decision we are currentiv appealing to the p>tennal improvement areas that are Coming on the heels of this deci-U. S. Court ot' Appeals for the bemg evaluated. sion, two other developments have District of Columbia. In late July, the Company accived provided A1P&L additional capital, This was ibilowed by a rate order the latest report from the Nuclear these being the United Gas Settle-from the A1PSC which granted tates Regulatory Commission (NRC) on its ment and the sale of A1P&L's interest to recover most of the Company's appraisal of AIP&L and Grand Gulf. in a gas pipeline.

! costs tbr Independence Unit 2, in This report was, overall, positive, and Newark, Arkansas, but denitd the it emphasiicd the excellent progress Company any rate relief relative to .md performance that was achieved Grand Gulf Unit 1. over the last year.

Coming ou't of July, it was evident

! that the Company was no longer on the defense, but was moving verv l aggressively, and on the ollense.

2

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1 t he t'mted Gas settlement ciaied to A1P&l and reduted tuel durges Wc lus e requcsted the AllN ~ ni an clcs tna c.n struggle for the ( om- to our t ustemers m t he past. present alk m us to usc these tunds in the pans m tu o lau stnts l he banic u as and turmc. I hus a substantul p< >rtu m micrun u hile uc des clop and tile winth the tight betause total benctits ot' t he total retund has been. i n w ill. with them an appihation thr a to < >m t ustomers aie estnuated to bc in the next teu s cars. be passed on distnbution < nt proteeds that w e think s2S9 nullion. uith sl65 nulhon paid under cusung rates to our t ustomers will be most ads antageous to our to .\\ P& l . in 19S5. and sl" 5 nulln in in lou t r f uel u ists t ustomCrs u M11H1g in 198~ ljus s2S9 nulhon llPhi has unestcd thc icmaMung ds (hc s car drew to a t h isc. b$ PNI figtlic aho ta nt ik into auount a pre 's ih5 nulhtin. and it B canung mtcrest sold its interest m a natura! gas pipe-s k ius 5 ! 5 milh( 41 tctllnd bs [ 'ilil ed until the f unc w hen the N11N nukes hnc The pipchne was built m the a dcasnin icgarding the tuul appln a carh 19 Os tii assure a supph ot

. ult / no , ,o uwm mrnym n to ni iit t he counung t'u nds. pnnunk natural gas bat k w hen dcIn enes under aiaf;m; m .or6 r a.Un . s t r, i n.f d-g g[3t gj ggi g; i tist i st tatilitics

( h 4 J-tcfm (tint ratts u cre belntd t ur-

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tm ed With the present as ailabihts of lutilfal gas and alicinate t'uch at leavinable pik es. It u .h nti lt inge r required t he pipelinc w as siild f or 524 1 nu lh< in A1P& I 's sluic ot' t he pnweeds w as about 59 4 nulloin Financial Outlook I.ookmg ahead to 19S6. u e u ant to gn e uiu a sense or u hcre n e are finant ulh . u hcre u c w ant to be our s

target s, and ht tu u e at e gt ilny ti) get j ,

t here tg Net earnings w ill flatten < >ut but hy f;;,

the ('ompam will soll expctt to carn its allowed rate ist return of 15 5 g y[fj percen t I hest .csults seund tan k

% 4 gg gii< >d for a ( ompam m dcc tuuncul straits in nud -s e.u .1985 I lou cs cr. as im#I 5 , mdn iduals u nh un estments in the

( ( dupans . s t ill Hus klu lu t hese results luask lust hon bad things u cre

- ' and w ould has c gotten u tthout rate rchet I he 19Sh carnmds u tll I- largeh non ush carmngs In 19hn. AIP&l N sharc < >t the ($ rand lill!! annlla! billing g uill bc VlS nullion Present rates u il: rco n er s 10S nulhon Ilut uill

.. A Icas c u' u it h a 5210 nulhi nn slu irttall t he septembci ute inder ist the

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Back to Basics *This year, we are tning to retum Earlier this year, a professional We've described our present and

'" *"'" ""'""I "PCI""Si to restore rese rch firm conducted an opinion future earnings picture. Now we want some of the payrams curtad.e d in suney of AIP&L customers. The to give vou some of the ways our 1985. But we w nt to contmue to be results of the survey rated the need Company is getting to worli on '"5' '"" *'I"" I

"' P 3'C P'I'.>rities n fbr more and better paym jobs as the shaping our financial outlook, our spending,and to hnut mcreases in smgle most important pro lem fa ,

• For one thin all levels of spending m pnynnis where there is a the people of Alississippi today.

management of ur Company clearly highpayback. ENERGY PLUS is addressing this understand that we must continue to To sumnun,zc , we plan to get back need, while positionmp our Company consene cash in all phases of our to the basics of operatmg a unhtv. m a proactive leadership role in our operations. stag s future. We firmly believe our

• Secondiv, we alreadv know that we Strengths for Tomorrow service area is npe for economic must reduc'c construction expen- Now that we have been through E."".th, and our number one obj,ec-ditures. Only $17 million is budgeted nve n to see that it happens.

the challenge of sunival, it is time to for 1986 ver' sus S45 million that was A' "' #" 6, our Company is get on with the challenges and oppor-budgeted in 1985. also well pos.itioned to begm makmg tunities of growth. We believe that

• We understand that we must delav wise men create more opportunity '* P'"*'"** m the areas of raising ea'pital until our financial

~ ~

" scrvice and shareholder than thev tind in life, and we are in ratings improve. Recognizing that we the pnxess of creating new oppor-

'"'[t Pyhat ma have foregone disidend payments the sound like a bold state-tunities for 51P&L.

past three quarters to our parent com- ment, in light of the traumatic year jou have been introduced to the . we have just experienced, but there pany, Aliddle South Utihties (AISU), company's more aggressive posture in AIP&L wdl have to reinstate its are good reasons fbr optimism.

the pubhc arena with the ENERGi dividends to AISU if we expect them We do not say we won't be facing PLUS campaign. We have already serious challenge's in the future. We at to be able to purchase tlye common pub!icly promised our customers that AIP&L still have hurdles to clear, but stock required to maintain our capital AIP&L ,s i gomg to help bring more structure.

we predict the races in 1986 will be th.m 14,000 new j,ob opportunities to far different from the ones we ran in 1

• M e have deseloped innovative Alississippi by the end of 1990. Our 1985. 1 ways to increase electnc energy sales customers' response to the program through expanded marketmg efforts. Alanv of the challenges confronting has been very positive.

Alissidi pi Power & Light Company will be self-imposed as we strive to

. serve our customers, make our Com-

, - , ' *' en ., pany an even greater organization,

.y and protect your investment.

• % *W .~ .. Sincerely, ist hY -s + Y m.

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• %, Donald C. Lutken 5 M Chairnun of the Board and

/J ' Chief Executive Otricer T ;T - W.

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William Cavanaugh, III i" - President and Chief Operating Otlicer

~ I as, .

q lhmaid C 1.udrn Willuum Gumnaugh, !!!

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Customers Paak Demand and Energy Sales ,

< L ,; & ,,

n August 1, the 198a. peak gayggpet

-^

p.

l Odenund of 1,858,000 kilowatts was reached. It was A'  ;

N, i

up from last year's peak of 1,758,000 kilowatts, due to strong growth m the . w .

~ '

M g

- ~ ~ ' [<1 j number of residential customers cou-

, pied with an increase in the average

( annual consumption per customer, ,

l and robugt commercial energy -

consumpnon. -

The peak represents the maximum l requirement ti>r electricity by customers for any one-hour period in ,

a given year. System peak demand ,

occurs in AIP&Us service area during the summer months when electricity demand is pushed higher by heavy air conditioning usage.

There were 6,285 more customers served in 1985 than there were in 1984. In December 1985, the number of customers rose ta 328,998, with most of the growth in the residential and commercial area.

Customers bv classification were:

I Residential-282,043 i Commercial-41,016 l Industrial-3,411 l

.i Government and municipal-2,526 I

And other public utilit ics-2 Economic Development Ah"at a"whina r'llemr-+dgnne abundant /r

'li>tal energv sales ti>r the vear amounted to 10.13 billion 'k ilowatt '" " "'* *""i ril Nm N>". />"d"ona AlPNI, in 1985 laid the t.otindation in<nt than suo nu!/ ion /vr war in inwurfbr the hours, an increase of. 80 billion or a mm. s the num/vr ne caih cnf jer th< ami. It is ti>r a bold new economic development 8.5< percent increase when compared

, thrust in western Alississippi. 6/I'"*'" "*""^ "*'"' ""d ""-

to 1984. This mcrease was duc ENERGY PLUS was launched with --

primarily to an increase in sales to the a major media campaign on other operating companies m the November 1 as a new commitment to l Aliddle South System. An , m crease u. i to attract larger electricity users. Addi-

" helping build the Alississippi sales to retail customers was also an economv." tional electricity sales wiil tend to

, mdicator of contmued economic At the core of ENERGY PLUS is a lower future ra'tes below what thev recoverv in western Alississippi. would othenvise poposed economic development In 198a, sales to retail customers The new ENERGY PLUS program incentive rate, designed to attract amounted to e.85 billion kilowatt major new encry users to the sern. ce will provide the Company with a hours, a 2.98 percent increase above area. number ofimportant side benefits.

the year before. Also, the average Tradidonally, Alississippi industrv This prot:' ram will improve the residenn,al customer used 11,414 intensive, Companv's working environment in kilowatt hours m 1983, an merease of has not;,ybeen very encrp's accounting i

g gg purchase western hiississippi, and create an 2.58 percent over the previous year.

tiir less than one percent of tinal important economic development Other posinve signs of economic product cost ti>r more than 70 percent momentum wh, h can be sustained recoverv Svere evidenced by the rise in of Alississippi's industrial customen. ti>r tears to come.

commercial usage for the year. Com- Nevertheless, while rates are univ one As things turned out,1985 pnwed mercial energy sales were up by 6.< a, of many factors considered in in'dus- to be an excellent vear to launch percent compared to 1984. trial siting, the incentive rate proposed ENERGY PLUS because in 1985 '

under ENERGY PLUS, could have a there was a sittnificant increase in the

maior impact on Alississippi's ability number of ne'w manufacturing and ,

j other jobs available to the people of western Alississippi.

I l

5

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~ -- _____________.__.________________._M

l l

In summary, there were a total of the drawing boani. By this standard, Marketing 25 new industrv h> cations and 56 the AIP&I.-served western Alississi,Pi .

. I AIP&l.,s scru.ce area is chanbinF and expansions of c'xisting industry during- counties should enj.oy substant al new . ..

the year.

so is the electnc mdustrv. The

, gn>wth i n the near term. AIP&I. . .

l Tisese 81 new and ex anded indus- """* '" P ^.' ". '""*"*'"*

hosted 61 ditTerent clients on 84 visits

. . . .. very ditrerent from the one the Com-i tries I3rovided a total o 3,431 new to western AlississiPPi m 198a..

manufacturing jobs at a total capital pany faced even ten years ano.

(

This was up slightiv from one year - N<o lonoc,r .is the electne mdustrv

. .o investment of $76.8 million. The abvo, and th.is Bvro vth in new economic e .

C,ompany estimates that they w.d l development activity occurred m. spite stable and predictable. This uncer produce a new electncal load of rainty has forced the Company to of the tact that budget problems late -

44,569 KW. Annual revenues to the develop new strategies for growth to in the year in the Company fbrced a Company from this addinonal respond to the needs ofits customers.

curtaihiient of m. dustrial recnuting business should exceed 59.38 million. trips. AIP&I. industrial development '

One way of determining future specialists spent a total of 47 days -

.@ # .;...A  ;-- -

M 1.j ff business opportunities is to h>ok at traveling out of state calling on 138 e bif ' " g. .? ~z. " f g'h.f

.. t -

current prospect activity-contacts companies during the past year. 1 ..

g.9 f with firms that have active projects on s t'(,,

~ , 31,3 1pr - .5 i. . .

. : . .rm '3 rg ..

%.^ . f? .' q : u .. h j.i -- '.^

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, ' W .4 . +.2 * . tilt's. rungbnre linry Brn%n as trjnirity an cicc-

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) Y truc nwnr with the sanw jnrrisurn ayurier uvul,i use tufincir turw a untch.

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. y_/ .g i i .f f. yII 4 i.. ' % ,'] One way AIP&l is achieving its

%y' .

y y; . ; _g .- -4 ~ .

/; V ^

.- tinancial goal is through marketing hh:b .v .~b u standing marketing results were V;.g , i .. { ea - '

obtained in 1985 for new industrial j.wcy7,

. .M

,g.f b' ,

e h, m.m b;

p "g ,"

. l .,

L".

f p;

7+

..f(fi ' '

t process heating capacity and new .

commercial / industrial heating capacity installed with respective increases of c ;i,_ hp p'Y:. .,

fn.;#

• j . %.

.".- -27' I ~

94 percent and 56 percent over 1984

[cyegs, 1

f N ,,jf ? ,

' Pl& L e . 'W The percent of new multi-family

/ 9 ;I jA I ' e,., ;f c

~

housing that was total electric was up gT.

"" 4.#hg? " ' ~

to 83 percent, an increase of 12.6

$_ g:' . ." l .

. j [of;[i .i., [, ,

, percent over the previous year. The

^ . .  ;, 4. ., :. .4_4- .v total number of heat pump tons

%., g. x v .

479 ,

installed in all new construction was

, a  : / .'

<a at an all time high of 5,403 tons.

-u '

.- i

' In 1985, a marketing program called

< . J. ,

wgen Bold Steps to Build Customer 3 gy r.  :

.? F'  : M. - . . Satisfaction" was launched. This pro-p' jf.;hg.{

M d, 3

~ gram marks the beginning of a

- - ~~ -

.a number of new markermg approaches Untirnity tran/vn aiulpnmte buinwsvnwn arr and the revitalization of some tried uvrkup tzywther in J.u-kson to brrry swal uninvits and true prineiplcs that have nxanh to tlv pmhu t dopn Iwnl arul tixn to tlv coninumul naarkt on .t1:ssisrippi thnnph tiv historically worked.

institute fbr larhndyrv iMrbynwnt tll % Dr ikurut .ttwphnr is iIlYs dem air 6

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M

l l

The Ten Hold Steps pnyram is built AIP&I customers with pnyrams such on three major objectives. The first is -

y as Timely Due Date, Time Pay, to sell additional electricity in prima- .

Protected Customer, Aledical rily otT-peak periods in order to allow . ,, .

Emergency and Emergency Pay Plan.

the Company to increase sales without having to increase overall costs. This will ultimately pn> duce lower costs per .

,k ,

kilowatt hour of electricity used fi>r all .

of the Company's customers.

The second objective is to provide _

more services and choices for customers. These additional senices will be targeted at our customers' /a,nic Nstfriul. an .tUel. c,ays,w in India,n>41, needs and will improve their percep- pint <1 the hunuin a,uch orcrrricalana/ms and -

tion of the value of electricitv.

l9"""' *> a a"" rut" pnnrour uvyn mti,g7 r,th g  :

The final objective of the program is --

to create a more customer-oriented environment in the Company which will enable it to be more competitive .

In 1983, some 8,800 customers and a

regardless of the regulatory changes which may occur in the fiiture. 1,200 AIP&L employees donated

$135,810 for Energy CONCFRN.

4N The Ten' Bold Steps pn> gram ti>cuses 51 ore than 2,900 grants totalmg ,

on the tiillowing marketing etlbrts: .

SI40,493 were distnbuted to needy

• Industrial incentive rates fann.h,es. In three years of operation,

• Homebuilder incentive packages Energy CONCERN has raised more l

• Product image pnyram than S410,000 for distnbution to

• Cogeneration ventures needy citizens.

• Alulti-family, all-electric housing A1P&L aho otlirs a Helping Hands progrJm .

zation l

• Expanded guaranteed senice plan pnyram to provide Sveathen. .

fi,r electric water heaters and conservation assistance tbr homes I of needy customen.

• Commercial and industrial heatin"g l In 198a, more than $23,000 was I program -

spent on weatherization projects for

• Increased security lighting " 150 qualitied homes through Helping pnyrams Hands. Dunng the three years of

• Commercial cooking customer incentives and finallv, ",peration of Helpmg Hands, the Company has provided weatherization

• Development of new marketing tor 360 homes at a total cost of more ,sfyg,,,, p,m,,p,,,,y, j,, fys,n Publu .scha,rs thrusts for the '90s. than n,o,000 in materials. All labor is Ansc,ur and nypnni,pr Ans Gurkt diarpcn The investment required tbr the Ten contributed through other comm nity thcir acadcarr thcir A #nniter arts Bokj Steps program w,di be a;most .

,,py,, ,, ,33 ug7,,,skills

,,3,,f or dov4r,3,, ,, f,,'fp,g7 f,,jgf S2.5 million, but the benefits are con- senace orgamzanons. g, ,33 , ,, g,,, , ,,3,,

Both the Energy CONCERN and g,o,,,,,,,,,,,,,,

servativelv estimated to be more than '

S8.8 miliion present value over the Helping Hands pnyrams received national recogmnon m June when liti of the program.

President Ronald Reagan chose the Energy CONCERN / P"V'3*' 'I".ig with 69 others to nor in a u hire House cenmony.

Halping Hands Progam I".>The Company was honored under The Ce mpany's Energy CONCERN the President's Citation Program tbr .

l program, administered by The Salva- Private Sector Initiatives. AIP&L Vice l tion Arriy, provides help ti>r elderly President Hiram Walten accepted the and han,licapped customers, who have citation from Vice President George exhausted all other sources of tiinds Bush.

and sdll cannot pay their electric bills. Encryv CONCERN and Helping The Saharion Army works with 180 Hands are two major dhisions of social sarice agencies in western CONCERN, a 13-point pnyram to Alississippi to certify applicants. provide various types of assistance to customen. Other CONCERN opera-tions last year sened some 80,000 i

7

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Finances l

Rate Matters In January 1985, the A1PSC allowed -

n November 16,1984, AIP&L S44.7 million interim r te inmaw ny mer cmts fmm Indepen-Oque&L AIP h!cd a ratedence st with the Alississippi increase Unit 2, with there-rates estimated

(

be ofTset by approximately $60.9 Public Senice Commission (A1PSC) to '".U',""

increase its retail rates to meet its pur-

'," f"'I

V" lgs fn>m the umt.

chased power expenses associated with On June 14,198a, the AIPSC

=

kj capacity and energy from Grand Gulf gr nted AIP&L a S48.7 million rate ,,

c i Unit l'and from Independence Unit '"'. (9.97 percent mcrease be ore  %

l 2 and to support the fixed costs fuel savings) that included the mte.~m - g, related to its ownership share of increaw fmm Independence Unit 2. , .,

Independence Unit 2. Tlus order by the AIPSC came af,ter AIP&L is the owner of 25 percent 'II P'.es m the rate case agreed to a ,

of IndeI*ndence Unit 2 and, been- stipulati n which settled all issues tr's sw Rudm, e ta rnrid< ,uppn umus in riy l execPt Grand Gulf Unit 1, the ayuriu d,prmuent nr .ulet..

ning in December 1984, purchased an additional 31.5 percent of the capacity prudence of AIP&L,s 31.a percent aad energv from the unit for five ycds purchase of capacity and energy from fmm Arkansas Power & Light Inde[wndence Unit 2, and A1P&L's 1 treatment of otT-system sales. The which allows AIP&L to recover cur-Ir tion, by order of the Federal order denied any increase at that time rently, defer (inventory), and phase-in Encry Regulatorv Commission, dated for Grand Gulf Umt 1. through retail rates its Grand Gulf j June 13,1985, AIP&L was alh>cated .On June 27,1985, AIP&L tiled Umt I related costs. Recoverv from  !

33 percent of Aliddle South Encry with the AIPSC a rehearing applica- ratepayers of the deferregi and phase-m, l Inc.'s 90 percent share of the capacity tion based on that portmn of the portion of these costs will be put otr )

from the early years of commercial and energ from Grand Gulf Unit 1, A1PSC s June 14 Order that demed l

which was placed in commercial AIP&L additional revenues associated operation of Grand Gulf Unit I until

)

operation on July 1,1985. with Grand Gulf Unit 1. Hearings the later years. The AIPSC order  ;

were held m early September, and on allows AIP&L an overall mcrease ,m September 16, 1985, the AIPSC issued a Final Order on Rehearing, Operating Revenues Total operating revenues were S605,129,000 in 1985, compared with $531,927,000 in 1984. This was mainly due to an increase in sales to the sister companics in the Aliddle South System.

A distribution of the Company's 1985 revenue dollars was as tiillows:

Amount in Percent of Thousands Revenue Fuel . . $180,293 29.79 Purchased Power . 152,191 ~~25.15 Total Fuel and Purchased Power.. 332,484 5UE Taxes. 61,694 10.20 Pavroll. 38,876 6.42 Depreciation . 34,392 5.68 Other Income, Expenses and Deductions. 47,908 7.92 Cost of Capital:

Cost of Debt. 38,862 6.42 Net Income . 50,913 8.42' Total Revenue . S605,129 100.00

• l.80 percent paid as pretcrred diyidends; 3.14 percent paid as common dhidends; and 3 48 percent reimesttd in t'acihtics to sene customen.

8

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--r,- -- ,.------m-

l

, .w e l na/,,s atris #ta inar base rate res enues relarm to Grand Financing z wm r, aa.io a, ta a th ami :t GultUmt I of approumarch < ( sm/mn "nid . n ' .im b

. .hm u m tu o diunculgs in 198_3 ,',ws sm igpra fes.n f on n yu n -

.nu, ,

S326,54~,000 for the pnyctred test in A1.n , pursuant t< > r omI,etttn e j'n 'uia nt syn:a s;mumw w+ tv m:runu tt+

scar (ncr the base rates appnned bs bids. alp & l sold 530.000.000 ot' P"'l'""/" "

the A1P$( - m its June 14 ()rder. After 1 irst N1orttage lk mds, 12% b,c rcen t '

, .-0.t apph ing a rate nh >derath >H nder and senes. d uc' A'1.n 1, 1992. - -

M .s

.- * ' . . , ~

~

u nnsidefillg estimated tticl %Bings, t he .- - -

/' <..%?

l In N1.n . the (,omnans also sold ' .

N 4 . - \?-

I'inal ( 3rder t)n Rcheanng TCstllts In a f

S10.005.000 of uimmon stod to its - 1 9- ~~ - . 4. .

les CI til cu! Tent res enues that . ire parcht (t)mpans . hilddlc hulth ;w+.1.1' h.

' t .

b '4 -O

- G'N . #- 1* -

Cstimated it > result in lihreases in y

• 4

(,tlhiles . '

- - -a (listtimer hills atinhutablc iti (irand

(.iult t.mt I os ci rates appros ed m the Expenses '

1- . ~-

g ,... .f June 14 order ot' approumatch 14 0- , ..

pertent til the first s car lhinng the s car. operatmg expenses .

V'K' '.:J J. , T ' :-

The order, u hn h came 10 months ucre S528.561.000, an mcrease ot' c  ; c. W f..

15 6 percent us er 1984. ...;.

1 - ly ! '

• O af ter the case w as filed, w as appealed .

I to the Alississippi hupreme ('ourt bs This mcrease w as due pnmanh to -

y" ' " " " -- '

iJf- -

the Alississippi Attiirncs General and mcreased purchased pou cr tosts the Alississippi 1 cgal sen iccs resultmg t' rom the Compans 's pur-( t ha!!Ih m t hased pt)M er agreements ti>renergs trom Grand Guit' Nuticai htanon Umt I and IndepcHdence htcam }'lectrh

$tatu m l' nit 2 A lv a u r!T: *'H U Id* \l' d 5D I,,n Gd' HI RvHabi Ru a,wi , lur' wh onni e arrnw n hTnote as snv at ie Wrb ,umna nw una ? toe I k lta t muu i! an , nwn: anon that ha ve n , ,ipny aunt, ti,e pnwri .md s<nb 7 m< nt t ti,o wnda1:s;h ta nk !suui m!v ri>a n:anonram . A nun a n hh

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Facilities Construction Grand Gulf the cost and schedule etreets of On Julv 1,1985, Grand Gulf Unit indusm-wMe en nts and oGer xpenditures fbr construction 1, one of twu nuclear generating units I'"PI"E "

I Eduring the S24,187,000. This figure year were at the Grand Gulf Nuclear Station, *I" P'"eral, 11 s.igmticant cost and reflects a 59.399 million credit thr the schedule m.ercases on Grand Gulf were was placed in commercial operation.

Grand Gulf Unit I and Grand Gulf due to factors associated with the sale of a gas pipeline svstem. ,

Alajor transmission gi rojects during Unit 2 are located in southwest gmwth of the nuclear power industry the year included the completion of Alississippi near Port Gibson, on a dunng the 1970s and the early 1980s ,

~

the Brookhaven to South Bnxikhaven bluff overlooking the Alississippi River. 3CCI nd mn 30 factors unittue to the pnw

,**CII-115 KV line, the Openwuod to North Grand Gulf Unit 2 is appnmmatelv Vicksburg 115 KV line, the Franklin 34 percent comple:e. From late 1979 *While a number of project activi-to Bogatusa 500 KV line and the until September 1985, oniv a limited ties were pertbrmed by orl 3ers, A1P&L associated Franklin 500 KV line bav, amount of construction w.is per_ dcctuately planned, participated m ,

the Rex Brown to Brandon 115 ~ tbrmed on the unit. In September and managed these actwines, and met "V/230 KV line conversion and the 1985, the Alississippi Public Service the evolvmp needs and demands of Rankin 115 KV/230 KV substation. Commission issued an order directing l'and Gult.

that construction activities on Grand . *Specifically, cost and schedult

,. , Gulf Unit 2 be suspended and direct- ".meases on Grand Gulf were pn:ma- ,

~ 5: k ,

ing the Companv and Aliddle South nly due to charyges and addinons m N *l Energv, Inc. (AISE) to report to the nyulaton n qynrements, engmeenng s.' Commission beibre the end of the and construenon evolunon over the 3.* ,,, a 3 vear regarding their future plan tbr the coune of yhe project and the impact of the accident at Three Atile Island.

imit. Following the Commission's

I;i' - -I ,' order, construction on Unit 2 was J, *By most nwasures, the cost and

% . . '- ?.4. L I.J. suspended.

schedule of Grand Gulf Um,t 1 Nd' -

In December the Aliddle South '.onypare adequately against those of x y . AgJgh' %' . ~

W- i.IMj.; N ~Utilities (A1SU) board said that until similar nuclear umts constructed further evaluations are made, which during the sarne tinw franw.

jg ij-[i.yf.p.. g i a p* " MSU estimates will take no more

. . c 1,ql- (c;[ l.~ .:s y ' than one year, it has decided to con. Fuel Diversification s .. ... .e e tinue with full suspersion of Unit 2 A1P&L made great strides toward its and to continue to limit expenditures long range goal of fuel diversitication, thgl l'utisim, an c/crtncian nr Aff t~lls Gmn- to only those activities which are ab- or shifting from natural gas and oil to l n ,r$ uIn ,I, s coal and nuclear, in 1985.

r in- [ net}ssary tbr demobilization Gran Gulf Units I and 2 are owned 90 percent by AISE, a sub- __ _ _ _ . _ _

sidian of A1SU, and 10 percent by f g g,, ,,,,,,j,,,,, f,,,g,n,,7 ,,,,f,pg ,,7f,j,,c,,,,

, Mer major 198a, construcnon pn* South Alississippi Electric Power ,n,denti ar afinissif.j,i starc Unnrmiv, and ircts mcluded transmimon capautor Association (SMEPA). A1P&L operates airhiert1/ium t/u /n=r armr to wm/rr m build bank additions at the South Jackson- the station on their behalf. * #"c" *alv" I"" /**" /*'"ihk d"""8

• Horn Lake, Grenada, and Pelahatchic ul**>l'5 A 'th kn.

substations. Preliminary design and . Grand Gulf Construction Audit suncy wurk was begun on the Ritthie . . j.,

In June, a Grand Gulf t,onstruction .." c~ ~ 3, ' s . ..

to Tunica to Freeport 230 KV line .,

and the associated 230 KV/l15 KV Audit report was released by two firms -

.~ ' 5.l _ g substation at Ttmica and the 500 hired in 1984 bv the Mississippi e  %

Public Senice Commission. The t' * ' ' ' '

KV/230 KV substation at Freeport. ,

~

report said that MP&L was a prudent These lines and substations are .

scheduled thr completion in 1988. manager of the project .,i A substation site also was secured Quotes from the "tindings and con- ,'

i tbr the construction of a 115 KV clusions" section of the Construction h6 .

substation near Whitticld. Audit included the ibliowing: {M -

.s..

r jE mM. #[." ..b : f ."Wf' #S\

~

• Factors causing major cost escala- .

tion and schedule slippage were 2 #

industry-wide in nature and bevond ';. '

the direct control of MP&l.. ~ *

• Review of the project indicates that MP&L took measures to minimize E

E

.O _ _ _ _ _ _ _ _ _ . . . . _ _ . _ _ . . _

"a*9'N8/mWe*PC"*rmeledlMmWh- e m _m_, rm ,a . - 7 ugu, gg gmM. o m pu.g ygu : , r ,m , r er.: cwum gw - _ _ - -

+

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Employees ThomasA !)allas, s ice president Joe N1. Ibs c, manager of uim-E dum bv the A. Aliddle lhiard or ihrct rors on I.upberger South liihnes was and chief named engineer, was promoted to semor s ne president and assistant to mumtv des clopment, replaced Pilgnm as thrector ot' area des clopment and 1)cccmber 20,1985, as A1NL "s new the cnairman. IIc was ghen respon- o >nsumer relations.

chairman and president. suacethng sibihn mer the internal authring Thomas E Gunter, manager of Flm d W. I.csus. u lui retired thr department, the legal and Jaims mternc! auditing, became director of health reasons on 1)ctember 1 department, the strategn planning the same department A1P&I. is one of the pnnapa; department, and the neu h created operatmg subsahanes of Alaidle Nouth en aronmental atl.un department. Early Retirement Program Utihtics, Inc. Ibnald E Alenwn, semor uce 1.upbeger ako succeeded I.cuis as a president, customer and mtbrmational in late Neptember, emplosces - _

director of N113&I.. He assumed tlus scn nes, became senior s ite presalent, between the ages ot' 60 and 6a ucre post m Januan 1986. torporate operanons, and assumed "tle. red a speual, one-nme-onh carlv Formerly Alst"s semor s ice responsibihn m er engmeenng, ss stem wnynwnt program.

president-duct' tinanual otlicer. operations and u mstrucnon as ucil as llw pn> gram was designed to reduce 1.upbeiger, 49, had sen ed as acting customer sen nes. the number ot actne emplovces and -

thict' eicturne otlicer since 1.cu is' Frank F Gallaher. assistant s ac t he amount ot' cash required to meet.

hospitah/ anon tbr heart surgen in presalent. engmcenng and tbssil pro l_w roll expenses. Af ter consideranon, September. The new chairman iomed dut non, u as promoted to uce presi- M cmplom ancpwd ik oh

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Niiddle South in Febniarv 19~9 as dent and chict engineer, repornng to Alst"s uce president, tinance. lie was Alcinen.

named uce presnient-chict tinanual James I. 51oore, assntant ute presi-otlicer in N1av 1980 and semor s ice dent, mtbrmanonal senices, became president-chict' tinanual otlicer in s ne presnient over the neu k named blarch l98l. Wrporate u tmmumcations depart-A narne ot' Atlanta, Georgla, ment, reportmg to ( hairman Ibnald I.upbeger has 23 scars management ( I .utken .

cxpencoce with electnc unhtv Jack it Richard, semor sice presi-tompames. dent, was assigned to tonduct spcual He holds an A.!L degree m nudcar studies, reportmg to President  ;

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L a 4 4

Financial Section 3

i Miccissippi Power & Light Company 1985 Financial Review R: port Of Management The management of the Company has prepared and is responsible for the financial statements and related fmancial infbr-mation included in this annual report. The financial statements are based on generally accepted accounting p inciples, consistently applied. Financial infbrnution included elsewhere in this report is consistent with the financial statements.

'Ib meet its responsibilities with respect to financial infornution, management maintains and enfbrces a system ofinter-nal accounting controls which is designed to pnnide reasonable assurance, on a cost etrective basis, as to the integrity, objectivity and reliability of the financial records and as to the protection of assets. This system includes communication through written policies and procedures, and an organizational structure that pnnides fbr appropriate division of respon-sibility and the training of personnel. This system is also tested by a comprehensive internal audit program.

The board of directon pursues its responsibility for reported financial infonnation through its audit committee, com-posed of outside directori The audit committee meets periodically with management, the intemal auditors, and the in-dependent public accountants to discuss auditing, internal control, and financial reporting matten. The independent public accountants and the intemal auditors have free access to the audit committee at any time.

The independent public accountants provide an objective assessment of the degree to which management meets its responsibility fbr fairness of financial rep >rting. They regularly evaluate the system ofinternal accounting control and per-tbrm such tests and other procedures they deem necessarv to reach and express an opinion on the faimess of the financial statements.

51anagement believes that these policies and procedures provide reasonable assurance that our operations are carried out with a high standard of business conduct.

Cpinion Of Independent Public Accountants Mississippi Power & Light Company We have examined the balance sheets of 51ississippi Power & Light Company as of December 31,1985 and 1984 and i the n lated statements ofincome, retained earnings, and changes in tinancial position fbr each of the three years in the period ended December 31,1985. Our examinations were made in accordance with generally accepted auditing standards ard, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessarv m the arcumstances.

In our opinion, the above-mentioned financial statements present fairiv the financial position of the Company at December 31,1985 and 1984 and the results ofits operations and the changes in its financial position tbr each of the l

three years in the period ended December 31,1985, m contbrmity with generally accepted accounting principles applied

! on a consistent basis.

M s- O February 25,1986 New Orleans, Inuisiana 13

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,c, =u.-_,-_~=_.n_.~ n.n ,nn_ n Mississippi Power & Light Company Management's Financial Discussion And Analysis I. FINANCIAL CONDITION Construction expenditures (including AFDC) for 1986, Net income for 1985 increased 5.3 percent, or $2.6 1987, and 1988 an estimated to be S17.0 million, S49.8 million above the prior year. The rate relief granted by million, and $41.4 million, respectively. Also, additional the Alississippi Public Senice Commission (AIPSC) in capital requirements of $234.4 million in 1986,$1912 September 1985 (see Note 2 to the Financial Statements) million in 1987, and 5135.2 million in 1988 will result enabled the Company to achieve a more stable financial from the inventoried portions of the costs of Grand Gulf position by year-end. Continued financial stability in 1. These amounts include the Grand Gulf I deferred 1986 is dependent upon the availability of the necessary costs that will be collected from ratepayers in the future financing required to support the rate moderation plan under the rate moderation plan ordered by the A1PSC associated with the costs of Grand Gulf I and the (see Note 2 to the Financial Statements). The financing September,1985 decision of the AIPSC being upheld on requirements from external sources in order to support appeal. In addition, the Company's rate moderation plan the above-mentioned rate moderation plan and other re-includes pnwisions which, in accordance with current quirements during the period 1986-1988 are estimated to generally accepted accounting principles, alknvs the Com- be $236.2 million. In addition, $63.8 million will also be pany to defer costs for recovery in subsequent periods. required to fund maturing long-term debt and to meet floweven if the Financial Accounting Standards Board long-temi debt and preferred stock sinking fund adopts certain amendments to its Statement of Financial requirements.

Accounting Standards No. 71 (SFAS 71) as proposed, the The Company's capital requirements may be increased Company's future financial condition might be adversely by the pending resiew by AISE of Grand Gulf 2 because atrected. (See Note 8 to the Financial Statements.) any alhxation to the Company by the Federal Energv In the future, the allocation of capacity and energy or Regulatory Commission of either capacity and energy or abandonment costs of Grand Gulf 2 to the Company abandonment cost associated with Grand Gulf 2 can be could likewise atrect its continued stability. cxpected to be resisted by state regulatory agencies. (See Note 8 to the Financial Statements.)

II. LIQUIDITY AND CAPITAL RESOURCES The Company's investment in construction work in During 1985, the Company had construction expen- progress (CWIP) decreased significantly due to the addi-ditures of approximately $24.2 million. This amount tions to plant in senice of several large transmission pro-reflects the implementation in July of a cost curtailment jects in 1985. Allowance tbr funds used during construc-and cash conservation program delaying $11 million of tion (AFDC), which improves net income through credits expenditures in construction projects, mostly in the area to the income statement to otTset charges for the cost of of production and transmission and substation projects. tinancing construction programs prior to recovery in rates, From the commercial operation of Grand Gulf I on July was $2.2 million, or 4.4 percent of net income in 1985 1,1985, through December 31, 1935, the Company has as compared to S7.7 million, or 16 percent of the net in-been billed approximately SP3 million by Aliddle South come in 1984. AFDC will continue to represent only a Energv, Inc. (AISE) thr its 33 percent share of the small portion of net income due to a decreased invest-capacity and energv. As of December,1985, the Com- ment in CWIP.

pany received 557.3 million credit against the Power Pur- In view of the deterioration of the System's financial chase obligation to AISE fbr payments made prior to condition fblkming commercial operation of Grand Gulf commercial operation of Grand Gulf I under the Power 1 and related liquidity problems stemming from state and Purchase Advance Payment Agreement (see Note 8 to the h> cal regulators' delays in approving rate increases, the Financial Statements). Additional credits, including Company's I oard of Directors did not declare a dividend accrued interest, were taken ihr January and Februarv, on its common stock tbr the third quarter of 1985. The 1986. The Company's monthly obligation to AISE is ap- 1985 tburth quarter dividend and the 1986 tirst quarter proximately $26.5 million. dividend were omitted in view of the many uncertamtics still facing the Company including the need to finance the extensive rate moderation plan ordered by the AIPSC in its September 1985 Order which is on appeal.

During 1985, the Company obtained funds externally y thmugh the sales of $30 million of first mortgage bonds, S10 million of common stock, and through the 1 drawdown of funds presiously arranged through a pollu-tion control revenue bond financing. The Company made use of short-term borrowing in the tint two quarters of 1985, with the maximum amount of $22 million being utilized. The amount of short-term bornming authorized by the Securities and Exchange Commission (SEC) is 10 percent of capitalization, which was 575 million at thember 31,1985. Subsequent to year-end, the Com-pany renegotiated S30 million in lines of credit with Alississippi banks, none of which was being utilized at Alarch 11,1986.

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The Company's earnings coverage ratio of bmd interest percent increase over 1984. Fuel and purcha,ed p nver requirements was 3.61 for Deccmtxr 31,1985 compared costs continue to be the Company's major expense, to 3.81 for 1984 and 4.12 fbr 1983. Maintaining the re- equalling approximately 55 percent of total revenue.

quired minimum of 2.0 times the annual mortpge in- Other operation and maintenance expenses increased 59.1 terest requirement is necessary to issue additional bonds million, or 10 percent over the prior year and $16.7 (other than for refunding purposes). Subject to the million, or 20 percent over 1983. The major factor con-availability of bondable property and assuming an interest tributing to the increase was recognition of expenses of rate of 12 percent, the Company could issue $240 engineering and design costs and estimated liabilities million of new first mortpge bonds. At December 31, associated with indetmitely delayed future fbssil generating 1985, unfunded bondable propeny would support addi- facilities. Also affecting net income was the recording of tional bonds of appnnimately $101 million. The pre- pnnisions tbr estimated adjustments resulting fmm issues ferred stock coverage ratio, which must be a minimum of raised during the Federal Energv Regtdaton Commission's 1.50 times the Company's annual interest charges and normal periodic resiew of Company operations. These in-preferred stock dividend requirements to allow the is- creased expenses were somewhat otTset bv a S4.1 million suance of additional preferred stock, fbr December 31, net pin recorded in connection with the sale of the ps 1985 was 1.76, compared to 1.60 and 1.77 fbr 1984 and pipeline system. (See Note 12 to the Financial 1983, nspectively. Additional preferred stock of 575 Statements.)

million could be issued at an assumed dividend rate of 12 percent. IV. EFFECT OF INFLATION At year-end, the Company had temporary investments Despite the reduced level ofintlation during 1985, its of S201 million as a result of several nonrecurring transac- impact on the Company's operation in recent years has tions. Included in this amount is $165 million received been significant. (See Note 13 to the Financial from the United Gas Pipeline Company Settlement plus Statements.)

53.7 million interest. (See Note 1I to the Financial Statements.) The Company is due an additional S17.5 V.

SUMMARY

million from United by September 25,1987, as a final Receipt of rate relief through accounting treatment of payment. The use and disposition of the settlement pro- the costs of Grand Gulf I has sustained the financial con-cceds and interest earned are subject to the jurisdiction of dition of the Company. However due to the rate the MPSC which has not yet mied in the matter. In moderation plan, certain Grand Gulf I costs are being December 1985, the Company sold its interest in a deferred requiring substantial external financing. The natural ps pipeline that result'ed in a 59.4 million in- future financial condition of the Company will be depen-crease in cash. Omission of common dividends in the dent upon (1) securing this financing, (2) the September; third and thurth quarters, the shorter amortization period 1985 MPSC decision being upheld on appeal, (3) the for the advance purchase pnver payments, and decreased timing and regulatory treatment of costs associated with expenses from the cost curtailment pmgram also served to Grand Gulf 2 and (4) the potential etrect of certain pro-improve the cash position of the Company. posed amendments to SFAS 71 if adopted.

III. RESUL'13 OF OPERATIONS The Company's net income fbr 1985 was 550.9 million, an increase of approximately $2.6 million, or 5.3 percent over 1984, and approximately S7.4 million, or 17 percent over 1983.

Operating revenues increased by S73 million, or 13.8 percent in 1985, compared to an increase of $11 million, or 2.3 percent in 1984. This increase in revenues was mainly the result of the increase in rates allowed by the MPSC. Also, sales to ultimate customers in 1985 were approximately 3 percent above the prior year. A 5 percent increase in residential eneigv sales and a 7 percent in-crease in commercial encryv sales during the year reflected the continuing economic improvement in the Company's scruce area.

Increases in operation and maintenance expenses from the capacity and energv costs of Grand Gulf I and In-dependence 2 accounted tbr 8.1 percent of the total 16.4 15

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I Mississippi Power & Light Company Calance Sheets )

DECEMBER 31,1985 and 1984 ASSETS 1985 1984 In Thousands UTILITY PLANT (Note 8):

Electric plant. . . . .. ...... . .. . .. . . . . . . . . . .. $1,116,606 S1,091,639 Construction work in progress... ... . . . . . ... . 2,365 16,643 Electric plant acquisition adjustments. .. . ... . . .. . . . .

1,317 1,498 Total... .. . . . . . . . . .. . . .. . . . . . . . . . . 1,120,288 1,109,780 Less accumulated depreciation. .. . .. . . . . . . 338,308 318,818 Utility plant-net... . . . . ...... .. . . . . . . . . . 781,980 790,962 l l

OTHER PROPERTY AND INVESTMENTS:

Investment in subsidiary company, at equity (Note 8).. . . .. . 20,644 19,909 Other... . . . . . . . . . . .. . ... . .. . 742 767 Total.. . .. . .. . . .. . . 21,386 20,676 {

l CURRENT ASSETS:

Cash and special deposits . . . . .. . . . ... . . 2,084 4,055 Temporary investments - at cost which approximates market Associated companies. . . . . ... . . . . . .

12,000 Other (Note Il) ... . . . . .. . . . 201,451 -

Accounts receivable:

Customer and other - less allowance for doubtful I accounts-S762,000 in 1985 and $679,000 in 1984. ... 29,257 21,761 Associated companies. . . . . . . . . . .. . . .. . . 1,785 1,190 Materials and supplies-at average cost:

Fuel.. . .. . . . . . .. . . . ... . 3,076 2,582 Other . . . . ... . . . . . .. . . . . .. 8,062 8,473 Power purchase advance payments (Note 8) .. .. . . .. . . . . . . 25,833 10,231

{

Rate deferral (Notes 2 and 8). .. . . . . . . 23,936 -

Accumulated deferred income taxes (Note 3). . . . . . . 82,133 -

Other.. . . . . . .. . . . . 9,176 12,541 Total.. .. . . . 386,793 72,833 l

DEFERRED DEBITS:

Power purchase advance payments (Note 8) . . .. . . -

40,922 Rate deferral - net of recoveries (Notes 2 and 8).. . . . . . .

122,672 -

Gas contract settlement (Note 11). . . . 17,500 -

Accumulated deferred income taxes (Note 3). . . .. . 20,138 10,819 Other.. . . . . . . 2,151 2,008 Total. . . . . 162,461 53,749 TOTAL. . . . . 51,352,620 S 938,220 See Notes to Financial Statements.

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CAPITALIZATION AND LIABILITIES 1985 1984 in Thousands CAPITALIZATION: _

Common stock, no par value (stated value S23 per share) authorized 15,000,000 shares; issued and outstanding 6,275,000 shares in 1985 and 5,840,000 shares in 1984 (Note 5) . .

$ 144,325 S 134,320 106,837 85,788 Retained earnings (Note 7) . . .. . . . . . .

251,162 220,108 Total common shareholder's equity. .. .

Preferred stock (Note 5):

38,077 38,077 Without sinking fund . . . . .. . .

54,802 55,000 With si,iking fund. .

401,065 369.200 long-term debt (Note 6) . . .. . .

745,106 682,385

'Ibral . . . . .

OTIIER NON-CURRENT LIABILITIES:

5,851 7,998 Accumulated provision ihr property insurance . . . .

1,555 2,122 Accumulated provision for injuries and damages.. .

7,406 10,120 Total.. . . . . . .. .

CURRENT LIABILITIES:

10,100 10,513 Cuntntly nuturing long-term debt (Note 6), .

Accounts payable:

43,084 7,909 Associated companies.. .

20,920 16,405-Other . . . . . . . ..

168,651 -

Gas contract settlement (Note 11). .. .

14,806 13,747 Customer deposits .

73,776 18,910 Taxes accrued . . . . .

10,800 14,513

~ Interest accrued. .

2,721 12,097 Dividends declared. . . ,

11,657 -

Accumulated deferred income taxes (Note 3). . ..

9,499 3,069 Ot her. . . .

366,014 97,163 Total. . .

DEFERRED CREDITS: 96,258 162,356 Accumulated deferred income taxes (Note 3). . . .

45,996 47,421 Accumulated deferred investment tax credits (Note 3) .

17,500 -

Gas contract settlement (Note 11). . .

6,817 6,298 Other.. .

234,094 148,552 Total. .

COMMITMENTS AND CONTINGENCIES (Notes 2 and 8):

TOTAL. . _ _

- . -$1,35_2,620 _ $ _938,220 See Notes to Financial Statements.

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Mississippi Power & Light Company Ctatements Of Income FOR THE YEARS ENDED DECEMBER 31,1985,1984 and 1983 1985 1984 1983 In Thousands OPERATING REVENUES (Note 2) . . $605,129 $531,927 S520,103 OPERATING EXPENSES:

Operation: -

Fuel. . .. . . . . . 180,293 194,636 177,938 Purch2 sed povrinct (Note 2). . ..... . 152,191 86,032 103,605 Other. . . .. . . 75,183 66,963 57,011 Alaintenance. . . . . . . 24,808 23,920 26,236 Depreciation. . . .. 34,392 30,939 30,013 Taxes other than income taxes.. .. 23,944 21,208 22,088 Income taxes (Note 3). . . . 37,750 33,659 36,766 T6tal . .. . . . .. . 528,561 457,357 453,657 OPERATING INCOh1E . ... . . . .. . 76,568 74,570 66,446 OTHER INCOME AND DEDUCTIONS:

Allowance fbr equity funds used during construction . .. 857 5,303 4,664 Gain on sale of gas pipeline system. . 7,975 - -

Miscellaneoitt-net . . . . . . 13,676 6,099 1,319 Income taxes (Note 3). . . _(9,301) (875) 401 Total . . . . 13,207 10,527 6,384 INTEREST CH ARGES:

Interest on long-term debt . . 38,447 31,626 28,003 Other interest-net. . .. 1,775 7,512 3,169 Allowance ihr borrowed funds used during construction . . . . . (1,360) (2,374) (1,837) 3 Total . . 38,862 36,764 29,335 NET INCOME ,

_$_50,913 _S 48,333 _S 43,495 Statements Of Retained Earnings-

.FOR THE YEARS ENDED DECEMBER 31,1985,1984 and 1983 RETAINED EARNINGS, JANUARY 1. S 85,788 S 83,604 S 80,783 ADD-. Net income . . 50,913 48,333 43,495 Total . . . 136,701 _131,937 124,278 DEDUCT:

Dividends-cash:

Preferred stock. . 10,884 9,065 8,359 Common stock (Note 8).. 18,980 37,084 32,315 Total . 29,864 46,149 40,674 RETAINED EARNINGS, DECEMBER 31 (Note 7) . $106,837 S M ,788 $ 83.604 See Notes to Financial Statements.

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Mixissippi Power & Light Company Ctctements Of Changes In Financial Position FOR THE YEARS ENDED DECEMBER 31,1985,1984 and 1983 1985 1984 1983 In Thousands FUNDS PROVIDED BY:

Operations:

Net income.. . .. . . . . .. . . . S 50,913 5 48,333 S 43,495 Depreciation., .. . . . . . . . . .. . . 34,392 30,939 30,013 Deferred income taxes and investment tax credit adjustments-net......... . . (12,272) 10,908 41,844 Allowance for equity funds used during construction . . .

J857) (5,303) (4,664)

Total funds provided by operations.. . . 72,176 84,877 110,688 Other: 4,664 Allowance for eguity funds used during construction. . 857 5,303 Decrease in working capital * . . . 86,118 - 2,850 Investment in subsidiary company.. . . . . .

- - 2,259 Gas contract settlement (Note 11) ..... ...... 151 - -

186,305 57, - -

Power purchase advance .

Miscellaneous-ner.... . pr 'ients (Note 8) .

- 1,440 2,215 Total funds provided excluding fmancing transactions . . . . . . 402,607. 91,620 122,676 Financing transactions:

Common stock. . . 10,005 - 29,900 Preferred stock... ..... . .. .. .

- 15,000 10,000 First mortgage bonds . . . . . . 30,000 35,0(X) 45,000 Other long-term debt. . .

14,493 4,390 7,275 Short-term securities-net. . .. .

- 11,500 -

Total funds provided by financing transactions . . . . .

54,498 65,890 92,175 Total funds provided . .

S457,105 S157,510 5214.851 FUNDS APPLIED TO:

Utility plant additions:

Construction expenditures (includes allowance for funds usetf during constmction) . . . $ 24,187 5 50,776 S 63,623 Rate deferral . . . . . . 153,323 - -

Rate deferral recoverv _(6215)

Rate deferral-net (Notes 2 and 8). . . . 146,608 - -

Other: 8,359 Dividends declared on preferred stock. 10,884 9,065 Dividends declared on common stock. 18 37,084 32,315 168,'980 Special cash investments (Note 11)..... ...... ....... .. 651 Defentd receivable-gas contract settlement 17 500 - -

Power purchase advance payments (Note 8)(Note 11) . 31,985, 51,153 -

Increase in working capital' . .

- 7,315 -

Investment in subsidiary company. . 735 1,635 -

Refund to retail custoniers.. '. .

- - 74,600 Miscellaneous-net. . _ _ 4,151 _ -- .--

Total other ftmds applied . .

252,886 106,252 _115,274 Financing transactions:

IL:tirement of first mortgage bonds . - - 12,000 Retirement of other long-term debt.. 12,o24 482 454 Short-term secunties-net. .

20,800 _

- 23,500 Total funds applied to financing 35,954 transactions . 33,424 482

$457,105 S157,510 S214,851 Total funds applied .

' DETAIL OF INCREASE (DECREASE) IN SELECI'ED WORKING CAPITAL ITEA1S:

Cash and special deposits.. 5 (1,971) $ 3.412 5 (3.212) 8,091 (2,731) 387 Accounts receivable.. . ~ . . . . .

(3,282) 5,446 (702)

Materials and supplies and other current awets .

(39,690) 12.223 (11,594)

Accounts payable .

(1,059) (934) (1,265)

Customer deposits..

Tnes accrued . (54,866) (432) 6.602 Interest accrued . 3,713 (4,%I) 3.353 9,376 (3,543) (851)

Dnidends declared .

Other (urrent liabihtics.. (6,430) (1,165) . _ _ 4,4 32 Net . __$(86,118) S 7.315 $ (2.850)

• Working capital cwludes short-term wcunnes, curn nt matunrics oflong-term debt, and the current portion ontludmg deferred income enes) of the rate deferral, the pcmcr purthase adsante payments and the gas contract settlement.

See Notes to Financial Statements.

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n- -_ - __n ___-_- -_ _ - _ _ _ , ___ _

Notes To F!nancial Statements plant, an allowance for ftmds used during construction (AFDC). Under this utility industry practice, construction

1. Summary of Significant Accounting work in progress on the b' lance a sh'eet is charged and the Policies income statement is credited fbr the approximate com-posite interest cost of borrowed funds and fbr a A. SYSTEM OF ACCOUNTS "'#*""' "'* urn on the equity funds used durin con-The accounts of the Company are maintained in .

struction. This procedun is intended to remove rom the accordance with the system of accounts prescribed by the Federal Energy Regula' tory Commission.

ncome smement e cet o et of f nancing the construction program and results in treating the AFDC B. REVENUES chages in the same manner as construction labor and The Company records revenues as billed to its customers material costs. As non-cash items, these credits to the on a cycle billing basis. Revenue is not accrued for energy income statement have no etTect on current cash camings.

delivered but not billed at the end of the fiscal period. The After the property is placed in senice, the AFDC chaged rates of the Company include fuel adjustment clauses under to construction costs is recoverable from customen in which fuel costs above or below the base levels allowed in rates chaged for utility senice. The effective composite the various rate schedules are permitted to be billed or AFDC rates were 11.34 percent,8.70 percent and 9.20 required to be credited to customers. percent for 1985,1984 and 1983, respectively.

C. UTILITY PLANT AND DEPRECIATION e Company continues to capitalize allowance for Utility plant is stated at original cost. The costs of funds used dunng construction on projects during additions to utility plant include contracted work, direct pn ds of interrupted construction when such mterrup-labor and materials, alh> cab!c overheads and an allowance "".n n tempomy and the continuation can be justified as fbr the composite costs of funds used during construc-being reamnn under th drcunmances.

tion. The co<ts of units of property retired are removed G. OTHER NON-CURRENT LIABILITIES fn>m utility plant, and such costs plus removal costs, ;ess Prior to January 1,1985, it was the policy of the Com-salvage, are charged to accumulated depreciation. pany to make pnwisions for uninsured property risks and Alaintenance and repairs of pn>perty and replacement and fbr claims for injuries and damages through charges to renewal ofitems determined to be less than units of operating expense on an accrual basis. Accruals fbr these risks property are chargcd to operating expenses. Substantially were allowed fbr rate-making purposes.

all of the utility plant is subject to the lien of the To comply with a regulatory agreement as discussed in Company's first mortgage bond indenture. Note 2, the Company, effective January 1,1985, Depreciation is computed on the straight-line basis at suspended such pn> visions and etrective July 1,1985, rates based on the estimated senice lives of the various implemented a procedure to amortize, over a three-year classes of property. Depreciation pnwided in 1985,1984 period, the accumulated balances as of June 30,1985.

and 1983 amounted to approximately 3.3 percent on average depreciable property. 2. Rate Matters D. POSTRLTIREMENT BENEFITS The Company is a party to certain agreements and pnw The Company has postretirement benefit plans covering ccedings concerning Middle South Energy, Inc. (MSE) substantially all ofits emplovces. The policy of the Com- and the Grand Gulf Nuclear Station,90 percent of which pany is to fbnd pension costs as accrued an'd other is owned by MSE. See Note 8 with respect to these postretirement costs as incurred. matters.

In November 1984, the Company requested a rate E. INCOME TAXES increase from the Mississippi Public'Senice Commission The C,ompany joins its parent in filing a consolidated (MPSC) to recover costa associated with: (1) its 25 per-Federal income tax return. Income taxes are alh>cated to cent share of the Independence Steam Electric Station the Company m propornon to its contnbution to the (ISES) Unit 2, (2) the five-vear purchase from Arkansas consolidated taxable mcome. . Power & Light Companv (AP&L) of an additional 31.5 Det,e rred mcome taxes are prouded fbr ditrerences . percent capacity ofISES' Unit 2, (3) general increases in between book and taxable income to tne extent pernut" the costs of op'erations and (4) its allocation of Unit I of ted by the regulatorv bodies ihr rate-makmg purposes.

the Grand Gulf Nuclear Station (Grand Gulf 1).

Investment tax credits allocated to the Company are In early 1985, the MPSC issued an Interim Order deferred and amortized based upon the average usefu1 life , granting the Company intenm rate relief and allowing of the related property. Pnor to 198a, the amortizanon additional operating rkvenues on an annual basis of of the accumulated det, erred investment tax credits began approximatelv S45 million pending a final determination with the year hrst allowed in the consolidated tax return. in this case. The interim increase in rates was to be offset

,1;> comply with a regulatory agreement as discussed m by appnnimatelv $61 million in ibel sasings resulting in hote 2, the Company, etlectwe January 1,19ha, changed nht annmi uvin'gs to customers of approximately $16 the u, ming of the amortization of its accumulated million.

deferred mvestment tax credits to begin with the year b 11985, the Compnv entered into a regulatory thllowing the deterral. agreement which stipulated to' certain issues regarding ~

F. ALLOWANCE FOR FUNDS USED DURING revenue requirements in the rate tiling and with certain CONSTRUCTION specified exceptions and reservations of rights, resolved all in accordance with the regulatory system of accounts, issues in the rate case, including the revenue requirement the Company capitaliics, as an appropriate cost of utility tbr ISES Unit 2. The issues specifically excepted and 20

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reserved fmm the agreement included, among other pany to include the balance of costs accumulated in the things, all Grand Gulf 1 issues. By order dated Alay 7, TenNear Inventory Period in its rate base for determining 1985, the hiPSC accepted and adopted the agreement its revenue requirements and allows the Company to which allows the Company additional annual revenues of amortize and recover through its rates such accumulated S48.7 million based on the projected test yean or costs in equal amounts over the remaining depreciabic life approximately $4.0 million in excess of the amount of Grand Gulf I or such shorter period of time as the allowed by the Interim Order. Howeven the interim rates A1PSC may subsequently determine to be appropriate.

continued in effect because the agreement could not be The Company will also be allowed to amortize on a implemented until the A1PSC issued a final order in the level basis and recover through its rates during the first case.

three years of the defeiral plan all of the costs associated By order of the Federal Eneigy Regulatory Commission with its alk)cated share of the power available from Grand (FERC) dated June 13,1985, the Company was alkxated Gulf 1 incurred during the period July 1,1985 through 33 percent of Aliddle South Eneigy's 90 percent share of September 19,1985. In addition, the Company will be the capacity and energy from Grand Gulf 1, which was allowed to recover on a current basis the costs of fman-placed in commercial operation on July 1,1985. cing the inventoied and deferred portions of the cost of On June 14, 1985, the AiPSC issued a Final Order in Grand Gulf 1. The Company has the right to sell the the November 1984 rate case, reaffirming its acceptance energy availabic from the mventory capacity to third and adoption of the regulatory agreement, but denying parties, or to its customers at a price equal to its avoided the Company's request for rates relating to Grand Gulf 1. energy costs. All revenues resulting from the sale of In acceptmg and adopting the agreement in the Final capacity or eneigy from the inventory capacity to third Orden the AIPSC expressly incorporated the mservations parties or to the Company's customers in excess of the of rights set out in the regulatory agreement referred to fuel costs of producing that energy shall be applied to above. On June 21,1985 the Company fded rates in reduce the inventory costs associated with the mventory compliance with the portion of the Final Order that capacity. The inventory and phase-in of a portion of approved the additional revenues covered by the agree- Grand Gulf I costs, as pnnided in the Final Order on ment. The AIPSC, by order of June 24,1985, approved Rehearing, is conditioned upon the Company's ability to the resised rates, which went into etTect on bills rendered finance such deferrals on reasonable terms. In the event on and after June 28,1985. the Company is not abic to finance fbr certain specified On June 27,1985, the Company filed with the A1PSC reasons all or any portion of the defern-d or phased-in a rehearing application based on that portion of the costs on reasonable terms, the inventoried costs and the AIPSC's Final Order that denied the Company additional deferred costs may be reduced to the extent of the Com-revenues associated with Grand Gulf 1. pany's inability to finance on reasonabic terms and the in September 1985, the AIPSC issued a Final Order on amount of costs to be recovered currentiv from customers Rehearing in the rate case which all<ms the Company to wuuld be increased correspondingly. Sucli reductions in recover currently, defer (inventory), and phase-in through inventory and deferred costs coufd be made by the Com-retail rates its Grand Gulf I related costs. pany after 30 days notice to the AIPSC and to all panies The Company was allowed an overall increase in base of record in the rate case; provided, howeven in the event rate revenue relating to Grand Gulf I of appn>ximately the A1PSC desires a hearing on the Company's inability S326,547,000 thr the projected test year over the base to finance, the proposed reduction or adjustment may be rates appnwed by the AIPSC in its June 14 Final Order. suspended tbr not more than 120 days and set fbr hear-Atier applying a rate moderation rider and considering ing. Upon such a hearing, the Company would have the estimated fuel savings, the Final Order on Rehearing burden of proof to establish the existence ofits inability results in a level of current revenues that are estimated to to finance.

result in increases in customer bills attributable to Grand The retail rates provided for in the Final Order on Gulf I over rates appnwed in the June 14 Final Order of Rehearing have been filed by the Company and were approximately 14 percent in the first year,8-10 percent in approved by the A1PSC by order of September 19, 1985, the second and third years and 7-8 percent in the thurth and became etrective fbr senice on and afier September and fifih years. 19, 1985. On October 15,1985, the Alississippi The Final Order on Rehearing requires the Company Attorney General filed a Notice of Appeal with the (1) to inventory one-third ofits alhication af Grand dulf Alississippi Supreme Court and on October 16,1985, the I fbr a ten-year period beginning September 20,1985, Alississippi I egal Senices Coalition filed a Notice of (Ten-Year Inventory Period), (2) to inventory the portion Appeal with the A1PSC, in each instance giving notice of of remaining costs fbr Grand Gulf 1 that exceeds a 14.5 their appeal of the Final Order, the Final Order on percent alk> cation of the unit for a three-year period Rchearing, dated September 16,1985, and the Order issued in the case on Alarch 5,1985, which severed the twginning September 20,1985, (Three-Year Inventory Period), and (3) to phase-in over a three-year period issues of prudence and rate design from the rate case.

beginning September 20,1985, a portion of the 14.5 During the appeals, the Company will continue to collect percent alhication (Phase-In Portion). Ikginning in the the rates approved by the A1PSC, which are subject to titih year (September 1990), the Company will be refimd to the extent that a tinal judicial determination allowed to amortize and recover through its rates those may result in a schedule of rates less than what the costs deferred and accrued in the Three-Year Inventory A1PSC allowed. The matter is pending.

Period and the Phase-In Portion in equal amounts over years five through ten. Furthermore, hepinning in year eleven, the Final Order on Rehearing allows the Com.

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_ _ _ - - . - - _ _ - - - _ , -~ _- _ ~_

3. Income Taxes Income tax expense (credit) consists of the fbliowing:

1985 19E4 1983 In Thousands Current:

Federal . $53,043 S20,659 S(5,303)

State . 6,280 2,967 (176)

Total . 59,323 23,626 (5,479)

Deferred-net:

Rate deferral-net of recoveries (Notes 2 & 8). 71,398 - -

Gas contract settlement (Note 11). (82,133) - -

Unbilled revenue. (2,909) - -

Provision fbr estimated losses (Note 12) . (5,544) - -

I.iberalized depreciation . 5,129 7,001 12,973 Revenue subject to refund. - -

25,997 Other.. 362 1,354 (461)

Total . (13,697) 8,355 38,509 Investment tax credit adjustments-net. 1,425 2,553 3,335 Recorded income tax expense. $47,051 S34,534 536,365 Charged to operations. 537,750 $33,659 S36,766 Charged (credited) to other income . 9,301 875 (401)

Recorded income tax expense. 47,051 34,534 36,365 Income taxes applied against the debt component of AFDC.. - 2,184 1,690 Total income taxes . 547,051 S36,718 _S38,055 Total income taxes differ from the amounts computed by applying the statutory Federal income tax rate to income befbre taxes. The reasons fbr the ditrerences are as fbliows:

1985 1984 1983 In Timusands

% of  % of  % of Pre-Tax Pre-Tax Pre-Tax Anmunt incorne Amou n_t_ I_ncome _Amou n_t, Incente Computed at statutorv rate. $45,064 46.0 $38,119 46.0 S36,736 46.0 increases (reductions) in tax resulting from:

Allowance tbr funds used during construction (394) (0.4) (3,531) (4.3) (2,990) (3.7)

State income taxes--net . 2,687 2.7 2,076 2.5 1,786 2.2 Other-net. __f06). (0.3) (2,130) (2.6) 833 1.0 Recorded income tax expense. 47,051 48.0 34,534 41.6 36,365 45.5 Income taxes applied against the debt component of AFDC. _ _ _ _ ._ _

_ 2,184_ _ l .ft _ _l,690 1.2 Total income taxes . S47,051 48.0 S36,718_ 43.2 S38,055 46._7 __

Unused investment tax credits it December 31,1985, amounted to $4.8 million. These credits may be applied against Federal income tax liabilities in future years. If not used, they will expire in 1992 and 1993.

Cumulative income tax timing ditrerences thr which deferred income taxes have not been provided are S57.7 million, $51.3 million, and S50.6 million in 1985,1984 and 1983, respectively.

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4, Lines of Credit and Short-Term 5. Preferred and Common Stock BorrowingS Preferred stock at December 31,1985 and 1984 con-The Company participates with certain other companies sisted of the fbilowing:

of the Aliddle South System in a monev pool arrange-Current ment whereby those companics with available funds make short-term loans to other companics in the Svstem Sharu Sun Outstanding Call Price Au_thorized 1985 19M Per Slure having short-term borrowing requirements. T'he Com_

pany may borrow from these sourecs subject to its maxi-mur'n authorized level of short-term borrowings. The Without sinking fund:

4.36% Series . 60,(XX) 59,920 59,920 S103.86 Company has received authorization from the Securitics 44,476 43,888 43,888 107.00 4.56% Series .

and Exdiange Commission (SEC) under the Public Utili. 100,000 100,000 100,(XX) 102.88 4.92% Seiies .

tv Holding Company Act of 1935 to have outstanding at 100,000 100,000 100,(XX) 1(M.67 any one time short-t'erm borrowings aggregating not 7.44% Series .

9.16% Series . 75,000 75,000 75,(XX) 1(M.06 more than 10 percent of the Company's capitalization, which was $75 million at December 31,1985. At Total 379,476 378,808 _378,808 December 31,1984, the Company had $22 million in lines of credit with Alississippi banks and participated

, With sinking fund:'

with the other Aliddle South operating compames in 12.00% Series . 100,000 100,000 100,000 112.00

$180 million of consolidated hnes of credit with banks 1G% % . 100,000 100,000 100A M IE83 outside the Aliddle South System service area. The 16.16% Series . 150,000 150,000 150,000 116.16 aggregate amount of the unused lines of credit with 17.00% &s . . 200AU 200,000 200JX0 117 2 Ahssissippi banks was S22 mdhon and the operating com-Total . 550,000 550,000_550JXX) panics had available $180 million under the consohdated _

lines of credit at December 31, 1984. At the end of 1985 these lines of credit were no longer available- Unis:ued . 1,075,000 Subsequent to year-end, the Company renegotiated $30 Total ' 2'(XM'476 million in lines of credit with Alississippi banks, none of = - = --

which was being utilized at Alarch 11,1986. In 'Ihouunds The short-term borrowings and applicable interest rates Without sinking fund:

(determined by dividing interest expense by the average Stated at $100 a share $37,881 S37,881 amount borrowed) tbr the Company were as ibilows: Pwmium 1_%._ 1%_

1985 1984 1983 tal $38,07 y8,y In Thousands With sinking fund:

Stated at $100 a share $55,000 S55,000 Ataximum borrowin"a.. S22,000 $46,000 $31,000

"""' -@ L --

Average twrowings:

Toul _S54,802 555JX)0 Bank loans. - S 4,003 --

Associated companies. $ 2,692 S 7,918 $ 2,853 *These series are to be retired in full through the opera-Average interest rate tion of sinking timds. Beginning Alarch 1,1988 and on dunng the period: each Alarch I thereafter, the 12.00% series is to be Bank hians. - 12.26 % -

redeemed at the rate of 5,000 shares per year. The Asmciated companies. 8.48% 10.89 % 8.98 % 14.75% series is to be redeemed at the ra'te of 33,333 shares per year beginning on Alarch 1,1990 and 1991, and 33,334 shares beginning on Alarch 1,1992.

Beginning November 1,1989 and on each November I thereafter, the 16.16% series is to be re&cmed at the rare of 7,500 shares per year. Beginning kptember 1, 1986 and on each September 1 thereafter, the 17.00%

series is to be redeemed at the rate of 10,000 shares per year. In addition, the Company has the non-cumulative option thr the 17.00%, the 12.00% and the 16.16%

series to redeem an additional like amount of said shares cach year commencing in the first year of redemption in each respective series.

Number of Shares Sold 1985 1984 1983 Common stock shares 435,000 -- 1,300,000 Preferred stock shares - 150,000 100,000 2,,3

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6. Long-Term Debt *In 1982, the Company entered into agreements with Independence Courry, Arkansas whereby the County long-term debt at December 31,1985, and 1984 con. issued S30,000,000 in Pollution Control Revenue sisted of the following: Ik)nds, $10,000f00 of which are due each year in July 2012,2013, and 2014. The Ik>nds are secured by 1985 1984 First Afortgage Ik>nds which are held by the Trustee First Afortgage Bonds: In Thousands and bear an interest rate which is determined by series 41/8% Series duc 1988. $ 15,000 on a rotating basis as follows:

S 15300 1I 1/4% Series due 1988. 45,000 45,000 151/8% Series duc 1990. 30,000 30,0fX) 121/4% Series duc 1992. 30,000 -

Intemt Rate 4 5/8% Series due 1995. 20,000 20,000 Detennination and 51/8% Series due 1996.. 25,000 25,000 l'rincipal Amount Remarketing Dates 6 3/8% Series duc 1996.. 10,000 10,000 Series A $10,000,000 July 1,1985 and July I of 9 5/8% Series duc 1999. 20,000 20,000 crery third year thereafter 91/4% Series due 2000.. 17,500 17,500 Series B 7 3/4% Series due 2002. 15,000 15,000 and D 10,000,000 July 1,1986 and July 1 of 7 3/4% Series duc 2003. 30,000 30,000 crerv third year thereafter 81/4% Series due 2003. 20,000 20,000 Series C 9 7/8% Series duc 2004. 25,000 25,000 and E 10,000,000 July 1,1987 and Julv I of 10 7/8% Senes duc 2005. 25,000 25,000 everv third vear thereafter 141/2% Series due 2014. 35,000 35,000-Total --.S.30,000,000

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Total First Afortgage Ikmds 362,500 332,500 Pollution Control Bonds: The holders of the Bonds have the right to have their 71/2% due 2004.. 9,400 9,400 lkmds purchased in accordance with the above rotating 81/2% due 2004. 8,575 8,575 schedule at a price equal to 100% of their pnncipal 7% to 81/2% due amount. Any holders of Bonds wishing to have their 1986 to 1995. 1,600 1,700 ihmds purchased must deliver such lkmds to the 7 7/10% to 11 1/2% due Remarketing Agent on or prior to the 15th day of June 2012 to 2014' 30,000 30,000 preceding such July 1. The Company's intent is to less-Amount held by Trustee -

(7.123) remarket these Bonds at the remarketing date.

Total Pollution Control 1onds. _4M75 _ 42,552 At December 31,1985, the sinking tund requirements Principal Amount of Capitalized and maturities ti>r long-term debt ti>r years 1986 through lease-8 % - 5,154 1990 are as ti>llows:

Unamortized fremium on Debt 786 847

-Sinking Fund

• Alaturities Unamortized Discount on Debt _ l_,6_96)

( (1,340) g

~ ~

In Th[nysan[1.s Total long-term Debt . 411,165 379,713

-~~

Ixw-Amount due within 1986. 53,218 S10,l00 one year

• 10,100 10,513 1987. 3,548 10,100 long-term debt cwluding 1988. 2,937 70,150 amount due within 1989. 2,937 150 one year. S401,065 5369,200 _

1990. 2,637 30,150

• Sinking fund requirements may be satisfied by certiti-cation of property additions at the rate of 167% of such requirements.

7. Retained Earnings The indenture provisions relating to the Company's long-term debt provide for restrictions on the payment of cash dividends on common stock. As of December 31, 1985, S65,240,000 of retained earnings were free from such restrictions.

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8. Commitments and Contingencies quarters of 1985 and the tint quarter of 1986. As a result, Aliddle South Utilities (51SU) was unable to Capital Re9"irements and Financing . . declair its common stock dividend fbr these same three

-At December 31, 1985, the Company's most sigmfi- quarters. Resumption of the Company's and MSU's com-cant commitments related to the financmg of the deferred mon stock dividends depends upon improvement in the ircovery of costs associated with the commercial opera , financial condition of the Middle South System.

tion of' Grand Gulf 1. As a result of the September 198a rate order of the A1PSC, discussed below, sutlicient rate Potential Debt Acceleration and the Viability relief was obtained by the Company to enable it to of the Middle South System recover its Grand Gulf I costs over a period of time The failure of a System operating company to meet a assuming it can obtain the requisite financing thr a por- payment for capacity and energy from Grand Gulf 1 tion of the costs associated with Grand Gutt I which wdl might, technically under certain agreements related to be deferred and financed until phased into rates. The MSE's indebtedness, lead to acceleration of such financing of such costs would be subject to, among other indebtedness unless waiven were obtained, the debt was things, receipt of SEC appnwal. In addition, the uncer- restructured or other arrangements could be negotiated.

tain status of Grand Gulf 2 may impact the Company if, In the absence of such waivers, debt restructuring or in the event of cancellation of the unit, the Company is other negotiated arrangements, acceleration of such in-allocated any Grand Gulf 2 costs by the Federal Energy debtedness could also occur if a System operating com-Regulatory Commission (FERC). pany were rendered insolvent by its failure to obtain rate The Company's construction program at December 31, relief or under provisions of MSE's bank hian agreements 1985 contemplated expenditures (including AFDC) of requiring that all System operatmg compames secure ac-approximately $17.0 million in 1986, S49.8 million in (eptable retail rate relief with respect to Grand Gulf I by 1987 and $41.4 million in 1988. June 30,1986.

The Company estimates that it will require S234.4 Given the substantial amount of MSE's debt, it would million in 1986, S191.8 million in 1987, and S135.2 not be able to meet its obliptions, if accelerated. Under million in 1988 to finance the deferral or phase-in of a MSE's financing agreements, MSU, and not the System por* ion ofits Grand Gulf I costs pursuant to the operating companics, wouki tw responsible to pay MSE's September 1985 MPSC Order discussed below. accelerated obliptions if MSE could not. MSU, with financial resources currently limited, including limitation Grand Gulf 1 Rate Order on its abihty to bormw funds or issue add,monal shares of

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On September 16, 1985, the MPSC issued a Final its common stock, would not at this time be in a posi-Order on Rehearing which allows the Company to tion to satisfy MSE's obliptions, if accelerated.

recover all ofits Grand Gulf I related costs either cur- Also, certain of the financing agreements and leases of rently, deferred (inventoned) or phasepm through retail System Fuels, Inc. (SFI) may require payments by the rates. The deferred and phased ,m portions of these costs ,

3vstem operating companies', MSU or ilSE in th'e event will be recovered from ratepayen in the later years of S'FI's obliptions under such agreements are accelerated as commercial opcration of the umt. See Note 2 " Rare a result of the insolvency of a System operating company Matters" thr further infbrmation reprding this Order. and SFI is unable to me'et these'obliptions or otherwise Unit Power Sales Agreement satisfy these obliptions through the sale of the collateral The Unit Power Sales Agreement, as approved by the $ecuring such y>bliptions. In addition, insolvency of a S.ystem operatmg company would atrect terms of financ-FERC in its June 13, 1985 decision (June 13 Decision),

ing, neludmg an mcrease m, cost of financing, or could oblipres the Svstem operating companies to purchase pmclude financmg for other Middle South System com-from MSE, at 'MSE's full cost of senice, all of MSE's 90 panies. Under these circumstances the contmumg uability percent sharewith of tthe cahacity and energy fium Grand of the Middle South System wuuld be placed m jeopardy, Gulf 1 in accordance e following percentage alh> cations:

wuh possible bankrupt'cv tilings fbr one or more of the the Company-33 percent; Arkansas Power & Light insolvent Middle South System compames.

Company (A'P&L)-36 percent; Louisiana Power & Light Company (LP&L)-14 percent; and New Orleans Public Availability and Realk cation Agirements Senice, Inc. (NOPSI)-17 percen*. In connecnon with The System operating companies are severally oblipted payments by the Company to MSE tbr Grand Gulf 1 to MSE under the Availability Agreement in accordance n lated charges, the Company's obliption tbr such with stated percentages (the Company 31.3 percent, payments is approumatelv $26.5 milhon per month, AP&L 17.1 percent, LP&L 26.9 percent, NOPSI 24.7 with such payments through the March 15,1986 pay- percent) to make payments or subordinated advances ade-ment being reduced by credits of $10.9 milhon per quate to cover all of'the operating expenses, including month, plus interest, tbr power purchase advance depreciation, of MSE. The Svstem operating companies, payments presiously made to MSE- including the Company, in November 1981 entered into Dividend Suspension a Reallocation Agreement which would have alkicated the capacity and energy available to MSE from the Grand In light of, among other things, the need to conserve Gutt Nuclear Stanon to the Company, l.P&L and cash in view of the weakened financial condition of the NOPSL These companies thus had agreed to assume all System stemming trom state and kical regulators' delavs the responsibihnes and obhpnons of AP&L with respect in approving rate increases, the Company and the otlier to the tirand Gulf Nuclear Stanon under the Availability System operating companies determined'not to dedare Agreement and the Power Purchase Advance Payment dividends on their common stock thr the last two Agreement with AP&L rehnqtuslung its nghts to the 1

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• Grand Gulf Nuclear Station. Each of the System October 15, 1985, the Power Purchase Advance Payment operating companies, including AP&L, ind'isidually, Agreement was amended to allow the Company to would have remained primarily liable to AISE and its receive a credit of $10.9 million for its power purchase assignees for payments or advances under these obligation to AISE due that date. This credit was also agreements. AP&L would have been oblipted to make taken monthly through the Alarch 15,1986 pavment.

its share of the payments or advances only if the other Accrued interest was added to the credit amoun't.

System operatin companics had been unable to meet their contractua obhptions. However, the FERC s June Pmposed Amendments to Statement of Financial 13 Decision supersedes the Reallocation Agreement m- AccountinE Standards No. 71 sofar as it relates to Grand Gulf 1. The accounting standards nlated specifically to public utilities and certain other regulated enterprises are Grand Gulf 2 promulpted by the Financial Accounting Standards As of December 31,1985, AISE had invested S937 Board (FASB) in Statement of Financial Accounting Stan-million in Grand Gulf 2, which is approximately 34 dards No. 71 (SFAS 71). In December 1985, the FASB percent complete based on the estimated man-hours issued an Exposure Draft proposing certain amendments needed to complete the unit. From late 1979 until to SFAS 71. The amendments, if adopted as proposed, September 1985, only a limited amount of construction would become effective for fiscal yean beginmng after was perfbrmed on Grand Gulf 2 Effective September 18, December 15, 1986 with retroactive apphcation for prior 1985, constnation actisities on Grand Gulf 2 were transactions. The Exposure Draft proposes amendments suspended folkming an order of the AIPSC. AISE has to the accounting standards for: (1) the phase-in of rates now determined to continue with full suspension of con- asmciated with the costs of new generating plants, (2) stmction on Grand Gulf 2 until further evaluations are abandonments of partially completed generating plants made, which are estimated to be completed sometime in and (3) disalkmances of costs associated with newly com-1986, and to limit expenditures to only those activitics pleted generating plants. The proposed amendments, if which are absolutelv necessary fbr demobilization and adopted in their present form, could have a material suspension. Ikcause of seriotis financial restraints on the adverse impact on the Company due to the revisions pro-Aliddle South System, com posed in the accounting treatment of phase-in plans. The ,

appears unlikely. Ilowever; befbre apletion of Grand final decision is made,Gulf 2Company is under a AiPSC ordered rate phase-in plan fbr consideration will be given to various long-term factors recoverv ofits share of the costs of Grand Gulf I which, and regulaton agency requirements applicable to Grand in its present fbrm, meets the current requirements of

, Gulf 2. SFAS 71, but may not meet the requirements in the Ex-Ifit is ultimatelv decided that Grand Gulf 2 should be posure Draft. The Company's Phase-In Plan (see " Grand cancelled, AISE would take all actions necessary befbre Gulf 1 Rate Order" above) provides mechanisms for ad-the FERC and the courts to attempt to recove'r its dressing an adverse impact on costs recoverable under it investment. Such actions would likely involve a filing associated with a change in circumstances, including a with the FERC requesting recovery ofits full investment, change in accounting standards. If the proposed revisions over a period of years, through charges to the Svstem become efEcrive and apply to the Phase-In Plan, the operating companies. Such proceedings, and related pro- Company will attempt to use these mechanisms to make ccedings befbre state or local regulatory authorities with appmpnate revisions. The Company is studying the respect to retail rates, could be protracted and stmngiv Exposure Draft; howevei; until the Board issues a new contested on various grounds, including imprudence. 'If Statement of Financial Accounting Standards which the Company was alh>cated a share of AISE's investment amends SFAS 71, the Company cannot determine what in Grand Gulf 2 and it was unable to recover these costs will be the specified impact of the proposed changes, if fium its customen, the Company's financial condition any.

4 might be advenely afkcted. As an addendum to the Spg September 18,1985 order, the A1PSC advised the Com- -

pany and AISE that it was the AIPSC's position at that The Company has a 19 percent interest in SFI, a joint-time, with which the Company disagrees, that any poten, ty owned subsidiarv of the fbur principal operating sub-tial plan fbr recovery by the Company of" sunk c'osts" in

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sidiaries of AISU. SFI operates on a non-profit basis fbr Grand Gulf 2 throtigh retail rates is tinjustifiable. the purpose of planmng and implementmg programs fbr the procurement of fuel supplies thr all of the operating Power Purthase Advance Payment Agreement companies; its costs are primarily recovered through Under the Power Purchase Advance Payment Agree- charges fbr fuel delivered.

ment, the Company made advance payments to AISE The parent companies of SFI have made hians to SFl 4

from Januarv 1984 to June 1985 (aggrepring S72 to tir.ance its fut supply business under a loan agreement million) thr [x>wer to be delivered upon commercial dated Januarv 1,1984, as amended Januarv 1,1986, operation of Grand Gulf 1. These advances were to have which provides tbr SFI to borrow up to S75 million from been credited against the power purchase obliptions of its parent companies through December 31,1986. As of the Company over an 18-month period, ibilowing com. December 31,1985, the Company had loaned $2.85 mercial operation of Grand Gulf I on July 1,1985. Such million to SFl pursuant to this h>an agreement and the credits were received accordingly in August and in Company's share of the unused loan commitment was September at the rate of 4 percent of the total advances. $8.4 million. Notes under this agreement mature in October 1985, the remaming amortization period was December 31, 2011. In addition, the Company had shortened fn>m 16 to 6 months and the amortization loaned SFl $17.8 million under previous loan rate ihr the credits was changed to a level basis. On agreements. Notes mature in 2002 and 2008 under the 26 E _ _ . . _ _ _ _ _ _ _ _ . _

provisions of the previous loan agreements. submitted to the MPSC in June 1985 and generally con-In connection with certain of SFI's borrowing ar- cluded that cost and schedule increases on Grand Gulf I rangements, SFI's parent companies, including the Com- were primarily due to changes and additions in regulatory pany, have covenanted and agreed severally in accordance reqmrements, engmeering and construction evolution with their respective shares of ownership of SFI's com- over the course of the project and the impact of the i mon stock, that they will take any and all action neces- 1979 Three Alile Island Unit 2 incident. The audit fur- i sary to keep SFI in a sound financial condition and to ther concluded that the factors causing these increases place SFI in a position to discharge, and to cause SFI to were industry-wide in nature and bevond the control of discharge its obliptions under these arrangements. At the Company and that the Company took measures to December 31,1985, the total loan commitment under minimize the cost and schedule effects of these industrv-these arrangements amounted to $210 million of which wide events and of other factors impacting Grand Gutt'l.

$189.1 million was outstanding at that date. Also, SFI's The final management audit report of the Company was parent companics, including the Company, have made submitted to the A1PSC in July 1985. This audit, while similar covenants and agreements in connection with generally favorable, raised questions reprding certain long-tenu leases by SFl of oil storage and handling management decisions of the Company, including deci-facilities and coal hopper cars. At December 31, 1985, sions relating to Grand Gulf 1.

the aggregate discounted value of these lease arrange- Nuclear Liability Insurance ments was $78.5 million. The Company is a member-insured of Nuclear Electric SFI has contracted with a joint venture fbr a suppiv of Insurance Limited (NEIL), a mutual insurer that pnnides coal from a mine in Wyoming, which based on estiniated its members with insurance coverage fbr certain costs of reserves is presently ex;wcted to provide for at least thiny replacement pmver incurred due to cenain prolonged years of the projected requirements of the Independence outages of nuclear units. As a member-insured with this Station. SFI's parent companies, including the Company, mutual, the Company is subject to assessments iflosses each acting in accordance with their share of the owner:

exceed the accumulated funds available to the insurer.

ship of SFI's common stock, joined in, ratified, con-The Company's present maximum assessment fbr finned and adopted the contract and the obliptions of , ,

SH thereunder. Under the contract, investment in the mcidents occuning dunng a poh,cy year is appnmmately mine for leases, plant and equipment is the respmsibility $1 million.

of the joint venture. In order to limit the joint venture's Stockholded Suit investment rights and, hence, the amount to be paid to During August and September 1985, five purported it as a component of the price of coal, the contract class action suits were filed by AISU sharehokiers provided that SFl mvest any funds fbr plant and eqm.p- (purporting to cover classes who purchased AISU com-ment in excess of a specified amount. The Company, mon stock over vaning periods of time) in federal court.

AP&L and Arkansas Electne Cooperative Corporation, as These complaints have been consolidated in the U.S.

co-owners in part of District Court tbr the Eastern District of louisiana. The agreed to make the lthe mvestments Independence rather than SFI and, ac- Station, have Consolidated Amended and Supplemental Complaint cordingly, have reimbursed SFI for investments previously alleges violations of the dischwure requirements of the made by it. Through December 31,198,, 3 the Company Securities Exchange Act of 1934 and the Securities Act of had mvested $15./ milhon in mme facihnes and related 1933, common law fraud and common law negligent capitahzed assets. During 1986, it is presently esnmated . misrepresentation in connection with the financial condi-that an additional S.8 million will be mvested under this tion of AISU and prays tbr compensatory and punitive agreement. 'T,he Company s share of the additional m- damages, legal costs a'nd fees and other proper relief vestment would be 5.2 million. apinst A1SU, various other Aliddle South System com-Power Purchase Agreements panics, including the Company and cert:an officers and directors of AISU, the Company's outside auditors and The electric power su ply facilities of the Compant are interconnected with the facilitics of Alississippi Power cenain undenvriters of AISU common stock. While AISU and the other defendants are reviewing the allegations Company, a neighboring utility that is part of the and plan to assert all available defenses thereto, they Southeni Com 3any Svstem. hi Alav 1980, the Company ~

believe that A15U's dischwure ofits financial condition entered into a ong-te'rm agreement that pnnided for the was in compliance with applicable SEC requirements.

Company to purchase 200 megawatts of capacity from flowever, the eventual outcome and impact on the Southeni Company Senices, Inc. (SCSI) w hen .ivailable Alidtile South System's financial condition cannot be during the period Iulv 1,1980 through December 31, .

predicted at thn time.

i 1986. The energy cos't, which includes a capacity char l

is based upon a ibnnula that adjusts thr hourly incre ge, mental cost of SCSI coal-fueled steam generation. If the energy is to be supplied from higher cost sources the Company may, at its option, retuse the purchase and a credit adjustment to the capacity charge will be made.

_AIP.SC._A_l.a_nd.a.ted A_ u_dits In Septendier 1984, the AlPSC appointed special con-sultants to conduct a construction audit of the Grand Gulf Station and a management audit of the Company.

The final construction audit report thr Grand Gulf I was 27

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9. Transactions with Affiliates 10. Postretirement Benefits A. JOINTLY OWNED GENERATING STATION The companies of the Aliddle South System have The Company jointiv owns 25 percent of the v n us postretirement benefit plans covering substantially Independence Steam Electric Station (ISES), a two-unit all of their employees. ,

coal-fired generating station. AP&L owns 31.5 percent of Pension plans are administered by a trustee who is the station and operates the facility. The Company and n sp nsible for pension payments to retirees. Vanous AP&L have entered into a Unit P'ower Purchase ^ gree- nvestment managers have responsibility for management ment Ihr the purchase by the Company of AP&L's of the plans assets. In addition, an mdependent actuary capacity and energy froni ISES Unit 2 'fbr an initial five- perfbrms the necessary actuarial valuanons fi>r the year term ending in 1989. The Company records its individual company plans.

investment in and expenses associated with this station to EtTective January 1,198a,, the Company's plan was the extent to which the Company owns and participates amended to comply with the Renrement Equity Act.

in the generating station. The Company's investment in Tliese amer 1dments, which improved benefits, did not the generating station at December 31,1985 was $241.3 have a sigmficant impact on 1983 pension expense. Total million, less accumulated depreciation of $17.9 million. pension expense of the Company for 1985,1984 and 1983 was $6,375,000, S4,875,000 and S4,647,000, B. OTHER AFFILIATED TRANSACTIONS respectively.

The Company buys from and sells c!cctricity to the For a limited period in 1985, a special early retirement

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other subsidiarics of' Aliddle South Utilities, Inc., its PnFam was otTered to certain employees of the Com-parent, under rate schedules filed with the Federal Encryv pany. This pn> gram had a one-time etTect of mereasing Regulatory Commission. In addition, the Company pur.- 1985 pension expense by SI,230,000.

chases fue'l from SFI and AP&L and receives techiiical The companson of the actuarial present values of and advisorv services from Aliddle South Services, Inc. accumulated pension plan benctits and plan net assets fbr

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Operating revenues include revenues from sales to the dehned plan is presented below. This companson was afliliates amounting to S97,584,000 in 1985, determmed m accordance with the provisions of State-

$72,179,000 in 1984 and $50,157,000 in 1983. ment of Financial Accounting Standards No. 36 which requires the use of cenam assumpnons which are ditTerent Ojwrating expenses include charges from afliliates as g igws; from those used by the Company's actuary m deternun-ing an appropriate level of funding for the Company.

19_85 1984 1983 January 1, 1985 1984 Fue1 purchased In Thousands

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in>m SFI $ 32,748,000 S46,173,000 S31,809,000 Actuarial present value of Fuel accumulated pension plan benetits:

purchased Vested . S38,510 533,929 from AP&L 38,273,000 28,123,000 28,740,000 h,onvested .

2,974 - 2,642 - -

Power .ht3I - __ $41,484 S36,571 purchased from Grand Net assets available Gulf 1 181,933,000 1,051,000 -- for pension benefits . $69,867 563,579 Power purchased from Grand Gulf 1 (Deferred) (l46,608,000) -- --

Power pur-chased from AP&L(ISES Unit 2) 65,258,000 4,808,000 -

Other power purchased tiom AISU System 8,471,000 3,067,000 17,985,000 Technical &

advisory senices 10,512,000 9,895,000 7,924,000 28

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The assumed rate of return used in determining the 12. Quarterly Results (Unaudited) actuarial present value of accumulated plan benchts was 9 Unaudited operating results by quarters follow:

percent.

The Company also provides certain health care and life insurance benefits tbr retired emplovces. Substantially all

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Juarter Ended _

employees may become eligible tor these benefits if thev Ahrch June September December reach retirement age while still working tbr the Company. In Thousands

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These benefits and similar benefits for active employees are provided thmugh payments of premiums to insurance 1985 companies. The Company recognizes the cost of pro-viding these benefits by c'xpensing the payments as thev

' - Operating revenues $143,350 $142,513$178,984 $140,282' are incurred. The cost of pnwiding these' benefits the retirees is not separable from the cost of providing 9PC"'I"E 16,976 15,666 33,425 10,501' benefits thr active employees. The total cost of pnwiding (",come these benefits and the average number of active 9,100 7,633 25,831 8,349' in me emplovces and retirees for the last three fiscal years were as tolinws: gg3 1985 1984 1983 Operating

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revenues $120,101 S126,204 S165,335 5120,287

'Ibral cost of health Operating care and life insurance income 18,090 18,208 27,682 10f 90" 52,423 51,635 $1,702 (in thousands) . Net Number of active income 12,831 8,423 22,299 4,780 "

employees . 2,275 2,153 2,075 Number of retirees . 320 296 275

• 1hurth quarter 1985 operating revenues reflect a redoc-11o Settlement Agreement With Gas 'i"" recognmon "f dPP'"'i"'3!'l Y of S7 prou. :7 "'iFi""

in connection u sions for estimated adiustments Supplier resulting fnim issues mised during the Fedeni Energy Regulatory Cummission's normal periodic rrview of Com-On September 25,1985, the Company and United Gas pany operations. These provisions reduced operating and Pipeline Company executed a Settlement Agreement in connection with (1) the suit filed by the Company on net income by appnnimately $5.5 million. In addition, operating and net income were reduced by 55.7 million August 30,1974 for damages resulting from the breach due to the recognition of engineering and design costs of a Gas Sales Agreement and misrepresentations made to and estimated liabilities associated with indetimtelv the Company and (2) the suit filed by the Company on delayed future fbssil generating facilitics and invest'ments April 22,1983, tbr damages resulting' from the brea'ch of in the Svstem's fuel procurement program. Net income a Gas Sales Agreement and thr billing and collecting from was increased in this quarter by appnnimately $4.1 the Company, rates tbr gas in excess of that allowed by million in connection with the sale of the gas pipeline the Agreement. Pursuant to this Settlement Agreemen't, United paid the Company $165 million on September system.

25,1985 and agreed to pay an additional $17.5 million

' Operating income and net income in the thurth by September 25,1987. Upon receipt, the 1985 funds quarter of 1984 reflect a reduction of appnnimately $3.2 were mvested in United States Government Repurchase million due to the recognition of engineering and design Agreements. The use and disposition of the settlement costs and estimated liabilities associated with indefinitely proceeds and the interest earned on those proceeds are delayed future tbssil generating facilities.

subject to the jurisdiction of the MPSC which has not yet ruled in the matter. 'I he business of the Company is subject to seasonal fluctuations with peak periods occurring during the sum-mer months. Accordingly, earnings intbrmation ihr any three-month period should not be considered as a basis tbr estimating the results of operations thr a full year.

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13. Effect Of inflation On Operations (Unaudited)

The fi>llowing supplementary infi>rmation about the effect of changing prices on the Company is provided in accordance with the requirements of Statement of Financial Accounting Standards No. 33, " Financial Reporting and Changing Prices",

as amended by Statement of Fmancial Accounting Standards No. 82. It should be viewed as an estimate of the etrect ofchanging prices rather than as a precise measure.

Statement ofIncome from Operations and Other Financial Data Adjusted ti>r Etreets of Changing Prices ti>r the Year Ended December 31ul985 In Thgusands Adjusted fi>r As Reponed in Changes in the Financial Specific Prices Statements (Current Costs)

Rcrenues* . S605,129 5605,129 Operating expenses (excluding depreciation)* .

494,169 494,169 Depreciation . 34,392 74,546 Total operating expenses. 528,561 568,715 Operating income . 76,568 36,414 Other income' 13,207 13,207 Interest and other charges

• 38,862 38,862 Income from operations (excluding adjustment to net recoverable cost) . . . S 50,913 S 10,759 increase in specific prices (current costs) of property, plant, and equipment held during the year * * . S 48,264 Adjustment to net recoverable cost. . . 25,534 Etrect ofincrease in general price level. . (62,861)

Excess (deticiency) ofincrease in specific prices, after adjustment to net recoverable cost, over increase in general price level . 10,937 Gain from decline in purchasing power of net amounts owed.. 20,554 Net. S 31,491

' Assumed to be in "aserage ti>r the year" dollars and thus are not restated.

"At December 31, 1985, current cost of prope ty, plant, and equipment, net of accumulated depreciation, was

$ 1,693,000,000 while historical cost or net cost recoverable through depreciation was $781,980,000.

Five-Year Comparison of Sc!ceted Supplementary Financial Data Adjusted tiyr Etrects ot1 Changing Prices In Thousands of Average 1985 Dollars YSJJ'_I5Hded .1)ecember 31, 1985 1984_ 1983 1982_ 1981_

OPERATING REVENUES. . $605,129 5550,906 5561,586 5586,762 5629,074 CURRENT COST INFOlulATION:

Income from operations (escluding adjustment to net recoverable cost) . . . $ 10,759 $ 10,849 S 2.216 S (1,012)S 5,316 Escess (deticiency) of increase in ,pecific prices, after adjustment to net recoserable cost, oser increase in general price level . .S 10,937 5 7,741 S 35,434 S 14,929 S(19,569)

Net awers at Scar-end at net recmcrable cost. . $247,173 S224,782 5231,351 $204,0~8 S212,911 GENERAL. INI Olul ATION:

Gain from dethne in purchasing power of net amounts owed . . S 20,554 S 22,637 5 21,982 5 21,046 S 41,251 Ascrage tonsumer price indes . 322.2 311.1 298.4 289.1 272.4 30 C

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Current cost amounts reflect the changes in specific To properly reflect the economics of rate regulation in prices of property, plant, and equipment from the year of the Statement ofIncome from Operations presented acquisition to the present. The current costs of property, above, the adjustment of net property, plant, and equip-plant, and equipment, which represent the estimated ment to net recoverable cost is adjusted by the cain from costs of replacing existing plant assets, are determined by the decline in purchasing power of net amounts owed.

applying the Handy-Whitman Index of Public Utility During a period ofinflation, holders of monetc..y assets Construction Costs (HWI) to the cost of the surviving suffer a loss of general purchasing power while holden of plant by year of acquisition. Land and certain other plant monetary liabilities experience a gain. The gain from the assets that are not included in the HWI were converted decline in purchasing power of net amounts owed is using the Consumer Price Index for all Urban Consumers primarily attributable to the substantial amount of debt (CPI-U). which has been used to fmance property, plant, and The current year's depreciation expense on the current equipment. Since the depreciation on this plant is limited cost amounts of pn>perty, plant, and equipment was to the recovery of historical costs, the Company does not determined by applymg the Company's depreciation rates have the opportunity to realize a holding gain on debt to the indexed amounts. and is limited to recovery only of the embedded cost of Fuel inventories and the cost of fuel used in generation, debt ca;-ital.

have not been restated from their historical cost in nominal dollars. Regulation limits the recovery of fuel costs to actual costs incurred through the operation of adjustment clauses or adjustments in basic rate schedules.

For this reason, fuel inventories are effectively monetary assets.

As prescribed in Statement of Financial Accounting Standards No. 33, income taxes were not adjusted.

The regulatory commissions to which the Company is subject allow only the historical cost of plant to be recovered in revenues as depreciation. Therefore, the excess cost of plant stated in terms of current cost over the historical cost of plant is not presently recoverable in rates. This excess (deticiencv) is reflected as an adjustment to net recoverable cost. While the ratemaking pn> cess gives no recognition to the current cost of replacing property, plant, and equipment, the Company believes, based on past experience, that it will be allowed to earn on the increased cost ofits net investment when replace-ment of facilities actually occurs.

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Mississippi Power & Light Company Record Of Progress 1975-1985 1985 1984 1983 SELECTED FINANCIAL DATA (000's OMilTED)

ELECTRIC OPERATING REVENUES:

Residential . . . . . . . . . . . . . . . .. . . . . . . . . . . . . $ 207,738 $ 186,2 % S 185,917 Commercial. ... .. .... . . . . . . . . . . . . . . . . . . 152,007 134,276 129,863 1ndustrial.. . . . . . .. . ... ... . . . . . . . . . .... . . ..... I13,044 106,924 108,365 Government & municipal.. . . . . . . . . . . . . . . . . . . . . . . . 19,480 17,694 19,593 Cooperatives & municipalities . . . . . . . . . . . . . . - 4,189 7,996 Total from encry sales (Miss. area) .. . . . . . . ... ..... ..... 492,269 449,379 451,734 Sales to other public utilities... . ... ..... . . . . . . . . . . 104,384 73,218 51,171 Total from energy sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 % ,653 522,597 502,905 Miscellaneous revenues ................... .. . . . . ...... 6,100 10,422 9,788 Deferred fuel adjustment revenues! .... ........ . 2,376 (1,092) 7,410 Total electric operating revenue.. . . . . . . . . . . . S 605,129 5 531,927 5 520,103 NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S 50,913 $ 48,333 5 43,495 TOTAL ELECTRIC UTILITY PLANT:

Production .. . .... . . . . . . . . . . . . . . . . . . S 572,646 5 572,938 5 482,177 Transminion . . . . . . . . . . . ... . . . . . . . .. 247,476 218,383 215,575 Distribution . .. ... . . .. . . ....... . . . . . . . . . . . . . . 267,162 256,146 242,433 General & other... . . . . . . . . . . . . . . . . . . . . . . . . . _ 25,383 40,233 36,592 Total utility plant completed .... .. .... . .. . . . . . . . . . . . . 1,112,667 1,087,700 976,777 s Plant held fbr future use. .. ... .. . . . . . . . . . . . . . .. . 3,939 3,939 3,939 Construction work in progress ....... .. . . . . . . . . . . . . . . . . . . . . 2,365 16,643 83,590 Electric plant acquisition adjustments.... ..... . .. . . 1,317 1,498 1,680 Total utility plant .. .. . . . . . . . . . . . . . . . . . . . . . . . .... $1,120,288 S1,109,780 $1,065,986 TOTA L ASSETS . . . . . . . . . . .. ..... . . . . . . . . . $1,352,620 $ 938,220 $ 862,249 LONG-TERM DEBT . . .... . ...... . ... . .. . . . . . . . . S 401,065 S 369,200 $ 340.506 PREFERRED STOCK, WITH SINKING FUND ... .. ... . $ 54,802 S 55,(X)0 S 40,000 OTIIER DATA ELECTRIC ENERGY SALES (MKWII):

Iksidential . . .... .. . . . . . . . . . . . . . . . . . . . ....... 3,191,980 3,051,947 2,935,883 Commercial. .. ... . . . . . . . ... .. . . . . . . . . . . . . . . . 2,318,724 2,172,115 2,026,136 Industrial. .. ..... .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 2,018,793 2,085,639 2,043,737 Government & municipal. . . . .. . . . . . . . . . ...... 323,269 315,885 343,789 Cooperatives & municipalities . . .. . . .... ... . . .... . - 94,295 178,081 Total energy sales (Miss. area)... . . . . . . . . . . . . . . . . . . . . . . 7,852,766 7,719,881 7,527,626 Sales to other public utilities... . . . . . . . .. 2,272,493 1,605,347 980,031

, Total c!cctric energy sales... . . . . .. ... .. . ... . .... 10,125,259 9,325,228 8,507,657 ELECTRIC CUSTOMERS (END OF PER.IOD):

Iksiden tial . . . . . . . . . . . . . . . . . . .. .. ... . . ... .. .. ... .... 282,043 276,586 272,281 Commerical., ... ... .. .. .. ... .... . . . . . . . 41,016 40,290 39,403 Industrial. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,411 3,387 3,246 Gm ernment & municipal.... . . ...... .. .. .... ... . ..... ..... 2,526 2,448 2,363 Cooperatives & municipalities . . . . .. . . . . . . .

- - 5 Total customers (Miw. area). . . . . .. ... ...... . 328,996 322,711 317,298 Other public utilities. . . . . . . . . . . . .. . . . .. 2 2 2 Total electric customers... . . . . . . . . ... . 328,998 322,713 317,300 ENERGY SOURCE AND DISPOSITION:

Total generation.. .... ..... . . . .. . 6,471,405 6,724,724 5,445,661 Purchased and net interchange ....... ..... . . . . . 4,435,96_9_

_3,294,151_ 3,914,7_96

Total . . . . . . . . . . . ... .... ..... . . . . . . . . . . . . . . . 10,907,374 10,01H,875 9,360,457 I.cw

Company uw, losses and unaccounted thr... . .... _ 782_,115 693/>47 8_52,800 1 Total e ne rgy sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,125,259 9,325,228 8,507,657 NET INPUT (MISS. AREA)-MKWII. ... .. . . . . . 8,634,881 8,413,528 8,380,426 PEAK LOAD (MISS. AREA)-KW . . .. .. .. 1,858,000 1,758,000 1,894,000 LOAD FACTOR (MISS. AREA)-PERCENT ., ... .. . 53 54 50 NET PLANT CAPABILITY-KW . ... . .... .. 3,136,000 3,183,000 2,972,000 CIRCUIT MILES OF ELECTRIC LINES . .. . .. 19,871 19,578 19,387 Is.c Item B to Note 1-Summary of significant accounting policies.

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l 1982 1981 1980 1979 1978 1977 1976 1975

$ 173,349 $ 168,387 $ 147,525 S 120,246 5 110,705 S 106,520 $ 91,849 $ 74,2 %

121,164 115,147 96,724 83,562 73,542 69,114 60,855 47,484 a 105,164 110,138 91,814 83,491 70,306 67,948 58,645 42,863 19,261 19,838 15,919 13,433 11,804 11,158 9,899 7,022 9,559 16,975 34,377 39,423 36,591 34,073 25,622 21,399 428,497 430,485 386,359 340,155 302,948 288,813 246,870 193,064 94,563 93,237 139,076 93,347 93,701 77,732- 57,298, 43,084 523,060 523,722 525,435 433,502 3 % ,649 366,545 304,168 236,148 10,560 7,826 6,444 4,568 3,187 1,441 1,113 838 295 1,109 (1,546) 440 (2,640) 3,495 3,071

(7,137)

S 526.483 $ 531,843 $ 532,988 5 436,524 5 400,276 $ 365,346 5 308,776 S 240,057

-35,120 $ 36,031 S 33,954 S 22,581 S 28,845 S 25,027 5 -25,745 S 20,803

-S 5 356,298 5 355,771 S 355,084 S 352,658 5 351,646 S 349,195 5 338,118 5 299,583 210,926 179,778 171,810 149,887 146,227 132,966 118,137 118,450 235,114 225,152 212,035 201,361 190,820 180,035 171,955 166,590 1

22,293 20,646 18,641 17,128 16,254 16,154 15,727 15,366 l

824,631 781,347 757,570 721,034 704,947 678,350 643,937 599,989 3,939 3,316 3,316 3,270 3,270 3,270 3,270 4,070 i 174,744 135,605 17,702 25,913 10,820 15,660 28,061 35,772

. 1,861 2,043 2,224 2,406 2,588 2,769 2,951 3,113

$ 1,005,175 S 922,311 S 780,812 5 752,623 5 721,625 $ 700,049 5 678,219 $ M2,944 794,288 $ 728,477 S M9,101 S 607,643 $ 603,812 5 594,985 5 584,022 S 559,009 S

286,060

, S 288,835 5 284,349 S 262,860 5 263,380 $ 271,374 5 279,073 S 278,029 S

! S 30,000 S 20,000 - - - - - -

2,943,959 3,069,404 2,787,432 2,856,736 2,727,718 2,491,067 2,440,460 2,953,836 1,938,341 1,918,334 1,832,462 1,781,881 1,647,919 1,537,169 1,457,505 l 1,988,978 2,196,968 2,217,846 2,285.120 2,187,020 2,071,093 1,935,573 1,751,042 2,011,579 387,503 385,133 369,441 371,811 344,634 326,275 302,319 362,072 210,368 418,447 986,063 1,270,584 1,280,949 1,217,042 1,064,636 990,309 7,885,218 8,576,780 8,545,039 8,478,397 8,008,406 7,354,720 6,941,635 7,526,833 2,419,177 4,343,224 3,681,898 4,354,425 3,580,571 2,624,001 1,638,144 2,314,418 l~ 12,226,937 12,832,822 11,588,977 9,978,721 8,579,779 9,841,251 10,304,395 12,920,004 266,975 263,850 260,421 255,174 249,889 245,384 241,739 l 268,556 38,427 38,115 37,919 37,405 35,922 34,718 33,801 38,651 3,351 3,276 3,230 3,245 3,301 3,247 3,247 3,194 2,221 2,132 2,087 2,049 1,965 1,920 1,879 2,309 l 64 66 67 67 66 3 5 12 39 307,412 303,721 297,939 291,144 285,336 280,732

} 312,715 310,986 2 2 2 2 2 2 1 2

307,414 303,723 297,941 291,146 285,338 280,733 312,717 310,988 7,483,624 10,327,561 9.909,942 11,881,340 10,297,826 8,020,408 5,923,584 f 7,071,398 2,022,658 2,598,778 3,298,528 i 3,497,887 3,513,268 _ 3,423_,648 3,081,406 _ _1,772,740 1 10,569,285 10,996,892 13,751,209 12,991,348 13,654,080 12,320,484 10,619,186 9,222,112 692,497 831,205 764,411 821,258 731,507 640,465 642,333

728,034 10,304,395 12,920,0M 12,226,937 12,832,822 11,588,977 9,978,721 8,579,779 i 9,841,251

' 9,407,985 9,309.449 9,299,653 8,739,930 7,995,184 7,583,971 8,254,866 8,577,858 2,078,000 1,913,000 1,899,000 1,784,000 1,733,000 1,642,000 1,765,000 1,912,000 52 56 56 56 53 52 53 51 2,763,000 2,763,000 2,763,000 2,763,000 2.763,000 2,752,000 2,752,000 2,763,000 19,120 18,855 18,504 18,334 18,!09 17,859 17,713 19,262 33 E

a

r e-Board Of Directors .

And Officers BOARD OF DIREC'IORS: OFFICERS:

David C. Bramlette, III, Partnen Adams, Forman, Trulv, Donald C. Lutken, Chaimun of the Board and Chief Ward, Smith and Bramlette, Natchez Executive Otlicer William Cavanaugh, III, President & Chief Operating William Cavanaugh, III, President and Chief Operating Otlicen Alississippi Power & Light Company, Jackson Othccr Frank R. Day, Chairman of the ikurd and Chief Donald E. Aleiners, Senior Vice President, Corporate Executive Otlicen Trustmark National Bank, Jackson Operations Norman B. Gillis, Jr., Attorney-at-Law, AlcComb

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Jackson B. Richard, Senior Vice President Dr. J. Harvey Johnston, Jr., Phvsician, Jackson Frank S. York, Jr., Senior Vice President, Chief Robert E. K'ennington, II, Chairnun of the Ikurd and Financial Officer and Secretary Chief Executive Otticen Grenada BankingCystem, Thomas A. Dallas, Senior Vice President and Assistant Grenada to the Chairman Floyd W. Lewis, Chairnun of the Ikurd and President, J. Stew art Frame, Senior Vice President, Personnel

'Afiddle South Utilities, Inc., New Orleans (Retired and Administration December 1,1985, for health reasons. Succeeded by John D. Holland, Vice President, Govemmental Affairs C. Hiram Walters, Vice President, Customer Senices Edwin A. Lupberger*in January 1986.)

Donald C. Lutken, Chaimun of the lkurd and Chief Frank F. Gallaher, Vice President and Chief Engineer Executive Otlicer, Alississippi Power & Light I25*8 L AI "C' V'ce President, Corporate Company, Jackson Communications Richani D. AlcRae, Sr., Chairman of the Board and Oliver D. Kingsley, Jr., Vice President, Nuclear Chief Executive Otlicer, AlcRae'3, Inc., Jackson Operations ,

LeRoy P. Percy, Planten Greenville Ted H. Cloninger, Vice President, Nuclear E. B. Robinson, Jr., Chairnun of the Board & Chief Engineering and Support Executive Officer, Deposit Guaranty National Bank, George A. " Pat" Goff, Vice Pres, dent, i h_ nance and Jackson Accountmg Dr. Walter Washington, President, Alcorn State James R. Alartin, Treasurer and Assistant Secretary Univenity, lorman Allan H. Alapp, Assistant 'Ircasurer and Assistant Robert A1. Williams, Jr., Partnen Reeves-Williams Secretary Builden, Southaven DIVISION A1ANAGERS:

John R. Craft, North Central, Greenville Bob L. Alanh, Central, Jackson James S. Pilgrim, Western, Vicksburg Graham H. Tempel, Southern, llrookhaven T. Ray Tomlinson, Northern, Senatobia 8',f '

PLANT AIANAGERS:

Atalcolm A. Allred, Baxter Wilson, Vicksburg L. Otis Dewcase, Natchez, Natchez (acting Plant Atanager)

C. R. Hutchinson, Grand Gulf Nuclear Station, Port Gibsor.

A. T. Johnson, Rex Brown, Jackson d

Alan J. Sebern, erald Andrus, Greenville

'um A.1 9"/ Rex A1. Sha. mon, Delta, Cleveland i

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The Company System Map MISSISSIPPI POWER & LIGliT COMPANY is a N'

regulated electric utility operating in 45 counties of a.

western Mississippi. < SENATOBIA MP&L serves about 329,000 customers in an area com-prising 25,900 square miles with an estimated population of 1.3 million. As of December 31,1985, the Company  %

MiSSISSIPP I pmvided electric service in 140 municipalities. MP&L also prosided transmission senice to South Mississippi j Electric Power Association (SMEPA), an association of ta aggy,g, rural electric cooperatives, and the Mum,cipal Energy Agency of Mississippi (MEAM), eight municipally owned actEv 94.

4 utilities. \ ^

a The Company is one of the principal operating sub. o E ILLE sidiaries of Middle South Utilitics, Inc. and its system is a r, o es interconnected with and operated as a part of the Middle South Utilities System, which supplies the electric energy requirements of more than 1.6 million customers in a =

92,000-square mile area of Arkansas, louisiana, Mississippi and Missouri. ,

TIIE COMPANY'S 1985 ANNUAL REPORT 'ID - '

TlIE SECURITIES AND EXCHANGE COMMISSION s c >g ON FORM 10-K (INCLUDING FINANCIAL 4 '-

t STATEMEN'IS AND FINANCIAL STATEMENT ,, g ,w r , SON SCIIEDULES) IS AVAILAllLE 'ID ANY SIUCKHOLDER UPON REQUEST WITHOUT i. cram ir CHARGE. Persons interested in obtaining a copy should l write to Frank S. York, Jr., Senior Vice President, Chief i 5-

~7 BROO iAVEN Financial Omcer and Secretary, at the address below:

l 4 z MISSISSIPPI POWER & LIGHT COMPANY l P. O. Ilox 1640 l i

• 18 Jackson, Mississippi 39215-1640 f (601)969-2311 l REGISTRAR (for preferred stock): 1 Deposit Guaranty National llank I h E"'J .,c Jackson, Mississippi n, TRANSFER AGENT (for preferred stock): 46) ,po- s=,c.

Trustmark National llank Jackson, Mississippi  !

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Mississippi Ibwer & Light Company 11ULK RATE Post Office llox 1640 U.S. POSTAGE Jackson, Mississippi 39215-1640 PAID JACKSON, MS PERMIT NO. 24 ,

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Deloitte Haskins+ Sells MIDDLE SOUTH ENERGY, INC.

' Financial Statements for the Years Ended December 31, 1985 and 1984 and Auditors' Opinion M ' - - - - - - - - - _ _

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MIDDLE SOUTH ENERGY, INC.

1985 ANNUAL REPORT

) TABLE OF CONTENTS Auditors' 0 pinion..................................................... 1 Re po r t o f Ma n a geme n t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

) Management's Financial Di scussion and Analysis. . . . . . . . . . . . . . . . . . . . . . . . 3 Sel ected Fi nancial Data - Five Year Compari son. . . . . . . . . . . . . . . . . . . . . . . . 8 Balance Sheets........................................................ 9 Statements of Income.................................................. 10 Statements of Retained Earnings....................................... 10 Statements of Changes in Fi nancial Position. . . . . . . . . . . . . . . . . . . . . . . . . . . 11

) No tes to F i na nc i al S tateme n ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Di recto rs and Execu tive 0f ficers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 C o rpo ra te I n f o ma ti on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

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a Deloitte Haskins+ Sells 39th Floor

]~ One Shell Square New Orleans. Louisiana 70139-3997 (504) 581 2727 ITT Telex: 4995705 q

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AUDITORS' OPINION Middle South Energy, Inc.:

O We have examined the balance sheets of Middle South Energy, Inc. as of December 31, 1985 and 1984 and the related statements of income, retained earnings and changes in financial position for each of the three years in the period

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ended December 31, 1985. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

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As discussed in Note 7 of Notes to Financial Statements, there are uncertainties associated with the Grand Gulf Nuclear Station. These uncertainties involve: resolution of rate matters, including the receipt of adequate rate relief by certain of the Middle South System operating companies; recovery of the investment in Grand Gulf 2; and potential O acceleration of certain indebtedness. The Company is unable to predict the ultimate outcome of these matters, and no 3rovision for any losses that may result from their resolution has been made in the financial statements.

In our opinion, subject to the effects on the financial 7~ statements of such adjustments, if any, as might have been required had the outcome of the uncertainties referred to in the preceding paragraph been known, the above-mentioned financial statements present fairly the financial position of the Company at December 31, 1985 and 1984 and the results of its operations and changes in its financial aosition for each D

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of the three years in the period ended December 31, 1985, in conformity with generally accepted accounting principles applied on a consistent basis.

DELOITTE 11ASKINS & SELLS O

New Orleans, Louisiana March 14, 1986

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O REPORT OF MANAGEMENT O

The management of Middle South Energy, Inc. has prepared and is responsible for the financial statements and related financial information included in this annual report. The financial statements are based on generally accepted accounting principles, consistently applied. Financial information included elsewhere in this report is consistent with the financial statements.

O To meet its responsibilities with respect to financial information, '

management maintains and enforces a system of internal accounting controls which is designed to provide reasonable assurance, on a cost effective basis, as to the integrity, objectivity and reliability of the financial records and as to the protection cf assets. This system includes communication through written

.(D policies and procedures and testing by a comprehensive internal audit program.

The independent certified public accountants provide an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures as they deem

() necessary to reach and express an opinion on the fairness of the financial statements.

Management believes that these policies and p'rocedures provide reasonable assurance that its operations are carried out with a high standard of business conduct.

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MIDDLE SOUTH ENERGY, INC.

3 MANAGEE NT'S FINANCIAL DISCUSSION AND ANALYSIS Financial Condition During the last half of 1985, the financial condition of Middle South

) Energy. Inc. (the Company) began reflecting the impact of the July 1,1985 commercial operation of Unit 1 of the Grand Gulf Nuclear Station (Grand Gulf 1) and the resultant receipt of revenues from the System operating companies for their share of capacity and energy from Grand Gulf 1. Allowance for funds used during construction (AFDC) attributable to Grand Gulf 1, a substantial portion of the Company's earnings, ceased accruing concurrent with commercial 3 operation. The Company's earnings for the last six months of 1985 reflect earnings applicable to payments received from the System operating companies pursuant to the Federal Energy Regulatory Commission (FERC) allocation of the costs of capacity and energy from Grand Gulf 1 and, until suspension of construction on Seotember 18,1985 (as discussed below), from AFDC attributable to Unit 2 of the Grand Gulf Nuclear Station (Grand Gulf 2).

Under traditional utility regulatory principles, wholesale rates approved by the FERC should be charged to retail ratepayers. As a result of the FERC decision on June 13,1985, (June 13 Decision) all of the costs, capacity and energy associated with the Company's 90% share of Grand Gulf 1 have been allocated to the System operating companies commencing with commercial 3 operation of the unit. Arkansas Power and Light Company ( AP8L), Louisiana Power and Light Company (LP&L), and Mississippi Power and Light Comoany (MP4L) have received rate relief for their allocated share of costs associated with Grand Gulf 1. New Orleans Public Service Inc. (N0 PSI) has proposed a rate moderation plan in a rate application currently pending before the Council of the City of New Orleans with respect to its Grand Gulf 1-related costs.

h However, to date, NOPSI has not received adequate rate relief to recover its costs for Grand Gulf I capacity and energy, and its request for rate relief has been strongly contested. The Company cannot predict whether rate relief will be forthcoming to enable N0 PSI to continue to meet its monthly Grand Gulf 1 payments. N0 PSI has filed a petition in Federal district court seeking to have O its regulatory body recognize its FERC allocated costs of capacity and energy associated with Grand Gulf 1 as a legitimate operating expense and to grant rates to cover that expense. Following several hearings and proceedings, the case has been remanded by the U. S. Court of Appeals to the district court for a decision on the merits. The matter is pending. See Liquidity and Capital Resources for infomation as to the effect on the Company of NOPSI's failure to g meet its Grand Gulf 1 payments.

In addition to the receipt of rate relief for NOPSI, the Company's future financial condition depends on the ultimate resolution of the FERC's June 13 Decision allocating the capacity and energy from Grand Gulf 1. Various parties, including AP&L and MP&L, have filed appeals of the FERC's September g 26, 1985 order whereby the FERC denied all requests for rehearing of its June 13 Decision. Briefs were filed and oral arguments were presented in March 1986; the matter is pending.

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O Pursuant to the order issued by the Mississippi Public Service Commission (MPSC) on September 18, 1985, the Company suspended construction activities on Grand Gulf 2 and is currently evaluating its position with respect to the O completion of the unit. From late 1979 until September 1985, only a limited amount of construction was perfomed on Grand Gulf 2. The Company has now detemined to continue with full suspension of construction on Grand Gulf 2 until further evaluations are made, which are estimated to be completed sometime in 1986, and to limit expenditures to only those activities which are

_ absolutely necessary for demobilization and suspension.

O Because of the suspension of construction of Grand Gulf 2, the Company ceased accruing AFOC on the unit effective September 18, 1985. The Company had been accruing and capitalizing AFDC on its investment in Grand Gulf 2 at the rate of approximately $8 million per month. The cessation of AFDC has resulted and will result in a corresponding decrease in the Company's earnings. (See

_J Note 7 to the Financial Statements " Commitments and Contingencies - Grand Gulf 2" for infomation with respect to Grand Gulf 2, including effects of possible cancellation of Grand Gulf 2.) The Company's future earnings are dependent on payments from the System operating companies for their allocated share of the Company's 90% share of capacity and energy from t1e Grand Gulf Station. In addition, the Financial Accounting Standards Board has proposed

_J certain amendments to its Statement of Financial Accounting Standards No. 71 which, if adopted in their present fom, could have a material adverse impact on the Company. (See Note 7 to the Financial Statements " Commitments and Contingencies - Proposed Amendments to Statement of Financial Accounting Standards No. 71".)

3 Liquidity and Capital Resources During the period 1983-1985 the Company had construction expenditures totaling $1,489 million, including AFDC of $894 million. Funding for this construction activity was primarily through the application of proceeds

, received from the sales of first mortgage bonds, pollution control revenue s bonds and common stock, bank borrowings, payments received from certain of the System operating companies for advance power purchases, and income tax benefits. The July 1,1985 commercial operation of Grand Gulf 1 has lessened the heavy financial burden experienced by the Company in recent years resulting from construction of the unit. In addition, the Company has suspended

, construction on Grand Gulf 2 following the previously discussed MPSC order. At J January 31, 1986, the Company estimated construction expenditures (excluding nuclear fuel) of approximately $83.1 million in 1986, $70.3 million in 1987, and $73.9 million in 1988. These estimated expenditures assume virtually no construction on Grand Gulf 2 except for those activities which are absolutely necessary for demobilization and suspension.

O The Company estimates that it will require approximately $1,608.2 million for the period 1986 through 1988 to refinance maturing indebtedness, to meet sinking fund obligations and to finance its other capital requirements (including construction expenditures listed above). The Company expects to obtain a significant portion of such funds through its receipt of payments from g the allocation of costs associated with Grand Gulf 1 to the System operating 3 I

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companies under the Unit Power Sales Agreement. The balance of amounts needed by the Company will be obtained from external sourcest' (See Note 7 to the Financial Statements " Commitments and Contingencies I Capital Requirements O and Financing" for infomation with respect to facto'rs affecting the Company's ability to obtain such new funds.) '

In addition, the Company's $175 million nuclear fuel lease is currently scheduled to teminate in 1987. Unless the present credit if ne is extended or a new line is secured, the Company will require additions) capital funds.

In connection with the Grand Gul'f Station, Midd1'e South Utilities, Inc.

(MSU) has undertaken to provide or cause to be provided to the Company sufficient capital (i) to maintain the Company's equity; capital at an amount at least equal to 35 percent of total capitalization, (ii) to construct and place in operation the two units of the Grand Gulf Station, (iii) to provide for O pre-operating expenses and interest charges of the Company, (iv) to pemit the continuation of commercial operation after commencement thereof, and (v) to pay in full all indebtedness for borrowed money of the Company when due.

4 As discussed previously, NOPSI has not yet received rate relief with respect to its Grand Gulf I costs. Without adequate rate relief for Grand Gulf O 1, NOPSI currently projects that at sometime during the first hl.lf of 1986 it would be in the position of not being able to meet its payment for. capacity and energy from Grand Gulf 1. /

The failure of NOPSI to meet a payment for capacity and energy from Grand Gulf 1 might, technically under certain agreements related t9 the Company's O indebtedness, lead to acceleration of such indebtedness unless (1) waivers,were obtained, (ii) the debt was restructured or (iii) other arrangements could be negotiated. In the absence of such waivers, debt restructuring or other negotiated arrangements, acceleration of such indebtedness could also occur if NOPSI were rendered insolvent by its failure to obtain rate relief or under provisions of the Company's bank loan agreements requiring that all System O operating companies secure acceptable retail rate relief in respect to Grand Gulf 1 by June 30, 1996.

Given the substantial amount of its debt, the Company would not be able to

. meet these obligations, if accelerated. Under the Company's financing-agreements, MSU, and not the System operating companies, would,be responsible lO

to pay the Company's accelerated obligations if the Company ceuid not. MSU,

with financial resources currently Itmited, including limitations on its 1 ability to borrow funds or issue additional shares of its common stock, would i

not at this time be in a position to satisfy the Company's obligations, if, accelerated.

9 The Company has amended its foreign and domestic bank . loan agreements to convert borrowings thereunder to tem loans. ln addition, the Campany was i

1 pemitted to defer to March 17, 1985 approximately $115 willion and $125

! million, respectively, of the prepayments due February,3,1986 and March 1,

! 1986 under the domestic bank loan agreement and approximately $45.3 million of

! the prepayment due February 5,1984 under the foreign bank loan agreement. On O

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March 17, 1986, the balance of the unpaid deferred amounts were further

deferred to June 16, 1986 and the Company comitted to issue First Mortgage i

Sonds to secure such amounts. The Company will not pay any dividends on its O common stock until payment of the deferred prepayments has been made. (See

Note 3 to the Financial Statements " Lines of Credit and Related Borrowings".)

On August 9,1985, the Company applied the net proceeds from a December

1984 sale of pollution control revenue bonds and other funds to a reduction in amounts outstanding under its domestic bank loan agreement.

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! In October,1985, the Company entered into an amendnent to the Pcwer Purchase Advance Payment Agreement whereby the Company paid LP&L approximately

$58 million and NOPSI approximately $30.4 million (including interest) as partial reimbursement for power purchase advance payments previously made to the Company. In addition, the Company agreed to accelerate the rate of

.O credits, for the balance of such advance payments, against the monthly payment l

obligations of LPaL, MP&L and NOPSI. (See Note 7 to the Financial Statements-

"Connitments and Contingencies - Power Purchase Advance Payment Agreement".)

j The Company's liquidity is affected by the large amount of floating rate i debt which it has outstanding. At December 31, 1985 the Company had

!O approximately $1,476 million in such floating rate debt. An increase of one

! percentage point in the rate at which interest was computed at such date would j result in additional annual interest requirements of approximately $16 million.

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The Company is subject to limitations on the maximum amount of short-term j borrowings outstanding under both the Public Utility Holding Company Act of O 1935 and the tems of its bank loan agreements. At Decembe r 31,1985, the

! maximin permitted was the lesser of five percent of capitalization or $200

million. . The Company's lines of credit for short-tem borrowings with various l banks in the Middle South System service area expired on June 28, 1985. The Contany has not secured any replacement lines of credit or made any other unsecured short-tem borrowings. At December 31, 1984, the Company had no

.O short-term borrowings outstanding under its bank lines of credit but had unsecured short-term borrowings with other banks totaling $10 million. In comparison, at December 31, 1983, outstanding borrowings under bank ifnes of credit amounted to $4.2 million while unsecured short-tem borrowings amounted j

to $32.5 million. Unused short-tenn bank lines of credit amounted to $14.7 million and $65.6 million at December 31,1984 and 1983, respectively.

Results of Operations

. The Company began to report results of operations with the July 1,1985 comercial operation date of Grand Gulf 1. Prior to that time, the Company's income statement reflected only non-operating items.

Prior to the commercial operation of Grand Gulf 1, all of the Compar./ s 1 net income had been the equity component of AFDC, which consisted solely of i non-cash credits to the income statement that represented a reasonable return on equity funds used for construction. With the cormercial operation of Grand O

Gulf 1, the Company's net income began reflecting cash earnings resulting from

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O the allocation to the System operating companies of the unit's capacity and energy. Net income, exclusive of the equity component of AFDC, aggregated

$97.6 million during the first six months of commercial operation.

O Total AFDC for 1985 was $224.4 million, a decrease of $152.1 million, or 40.4 percent, over 1984. Total AFDC for 1984 was $376.5 million, an increase ,

of $83.3 million, or 28.4 percent, over 1983. The increasing amounts of AFDC through June 30, 1985, reflected the increasing amount of construction work in progress, all attributable to the Grand Gulf Station. Subsequent to June 30,

_O 1985, the decreasing amounts of AFDC reflect the cessation of AFDC on Grand Gulf I concurrent with its July 1,1985 connercial operation and, to a lesser extent, the cessation of AFDC on Grand Gulf 2 as a result of the construction suspension ordered by the MPSC cn September 18, 1985. ,

Income taxes and credits in lieu of income taxes on the Company's income O statement during the years 1983-1985 represent the tax benefit that has been or will be realized during the carryforward periods resulting from the Company's Federal tax losses included in the MSU consolidated income tax return. The Company charged to operations approximately $119 million of income tax expense in 1985 due primarily to recognizing earnings related to the commercial operation of Grand Gulf 1.

O Interest on long-tem debt increased by .317.4 million, or 5.2 percent, in 1985 compared to 1984. This increase was due to an increase in interest rates and a greater amount of long-term debt outstanding. By comparison, interest on long-term debt increased by $82.7 million, or 33.0 percent, in 1984 compared to 1983 due to an increase in long-tenn debt outstanding and . higher prevailing O interest rates. Interest on the power purchase advance payments, which certain of the System operating companies began making to the Company in January 1984, amounted to $24.3 million in 1985, an increase of $12.5 million over 1984.

This increase was due to a larger balance of advance power purchase payments received on which interest was accrued. Other interest - net decreased by 76.5 percent in 1985 and 51.7 percent in 1984. The decreases for 1985 and 1984

.O were due to a substantial reduction in short-tenn borrowings.

Effect of Inflation j , Despite the reduced level of inflation in the period 1983-1985, its' impact on the construction costs for the Grand Gulf Station has been significann.

lO Liee Note 11 to the Financial Statements "Effect of-Inflation (Unaudited)".)

Summary The Company's ability to meet its extensive debt service requirements and to attain and maintain a financial condition strong enough to provide a reason-O able return to MSU is dependent, among other things, upon (1) the ultimate resolution of the FERC's June 13 Decision which has been appealed in court by various parties, (2) the receipt of adequate rate relief by NOPSI to allow that l company to meet its Grand Gulf 1 obligations, (3) the ability of AP&L and MP&L to finance their Grand Gulf 1 rate deferrals, and LP&L to finance its Waterford 3 rate deferral, (4) the rate treatment to be accorded Grand Gulf 2 should it

!O be cancelled, and (5) the successful financing or refinancing, on reasonable tems, of the Company's capital requirements. (See Note 7 of the Financial Statements " Commitment and Contingencies - Potential Debt Acceleration".)

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O MIDDLE SOUTH ENERGY, INC.

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O SELECTED FINANCIAL DATA - FIVE YEAR C0W ARISON (In Thousands)

Years Ended December 31, 1985 1984 1983 1982 1981 O

Operating Revenues. . . . . . . . . . $ 524,012 - - - -

Allowance for Funds Used O During Construction. . . . . . . $ 224,360 $ 376,477 $ 293,179 $ 260,832 $ 224,209 Net Income.................. $ 218,067 $ 188,425 $ 151,581 $ 121,857 $ 95,799 Total As sets . . . . . . . . . . . . . . . . $4,947,418 $4,780,456 $3,747,945 $3,045,266 52,387,096 O L ng-Tem Debt (excluding current maturities)....... $2,317,225 $2,623,301 $2,306,171 $1,845,500 $1,439,500 0

O l

l O

l O

O

MIDDLE SOUTH ENERGY. INC.

BALANCE SHEETS O *"ber 31, u85 and 1984 1985 1984 ASSETS (In Thousands)

Utility Plant (Notes 5, 7 and 8):

E1 e c t r i c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,281,242 -

O Construction work in pro 9Pesso m - ~ ~ ~.- ~ ~ ~ 944,176 $3,889,762 Nuclear fue1................... ................ .. 34.142 48,492 Tota 1................................... 4,259,560 3,938,254 Le ss-accumul a ted dep recia tion . . . . . . . . . . . . . . . . . . . . . . . 37,856 -

U t i l i ty p l a n t - ne t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,z21,704 3,938,254 Current Assets:

Ca s h ( N o te 3 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 O Te.,orary investments - as cost, nich approximates 456 martet............................................ 31.121 293,048 Accounts receivable:

0ther............................................. 3,771 877 Associated companies.............................. '76,480 575 Material s and supplies (LIFO basis) . . .. ... . ..... ... . 15,834 -

P repai d i nteres t ( Note 7 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17,877

.O O the r p repayment s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,091 2,054 Recoverabl e i ncome taxes ( Notes 1 an d 2 ) . . . . . . . . . . . . 55,071 16,169 Unamorti zed fuel expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,691 -

0ther............................................... 1,467 2,120 Tota 1................................... 187,533 333,176 Deferred Debits:

O Future benefits related to AFDC (Notes 1 and 2)..... 532,360 508,773 0ther............................................... 5,521 253 Tota 1................................... 537,s51 509,026 T0TAL.............................. $4,947,418 $4,780,456 O CAPITALIZATION AND LIABILITIES Capitalization:

Conson stock, no par value; authorized 1,000,000 shares; issued and outstandin shares

( Note 4 ) . . . . . . . . . . . . . . . . ......................

. . . . g 789. 35 0 $ 789,350

$ 789,350 Reta i ned ea rni ngs (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . 971,969 753,902 O To tal common sharenoi der' s equi ty. . . . . . . . . . . . . . . . 1,7el,31!F 1,543,z5z Long- terie debt (Notes 3, 5 and 7 ) . . . . . . . . . . . . . . . . . . . 2,317,225 2,623,301 Te te 1 m u . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.975.584 4,155.553 Current Liabilities:

No tes payabl e (Note 3 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10,000 Currently maturing long-term debt (Notes 3, 5 and 7) 523,735 196,235 Accounts payable:

O Associated companies.............................. 2,344 2,015 0ther............................................. 35,776 16,164 Taxes accrued....................................... 15,201 10,633 Interest accrued.................................... 55,524 103,489 Power purchase advance payments (Note 7 ) . . . . . . . . . . . . 51,152 32,345 Tota 1................................... esa,IJz 370,581 O Deferred Credits: '

Accumulated deferred income taxes (Notes 1 and 2)... 158,657 87,038 Acctsoulated deferred investment tax credits (Notes 1and2).......................................... 12,348 12.469 Power purchase advance payments (Note 7)............ - 129,378 Ot he r ( No te 2 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,137 14,137 l Tota 1................................... 185.142 243,022 '

Commitments and Contingencies (Note 7)

T0TAL.............................. 54,947,418 $4.780,456 See Notes to Financial Statements.

'O

1

$1100LE SOUTH ENERG7, thC. t O STATEMENTS OF INCOE ,

For the Years Ended December 31, 1985, 1984, and 1983 l

1985 1984 1983 (In Thousands)

Operati ng Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . l

$524,012 - - :

.O Operating Expenses: )

Operation:

Fue1..................................... 29,450 - -

0ther.................................... 57,403 - -

Maintenance................................ 19,597 - -

Depreciation and decomissioning........... 38,412 - -

O Ta xes other than i ncome taxes. . . . . . . . . . . . . . 7,56 8 - -

Income taxes (Note 2)...................... 118,815 - -

To ta 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 271,245 - -

Operating Income............................. 252,767 - -

Other Income:

O Allowance for equity funds used during c o n s truc ti on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,508 $188,425 $ 151,581 I n te re s t i ncome . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,707 91 9 Income taxes and credits in lieu of income taxes (Notes 1 and 2) . . . . . . . . . . . . . . . . . . . . 108,838 163,067 121,568 T o ta 1 . . . . . . . . . . . . . . . . . . . . . . . . . . z35,053 351,553 z73,158 O Interest charges:

Lo ng- terse debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,946 333,531 250,835 Power purchase advances (Note 7) ........... 24,256 11,724 -

O the r - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,403 5,955 12,340 Allowance for borrowed funds used during c on s t ruc t i on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (103,852) (188,052) (141,598)

Tota 1.......................... z72,753 163,158 121,577 O Ne t i n come . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,067 $188,425 5 151,581 O

STATDENTS OF RETAIME EARBINES For the Years Ended December 31, 1905. 1984, and 1983 1985 1984 1983 (In Thousands)

O Re tai ned Ea rni ngs , Janua ry 1. . . . . . . . . . . . . . . . . $753,902 $565,477 $413,896 Add - Net Income............................. 218,067 188,425 151,581 Retained Earnings, December 31 (Note 6)...... $971,969 $753,902 $565,477

!O See Notes to Financial Statements.

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p!DDLE SOUTH ENERGY, INC.

i

g STATDE

NTS OF CHANGES IN FINANCIAL POSITION Fer the Years Ended December 31, 1985, 1984, and 1983

' 1985 1984 1993 (In Thousands) -

Funds provided By:

9 Operations:

Ne t i n come . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218.067 - -

! 'Jepreciation and deconmissioning......... 38,412 - -

Deferred income taxes and investment tax t

credi t adj ustments - net. . . . . . . . . . . . . . . 71,498 3 55,202 3 7,615 Allowance for equity funds used during c o n s truc ti o n . . . . . . . . . . . . . . . . . . . . . . . . . . . (120,508) - -

g Total funds provided by operations... 207,469 55,202 /,615 f Other:

Allowance for equity funds used during c o n s truc ti on . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,508 188,425 151,581 Power purchase advance payments.......... 99,256 161,723 -

Decrease in working capital *............. - 4,764 49,342 Mi scel l aneou s - net. . . . . . . . . . . . . . . . . . . . . . - - 13,290 O Total funds provided excluding financing transactions............. 427,233 410,114 221,828 Financing transactions:

Common stock............................. 99,450 99,000 First mortgage bonds..................... 100,000 300,000 -

Pollution control revenue bonds.......... 250,000 27,100 49,500 Bank notes............................... 15,000 404,000

' 452,000

O Sale and leaseback of nuclear fuel....... 14,975 - -

' Short-term securi tie s - net. . . . . . . . . . . . . . 251,927 - -

Total funds provided by financing transactions....................... 631,902 830,550 600,500 Total funds provided............ 31.059,135 31,z40,664 TFft 37K i Funds Applied To:

Utility plant additions:

~O Construction expenditures for utility p1 ant.................................. $ 335,656 $ 581,184 $572,448 Nuclear fuel............................. 625 26,508 21.984 Total gross additions (includes j allowance for funds used durin construction).................g..... 336,281 607,692 594,432 Other:

~O Fu ture benefi ts rel ated to AFDC . . . . . . . . . . 23,587 95,310 109,754 Power purchase advance payments.......... 209,827 - -

Increase in working capita 1*............. 140,040 - -

Mi scel l aneou s - net. . . . . . . . . . . . . . . . . . . . . . 13,333 8,941 -

To tal other funds appl i ed. . . . . . . . . . . . Jae,757 - 104,z51 109,754 Financing transactions:

Re ti rement of bank notes. . . . . . . . . . . . . . . . . 281,832 161,000 -

O "'*"'"* " "*"tgage bonds....... 54,235 48,000 40,000 Short- term securi ties - net. . . . . . . . . . . . . . -

319.721 78,142 Total funds applied to financing transac tions . . . . . . . . . . . . . . . . . . . . . . . 336,067 528,721 118,142 Total funds app 11ed. . . . . . . . . . . . . si ,us9.135 si,zso,664 sazz,3za

• Increase (Decrease) in Working Capital:

O Cash ...................................... s (149) $ (1,259) $ 636 Accounts receivable........................ 78,799 1,014 (81)

Othe r cu rren t a s sets . . . . . . . . . . . . . . . . . . . . . . . 37,934 36,500 (2,080) 4 Accounts payable........................... (19,941) (11,187) (954)

Ta xes and i nte rest accrued. . . . . . . . . . . . . . . . . 43,397 (29,832) (46,863) 1 To ta1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s 140,040 3 (4,764) 5(49 6 )

O *"*'"'"'****",*I"d**"#'"*"'"***"***'.'Y'"I"""'"****"'

of long-term debt and power purchase advance payments

( See Notes to Financial Statements.

Q O

MIDDLE SOUTH ENERGY, INC.

NOTES TO FINANCIAL STATEENTS O For the Years Ended December 31, 1985, 1984, and 1983 NOTE 1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES O A. Organization Middle South Energy, Inc. (the Company) is authorized to conduct business as a wholly-owned subsidiary of Middle South Utilities, Inc. (MSU) to provide financing and ownership of certain base-load electric generating units within the Middle South Utilities System (System).

The Company and South Mississippi Electric Power Association (SMEPA) own undivided ownership interests of 90% and 10%, respectively, in the Grand Gulf Station. The Company records its investment associated with the Grand Gulf Station to the extent to which the Company owns and participates in the generating station.

The Company's only significant activity to date has been the construction of, operation of, and the financing of its 90% ownership interest in the Grand Gulf Station. The Grand Gulf Station consists of two 1250 MW nuclear generating units, the Company's share of which is to be 1125 MW in each unit.

D There were no operating revenues or expenses prior to July 1,1985. The

, Nuclear Regulatory Commission (NRC) issued a full power operating license for Grand Gulf Unit 1 on August 31, 1984. This unit began commercial operation on July 1,1985.

B. System of Accounts O

The accounts af the Company are maintained in accordance with the system of accounts prescribed by the Federal Energy Regulatory Comission (FERC).

i C. Postretirement Benefits 0 The Company does not have a postretirement benefits plan at the present time because it does not directly employ any personnel. The Company utilizes, at cost, the services of personnel from other Middle South System companies, primarily those of Mississippi Power & Light Company. Such persons are covered by their respective employers' postretirement benefits plans.

O D. Income Taxes The Company joins its parent in the filing of a consolidated Federal income tax return. Income taxes are allocated to the Company in oroportion to its

contribution to the consolidated taxable income. In addition, the Company files a c nsolidated Mississippi state income tax return with certain other System lO companies.

E. Allowance for Funds Used During Construction i In accordance with the regulatory system of accounts, the Company capital-O izes, as an appropriate cost of utility plant, an allowance for funds used during

J construction ( AFDC). Usder this utility industry practice, construction work in progress on the balance sheet is charged and the income statement is credited for the approximate net composite interest cost of borrowed funds and for a J reasonable return on the equity funds used for construction. This procedure is intended to remove from the income statement the effect of the cost of financing the construction program and results in treating the AFDC charges in the same nanner as construction labor and material costs. As non-cash items, these  !

' credits to the income statement have no effect on current cash earnings. After l the property is placed in service, the AFDC charged to construction costs is J recoverable from customers through depreciation provisions included in rates charged for utility service. Through June 1985, the Company used an accrual rate l for AFDC based on a return on average common equity of 14% plus actual interest cost net of related income taxes. As a result of the FERC's decision on June 13, i 1985, the 14% return on comon equity rate was increased to 16% effective July 1, 1985.

J The Company would continue to capitalize AFDC on projects during periods of interrupted construction if such interruption was temporary and the continuation could be justified as being reasonable under the circumstances. AFDC attributable to Grand Gulf I ceased accruing as of July 1,1985, the commercial operation date of the unit.

On September 18, 1985, the MPSC issued an Order Directing Suspension of Construction of Grand Gulf 2, which directed the Company and MP&L to suspend construction of Grand Gulf 2 as of the date of the Order. Following the suspension of construction of Grand Gulf 2, the Company ceased accruing AFDC on the unit effective September 18, 1985. (See Note 7 " Commitments and 3 Contingencies - Grand Gulf 2".)

F. Utility Plant, Depreciation and Decommissioning Utility plant is stated at original cost. The cost of additions to utility plant includes contracted work, direct labor and materials, allocable overheads, O and an allowance for the composite cost of funds used during construction (AFOC).

The costs of units of property retired are removed from utility plant and such costs plus removal costs, less salvage, are charged to accumulated depreciation.

Maintenance and repairs of property and the replacement of items determined to be less than units of property are charged to operating expenses. Substantially all of the utility plant is subject to the lien of the Company's first mortgage bond O indenture.

Depreciation on Unit 1 of the Grand Gulf Station (Grand Gulf 1) is being computed on the units of production method for the initial twelve months of commercial operation (which began July 1,1985) and, thereafter, will be computed on the straight-line basis. Depreciation provisions on average depreciable O property approximated 2.3% in 1985.

The Company is recovering approximately $1.1 million per year for nuclear plant decomissioning costs for Grand Gulf 1 and will deposit these monies in an external fund held by a trustee. The Company was permitted by its regulatory agency to recover these amounts based on a study of the estimated costs of 8 decommissioning Grand Gulf 1.

.O G. Reclassification Certain reclassifications of previously reported amounts have been made to O confonn with current classifications. These reclassifications have no effect on net income.

NOTE 2. INCOME TAXES AND CREDITS IN LIEU 0F INCOME TAXES O Income tax expense (credit) consists of the following:

Year ended December 31, 1985 1984 1983 (In Thousands)

M Current:

Federa1................................. $ (55,513) $(215,394) $(128,585)

State................................... (6,007) (2,875) (598)

T o t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,520) (218,269) (129,183)

O Deferred -- net:

Taxes capitalized in the financial statements............................ 5,731 8,994 7,615 Liberalized depreciation................ 69,160 45,a90 -

Te st e ne rgy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,272) /18 -

O Tota 1.............................. 71,619 55,202 7,615 Investment tax credi t adjustments-net. . . . . . . . (122) - -

Recorded income taxes and credits O in lieu f income taxes............ $ 9,977 $(163,067) $(121,568)

Charged to operations........................ $ 118,815 - -

Credi ted to other i ncome. . . . . . . . . . . . . . . . . . . . . (108,838) $(163,067) $(121,568)

Recorded income taxes and credits O i n lieu of income taxes. . . . . . . . . . . . 9,977 (163,067) (121,568)

Income taxes applied against the debt component of AFDC.......................... 98,589 160,192 120,622 Total income taxes and credits in

.O l ieu of income taxes. . . . . . . . . . . . . . . $ 108,566 $ (2,875) $ (946)

.O O

O Total income taxes and credits in lieu of inctaa taxes differ from the amounts computed by applying the statutory Federal income tax rate to income before taxes. The reasons for the differences are as follo s:

4 Year ended Decemcer 31, 1985 19s4 1983

O '

' Pre-Tax Pre-Tax Pre-Tax Amount income A.rount Income Amount Income T E Thousands)

Computed a t statu tory rate. . . . . . . . . . . . . . . . . . . . . $ 104,900 46.0 $ 11,665 Reductions in tax resulting from: 46.0 $ 13,806 46.3 Allowance for funds used during O construction............................ (103.206) (45.2) (173,179) (682.9) (135,051) (450.0)

Difference between book depreciation and tax straight-line depreciation...... 7,845 3.4 - - - -

State income taxes not of Federal income tax expense............................. 961 .4 (1,553) , (6.1) 0ther..................................... (323) (1.1)

(52 3) (.2) - - - -

Recorded income taxes and credits in Q lieu of income taxes............... 9,977 4.4 (163,067) (643.0) (121,568) (405.1)

Income taxes applied against the debt component of AFDC....................... 98.589 28.8 160.192 641.5 120.622 404.5 Total income taxes and credits in lieu of income taxes............... $ 108.566 33.2 $ (2.875) (1.5) $ (946) ( .6 )

O Grand Gulf Unit I was placed into service for tax purposes in 1984. The Company's interest expense and capitalized taxes are deducted currently for tax

-0 return purposes. Deferred income taxes are provided for differences between book and taxable income to the extent pemitted by the regulatory bodies for ratemaking purposes. The allowance for funds used during construction is excluded for purposes of determining taxable income.

Future benefits related to AFDC represent the tax benefit of the Company's

.o portion of the consolidated Federal tax los'ses that is expected to be realized during the loss carryforward period. Such benefits are paid to the Company when realized in the consolidated return of MSU. Income tax benefits for the years 1983,1984 and 1985 that were realized amounted.to $8.0 million, $123.8 million and $27.6 million, respectively. If not utilized to offset consolidated Federal taxable income, future benefits related to AFDC will expire in 1993 through 2000.

O SMEPA's portion of future benefits related to AFDC of $14.1 million was recorded as an other deferred credit.

Investment tax credits allocated to the Company have been deferred and those relating to Grand Gulf 1 are being amortized based upon the average useful life of the related property. Unused investment tax credits at December 31, 1985 O amounted to $214.6 million. These credits may be applied against Federal income tax liabilities in future years. If not used, they will expire in 1991 through 2000.

O O

O NOTE 3. LINES OF CREDIT AND RELATED BORROWINGS Prior to June 28, 1985, the Company had two revolving credit agreements O with various banks providing for borrowings totaling $2,089 million. One agreement, for $1,711 million, was with a grouo of domestic banks; the other agreement, with a group of foreign banks, was for $378 million. On August 2, 1985 and August 9,1985, respectively, the foreign and domestic bank loan agreements were amended, effective as of June 28, 1985, to convert the borrowings thereunder to tem loans. At December 31, 1985, the Company nad

,0 outstanding $1,476.4 million and $330.8 million, respectively, under the domestic and foreign bank loan agreements. The loans with domestic banks have a maturity date of February 5,1989, subject to semiannual mandatory prepayments of $125 million which were to be made on November 1,1985 and, thereafter, on the first day of each March and September, with the unpaid balance due on the maturity date. The maturity date for the loans with foreign O banks is February 5,1989, subject to mandatory semiannual prepayments of

$47.25 million which commenced August 5,1985.

With the consent of all of the domestic banks, the Company deferred the November 1,1985 prepayment due under the domestic bank loan agreement to February 3,1986. In connection with this deferral, the Company consented to O the payment of an additional 1% per annum interest on the deferred prepayment and agreed not to pay any dividends on common stock during 1985.

The Company was permitted to defer to March 17, 1986 approximately $115 niillion and $125 milton, respectively, of the prepayments due February 3,1986 and March 1,1986 under the domestic bank loan agreement. The Company was O pennitted to defer to March 17, 1986 approximately $45.3 million of the prepayment due February 5,1986 under the foreign bank loan agreement. The Company agreed, subject to the receipt of required regulatory approval, to various amendments to the domestic and foreign bank loan agreements which accomplish, among other things, the following: (1) an additional 1% per annum (in excess of the respective interest rates currently provided for under the O domestic and foreign bank loan agreements) will accrue and be payable on each of the deferred prepayments from the respective dates of commencement of the deferrals to the respective cates of payment and will be paid monthly in arrears and (2) the Company will not pay any dividends on its common stock until the deferred prepayments have been made and certain other requirements have been satisfied. In order to reduce the amount of the deferred O prepayments, the Company will pay ratably to the domestic and foreign banks on a monthly basis all of its available excess cash flow as defined in the agreements. In March 1986, the banks agreed to extend these deferrals to June 1986. In connection with this further deferral, the Company has agreed to issue First Mortgage Bonds equal to the unpaid deferred amounts to collateralize such deferred amounts.

P l The amended domestic bank loan agreement also (1) restricts the Company's

(

ability to make capital expenditures to not in excess of $80 million in any year plus any amounts required to be expended by regulatory authorities, (2) requires the Company to make additional prepayments to the domestic banks O

pursuant to a cash flow fonnula, and (3) requires the payment in full of outstanding loans if certain rate action satisfactory to the domestic banks has I

not been taken by June 30,1986 (by state or local regulatory authorities l recognizing as legitimate operating expenses FERC-approved costs relating to lO .

O Grand Gulf 1 and, if applicable, cancellation costs of Grand Gulf 2) or, if Grand Gulf 1 ceases operation for 90 continous days other than for routine maintenance or refueling. The restriction on capital expenditures and the 3 requirement for additional principal payments terminate if the Company makes prepayments sufficient to reduce the amount owing the domestic banks at maturity to $125 million or less.

In March 1986, the foreign bank loan agreement was amended subject to Securities and Exchange Commission (SEC) approval to (1) increase the interest O rate on borrowings thereunder by 1% effective from February 5,1986 and (2) to change certain provisions of the foreign bank loan agreement relating to Grand Gulf 2 such that prepayment of outstanding borrowings under this agreement would not be required for condemnation, abandonment or noncompletion of Grand Gulf 2. These amendments relating to Grand Gulf 2 will not be effective until the Company has paid to the foreign banks the deferred prepayments discussed g above as well as the prepayment due to the foreign banks on August 5,1986.

The Company has separate " interest rate swap" agreements, each with a bank, through February 1989 for $147.0 milion and $183.8 i;.11 ton, respectively (as of December 31, 1985), of the amounts outstanding under the credit agree-ment with foreign banks. The Company has agreed to make semiannual interest 3 payments based upon an 11.5% and 11.16% fixed rate, respectively, in exchange for semiannual interest payments by the banks based upon the London Interbank Offered Rate (LIBOR). These agreements serve to offset fluctuations in variable rates to be paid under the Company's credit agreement with foreign banks. They do not change the Company's obligations to the foreign banks for interest payments of LIBOR plus 1%.

O The Company's 1tnes of credit for the short-term borrowings with various banks in the System service area expired on June 28, 1985. The Company has not secured any replacement if nes of credit or made any other unsecured short-term borrowings. The Company is subject to limitations on the maximum amount of short-term borrowings outstanding under both the Public Utility Holding Company 3 Act of 1935 and the terms of its bank loan agreements. At December 31, 1985, the maximum pennitted was the lesser of 5% of capitalization or $200 million.

3 O

O O _. . __.- - . _ . _ --_ ._ --_- -. - - - - - . - -

Tne short-term borrowings and the interest rates (determined by dividing applicable interest expense by the average amount borrowed) for the Company 0,

were as follows:

Year Ended December 31, 1985 1984 1983 (In TTio'Usands) g Lines of credit........................... -

$14,680 $69,765 l Average borrowing:

Lines of credit......................... $ 1,342 $32,076 $51,653

Unsecured short-tem notes. . . . . . . . . . . . . . $ 4,275 $18,228 $65,823 Maximum borrowing

O Lines of credit......................... $ 5,149 $70,361 $66,404 Unsecured short-tem notes. . . . . . . . . . . . . . $10,000 $29,000 $70,000 Year-end borrowing:

Lines of credit......................... - -

$ 4,173 g Unsecured short-tem notes. . . . . . . . . . . . . . -

$10,000 $32,500 Average interest rate:

During period -

Lines of credit....................... 10.4% 11.8% 10.8%

Unsecured short-tem notes. . . . . . . . . . . . 9.4% 10.9% 10.0%

O At end of period -

Li nes of credi t. . . . . . . . . . . . . . . . . . . . . . . - -

11.0%

, Unsecured short-tem notes. . . . . . . . . . . . -

9.6% 10.7%

g NOTE 4. COMMON STOCK

, The changes in the number of shares of the Company's common stock were as follows (all sold to MSU at $1,000 per share):

i Year Ended December 31, 1985 1984 1983 O

Number of shares.......................... -

99,450 99,000 O

O O

O NOTE 5. LONG-TERM DEBT 4

The long-tem debt of the Company as of Deceaber 31, 1985 and 1984 was as O follows:

December 31, 1985 1984 (In Thousands)

O First Mortgage Bonds:

Due 1989, 9.25% Series............................ $ 232,000 $ 280,000 Due 2000, 12.50% Series........................... 92,265 98,500 Due 2000, 16% Series.............................. 300,000 300,000 Due 2000, 15 3/8% Series.......................... 100,000 -

Tota 1..................................... 724,265 678,500 O Bank Notes (Note 3):

Domestic bank line -

Due 1989, at 110% of the sum of prime and 1.3%.......................................... 1,476,417 1,696,000 Foreign bank line-Due 1989, at 11.16% pl us 1%. . . . . . . . . . . . . . . . . . . . . 183,750 189,000 0 Due 1989, at 11.5% plus 1%...................... 147,000 189,000 Tota 1..................................... 1,50/,167 2,074,000 Pollution Control Revenue Bonds:

Claiborne County, Mississippi -

Due 2013, at 8% adjustable / fixed rate. . . . . . . . . . . 49,500 49,500 Due 2014, at 8.75% adjustable / fixed rate... . . ... 27,100 27,100 0 Due 2014, at 8.5% adjustable / fixed rate. . . . . . . . . 206,000 206,000 Les s-Funds on deposit with trustees. . . . . . . . . . . . . - (201,447)

Due 2015, at 12.5%.............................. 44,000 -

To t a l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,600 81,153 Unamortized di scoun t on debt. . . . . . . . . . . . . . . . . . . . . . . . (17,072) (14,117)

O To tal Lo n g-Te m D eb t. . . . . . . . . . . . . . . . . . . . . . 2,840,960 2,819,536 Less-Amount due wi thin one year. . . . . . . . . . . 523,735 196,235 Long-Tem Debt Excluding Amount Due Within One Year......................... gl7,225 $2,623,301 0 '

The Pollution Control Revenue Bonds due 2015 at 12.50% are collateralized by $47.2 million of non-interest bearing First Mortgage Bonds.

l Sinking fund requirements and maturities for the ensuing five years for the Company s long-tem debt at December 31, 1985 were as follows:

O Cash Sinking Fund Maturities (In Thousands) 1986................................................ $54,235 $469,500 O $62,235 $344,500 1987................................................

1988................................................ $62,235 $344,500 1989................................................ $59,735 $720,667 1990................................................ $59,735 -

O

l I

!O i i

Substantially all of the Company's utility plant is subject to the lien of its  ;

i first mortgage bond indenture. )

lO NOTE 6. RETAINED EARNINGS The provisions of the Company's bank loan agreements and first mortgage bond indentures restrict the amount of retained earnings available for cash dividends on common stock. As of December 31, 1985 and December 31,1984, none of the retained earnings were available for cash dividends. The bank loan

'.O agreements prohibit the Company from paying any cash dividends on common stock until certain deferred prepayments have been repaid. Additionally, the agree-ments limit the amount of cash dividends which can be paid once the deferred prepayments have been repaid and other applicable requirements are satisfied to

a maximum of $200 million per year. (See Note 3 - " Lines of Credit and Related Borrowings".)

NOTE 7. COMMITMENTS AND CONTINGENCIES Capital Requirements and Financing

O At December 31, 1985, the Company's most significant commitments and contingencies related to (1) the refinancing of debt associated with the i financing of the Grand Gulf Station and (2) the uncertain status of Grand Gulf j 2, on which construction activities have been suspended pending further

evaluations which are estimated to be completed sometime in 1986.

l O The Company will require approximately $1,608.2 million for the period 1986 through 1988, to refinance maturing indebtedness, to meet sinking fund requirements and to finance its other capital requirements. The Company expects to obtain a significant portion of such funds through its receipt of payments from the allocation, as established by the FERC in its June 13 Decision, of capacity and energy to the System operating companies under the

.O Unit Power Sales Agreement. The balance of amounts required by the Company must be obtained from external sources, including issuance of first mortgage bonds, preferred and/or preference stock and pollution control revenue bonds.

1 The Company's ability to obtain new funds will depend on a number of factors, including the results of rate proceedings related to the Company, contractual

0 restrictions contained in the Company's first mortgage bond indenture and

, credit agreements, market conditions, and the credit ratings of the Company's

! securities.

! In connection with the Grand Gulf Station, MSU has undertaken, to the j extent not obtained by the Company from other sources, to furnish or cause to

! be furnished to the Company sufficient capital for construction and operation O and related purposes. Through December 31, 1985 MSU had invested $789.4 million in the common stock of the Company.

The Company's construction program contemplates expenditures for the Grand i Gulf Station of approximately $83.1 million in 1986, $70.6 million in 1987, and

$73.9 million in 1988. The above construction expenditures and AFDC estimates O assume virtually no construction activities on Grand Gulf 2 through 1988 except i

i for those activities relating to demobilization and suspension of the unit.

(See Grand Gulf 2 below regarding the current evaluation of plans for this unit.) A limited amount of construction on Grand Gulf 2 was performed during O

D 1985 prior to susoension of construction activities in late September. Through December 31, 1985, the Company had invested $4,225 million (excluding nuclear fuel) in the Grand Gulf Station. The Company estimates, pending a final review 3 of the cost allocation between the two units, that of this total, $3,288 million was invested by the Company in Grand Gulf 1 and $937 million in Grand Gulf 2.

The Company's nuclear fuel lease is currently scheduled to terminate in 1987. (See Note 8 " Nuclear Fuel Lease".) It is currently assumed that this 3 lease will either he extended pursuant to agreements subsequently negotiated or that an alternative lease will be arranged. To the extent, however, that this does not occur, additional financing requirements of up to $175 million could result.

Grand Gulf 2 As of December 31, 1985, the Company had invested approximately $937.2 million in Grand Gulf 2, which is approximately 34% complete based on the estimated man-hours needed to complete the unit. From late 1979 through September 1985, only a limited amount of construction was being performed on Grand Gulf 2. On September 18, 1985, the Company suspended construction 3 activities and ceased accruing AFDC on Grand Gulf 2 following an order of the MPSC. As an addendum to the order, the MPSC advised MP&L and the Company that it was the MPSC's position at this time that any potential plan for recovery by MP&L of " sunk costs" in Grand Gulf 2 through retail rates is unjustifiable.

The Company has now determined to continue with full suspension of construction on Grand Gulf 2 until further evaluations are made, which are estimated to be 3 completed sometime in 1986, and to limit expenditures to only those activities which are absolutely necessary for demobilization and suspension. Because of serious financial restraints on the Middle South System, completion of Grand Gulf 2 appears unlikely. However, before a final decision is made, consideration will be given to various long-tenn economic factors and regulatory agency requirements applicable to Grand Gulf 2. The Company had 3 been accruing and capitalizing AFDC on its investment in Grand Gulf 2 ac the rate of approximately $8 million per month. The cessation of AFDC has resulted and will result in a corresponding decrease in the Company's earnings.

Pursuant to the Company's domestic bank loan agreement, the Company has covenanted to limit capital expenditures (other than those required by 3 regulation) to not in excess of $80 million per annum in the aggregate. Unless waived, this covenant would preclude resumption of full construction of Grand Gulf 2 prior to 1989, or until the final payment owed under the domestic bank loan agreement in 1989 is reduced to $125 million or less as a result of prepayments by the Company.

3 The Company has covenanted with certain of its first mortgage bondholders that it will complete Grand Gulf 2 no later than December 31, 1988. The Company will seek from such bondholders whatever waivers or amendments are necessary to modify these requirements in accordance with the Company's decision concerning the future of Grand Gulf 2, but no assurance can be given

, that such waivers or amendments will be obtained. The Company has also covenanted with the foreign banks that it will use its best efforts to complete O

O the Grand Gulf Project (which as, defined, includes Grand Gulf 2) as soon as

practicable. The Company has negotiated changes, which are expected to be

! effective in August 1986, which would eliminate this requirement from the

'O foreign bank loan agreement.

l 4

If it is ultimately decided that Grand Gulf 2 should be cancelled, there can be no assurance that the Company would recover the full amount of its investment in the unit. The Company believes that its investment has been

,O prudent and will take all actions necessary before the FERC and the courts to attempt to recover its investment through rate relief. Such actions would )

likely involve a filing with the FERC requesting recovery of its full investment, over a period of years, through charges to the System operating companies. Such proceedings, and related proceedings before the state or local )

regulatory authorities with respect to retail rates, could be protracted and strongly contested on various grounds, including imprudence. If Grand Gulf 2

.O were cancelled and the Company were denied recovery of all or a substantial

{

amount of its investment in the unit through rates, the unrecovered cost would- '

be charged under current accounting principles against earnings in the period when such denial becomes final. In this event, the financial condition of the  !

l Company could be materially and adversely affected (although its cash position j

0 would not be adversely affected). If the Company's investment in Grand Gulf 2 i 4

were allocated to the System operating companies and they were unable to I recover these costs from their customers, the System operating companies'  !

! financial condition might be adversely affected. In addition, if the Company

! were forced to write-off all or substantially all of its investment in Grand {

i Gulf 2 and the Company does not recover this investment from the System

)lO operating companies, MSU's financial condition might be adversely affected since MSU is required to cause the Company to maintain a 35% equity ratio at l

all times under the Capital Funds Agreement and the write-off could cause the Company's equity capital to drop below 35%. The Company could seek to alleviate the ' strain on MSU by requesting waivers or amendments of this requirement from its creditors but no assurance can be given that such waivers

,D or amendments could be obtained. (See Note 3 " Lines of Credit and Related I Borrowings" concerning requirements in the Company's bank loan agreements that i any cancellation costs with respect to Grand Gulf 2 be adequately reflected in retail rates prior to June 30,1986.) (See Capital Funds, Availability and Reallocation Agreements below.) (See Proposed Amenenents to Statement of Financial Accounting Standards No. 71 below concerning the impact of possible Changes in accounting treatment.)

In the third quarter of 1985, SMEPA, which has a 10% ownership interest in Grand Gulf 2, had ceased making payments for its proportionate share of Grand i Gulf 2 costs incurred subsequent to July 31, 1985. Effective February 7,1986 SMEPA and the Company adopted a settlement agreement to resolve the dispute.

O Under the tems of the settlement agreement, SMEPA will pay its proportionate share of the Grand Gulf 2 costs incurred subsequent to July 31, 1985 and future costs for suspension and demobilization of the unit up to a maximum of $4.951 million but will no longer be obligated to pay costs of construction on Grand Gulf 2 should construction of the unit resume. Should the Company decide to resume full construction of Grand Gulf 2, SMEPA will have the option of having O refunded to it all payments made under the settlement agreement for costs incurred subsequent to July 31, 1985 and then having SMEPA's and the Company's ownership interest adjusted periodically, in proportion to their respective O

!O investments in Grand Gulf 2. The settlement agreement relates solely to Grand Gulf 2 and does not apply to SMEPA's ownership interest or investment in Grand Gul f 1.

O Capital Funds, Availability and Reallocation Agreements t

The System operating companies are severally obligated under the Availability Agreement in accordance with stated percentages (AP&L 17.1%, LP&L 26.9%, MP&L 31.3%, N0 PSI 24.7%) to make payments or subordinated advances

!O adequate to cover all of the operating expenses, including depreciation, of the Company. The System operating companies in November 1981 entered into a Reallocation Agreement which would have allocated the capacity and energy available to the Company from the Grand Gulf Station to LP&L, MP&L and N0 PSI.

These companies thus had agreed to assume all the responsibilities and obligations of AP&L with respect to the Grand Gulf Station under the

,O Availability Agreement and Power Purchase Advance Payment Agreement with AP&L relinquishing its rights to the Grand Gulf Station. Each of the System operating companies, including AP&L individually, would have remained primarily liable to the Company and its assignees for payments or advances under these agreements. AP&L would have been obligated to make its share of the payments

or advances only if the other System operating companies had been unable to

.O meet their contractual obligations. However, the FERC's June 13 Decision supersedes the Reallocation Agreement insofar as it relates to Grand Gulf 1.

(See Unit Power Sales Agreement below for a discussion of the FERC's June 13 l Decision.)

j In addition, under the Capital Funds Agreement, as supplemented, MSU

.O agrees to supply or cause to be supplied to the Company (1) such amounts of capital as may be required in order to maintain equity capital at an amount equal to at least 35% of the Company's total capitalization and (2) such amounts of capital as shall be required in order (a) for the Company to construct, own and place in commercial operation the Grand Gulf Station, (b) to provide for pre-operating expenses and interest charges of the Company and for O commercial operation of the two units and (c) to pay in full all indebtedness for borrowed money whether at maturity, on prepayment, on acceleration or otherwise. In addition, MSU agrees to make cash capital contributions to enable the Company to make payments on its borrowings.

Potential Debt Acceleration O

NOPSI has not yet received retail rate relief to recover its allocated share of costs of capacity and energy from Grand Gulf 1. Absent such relief, i NOPSI currently projects that, at sometime during the first half of 1986, it would be in the position of not being able to meet its payment for capacity and g energy from Grand Gulf 1. (See Rate Decisions below.)

The failure of NOPSI to meet a payment for capacity and energy from Grand Gulf 1 might, technically under certain agreements related to the Company's indebtedness, lead to acceleration of such iniebtedness, unless waivers were obtained, the debt were restructured, or other arrangements could be negotiated. In the absence of such waivers, debt restructuring or other O negotiated settlements, acceleration of such indebtedness could also occur if

3 HOPSI were rendered insolvent by its failure to obtain rate relief or under provisions of the Company's bank loan agreements requiring that all Systen

, operating companies secure acceptable retail rate relief in respect to Grand J Gulf 1 by June 30, 1986.

Given the substantial amount of the Company's debt, it would not be able to meet these obligations, if accelerated. Under the Company's financing agreements, MSU, and not the System operating companies, would be responsible to pay the Company's accelerated obligations if the Company could not. MSU, 3 with financial resources currently limited, including limitations on its ability to borrow funds or issue additional shares of its common stock, would not be in a position to satisfy the Company's obligations, if accelerated.

Certain of System Fuels, Inc.'s (SFI) financing agreements and leases may require payments by the System operating companies, MSU or the Company in the 3 event SFI's obligations under such documents are accelerated as a result of the insolvency of N0 PSI and SFI is unable to meet these obligations or otherwise to satisfy these obligations through the sale of the collateral securing such obligations. In addition, insolvency of N0 PSI would affect tems of financing, including an increase in the cost of financing, or could preclude financing for other Middle South System companies. Under these circumstances the continuing O viability of the Middle South System would be placed in jeopardy, with possible bankruptcy filings for one or more of the insolvent Middle South System companies.

Power Purchase Advance Payment Agreement O Under the Power Purchase Advance Payment Agreement, LP&L, MP&L and NOPSI made advance payments to the Company of an aggregate $225 million from January 1984 to June 1985 for power to be delivered upon commercial operation of Grand Gulf 1. No payments were made by AP&L. These advances were to have been credited against the power purchase obligations of LP&L, MP&L and N0 PSI over an g 18-month period. In order to improve the cash flow positions of certain of the companies which had made these advances, on October 15, 1985, the Company and these System operating companies entered into a second amendment to the Power Purchase Advance Payment Agreement, which revised certain of the terms of this arrangement. Pursuant to the second amendment, in October 1985 the Company paid, excluding interest accrued, LP&L $50.86 million and NOPSI $26.5 million.

g In addition, on October 15, 1985, these companies received credits in the following amounts for their power purchase obligations to the Company due that date: LP&L - $4.83 million, MP&L - $10.91 million and N0 PSI - $5.87 million.

Such credits plus interest are taken monthly through the March 15, 1986 payment.

g Nuclear Liability Insurance As of December 31, 1985, the Price-Anderson Act ( Act) limited the public liability of a licensee of a nuclear plant to $650 million for a single nuclear incident. This limit will increase by $5 million for each additional operating license issued by the NRC. Insurance for this exposure is provided by private 3 insurance and an indemnity agreement with the NRC. The Act is scheduled to expire in August 1987, and Congress is considering several proposals to amend the Act. The Company is unable to predict what action Congress might O

O ultimately take regarding the Act and what effect such action might have on the Company's potential liability. Every licensee of a nuclear power olant is O obligated, in the event of a nuclear incident involving any commercial nuclear factif ty in the United States that results in damages in excess of the private insurance, to pay retrospective assessments of up to 55 million per incident for each licensed reactor it operates or up to a maximum per reactor owned of

$10 million in any calendar year. At December 31, 1985, the Company had one licensed reactor.

O The Company is a member-insured of Nuclear Electric Insurance Limited, a mutual insurer that provides its members with insurance coverage of $550 million for property damage sustained by the insured in excess of $500 million caused by radioactive contamination or other specifled damage. The Company is also a .nember-insured under a primary property damage insurance program provided by Nuclear Mutual Limited, another mutual insurer. As a member-O insured with these mutuals, the Company is subject to assessments if losses exceed the accumulated funds available to the insurer. The Company's maximum assessment for incidents occurring during a policy year is approximately $40 million at December 31, 1985.

Spent Nuclear Fuel O

Under the tems of its nuclear fuel lease, the Company is responsible for the disposal of spent nuclear fuel. The Company has executed a contract with the Department of Energy (DOE) whereby the DOE will furnish disposal service for the Company's spent nuclear fuel at a cost of one mill per kilowatt-hour of gross generation.

O Takeover Investigations In connection with controversies surrounding the cost and allocation of capacity and energy from the Grand Gulf Station various governmental bodies and O ther parties have been investigating the possibility of condemning, expropri-ating, or otherwise acquiring electric utility properties of certain of the System operating companies. Certain of the government officials have expressed the view, with which the affected System operating companies do not agree, that a condemnation, expropriation or other acquisition of properties could be accomplished without the acquiring entity assuming responsibility for the O related obligations of the particular System operating company, including those relating to the purchase of capacity and energy from the Grand Gulf Station.

The System operating companies have indicated that they believe that any such takeover would not be in the best interests of their respective customers, investors, or the companies themselves, and would vigorously oppose any actual takeover attempts.

O Unit Power Sales Agreement On June 18, 1982, the Company tendered for filing with the FERC, as an initial rate schedule, the Unit Power Sales Agreement under which the Company would' sell from its 90% share of Grand Gulf 1 and Grand Gulf 2 the following O percentage allocations of capacity and energy: LP&L, 38.57% and 26.23%; MP&L, o

O i

31.63% and 43.97%; and N0 PSI, 29.80% and 29.80%, respectively. The rates and charges after commercial operation commenced were to be based on the cost of service of each unit. Various parties, including the Arkansas Public Service

'O Cownission, the Louisiana Public Service Commission (LPSC), the MPSC, the Missouri Public Service Commission, and the City of New Orleans (Council),

intervened in the proceedings, and some of these intervenors proposed, among other things, revised allocations of capacity and energy to the System operating companies, including an allocation of capacity and energy to AP&L.

O On February 3,1984, the administrative law judge ( ALJ) in the Unit Power Sales Agreement proceeding issued his initial decision. Principally, the decision recommended that the Company's request for the use of an automatic cost of service adjustment clause for Grand Gulf 1 be upheld, with certain modifications. The ALJ also recommended a proposal made by the LPSC, an

intervenor in the proceeding, to allocate capacity and energy from Grand Gulf 1

O and the cost thereof as follows: AP&L, 36%; LP&L, 14%; MP&L, 33%; and NOPSI, 17%. On June 13, 1985, the FERC issued a decision affinning the allocation of capacity and energy as proposed by the LPSC.

Various parties to these proceedings requested rehearings and some

! parties, including AP&L, requested a stay of implementation of the June 13

O Decision. On August 2,1985, the FERC issued an order denying all requests for a stay of its June 13 Decision. In so doing, the FERC considered the alterna-tive position of various parties that if a stay was not granted, the FERC should include a refund obligation in the event of reversal on appeal. On September 3,1985, the FERC denied several requests for rehearing of its August 2 order and clarified that order, stating that it does not have the power to

'O order a refund in the event the June 13 Decision is overturned by the courts on appeal, unless the court orders a refund. On September 26, 1985, the FERC issued an order denying all requests for rehearing of the June 13 Decision.

Various parties, including AP&L and MP&L, have filed appeals of these orders in the United States Court of Appeals for the District of Columbia Circuit. In i addition, on November 26, 1985, the Court of Appeals dismissed certain actions 1

O which had been filed by a party for a stay of the June 13 Decision.

Rate Decisions AP&L and LP&L have received rate settlements and MP&L has received a rate order from their respective regulatory agencies which provide for the adequate

,0 recovery through retail rates of the costs of their allocated share of capacity l and energy from Grand Gulf 1. However, AP&L and LP&L are required to retain l pennanently and not recover certain costs and AP&L and MP&L are required to phase-in certain costs associated with Grand Gulf 1. LP&L is also phasing-in certain costs associated with its Waterford 3 nuclear plant. NOPSI's request for increased retail rates to recover its allocated share of capacity and O energy from Grand Gulf 1 is still pending and is being strongly contested. A j federal appellate court ruled that NOPSI's application for rate relief is a matter of federal jurisdiction; however, as a result of the extreme opposition

! of the Council and substantial uncertainties regarding the timing and outcome of the various decisions, N0 PSI cannot predict when the final rate structure supporting its payment obligations in respect of Grand Gulf 1 will be in place

'O or whether adequate rate relief will be forthcoming. (See Potential Debt Acceleration above.) In its request for proposals for a prudence investigaton of Waterford 3, the LPSC has included the prudence of LP&L's decision to con-tract with the Company for capacity and energy from Grand Gulf 1. In O ._. - . - - - _ _ - - - - .

-. . . .= _- - - - - . . .- . - - - . - - - - - . -

1 O connection with NOPSI's request for permanent retail electric rate relief, the i Council, on October 17, 1985, initiated an investigation into all aspects of I NOPSI's prudence regarding its involvement with Grand Gulf 1. These matters I

are pending.

1 Mississippi Public Service Commission Mandated Audit

{ In September 1984, the MPSC appointed special consultants to conduct a '

1 construction audit of the Grand Gulf Station. The final construction audit j report for Grand Gulf 1 was submitted to the MPSC in June 1985 and generally l concluded that cost and schedule increases on Grand Gulf 1 were primarily due to changes and additions in regulatory requirements, engineering and

0 1 construction evolution over the course of the project and the impact of the i 1979 Three Mile Island Unit 2 incident. The audit further concluded that the factors causing these increases were industry-wide in nature and beyond the

! control of MP&L and that MP&L took measures to minimize the cost and schedule

effects of these industry-wide events and of other factors impacting Grand Gulf 1*

!O Stockholders' Suit

! During August and September 1985 five purported class action suits were

, filed in federal court by MSU stockholders (purporting to cover classes who i purchased MSU common stock over varying periods of time). The complaints have k since been consolidated into one proceeding before the U.S. District Court for

the Eastern District of Louisiana. The complaints allege violations of the j disclosure requirements of the Securities Exchange Act of 1934 and the l Securities Act of 1933, common law fraud and common law negligent misrepresen-

tation in connection with the financial condition of MSU. Among other things,

'O the complaints pray for compensatory and punitive damages, legal costs and fees

! and other proper relief. While MSU and the other defendants, including the j Company, are reviewing the allegations and plan to assert all available defenses thereto, they believe that MSU's disclosure of its financial condition was in compliance with SEC requirements. However, the eventual outcome and

, impact on the Middle South System's financial condition cannot be predicted at g this time. 1 Proposed Amendments to Statement of Financial Accounting Standards No. 71

The Financial Accounting Standards Board (FASB) has issued an Exposure i Draft proposing certain amendments to its Statement of Financial Accounting O Standards No. 71 (FAS 71) which relates specifically to public utilities and

, certain other regulated enterprises. The amendnents, if adopted, would become

! effective for fiscal years beginning after December 15, 1986 with retroactive j application for prior transactions. The Exposure Draft proposes amendments to  :

! the accounting for: 1) the phase-in of rates associated with the costs of new I

generating plants, 2) abandonments of partially completed generating plants and 10 3) disallowances of costs associated with newly completed generating plants.

1 The proposed amendments, if adopted in their present fonn, could have a i material adverse impact on the Company due to the revisions proposed in the

accounting treatment of plant costs. Specifically, if it becomes probable that j Grand Gulf 2 will be abandoned, the Company would have to remove its cost from

construction wort in progress and record a deferred asset representing the present value of the amount expected to be recovered through future rates in

!g connection with the abandonment. Any difference between this present value and l the carrying value of Grand Gulf 2 would be recognized as a loss. This loss,  !

net of related tax benefits, would be reported either by restating the l appropriate prior years' financial statements or by charging it against current  !

O l E._..

iO

, income. The Company is studying the Exposure Draft; however, until the FASB 1

issues a new Statement of Financial Accounting Standards which amends FAS' 71, i

the Company cannot determine what will be the specific impact of the final O changes, if any.

NOTE 8. NUCLEAR FUEL LEASE i

At December 31, 1985, the Company had a nuclear fuel lease permitting a 0 maximum of $175 million in nuclear fuel under lease. Lease payments, based upon nuclear fuel use, are treated as a cost of fuel. Lease expense charged to operations for the year ended December 31,1985 was $31.5 million. This lease,

which was to continue through 2029, is instead expected to be teminated on June 1,1987 upon temination of the credit ifne. Upon termination, the Com-pany will be required to repurchase the fuel then subject to the lease unless

.O the present credit if ne is extended or a new line is secured. The unrecovered cost base of the lease at December 31, 1985, 1984 and 1983 was $146 million,

$168 million and $172 million, respectively.

NOTE 9. TRANSACTIONS WITH AFFILIATES

.O All of the Company's 90T, share of the capacity and energy from Grand Gulf 1 has been allocated to the System operating companies by the FERC's June 13 Decision and accordingly, all of the Company's operating revenues consist of billings to the System operating companies.

.O When the Company acquired the Grand Gulf Station from MP&L, MP&L agreed under a Service Agreement to continue to design, construct, maintain and operate the Grand Gulf Station on behalf of the Company. In return, the 1

Company agreed to pay MP&L the actual cost to MP&L of rendering these services and granted to MP&L the power and authority to act on the Company's behalf as agent. Total payroll costs provided to the Company by MP&L for 1985, 1984 and M 1983 were $31.3 million, $25.2 million and $21.5 million, respectively.

The Company also receives technical and advisory services from Middle South Services, Inc. (MSS). Charges from MSS for these technical and advisory I

services for 1985,1984 and 1983 were 59.4 million, $9.8 million and $4.4 i

g million, respectively.

i O

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i

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,0 NOTE 10. QUARTERLY RESULTS (UNAUDITED)

-) c Results for the four quarters of 1985 and 1984 were as follows:

Quarter Operating Operating Net Ended Revenues Income Income (In Thousands)

() 1985:

March........................... - -

$53,635 June............................ - -

$53,938 September....................... $274,342 $142,017 $65,970 Dec emb e r. . . . . . . . . . . . . . . . . . . . . . . . $249,670 $110,750 $44,524*

() 1984:

March........................... - -

$43,861 June............................ - -

$43,935 September....................... - -

$49,986 December........................ - -

$50,643 j) Through June 30, 1985, the Company's net income consisted of the equity component of AFDC. The Company began recording operating revenues and expenses on July 1,1985 when Grand Gulf 1 was placed in commercial operation.

• Net income decreased in this quarter primarily due to the absence of an AFDC accrual on Grand Gulf 2.

O O

O 1

l

O O

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O NOTE 11. EFFECT OF INFl.ATION (UNAUDITED)

,O The following supplementary infonnation about the effect of changing prices on the Company is provided in accordance with the requirements of Statement of Financial Accounting Standards No. 33, " Financial Reporting and Changing Prices",

as amended by Statement of Financial Accounting Standards No. 82. It should be

! viewed as an estimate of the effect of changing prices rather than as a precise measure.

.O Statement of Income and Other Financial Data Adjusted For Effects of Changing Prices For the Year Ended December 31, 1985 Adjusted For t

As Reported In Changes In O The Financial Specific Prices Statements (Current Costs)

(In Thousands)

O Ope rati ng reve nue s*. . . . . . . . . . . . . . . . . . . . . . . . . s 524,012 s 524,012 Operating expenses (excluding depreciation)* z33,389 233,389

. Depreciation................................ 37,850 47,300 Total operati ng expenses. . . . . . . . . . . . . . . . . . . . zu ,zes zuu,es9 Operating income............................ 252,767 243,323 O Other income *............................... 238,053 238,053 Interest charges *........................... 272,753 272,753 Income (excluding adjustment to net recove rabl e cos t) . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,067 $ 208,623 lO Increase in specific prices (current costs) of property, plant and equipment held du r i ng th e ye a r* * . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,326 Adjustment to net recoverable cost. . . . . . . . . . -(59,696)

' Effect of increase in general price level... (186,872)

Excess (deficiency) of increase in specific O prices, after adjustment to net recover-able cost, over increase in general price l ev e 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (141,242)

Gain from decline in purchasing power of net amoun ts owed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,939 O Net......................................... s (51,303)

• Assumed to be in " average for the year" dollars and thus are not restated.

O **At December 31, 1985, current cost of property, plant and equipment was

$5,251,431,000 while historical cost or net cost recoverable through depreciation was $4,221,704,000.

O

D' Five-Year Comparison of Selected Supplementary Financial Data Adjusted For Effects of Changing Prices 3 (In Thousands of Average 1985 Dollars)

Years Ended December 31, 1985 1984 1983 1982 1981 g OPERATING REVENUES................... $ 524,012 - - - -

CURRENT COST INFORMATION:

Income (excluding adjustment to net recoverable cost) . . . . . . . . . . . $ 208,623 $ 195,148 $ 163,671 $ 135,809 $ 113,313 h Excess (deficiency) of increase in specific prices, after adjustment to net recoverable cost, over increase in general price level. $ (141,242) $ (143,259) $ (121,054) $ (100,141) $(197,871 g Net assets at year-end at net recove rabl e cos t. . . . . . . . . . . . . . . . $1,733,344 $1,576,025 $1,332,727 $1,107,200 $ 897,282 GENERAL INFORMATION:

Gain from decline in purchasing g powe r of net amoun ts owed. . . . . . $ 89,939 $ 88,412 $ 76,014 $ 63,914 $ 52,15e Average consumer price index...... 322.2 311.1 298.4 289.1 272.4 Current cost amounts reflect the changes in specific prices of property, plant, and equipment from the year of acquisition to the present. The current g costs of property, plant, and equipment, which represent the estimated costs of replacing existing plant assets, are detemined by applying the Handy-Whitman Index of Public Utility Construction Costs (HWI) to the cost of the surviving plant by year of acquisition. Land and certain other plant assets that are not included in the HWI were converted using the Consumer Price Index for all Urban Consumers (CPI-U).

As prescribed in Statement of Financial Accounting Standards No. 33, income taxes were not adjusted.

The regulatory commissions to which the Company and the System operating companies are subject allow only the historical cost of plant to be recovered g in revenues as depreciation. Therefore, the excess cost of plant stated in tems of current cost over the historical cost of plant is not presently recoverable in rates. This excess (deficiency) is reflected as an adjustment to net recoverable cost. While the ratemaking process gives no recognition to O

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e the current cost of replacing property, plant, and equipment, the Company believes that it will be allowed to earn on the increased cost of its net

, investment when replacement of facilities actually occurs.

J To properly reflect the economics of rate regulation in the Statement of Income presented above, the adjustment of net property, plant, and equipment to net recoverable cost is adjusted by the gain from the decline in purchasing power of net amounts owed. During a period of inflation, holders of monetary assets

,, suffer a loss of general purchasing power while holders of monetary liabilities J experience a gain. The gain from the decline in purchasing power of net amounts owed is primarily attributable to the substantial amount of debt which has been used to finance property, olant, and equipment. Since the depreciation on this plant is limited to the recovery of historical costs, the Company does not have the cpportunity to realize a holding gain on debt and is limited to recovery only

_ of the embedded cost of debt capital.

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DIRECTORS AND EXECUTIVE OFFICERS 3 MSE Directors MSE Officers EDWIN A. LUPBERGER EDWIN A. LUPBERGER Chairman of the Board, Chairman of the Board, President and Chief Executive President and Chief Q Officer of the Company Executive Officer Chainnan of the Board, President and Chief Executive DONALD C. LUTKEN Oficer of Middle South Utilities, Vice President Inc.

DAN E. STAPP J JAMES M. CAIN Secretary President and Chief Executive Officer of Louisiana Power & R. DRAKE KEITH Light Company, President Senior Vice President -

New Orleans Public Service Inc. Chief Financial Officer and Treasurer J DONALD C. LUTKEN Vice President of the Company, E. Eugene Brown Chairman of the Board and Controller Chief Executive Officer of Mississippi Power & Light Company

) JERRY L. MAULDEN President and Chief Executive Officer of Arkansas Power &

Light Company FRANK G. SMITH, JR.

J President and Chief Executive Officer of Middle South Services, Inc.

J The Company's 1985 Annual Report to the Securities and Exchange Commission on Form 10-K (including financial statement schedules) is available to any interested parties without charge. Interested parties can obtain a copy by writing to:

J Dan E. Stapp Secretary Middle South Energy, Inc.

225 Baronne Street New Orleans, Louisiana 70112 4D Telephone: (504) 529-5262 3