3,400,000 PREFERRED SECURITIES
ENTERGY GULF STATES CAPITAL I
8.75% CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES, SERIES A (QUIPS(SM))*
(LIQUIDATION PREFERENCE $25 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS SET FORTH HEREIN, BY
ENTERGY GULF STATES, INC.
------------------------
The 8.75% Cumulative Quarterly Income Preferred Securities, Series A (the
"Preferred Securities"), offered
hereby represent undivided beneficial interests in the assets of Entergy Gulf
States Capital I, a business trust created under the laws of the State of
Delaware (the "Issuer"). Entergy Gulf States, Inc. (formerly Gulf States
Utilities Company), a Texas corporation (the "Company"), will be the owner of
the beneficial interests represented by common securities of the Issuer (the
"Common Securities"). The Bank of New York is the Property Trustee of the
Issuer. The Issuer exists for the sole purpose of issuing the Preferred
Securities and the Common Securities and investing the proceeds thereof in 8.75%
Junior Subordinated Deferrable Interest Debentures, Series A, due March 31, 2046
(the "Junior Subordinated Debentures") to be issued by the Company under the
Indenture for Unsecured Subordinated Debt Securities relating to Trust
Securities dated as of January 15, 1997 (the "Indenture"), which will be
qualified under and subject to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Preferred Securities will have a preference under
certain circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities. See
"Description of the Preferred Securities -- Subordination of Common Securities".
(Continued on next page)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREOF FOR CERTAIN INFORMATION
RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
INITIAL
PUBLIC
OFFERING UNDERWRITING PROCEEDS TO THE
PRICE COMMISSION(1) ISSUER(2)(3)
------------ ------------- ---------------
<S> <C> <C> <C>
Per Preferred Security.................................... $25.00 (2) $25.00
Total..................................................... $85,000,000 (2) $85,000,000
</TABLE>
- ---------------
(1) The Issuer and the Company have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting".
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures, the
Underwriting Agreement provides that the Company will pay to the
Underwriters, as compensation ("Underwriters' Compensation") for their
arranging the investment therein of such proceeds, $0.7875 per Preferred
Security (or $2,677,500 in the aggregate). See "Underwriting".
(3) Expenses of the offering, which are payable by the Company, are estimated to
be $269,000.
------------------------
The Preferred Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that delivery of the Preferred Securities will be ready for delivery in
book-entry form only through the facilities of The Depository Trust Company
("DTC") in New York, New York, on or about January 28, 1997, against payment
therefor in immediately available funds.
- ---------------
*QUIPS is a servicemark of Goldman, Sachs & Co.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
------------------------
The date of this Prospectus is January 21, 1997
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PREFERRED
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
(Continued from previous page)
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accruing from the date of original
issuance and payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year, commencing March 31, 1997, at the rate of 8.75% per
annum of the liquidation preference of $25 per Preferred Security
("Distributions"). The Company has the right to defer the payment of interest on
the Junior Subordinated Debentures at any time or from time to time for one or
more periods (each, an "Extension Period"), provided that such Extension Period,
together with all previous and further extensions thereof prior to its
termination, does not exceed 20 consecutive quarters and does not extend beyond
the maturity of the Junior Subordinated Debentures. Upon the termination of any
such Extension Period and the payment of all amounts then due, the Company may
elect to begin a new Extension Period subject to the requirements set forth
herein. If interest payments on the Junior Subordinated Debentures are so
deferred, Distributions on the Preferred Securities will also be deferred and
the Company will not be permitted, subject to certain exceptions set forth
herein, to declare or pay any cash distributions with respect to the Company's
capital stock or debt securities that rank pari passu with or junior to the
Junior Subordinated Debentures or make any guarantee payments with respect to
the foregoing. During an Extension Period, interest on the Junior Subordinated
Debentures will continue to accrue (and the Preferred Securities will accumulate
additional Distributions thereon at the rate of 8.75% per annum, compounded
quarterly), and holders of the Preferred Securities will be required to accrue
interest income for United States Federal income tax purposes prior to receipt
of cash related to such interest income. See Description of the Junior
Subordinated Debentures -- Option to Extend Interest Payment Period" and
"Certain United States Federal Income Tax Considerations -- Potential Extension
of Interest Payment Period and Original Issue Discount".
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement (each as
defined herein), taken together, fully, irrevocably and unconditionally
guaranteed all of the Issuer's obligations under the Preferred Securities. The
Guarantee of the Company guarantees the payment of Distributions and payments on
liquidation of the Issuer or redemption of the Preferred Securities as set forth
below, in each case out of funds held by the Issuer, to the extent described
herein (the "Guarantee"). See "Description of the Guarantee." If the Company
does not make interest payments on the Junior Subordinated Debentures held by
the Issuer, the Issuer will have insufficient funds to pay Distributions on the
Preferred Securities. The Guarantee does not cover payment of Distributions when
the Issuer does not have sufficient funds to pay such Distributions. The
obligations of the Company under the Guarantee are subordinate and junior in
right of payment to all Senior Debt (as defined in "Description of the Junior
Subordinated Debentures -- Subordination") of the Company.
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Junior Subordinated Debentures at maturity or
their earlier redemption in an amount equal to the amount of Junior Subordinated
Debentures maturing or being redeemed at a redemption price equal to the
aggregate liquidation preference of such Preferred Securities plus accumulated
and unpaid Distributions thereon to the date of redemption. See "Description of
the Preferred Securities -- Redemptions". The Junior Subordinated Debentures are
redeemable prior to maturity at the option of the Company (i) on or after
January 28, 2002, in whole at any time or in part from time to time, at a
redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption plus 100%
of the principal amount thereof, or (ii) at any time, in whole (but not
2
<PAGE>
in part), upon the occurrence and continuation of a Special Event (as defined
herein), at a redemption price equal to the accrued and unpaid interest on the
Junior Subordinated Debentures so redeemed to the date fixed for redemption plus
100% of the principal amount thereof. See "Description of the Junior
Subordinated Debentures -- Redemption".
At any time, the Company will have the right to terminate the Issuer and,
after satisfaction of liabilities to creditors of the Issuer, if any, as
provided by applicable law, cause the Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities and the Common Securities
in liquidation of the Issuer. See "Description of the Preferred
Securities -- Redemptions -- Special Event Redemption or Distribution of Junior
Subordinated Debentures" and "-- Liquidation Distribution upon Termination".
The Junior Subordinated Debentures are subordinate and junior in right of
payment to all Senior Debt of the Company. As of September 30, 1996, the Company
had approximately $2.3 billion of Senior Debt outstanding. The terms of the
Junior Subordinated Debentures place no limitation on the amount of Senior Debt
that may be incurred by the Company. See "Description of the Junior Subordinated
Debentures -- Subordination."
In the event of the liquidation of the Issuer, after satisfaction of
liabilities to creditors of the Issuer, if any, as provided by applicable law,
the holders of the Preferred Securities will be entitled to receive a
liquidation preference of $25 per Preferred Security plus accumulated and unpaid
Distributions thereon to the date of payment, which liquidation preference may
be in the form of a distribution of such amount of Junior Subordinated
Debentures, subject to certain exceptions. See "Description of the Preferred
Securities -- Liquidation Distribution Upon Termination."
The Preferred Securities have been approved for listing, subject to notice
of issuance, on the New York Stock Exchange (the "NYSE") under the symbol "EGS
PrA". If the Junior Subordinated Debentures are distributed to the holders of
the Preferred Securities upon the liquidation of the Issuer, the Company will
use its best efforts to list the Junior Subordinated Debentures on the NYSE or
such other stock exchanges or other organizations, if any, on which the
Preferred Securities are then listed.
The Preferred Securities will be represented by one or more global
certificates registered in the name of DTC or its nominee. Beneficial interests
in the Preferred Securities will be shown on, and transfers thereof will be
effected only through, records maintained by participants in DTC. Except as
described under "Description of the Preferred Securities -- Book-Entry
Issuance", the Preferred Securities in certificated form will not be issued in
exchange for the global certificates.
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, Suite 1300, New York,
New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates by writing to the Public Reference Section of the Commission at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Commission
maintains a Worldwide Web site that contains reports, proxy and information
statements and other information regarding reporting companies under the
Exchange Act, including the Company, at http://www.sec.gov. In addition, such
reports, proxy statements and other information concerning the Company can be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Company and the Issuer have filed with the Commission a Registration
Statement on Form S-2 (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits thereto, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company, the Issuer and the securities offered
hereby, reference is made to the Registration Statement and the exhibits filed
as a part thereof or incorporated by reference therein, which may be inspected
at the public reference facilities of the Commission, at the addresses set forth
above. Statements made in this Prospectus concerning the contents of any
documents referred to herein are not necessarily complete, and in each instance
are qualified in all respects by reference to the copy of such document filed as
an exhibit to the Registration Statement.
No separate financial statements of the Issuer have been included herein.
The Company and the Issuer do not consider that such financial statements would
be material to holders of the Preferred Securities because the Issuer is a newly
formed special purpose entity, has no operating history or independent
operations and is not engaged in and does not propose to engage in any activity
other than its holding, as trust assets, the Junior Subordinated Debentures of
the Company and its issuance of the Preferred Securities and Common Securities.
The Issuer does not intend to file separate reports under the Exchange Act, but
must apply for and be granted relief by the Commission to avoid the requirement
to file such reports. See "Entergy Gulf States Capital I", "Description of the
Preferred Securities", "Description of the Guarantee" and "Description of the
Junior Subordinated Debentures".
4
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated into this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1995.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996, June 30, 1996 and September 30, 1996.
3. The Company's Current Reports on Form 8-K dated March 22, 1996, April
19, 1996, April 29, 1996, August 26, 1996, September 5, 1996 and
November 27, 1996.
Any statement contained herein, or in a document all or a portion of which
is incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of the Registration Statement and this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document that also is incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of the
Registration Statement or this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated by reference herein (other
than exhibits not specifically incorporated by reference into the texts of such
documents). Requests for such documents should be directed to: Christopher T.
Screen, Assistant Secretary, P.O. Box 61000, New Orleans, Louisiana 70161,
telephone: (504) 576-4212.
5
<PAGE>
As used herein, (i) the term "Indenture" means the Indenture for Unsecured
Subordinated Debt Securities relating to Trust Securities, as the same may be
amended and supplemented from time to time, between the Company and The Bank of
New York, as Debenture Trustee, pursuant to which the Junior Subordinated
Debentures will be issued, and (ii) the term "Trust Agreement" means the Amended
and Restated Trust Agreement, among the Company, as Depositor, The Bank of New
York, as Property Trustee, The Bank of New York (Delaware), as Delaware Trustee,
and the three Administrative Trustees named therein who are employees or
officers of or affiliated with the Company (collectively, with the Property
Trustee and the Delaware Trustee, the "Issuer Trustees"). Each of the other
capitalized terms used in this Prospectus and not otherwise defined has the
meaning set forth in the Indenture or the Trust Agreement, as the case may be.
RISK FACTORS
Prospective purchasers of the Preferred Securities should carefully review
the information contained elsewhere in this Prospectus and should particularly
consider the following matters.
OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR SUBORDINATED DEBENTURES ARE
UNSECURED AND SUBORDINATE TO SENIOR DEBT
The obligations of the Company under the Guarantee issued by the Company
for the benefit of the holders of the Preferred Securities are unsecured and
rank subordinate and junior in right of payment to all Senior Debt of the
Company. The obligations of the Company under the Junior Subordinated Debentures
are subordinate and junior in right of payment to all such Senior Debt. At
September 30, 1996, Senior Debt of the Company aggregated approximately $2.3
billion. None of the Indenture, the Guarantee or the Trust Agreement places any
limitation on the amount of secured or unsecured debt, including Senior Debt,
that may be incurred by the Company. See "Description of the Guarantee -- Status
of the Guarantee" and "Description of the Junior Subordinated
Debentures -- Subordination".
The ability of the Issuer to pay amounts due on the Preferred Securities is
solely dependent upon the Company making payments on the Junior Subordinated
Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES; POTENTIAL MARKET
VOLATILITY DURING EXTENSION PERIOD
The Company has the right under the Indenture to defer the payment of
interest on the Junior Subordinated Debentures at any time or from time to time
for one or more Extension Periods, each of which, together with all previous and
further extensions of such Extension Period prior to its termination, may not
exceed 20 consecutive quarters and may not extend beyond the maturity of the
Junior Subordinated Debentures. As a consequence of any such election, quarterly
Distributions on the Preferred Securities would be deferred (but would continue
to accumulate additional Distributions thereon at the rate of 8.75% per annum,
compounded quarterly) by the Issuer during any such Extension Period. In the
event that the Company exercises this right, the Company may not during any such
Extension Period (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
the Company's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities
(including other Junior Subordinated Debentures) that rank pari passu with or
junior in interest to the Junior Subordinated Debentures or make any guarantee
payments with respect to the foregoing (other than (a) dividends or
distributions in common stock of the Company and (b) payments under the
Guarantee). Upon the termination of any Extension Period and the payment of all
amounts then due, the Company may elect to begin a new Extension Period, subject
to the above requirements. Consequently, there could be multiple Extension
Periods of varying lengths throughout the term of the Junior Subordinated
Debentures. See "Description of the Preferred Securities -- Distributions" and
"Description of the Junior Subordinated Debentures -- Option to Extend Interest
Payment Period".
6
<PAGE>
Should an Extension Period occur, a holder of the Preferred Securities will
continue to accrue interest income in respect of its pro rata share of the
Junior Subordinated Debentures held by the Issuer for United States Federal
income tax purposes. As a result, a holder of the Preferred Securities will
include such interest in gross income for United States Federal income tax
purposes in advance of the receipt of cash, and will not receive the cash
related to such income from the Issuer if the holder disposes of the Preferred
Securities prior to the record date for the payment of Distributions. See
"Certain United States Federal Income Tax Considerations -- Potential Extension
of Interest Payment Period and Original Issue Discount" and "-- Sale, Exchange
and Redemption of the Preferred Securities".
In the event the Company elects to exercise its right to defer payments of
interest on the Junior Subordinated Debentures, the market price of the
Preferred Securities is likely to be affected. A holder that disposes of its
Preferred Securities during an Extension Period, therefore, might not receive
the same return on its investment as a holder that continues to hold its
Preferred Securities. In addition, as a result of the existence of the Company's
right to defer interest payments, the market price of the Preferred Securities
(which represent preferred undivided beneficial interests in the Junior
Subordinated Debentures) may be more volatile than the market prices of other
securities on which original issue discount accrues that are not subject to such
deferrals.
SPECIAL EVENT REDEMPTION; ADVERSE EFFECT OF POSSIBLE TAX LAW CHANGES
Upon the occurrence and continuation of a Special Event, as described in
"Description of the Preferred Securities -- Redemptions -- Special Event
Redemption or Distribution of Junior Subordinated Debentures", the Company has
the right to redeem the Junior Subordinated Debentures in whole (but not in
part), and thereby cause a mandatory redemption of the Preferred Securities and
the Common Securities, at a redemption price equal to the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption plus 100% of the principal amount thereof, within 90 days following
the occurrence of such Special Event.
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill"),
the revenue portion of President Clinton's budget proposal, was released. The
Bill would, among other things, generally have denied interest deductions for
interest on an instrument issued by a corporation that has a maximum weighted
average maturity of more than 40 years. The Bill would also generally have
treated as equity an instrument, issued by a corporation, that has a maximum
term of more than 20 years and that is not shown as indebtedness on the separate
balance sheet of the issuer or, where the instrument is issued to a related
party (other than a corporation), where the holder or some other related party
issues a related instrument that is not shown as indebtedness on the issuer's
consolidated balance sheet. The above-described provisions were proposed to be
effective generally for instruments issued on or after December 7, 1995. If
either provision were to apply to the Junior Subordinated Debentures, the
Company would be unable to deduct interest on the Junior Subordinated
Debentures. However, on March 29, 1996, the Chairmen of the Senate Finance and
House Ways and Means Committees issued a joint statement to the effect that it
was their intention that the effective date of the President's legislative
proposals, if adopted, would be no earlier than the date of appropriate
Congressional action. The 104th Congress adjourned without any such action
having been taken. There can be no assurance, however, that future legislative
proposals or final legislation will not affect the ability of the Company to
deduct interest on the Junior Subordinated Debentures. If legislation were
enacted limiting, in whole or in part, the deductibility by the Company of
interest on the Junior Subordinated Debentures for United States Federal income
tax purposes, such enactment could give rise to a Tax Event. A Tax Event would
permit the Company to cause a mandatory redemption of the Preferred Securities,
as described more fully under "Description of the Preferred
Securities -- Redemptions -- Special Event Redemption or Distribution of Junior
Subordinated Debentures".
7
<PAGE>
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES
At any time, the Company has the right to terminate the Issuer and, after
satisfaction of liabilities to creditors, if any, of the Issuer as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Preferred Securities in liquidation of the Issuer.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Preferred Securities if a liquidation of the Issuer were to
occur. Accordingly, the Preferred Securities that an investor may purchase,
whether pursuant to the offer made hereby or in the secondary market, or the
Junior Subordinated Debentures that a holder of the Preferred Securities may
receive on liquidation of the Issuer, could trade at a discount to the price
that the investor paid to purchase the Preferred Securities offered hereby.
Because holders of the Preferred Securities may receive the Junior Subordinated
Debentures if the Company exercises its right to terminate the Issuer,
prospective purchasers of the Preferred Securities are also making an investment
decision with regard to the Junior Subordinated Debentures and should carefully
review all the information regarding the Junior Subordinated Debentures
contained herein. See "Description of the Preferred
Securities -- Redemptions -- Special Event Redemption or Distribution of Junior
Subordinated Debentures" and "Description of the Junior Subordinated
Debentures -- Distribution of the Junior Subordinated Debentures".
RIGHTS UNDER THE GUARANTEE; LIMITATION AS TO FUNDS AVAILABLE TO THE ISSUER
The Guarantee will be qualified as an indenture under the Trust Indenture
Act. The Bank of New York will act as Guarantee Trustee for the purposes of
compliance with the Trust Indenture Act and will hold the Guarantee for the
benefit of the holders of the Preferred Securities. The Bank of New York will
also act as Debenture Trustee for the Junior Subordinated Debentures and as
Property Trustee under the Trust Agreement. The Bank of New York (Delaware) will
act as Delaware Trustee under the Trust Agreement. The Guarantee guarantees to
the holders of the Preferred Securities the following payments, to the extent
not paid by the Issuer: (i) any accumulated and unpaid Distributions required to
be paid on the Preferred Securities, to the extent that the Issuer has funds on
hand available therefor, (ii) the redemption price with respect to any Preferred
Securities called for redemption to the extent that the Issuer has funds on hand
available therefor, and (iii) upon a voluntary or involuntary dissolution,
winding-up or liquidation of the Issuer (unless the Junior Subordinated
Debentures are distributed to holders of the Preferred Securities), the lesser
of (a) the aggregate of the liquidation preference amount and all accumulated
and unpaid Distributions to the date of payment and (b) the amount of assets of
the Issuer remaining available for distribution to holders of the Preferred
Securities. The holders of a majority in aggregate Liquidation Preference Amount
(as defined in "Description of the Preferred Securities -- Redemptions") of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust power conferred
upon the Guarantee Trustee under the Guarantee. Any holder of the Preferred
Securities may institute a legal proceeding directly against the Company to
enforce its rights under the Guarantee without first instituting a legal
proceeding against the Issuer, the Guarantee Trustee or any other person or
entity. If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Issuer would lack funds for the
payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts. If the
Property Trustee fails to enforce its rights under the Junior Subordinated
Debentures or the Trust Agreement, a holder of the Preferred Securities may
institute a legal proceeding directly against the Company to enforce the
Property Trustee's rights under the Junior Subordinated Debentures or the Trust
Agreement, to the fullest extent permitted by law, without first instituting any
legal proceeding against the Property Trustee or any other person or entity.
Notwithstanding the foregoing, a holder of the Preferred Securities may directly
institute a proceeding for enforcement of payment to such holder of principal of
or interest on the Junior Subordinated Debentures having a principal amount
equal to the aggregate Liquidation Preference Amount of the Preferred Securities
of such holder on or after the
8
<PAGE>
due dates specified in the Junior Subordinated Debentures. See "Description of
the Preferred Securities", "Description of the Junior Subordinated Debentures"
and "Description of the Guarantee". The Trust Agreement provides that each
holder of the Preferred Securities, by acceptance thereof, agrees to the
provisions of the Guarantee and the Indenture.
LIMITED VOTING RIGHTS
Holders of the Preferred Securities will generally have limited voting
rights relating only to the modification of the Preferred Securities and the
dissolution, winding-up or termination of the Issuer. Holders of the Preferred
Securities will not be entitled to vote to appoint, remove or replace the
Property Trustee or the Delaware Trustee; such voting rights are vested
exclusively in the holder of the Common Securities except upon the occurrence of
certain events. The Administrative Trustees and the Company may amend the Trust
Agreement to ensure that the Issuer will be classified for United States Federal
income tax purposes as a "grantor trust" without the consent of holders, unless
such action adversely affects in any material respect the interests of holders.
See "Description of the Preferred Securities -- Voting Rights; Amendment of
Trust Agreement" and "-- Removal of Issuer Trustees".
TRADING PRICE OF THE PREFERRED SECURITIES MAY NOT REFLECT VALUE OF ACCRUED BUT
UNPAID INTEREST
The Preferred Securities have been approved for listing, subject to notice
of issuance, on the NYSE. The Preferred Securities may trade at a price that
does not fully reflect the value of accrued but unpaid interest with respect to
the underlying Junior Subordinated Debentures. A holder of Preferred Securities
who disposes of its Preferred Securities will be required to include in income
(as ordinary income) accrued but unpaid interest on the Junior Subordinated
Debentures through the date of disposition for United States Federal income tax
purposes and to add such amount to its adjusted tax basis in the Preferred
Securities disposed of by such holder. Such holder will recognize a capital loss
to the extent that the selling price (which may not fully reflect the value of
accrued but unpaid interest) is less than its adjusted tax basis (which will
include accrued but unpaid interest). Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
Federal income tax purposes. See "Certain United States Federal Income Tax
Considerations -- Sale, Exchange and Redemption of the Preferred Securities".
SIGNIFICANT LEGAL AND REGULATORY PROCEEDINGS AND OTHER ISSUES AFFECTING THE
COMPANY
Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, its Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, June 30, and September 30, 1996, and its Current Reports
on Form 8-K dated March 22, 1996, April 19, 1996, April 29, 1996, August 26,
1996, September 5, 1996, and November 27, 1996, incorporated by reference
herein, and to the Company's balance sheets as of December 31, 1995 and 1994 and
the statements of income (loss), retained earnings, and cash flows for each of
the three years in the period ended December 31, 1995 and the Notes thereto (the
"Annual Financial Statements"), and the Company's balance sheet as of September
30, 1996 and the statements of income (loss) for the three and nine month
periods ended September 30, 1996 and 1995 and the statement of cash flows for
the nine month periods ended September 30, 1996 and 1995 and the Notes thereto
(the "Interim Financial Statements"), set forth in this Prospectus , for a
discussion of certain legal and/or regulatory proceedings and other factors
affecting the Company, including but not limited to those described in the
following paragraphs:
1. $1.4 billion of Company-wide abeyed and disallowed costs associated
with the River Bend Nuclear Plant ("River Bend") that have not been allowed
in rates in Texas and are the subject of a writ of appeal before the Texas
Supreme Court and which, if ultimately disallowed in their entirety, could
result in a write-off, net of tax, of approximately $280 million, as of
September 30, 1996 (See Note 2, "Rate and Regulatory Matters -- River Bend"
to the Interim Financial Statements and to the Annual Financial
Statements).
9
<PAGE>
2. For customer retention reasons, the Company's industrial electric
sales increasingly are or may be made at negotiated prices that are lower
than the tariff rates that otherwise would be applicable. (See
"Management's Financial Discussion and Analysis -- Significant Factors and
Known Trends", for the year ended December 31, 1995, "Management's
Financial Discussion and Analysis -- Significant Factors and Known Trends",
for the quarterly period ended September 30, 1996 and "The
Company -- Recent Developments -- Loss of Revenues from Industrial
Customers").
3. The increasing competitive challenges that are facing the Company
(See "Management's Financial Discussion and Analysis -- Significant Factors
and Known Trends -- Competition and Industry Challenges" for the year ended
December 31, 1995 and "Management's Financial Discussion and
Analysis -- Significant Factors and Known Trends -- Competition and
Industry Challenges" for the quarterly period ended September 30, 1996).
4. The Company is subject to the risks attendant upon the ownership
and operation of River Bend, a 655 megawatt nuclear powered generating
unit. These include risks arising from the operation of nuclear facilities
and the storage, handling and disposal of high-level and low-level
radioactive materials, limitations on the amounts and types of insurance
commercially available in respect of losses that might arise in connection
with nuclear operations, and uncertainties with respect to the
technological and financial aspects of decommissioning nuclear plants at
the end of their licensed lives. The Nuclear Regulatory Commission (the
"NRC") has broad authority under Federal law to impose licensing and
safety-related requirements upon owners and operators of nuclear generating
facilities and, in the event of non-compliance, has the authority to impose
fines or shut down a unit, or both, depending upon its assessment of the
severity of the situation, until compliance is achieved. Safety
requirements promulgated by the NRC have, in the past, necessitated
substantial capital expenditures at nuclear plants and additional such
expenditures could be required in the future. In addition, although the
Company has no reason to anticipate a serious nuclear incident at River
Bend, if such an incident did occur, it could have a material adverse
effect on the financial position of the Company.
10
<PAGE>
THE COMPANY
Entergy Gulf States, Inc. (formerly Gulf States Utilities Company) was
originally incorporated under the laws of the State of Texas in 1925. The
Company's principal executive offices are located at 350 Pine Street, Beaumont,
Texas 77701. Its telephone number is 409-838-6631.
The Company is an electric public utility company engaged in the
generation, distribution and sale of electric energy with substantially all of
its operations in the States of Texas and Louisiana. In addition to its
principal electric business, the Company produces and sells steam for industrial
use and purchases and retails natural gas in the Baton Rouge, Louisiana area.
The Company serves approximately 623,000 electric customers in southeastern
Texas and south Louisiana, of which approximately 49.9% reside in Louisiana and
50.1% reside in Texas. The Company serves approximately 90,000 natural gas
customers in Baton Rouge, Louisiana. All of the outstanding common stock of the
Company is owned by Entergy Corporation ("Entergy"), a Delaware corporation.
Entergy is a registered public utility holding company under the Public Utility
Holding Company Act of 1935, as amended. The Company is subject to the
jurisdiction of the municipal authorities of incorporated cities in Texas as to
retail rates and services within their boundaries, with appellate jurisdiction
over such matters residing in the Public Utility Commission of Texas (the
"PUCT"). The Company is also subject to regulation by the PUCT as to retail
rates and services in rural areas, certification of new generating plants and
extensions of service into new areas in Texas. The Company is subject to
regulation by the Louisiana Public Service Commission (the "LPSC") as to
electric and gas service, rates and charges, certification of generating
facilities and power or capacity purchase contracts, depreciation, accounting
and other matters involving its service territories in Louisiana. For the nine
month period ended September 30, 1996 and the twelve month period ended December
31, 1995, residential customers comprised 32.5% and 32% of total sales,
respectively, commercial customers comprised 22.6% and 23.1%, respectively,
industrial customers comprised 34.9% and 33.8%, respectively, and governmental
and other sales comprised 10% and 11.1%, of total sales, respectively.
RECENT DEVELOPMENTS
Cajun Settlement. Litigation brought by Cajun Electric Power Cooperative,
Inc. ("Cajun"), a generation cooperative, which is a 30% co-owner of River Bend,
against the Company seeking recision and termination of the River Bend Joint
Ownership Participation and Operating Agreement and recovery of Cajun's $1.6
billion investment in River Bend plus certain costs and expenses is pending in
federal court. An agreement (the "Cajun Settlement") setting forth terms for
resolution of all such disputes has been reached by the Company, the Cajun
bankruptcy trustee and the U.S. Rural Utility Services, and was approved by the
United States District Court for the Middle District of Louisiana (the "District
Court") on August 26, 1996. On September 6, 1996, the Committee of Unsecured
Creditors in the Cajun bankruptcy proceeding filed a Notice of Appeal to the
United States Court of Appeals for the Fifth Circuit, objecting that the order
approving the Cajun Settlement was separate from the approval of a plan of
reorganization and, therefore, improper. The Cajun Settlement is subject to this
appeal and to approvals by the appropriate regulatory agencies. The Company
believes that it is probable that the Cajun Settlement will ultimately be
approved and consummated (See Note 1, "Commitments and Contingencies," to the
Interim Financial Statements).
Beginning in 1992, Cajun failed to pay its full share of capital costs,
operating and maintenance expenses, and other costs for repairs and improvements
to River Bend. Cajun's unpaid portion of River Bend operating and maintenance
expenses (including nuclear fuel) and capital costs for the nine months ended
September 30, 1996, was approximately $42.9 million. The cumulative cost to the
Company resulting from Cajun's failure to pay its full share of River Bend
related costs, reduced by the proceeds from the sale by the Company of Cajun's
share of River Bend power, and payments into the registry of the District Court
for the Company's portion of expenses for Big Cajun 2, Unit 3, was $17.0 million
as of September 30, 1996, compared with $31.1 million as of December 31, 1995.
Cajun's unpaid portion of the River Bend related costs is reflected in long-term
receivables with an offsetting reserve in other deferred credits. The Cajun
Settlement will conclude all disputes regarding the non-payment by Cajun of
11
<PAGE>
operating and maintenance expenses (See Note 1, "Commitments and Contingencies,"
to the Interim Financial Statements).
On December 21, 1994, Cajun filed a petition in the United States
Bankruptcy Court for the Middle District of Louisiana (the "Bankruptcy Court")
seeking relief under Chapter 11 of the United States Bankruptcy Code. In the
bankruptcy proceedings, Cajun filed a motion on January 10, 1995, to reject the
Operating Agreement as a burdensome executory contract. The Company responded on
January 10, 1995, with a memorandum opposing Cajun's motion. This dispute will
be resolved upon effectiveness of the Cajun Settlement.
On March 8, 1996, Southwestern Electric Power Company ("SWEPCO"), the
Company and certain member cooperatives of Cajun filed with the Bankruptcy Court
a joint proposal to bring an end to the Cajun bankruptcy proceeding. The
proposal was submitted in response to a bid procedure established by the Cajun
bankruptcy trustee. On April 19, 1996, SWEPCO, the Company, and certain Cajun
member cooperatives filed a separate plan of reorganization with the Bankruptcy
Court based upon their earlier proposal. On April 22, 1996, the Cajun bankruptcy
trustee filed a plan of reorganization with the Bankruptcy Court based on the
proposal of two non-affiliated companies to take over the non-nuclear operations
of Cajun. Proponents of all of the plans of reorganization submitted to the
Bankruptcy Court have incorporated the Cajun Settlement as an integral condition
to the effectiveness of their plan. The timing and completion of the
reorganization depends on Bankruptcy Court approval and any required regulatory
approvals (See Note 1, "Commitments and Contingencies" to the Interim Financial
Statements).
Competitive Transition Filings. On November 27, 1996, the Company filed a
plan with the PUCT that calls for the accelerated recovery of costs associated
with River Bend. The costs would be recovered over a seven year period and
include only those River Bend costs already in rate base. River Bend costs not
in rate base and which are the subject of an appeal pending before the Texas
Supreme Court are not included in the plan. This plan is designed to achieve an
orderly transition to retail electric competition in Texas while protecting
ratepayers from potential cost shifting among customer classes. It contains the
following key elements:
- Base rates will be frozen for seven years.
- The investment in River Bend as of June 30, 1996 will be recovered over a
seven year period. At the end of this period, that investment would cease
to be recovered from customers through electric rates.
- To prevent unfair cost shifting among customer classes, the plan provides
for a universal service charge to be paid by all customers, including
those who choose to purchase their electricity from another source, but
remain connected to the Company system. For customers who continue to
purchase electricity from the Company, electric bills would not increase
because the charge is already included in electric rates.
- The filing proposes performance standards for River Bend by setting a
ceiling on operating, capital and fuel expenses. If expenses exceed the
ceiling, then the Company will absorb the higher costs unless they were
caused by a catastrophic event. If expenses fall below the ceiling, the
Company will benefit from those efficiencies.
- The filing also includes a performance rate plan that has a return on
equity band of two percent around a mid-point established by the PUCT.
The Company will absorb costs or keep savings within the band. However,
if costs or savings are outside of the band, then these would be shared
equally with customers. This proposal provides an incentive for the
Company to operate more efficiently.
The PUCT has not yet established a procedural schedule for this proceeding.
See "Management's Financial Discussion and Analysis -- Significant Factors and
Known Trends" for the quarter ended September 30, 1996, regarding the Company's
competitive transition filing in Louisiana with the LPSC.
12
<PAGE>
Loss of Revenues from Industrial Customers. During 1996, the Company
entered into agreements with one of its largest industrial customers concerning
a steam generating station that historically has been contractually dedicated to
providing electricity for that customer. Under these agreements, the generating
facility was leased to the customer. The Company will continue to operate the
facility pursuant to contracts with the customer. It is anticipated that the
customer will make major improvements to the facility at its expense. As a
result of these arrangements, which were entered into with the expectations that
the customer otherwise would terminate its contracts with the Company and
construct its own generating facilities, the Company's revenues from this
customer are estimated to be reduced by approximately $33 million per year
beginning in August of 1997, and the Company's net income is expected to be
reduced by approximately $15 million on an annualized basis.
In November 1996, another industrial customer having an electrical load of
approximately 31 megawatts left the Company's system due to the commencement of
operations of a cogeneration facility to serve the customer's industrial
facility. This is expected to result in a revenue loss to the Company of
approximately $5.5 million per annum, and a reduction in net income of $3.3
million on an annualized basis.
Employment Litigation. The Company is a defendant in approximately 177
lawsuits filed in state court in Texas by former employees who claim that they
lost their jobs as a result of the merger between the Company and Entergy, which
was consummated at the end of 1993. The plaintiffs in these cases have asserted
various claims, including breach of contract, fraud, misrepresentation,
negligence, intentional infliction of emotional distress, and/or discrimination
on the basis of age, race and/or sex. It has been determined that these lawsuits
will be tried separately rather than being consolidated, and the first trial is
scheduled in 1997. The Company is vigorously defending all of these suits and
denies that it is liable to the plaintiffs. However, no assurance can be given
as to the outcome of these cases.
SIGNIFICANT LEGAL AND REGULATORY PROCEEDINGS
Proceedings currently pending before Texas and Louisiana regulators, in
which various parties are seeking significant reductions in the Company's base
rates or disallowances of fuel costs, are discussed in Note 2, "Rate and
Regulatory Matters" to the Interim Financial Statements.
The foregoing information relating to the Company does not purport to be
comprehensive and should be read together with the Annual Financial Statements
and the Interim Financial Statements and other information contained herein.
13
<PAGE>
ENTERGY GULF STATES CAPITAL I
Entergy Gulf States Capital I is a statutory business trust created under
Delaware law pursuant to (i) a trust agreement executed by the Company, as
depositor of the Issuer, the Property Trustee, the Delaware Trustee and an
Administrative Trustee who is an officer of the Company and (ii) the filing of a
certificate of trust with the Delaware Secretary of State. Such trust agreement
will be amended and restated in its entirety substantially in the form of the
Trust Agreement filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The Trust Agreement will be qualified as an indenture
under the Trust Indenture Act. The Issuer will have five Issuer Trustees: The
Bank of New York, as Property Trustee, The Bank of New York (Delaware), as
Delaware Trustee, and three individual Administrative Trustees who are employees
or officers of or affiliated with the Company. The Bank of New York, as Property
Trustee, will act as sole indenture trustee under the Trust Agreement for
purposes of compliance with the Trust Indenture Act. The Bank of New York will
also act as Guarantee Trustee under the Guarantee, and Debenture Trustee under
the Indenture. See "Description of the Guarantee" and "Description of the Junior
Subordinated Debentures". The holder of the Common Securities, or the holders of
a majority in liquidation preference of the Preferred Securities if a Debenture
Event of Default has occurred and is continuing, will be entitled to appoint,
remove or replace the Property Trustee and/or the Delaware Trustee. In no event
will the holders of the Preferred Securities have the right to vote to appoint,
remove or replace the Administrative Trustees; such voting rights are vested
exclusively in the holder of the Common Securities. The duties and obligations
of the Issuer Trustees are governed by the Trust Agreement. The Company will pay
all fees and expenses related to the Issuer and the offering of the Preferred
Securities and will pay, directly or indirectly, all ongoing costs, expenses and
liabilities of the Issuer.
The Issuer exists for the exclusive purposes of (i) issuing and selling the
Preferred Securities and the Common Securities, (ii) using the proceeds from the
sale of such securities to acquire the Junior Subordinated Debentures issued by
the Company and (iii) engaging in only those other activities necessary or
incidental thereto. Accordingly, the Junior Subordinated Debentures will be the
sole assets of the Issuer and payments under the Junior Subordinated Debentures
will be the sole revenue of the Issuer. All of the Common Securities will be
owned by the Company. The Common Securities will rank pari passu, and payments
will be made thereon pro rata, with the Preferred Securities, except that upon
the occurrence and continuance of an event of default under the Trust Agreement
resulting from a Debenture Event of Default, the rights of the Company as holder
of the Common Securities to payment in respect of Distributions and payments
upon liquidation, redemption or otherwise will be subordinated to the rights of
the holders of the Preferred Securities. See "Description of the Preferred
Securities -- Subordination of Common Securities". The Company will acquire
Common Securities having an aggregate liquidation amount equal to 3% of the
total capital of the Issuer. The Issuer has a term of approximately 54 years,
but may terminate earlier as provided in the Trust Agreement. The principal
executive office of the Issuer is 639 Loyola Avenue, New Orleans, Louisiana
70113, Attention: Treasurer, telephone: (504) 576-4308.
14
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The selected financial information of the Company set forth below should be
read in conjunction with the Annual Financial Statements and the Interim
Financial Statements of the Company and other financial information contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, ENDED DECEMBER 31,
------------------------ ------------------------------------------------------------------
1996 1995 1995 1994 1993 1992(1) 1991(1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues................ $1,574,328 $1,419,242 $1,861,974 $1,797,365 $1,827,620 $1,773,374 $1,702,235
Operating Income.................. 262,065 249,680 304,429 213,651 270,616 338,620 334,970
Interest Expense (net)............ 148,149 148,034 199,199 203,059 209,868 247,469 259,968
Net Income (Loss) before
extraordinary items and the
cumulative effect of accounting
changes......................... (14,152) 115,100 122,919 (82,755) 69,461 139,413 112,391
Net Income (Loss)................. (14,152) 115,100 122,919 (82,755) 78,862 133,848 112,030
Total Assets...................... 6,568,575 6,858,223 6,861,058 6,843,461 7,137,351 7,164,447 7,183,119
Long-term obligations(2).......... 2,346,532 2,585,558 2,521,103 2,689,042 2,772,002 2,798,768 2,816,577
</TABLE>
- ---------------
(1) Selected financial information for the years ended December 31, 1992 and
1991 have been restated due to the adoption on January 1, 1993 of Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes.
(2) Includes long-term debt (excluding currently maturing debt), preferred and
preference stock with sinking fund, and non-current capital lease
obligations.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, ENDED DECEMBER 31,
------------------------ ------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Electric Operating Revenues:
Residential..................... $ 488,000 $ 447,700 $ 573,566 $ 569,997 $ 585,799 $ 560,552 $ 547,147
Commercial...................... 340,500 311,900 412,601 414,929 415,267 400,803 383,883
Industrial...................... 524,300 454,800 604,688 626,047 650,230 642,298 582,568
Governmental.................... 23,500 18,300 25,042 25,242 26,118 26,195 24,792
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total retail.............. 1,376,300 1,232,700 1,615,897 1,636,215 1,677,414 1,629,848 1,538,390
Sales for resale
Associated companies.......... 13,600 43,900 62,431 45,263 -- -- --
Non-associated companies...... 61,300 52,300 67,103 52,967 31,898 24,485 44,136
Other(1)...................... 50,500 37,200 43,533 (15,244) 38,649 40,203 41,433
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total..................... $1,501,700 $1,366,100 $1,788,964 $1,719,201 $1,747,961 $1,694,536 $1,623,959
========== ========== ========== ========== ========== ========== ==========
Billed Electric Energy Sales
(Millions of kWh):
Residential..................... 6,396 6,012 7,699 7,351 7,192 6,825 6,925
Commercial...................... 4,905 4,680 6,219 6,089 5,711 5,474 5,460
Industrial...................... 12,457 11,500 15,393 15,026 14,294 14,413 13,629
Governmental.................... 329 231 311 297 296 302 295
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total retail.............. 24,087 22,423 29,622 28,763 27,493 27,014 26,309
Sales for resale
Associated companies.......... 399 2,092 2,935 1,866 -- -- --
Non-associated companies...... 1,714 1,744 2,212 1,650 666 540 1,049
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Electric
Department.............. 26,200 26,259 34,769 32,279 28,159 27,554 27,358
Steam Department................ 1,367 1,308 1,742 1,659 1,597 1,722 1,711
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total..................... 27,567 27,567 36,511 33,938 29,756 29,276 29,069
========== ========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) 1994 includes the effects of the Company's reserve for rate refund.
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
OPERATING OPERATING NET
REVENUES INCOME INCOME (LOSS)
-------- --------- -------------
<S> <C> <C> <C>
1996:
First Quarter.................................................. $456,631 $ 65,075 $(152,257)
Second Quarter................................................. 525,567 89,550 47,140
Third Quarter.................................................. 592,130 107,440 90,965
</TABLE>
15
<PAGE>
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the capitalization of the Company as of
September 30, 1996. The following data has been derived from and should be read
in conjunction with the Interim Financial Statements of the Company and other
financial information contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-------------------------------------------------
ACTUAL AS ADJUSTED(1)
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Common Stock and Paid-in Capital.............. $1,266,744 31.8% $1,266,744 31.8%
Retained Earnings............................. 322,054 8.1 322,054 8.1
---------- ----- ---------- -----
Total Common Shareholder's Equity........... 1,588,798 39.9 1,588,798 39.9
Preference Stock.............................. 150,000 3.8 150,000 3.8
Preferred Stock (without sinking fund)........ 136,444 3.4 51,444 1.3
Preferred Stock (with sinking fund)........... 77,460 1.9 77,460 1.9
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Trust(2).................................... -- -- 85,000 2.1
First Mortgage Bonds(3)....................... 1,489,611 37.4 1,489,611 37.4
Other Long-Term Debt(3)....................... 540,683 13.6 540,683 13.6
---------- ----- ---------- -----
Total Capitalization........................ $3,982,996 100.0% $3,982,996 100.0%
========== ===== ========== =====
</TABLE>
- ---------------
(1) Adjusted to give effect to the consummation of the offering of the Preferred
Securities and the application of the estimated net proceeds therefrom,
together with general corporate funds, to redeem shares of preferred stock.
See "Use of Proceeds".
(2) As described herein, all of the assets of the Issuer will be approximately
$87.6 million of the Junior Subordinated Debentures issued by the Company
to the Issuer. The Junior Subordinated Debentures will bear interest at the
annual rate of 8.75% of the principal amount thereof and will mature on
March 31, 2046. The Company owns all of the Common Securities of the
Issuer.
(3) Excludes current maturities of First Mortgage Bonds and Other Long-Term Debt
of $110.0 million and $50.9 million, respectively.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FOR THE TWELVE MONTH PERIOD ENDED
- ----------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
- ------------- ----------------------------------------
1996 1995 1995 1994 1993 1992 1991
- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1.35 1.09 1.86 0.36(1) 1.54 1.72 1.56
</TABLE>
- ---------------
(1) Earnings for the year ended December 31, 1994 for the Company were not
adequate to cover fixed charges by $144.8 million.
16
<PAGE>
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
DECEMBER 31, 1995
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The Company is involved in a capital-intensive business that requires large
investments in long-lived assets. While capital expenditures for the
construction of new generating capacity are not currently planned, the Company
does require significant capital resources for the periodic maturity of debt and
preferred stock and ongoing construction expenditures. Net cash flow from
operations totaled $401 million, $326 million, and $255 million in 1995, 1994,
and 1993, respectively. The Company's net cash flow from operations increased in
1995 due to higher revenues and lower operation and maintenance expenses. This
increase was partially offset by a Texas retail rate refund recorded in 1994 and
paid in 1995.
FINANCING SOURCES
In recent years, cash flows of the Company, supplemented by cash on hand,
have been sufficient to meet substantially all investing and financing
requirements, including capital expenditures, dividends and
debt/preferred stock maturities. The Company's ability to fund these capital
requirements with cash from operations results, in part, from continued efforts
to streamline operations and reduce costs, as well as from collections under
rate phase-in plans that exceed current cash requirements for the related costs.
In the income statement, these revenue collections are offset by the
amortization of previously deferred costs; therefore, there is no effect on net
income.
The Company's phase-in plan for River Bend will expire in 1998. In
addition, the Company has the ability to meet future capital requirements
through future debt or preferred stock issuances, as discussed below. Also, to
the extent current market interest and dividend rates allow, the Company may
continue to refinance high-cost debt and preferred stock prior to maturity. See
Notes 5, 6, and 8 in the Annual Financial Statements for additional information
on the Company's capital and refinancing requirements in 1996 -- 2000.
The Company periodically reviews its capital structure to determine its
future needs for debt and equity financing. Certain agreements and restrictions
limit the amount of mortgage bonds and preferred stock that can be issued by the
Company. Based on the most restrictive applicable tests as of December 31, 1995,
and an assumed annual interest rate of 8.25%, the Company could have issued
mortgage bonds in the amount of $824 million. The Company was precluded from
issuing preferred stock at December 31, 1995.
In addition to these amounts, the Company has the ability, subject to
certain conditions, to issue approximately $578 million in bonds against retired
bond credits. In some cases, no earnings coverage test is required. The Company
has no earnings coverage limitations on the issuance of preference stock. See
Notes 5 and 6 in the Annual Financial Statements for long-term debt and
preferred stock issuances and retirements. See Note 4 in the Annual Financial
Statements for information on the Company's short-term borrowings.
SIGNIFICANT FACTORS AND KNOWN TRENDS
FINANCING REQUIREMENTS
See Notes 2 and 8 in the Annual Financial Statements regarding River Bend
rate appeals and litigation with Cajun. Adverse rulings in the River Bend rate
appeal could result in approximately $289 million of potential write-offs (net
of tax) and $182 million in refunds of previously collected revenue. Such
write-offs and charges, as well as the application of Statement of Financial
Accounting Standards ("SFAS") 121 (see Note 1 in the Annual Financial
Statements), could result in substantial net losses being reported in the future
by the Company, with resulting adverse adjustments to common
17
<PAGE>
equity of the Company. Adverse resolution of these matters could adversely
affect the Company's ability to obtain financing, which could in turn affect the
Company's liquidity and ability to pay dividends.
COMPETITION AND INDUSTRY CHALLENGES
Electric utilities traditionally have operated as regulated monopolies in
which there was little opportunity for direct competition in the provision of
electric service. In return for the ability to receive a reasonable return on
and of their investments, utilities were obligated to provide service and meet
future customer requirements. However, the electric utility industry is now
undergoing a transition to an environment of increased retail and wholesale
competition.
Pressures that underlie the movement toward increasing competition are
numerous and complex. They include legislative and regulatory changes,
technological advances, consumer demands, greater availability of natural gas,
environmental needs, and other factors. The increasingly competitive environment
presents opportunities to compete for new customers, as well as the risk of loss
of existing customers. Competition presents the Company with many challenges.
The following have been identified by the Company as its major competitive
challenges.
THE ENERGY POLICY ACT OF 1992
The Energy Policy Act of 1992 ("EPAct") addresses a wide range of energy
issues and is being implemented by both the Federal Energy Regulatory Commission
("FERC") and state regulators. The EPAct is designed to promote competition
among utility and non utility generators by amending the Public Utility Holding
Company Act of 1935, as amended, ("PUHCA") to exempt from regulation a class of
Exempt Wholesale Generators ("EWGs"), among others, consisting of utility
affiliates and non utilities that own and operate facilities for the generation
and transmission of power for sale at wholesale. The EPAct also gave FERC the
authority to order investor-owned utilities to transmit power and energy to or
for wholesale purchasers and sellers. This creates potential for electric
utilities and other power producers to gain increased access to the transmission
systems of other utilities to facilitate wholesale sales.
In response to the EPAct, FERC issued a notice of proposed rulemaking in
mid-1994. This rulemaking concerns a regulatory framework for dealing with
recovery of costs that were prudently incurred by electric utilities to serve
customers under the traditional regulatory framework. These costs may become
"stranded" as a result of increased competition. On March 29, 1995, FERC issued
a supplemental notice of proposed rulemaking in this proceeding that would
require public utilities to provide nondiscriminatory open access transmission
service to wholesale customers and would also provide guidance on the recovery
of wholesale and retail stranded costs. The risk of exposure to stranded costs
that may result from competition in the industry will depend on the extent and
timing of retail competition, the resolution of jurisdictional issues concerning
stranded cost recovery, and the extent to which such costs are recovered from
departing or remaining customers.
With regard to pending proceedings, including Entergy's open access
transmission tariff proceedings originally filed in 1991 and amended in 1994 and
1995, FERC directed the parties to proceed with their cases while taking into
account FERC's proposed rule. Comments and reply comments on the proposed
rulemaking have now been filed with FERC by interested parties. Certain of the
parties filing comments have proposed that FERC should order the immediate
unbundling of all retail services as part of the final rulemaking in this
proceeding, which is expected in the second quarter of 1996. In its comments in
the proposed rulemaking, Entergy urged FERC to exercise its authority and
responsibility to serve as a "backstop" in the event a state is unable or
unwilling to provide for stranded-cost recovery -- particularly in the case of
multi-state utilities (such as Entergy and its subsidiaries), where cost
shifting among jurisdictions might otherwise occur.
18
<PAGE>
RETAIL AND WHOLESALE RATE ISSUES
The Company has recently been ordered to grant base rate reductions and has
refunded or credited customers for previous overcollections of rates. See Note 2
in the Annual Financial Statements for additional discussion of rate reductions
and incentive-rate regulation.
In connection with the Merger consummated on December 31, 1993, by which
the Company became a subsidiary of Entergy (the "Merger"), the Company agreed
with the LPSC and the PUCT to a five-year rate cap on retail electric rates,
which is the level of the Company's retail electric base rates in effect at
December 31, 1993, for the Louisiana retail jurisdiction, and the level of such
rates in effect prior to the settlement agreement with the PUCT on July 21,
1994, for the Texas retail jurisdiction, which may not be exceeded before
December 31, 1998 ("Rate Cap"). Additionally, the Company agreed to pass through
to retail customers the fuel savings and a certain percentage of the nonfuel
savings created by the Merger. Under the terms of their respective Merger
agreements, the LPSC and PUCT have reviewed the Company's base rates during the
first post-Merger earnings analysis and ordered rate reductions. See Note 2 in
the Annual Financial Statements for additional discussion of the Company's
post-Merger filings with the LPSC and the PUCT.
POTENTIAL CHANGES IN THE ELECTRIC UTILITY INDUSTRY
Retail wheeling, the transmission by an electric utility of energy produced
by another entity over the utility's transmission and distribution system to a
retail customer in the electric utility's area of service, continues to evolve.
Approximately 40 states including Louisiana and Texas have initiated studies of
the concept of retail competition or are considering it as part of industry
restructuring.
The PUCT is currently developing rules that will permit greater wholesale
electric competition in Texas, as mandated by the Texas legislature in its 1995
session. These wholesale transmission access rules are expected to be in place
by the first quarter of 1996. In addition, the PUCT is developing information to
be contained in reports that will be submitted to the 1997 legislature
concerning broader competitive issues such as the unbundling of electric utility
operations, market-based pricing, performance-based ratemaking, and the
identification and recovery of potential stranded costs as part of the
transition to a more competitive electric industry environment. This information
will be developed through a series of workshops and comments by interested
parties throughout 1996. In addition, during 1995, the Texas legislature revised
the Public Utility Regulatory Act, the law regulating electric utilities in
Texas. The revised law permits utility and non-utility EWGs and power marketers
to sell wholesale power in the state. The revised law also permits the
discounting of rates with certain conditions, but does not change the current
law governing retail wheeling or the treatment of federal income taxes.
During the second quarter of 1995, the Louisiana legislature considered a
bill permitting local retail wheeling. The bill was defeated, but similar bills
are likely to be introduced in the future. During the same time period, the LPSC
initiated a generic docket to investigate retail, wholesale, and affiliate
wheeling of electricity. Currently, no procedural schedule has been set for this
docket.
During January 1996, a bill entitled the "Electric Power Competition Act of
1996" was introduced into the United States House of Representatives. The bill
proposes to amend certain provisions under Public Utility Regulatory Policies
Act ("PURPA") for the purpose of facilitating future deregulation of the
electric power industry.
In some areas of the country, municipalities (or comparable entities) whose
residents are served at retail by an investor-owned utility pursuant to a
franchise, are exploring the possibility of establishing new electric
distribution systems, or extending existing ones. In some cases, municipalities
are also seeking new delivery points in order to serve retail customers,
especially large industrial customers, which currently receive service from an
investor-owned utility. Where successful, however, the establishment of a
municipal system or the acquisition by a municipal system of a utility's
customers could result in the utility's inability to recover costs that it has
incurred for the purpose of serving those customers.
19
<PAGE>
SIGNIFICANT INDUSTRIAL COGENERATION EFFECTS
Many of the Company's industrial customers, whose costs structures are
energy-sensitive, have energy alternatives available to them such as fuel
switching, cogeneration, and production shifting. Cogeneration is generally
defined as the combined production of electricity and some other useful form of
heat, typically steam. Cogenerated power may either be sold by its producer to
the local utility at its avoided cost under PURPA, and/or utilized by the
cogenerator to displace purchases from the utility. To the extent that
cogeneration is used by industrial customers to meet their own power
requirements, the Company may suffer loss of industrial load. It is the practice
of the Company to negotiate the renewal of contracts with large industrial
customers prior to their expiration. In certain cases, contracts or special
tariffs that use flexible pricing have been negotiated with industrial customers
to keep these customers as the Company's customers. The pricing agreements are
not at fully allocated cost of service. Such rates may fully recover all related
costs, but provide only a minimal return, if any, on investment. In 1995,
kilowatt-hour ("kWh") sales to the Company's industrial customers at less than
full cost-of-service rates made up approximately 27% of the Company's total
industrial class sales.
Since PURPA was enacted in 1978, the Company has been largely successful in
retaining industrial load. The Company anticipates it will be successful in
renegotiating such contracts with large industrial customers. However, this
competitive challenge will likely increase. There can be no assurance that the
Company will be successful or that future revenues will not be lost to other
forms of generation.
DEREGULATED UTILITY OPERATIONS
The Company discontinued regulatory accounting principles for its wholesale
jurisdiction and steam department and the Louisiana deregulated portion of River
Bend during 1989 and 1991, respectively. The operating income (loss) from these
operations was $7.2 million in 1995, $(5.2) million in 1994, and $(2.9) million
in 1993.
The increase in 1995 net income from deregulated operations was due to
increased revenues and reduced operation and maintenance expenses, partially
offset by increased depreciation. The larger net loss from deregulated
operations in 1994 was principally due to a smaller income tax benefit. The
future impact of the deregulated utility operations on the Company's results of
operations and financial position will depend on future operating costs, the
efficiency and availability of generating units, and the future market for
energy over the remaining life of the assets. The Company expects the
performance of its deregulated utility operations to improve, due to continued
reductions in operation and maintenance expenses. The deregulated operations
will be subject to the requirements of SFAS 121, as discussed in Note 1 in the
Annual Financial Statements, in determining the recognition of any asset
impairment.
PROPERTY TAX EXEMPTIONS
The Company is working with tax authorities to determine the method for
calculating the amount of property taxes to be paid once River Bend's local
property tax exemptions expire. River Bend's exemption expires in December 1996.
ENVIRONMENTAL ISSUES
The Company has been notified by the U. S. Environmental Protection Agency
("EPA") that it has been designated as a Potentially Responsible Party ("PRP")
for the clean-up of certain hazardous waste disposal sites. See Note 8 in the
Annual Financial Statements for additional information.
ACCOUNTING ISSUES
New Accounting Standard -- In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
effective January 1, 1996. This standard describes circumstances that may result
in assets being impaired and provides criteria for recognition and measurement
of asset
20
<PAGE>
impairment. See Notes 1 and 2 in the Annual Financial Statements for information
regarding the potential impacts of the new accounting standard on the Company.
Continued Application of SFAS 71 -- As a result of the EPAct and actions of
regulatory commissions, the electric utility industry is moving toward a
combination of competition and a modified regulatory environment. The Company's
financial statements currently reflect, for the most part, assets and costs
based on current cost-based ratemaking regulations in accordance with SFAS 71,
"Accounting for the Effects of Certain Types of Regulation" ("SFAS 71").
Continued applicability of SFAS 71 to the Company's financial statements
requires that rates set by an independent regulator on a cost-of-service basis
can actually be charged to and collected from customers.
In the event that all or a portion of a utility's operations cease to meet
those criteria for various reasons, including deregulation, a change in the
method of regulation, or a change in the competitive environment for the
utility's regulated services, the utility should discontinue application of SFAS
71 for the relevant portion. That discontinuation should be reported by
elimination from the balance sheet of the effects of any actions of regulators
recorded as regulatory assets and liabilities.
Except for certain portions of the Company's business, as of December 31,
1995, and for the foreseeable future, the Company's financial statements
continue to follow SFAS 71. See Note 1 in the Annual Financial Statements for
additional discussion of the Company's application of SFAS 71.
Accounting for Decommissioning Costs -- The staff of the Commission has
been reviewing the financial accounting practices of the electric utility
industry regarding the recognition, measurement, and classification of nuclear
decommissioning costs for nuclear generating stations in the financial
statements of electric utilities. In February 1996 the FASB issued an exposure
draft of the proposed SFAS addressing the accounting for decommissioning costs
as well as liabilities related to the closure and removal of all long-lived
assets. See Note 8 in the Annual Financial Statements for a discussion of
proposed changes in the accounting for decommissioning/closure costs and the
potential impact of these changes on the Company.
21
<PAGE>
RESULTS OF OPERATIONS
NET INCOME
Net income increased in 1995 principally as the result of an increase in
electric operating revenues, a decrease in other operation and maintenance
expenses, and an increase in other income. These changes were partially offset
by higher income taxes.
Net income decreased in 1994 due primarily to write-offs and charges
associated with the resolution of contingencies and additional Merger-related
costs aggregating $137 million, a base rate reduction ordered by the PUCT
applied retroactively to March 1994, and restructuring costs. See Note 2 and
Note 11 in the Annual Financial Statements for additional information.
Significant factors affecting the results of operations and causing
variances between the years 1995 and 1994, and 1994 and 1993, are discussed
under "Revenues and Sales", "Expenses", and "Other" below.
REVENUES AND SALES
See "SELECTED FINANCIAL DATA", for information on operating revenues by
source and kWh sales. The changes in electric operating revenues for the twelve
months ended December 31, 1995, are as follows:
<TABLE>
<CAPTION>
INCREASE/
DESCRIPTION (DECREASE)
------------------------------------------------------------------------- -------------
(IN MILLIONS)
<S> <C>
Change in base revenues.................................................. $32.0
Fuel cost recovery....................................................... (29.6)
Sales volume/weather..................................................... 35.0
Other revenue (including unbilled)....................................... 1.1
Sales for resale......................................................... 31.3
-----
Total.......................................................... $69.8
=====
</TABLE>
Electric operating revenues increased in 1995 primarily due to increased
sales volume/weather and higher sales for resale. These increases were partially
offset by lower fuel adjustment revenues, which do not affect net income. Base
revenues also increased in 1995 as a result of rate refund reserves established
in 1994, as discussed below, which were subsequently reduced as a result of an
amended PUCT order. The increase in base revenues was partially offset by rate
reductions in effect for Texas and Louisiana. Sales volume/weather increased
because of warmer than normal weather and an increase in usage by all customer
classes. Sales for resale increased as a result of changes in generation
availability and requirements among the subsidiaries of Entergy which include
Entergy Arkansas, Inc., the Company, Entergy Louisiana, Inc., Entergy
Mississippi, Inc., and Entergy New Orleans, Inc., (collectively referred to as
the "Operating Companies").
Electric operating revenues decreased in 1994 due primarily to a base rate
reduction ordered by the PUCT applied retroactively to March 1994, see Note 2 in
the Annual Financial Statements for additional information, and lower retail
fuel revenues partially offset by increased wholesale revenues associated with
higher sales for resale and increased retail base revenue. The decrease in
retail revenues is primarily due to a decrease in fuel recovery revenue and a
November 1993 rate reduction in Texas. Energy sales increased due primarily to
higher sales for resale as a result of the Company's participation in the
Entergy power pool, which includes Entergy and its various direct and indirect
subsidiaries (the "System").
Gas operating revenues decreased for 1995 primarily due to a decrease in
residential sales. This decrease was the result of a milder winter than in 1994.
22
<PAGE>
EXPENSES
Operating expenses decreased in 1995 as a result of lower other operation
and maintenance expenses and purchased power expenses, partially offset by
higher income taxes. Other operation and maintenance expenses decreased
primarily due to charges made in 1994 for Merger-related costs, restructuring
costs, and certain pre-acquisition contingencies including unfunded Cajun-River
Bend costs and environmental clean-up costs. Purchased power expenses decreased
because of the availability of less expensive gas and nuclear fuel for use in
electric generation as well as changes in the generation requirements among the
Operating Companies. In addition, the decrease in purchased power expenses in
1995 was the result of the recording of a provision for refund of disallowed
purchased power expenses in 1994. Income taxes increased primarily due to higher
pre-tax income in 1995.
Operating expenses increased in 1994 due primarily to higher purchased
power and other operation and maintenance expenses, partially offset by lower
fuel for electric generation and fuel-related expense and lower income tax
expense. Purchased power expenses increased in 1994 due to the Company's
participation in joint dispatch through the System power pool resulting from
increased energy sales as discussed above. The increase in purchased power
expenses in 1994 was also due to the recording of a provision for refund of
disallowed purchased power costs resulting from a Louisiana Supreme Court
ruling. Fuel, fuel-related expenses, and gas purchased for resale decreased in
1994 primarily due to lower gas prices.
Other operation and maintenance expenses increased in 1994 due primarily to
charges associated with certain preacquisition contingencies, additional
Merger-related costs and restructuring costs as discussed in Note 11 in the
Annual Financial Statements.
Income taxes decreased in 1994 due primarily to lower pretax income
resulting from the charges discussed above.
OTHER
Other miscellaneous income increased in 1995 as the result of certain
adjustments made in 1994 related to preacquisition contingencies including
Cajun-River Bend litigation (see Note 8 in the Annual Financial Statements for
additional information) the write-off of previously disallowed rate deferrals,
and plant held for future use. As a result of these charges, income taxes on
other income were significantly higher in 1995 compared to 1994.
Other miscellaneous income decreased in 1994 due to the write-off of plant
held for future use, establishment of a reserve related to the Cajun-River Bend
litigation, the write-off of previously disallowed rate deferrals, and obsolete
spare parts. These charges were partially offset by lower interest expense as a
result of the continued refinancing of high-cost debt.
Income taxes decreased in 1994 due primarily to the charges discussed
above.
23
<PAGE>
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
SEPTEMBER 30, 1996
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash flow from operations for the Company was $263.4 million and $344.3
million for the nine months ended September 30, 1996, and 1995, respectively.
The Company's cash flow from operations decreased for the nine months ended
September 30, 1996, due to increased accounts receivable balances resulting from
higher energy sales, and greater amounts of under-recovered fuel costs over the
same period in 1995.
FINANCING SOURCES
The Company's current ability to fund most of the capital requirements for
its domestic utility businesses with cash from operations results from continued
efforts to streamline operations and to reduce costs, as well as from
collections under rate phase-in plans that exceed current cash requirements for
the related costs. In the income statement, these revenue collections are offset
by the amortization of previously deferred costs so that there is no effect on
net income. These phase-in plans will continue to contribute to the Company's
cash position until 1998. Should additional cash be needed for investing and
financing requirements, the Company has the ability, subject to regulatory
approval and compliance with issuance tests, to issue debt or preferred
securities to meet such requirements, as discussed below. In addition, to the
extent market interest and dividend rates allow, the Company will continue to
refinance higher cost debt and preferred stock prior to maturity.
The Company periodically reviews its capital structure to determine its
future needs for debt and equity financing. Certain agreements and restrictions
limit the amount of mortgage bonds and preferred stock that can be issued by the
Company. Based on the most restrictive applicable tests and available retired
bond credits as of September 30, 1996, and an assumed annual interest rate of
8.5%, the Company could have issued mortgage bonds in the amount of $867
million. The Company was precluded from issuing preferred stock under its
earnings coverage tests at September 30, 1996. The Company has no earnings
coverage limitations on the issuance of preference stock.
The Company also has Commission authorization to effect short-term
borrowings. See Note 4 in the Annual Financial Statements for information on the
Company's short-term borrowing authorizations and bank lines of credit.
FINANCING USES
Due to its financial position, the Company has not paid common stock
dividends since the third quarter of 1994 and is not currently expected to pay
common stock dividends during the remainder of 1996. Declarations of dividends
on common stock are made at the discretion of the Company's Board of Directors.
See Note 7 in the Annual Financial Statements for information on dividend
restrictions.
See Notes 1 and 2 in the Interim Financial Statements regarding the River
Bend rate appeal and litigation with Cajun, including the Cajun Settlement. An
adverse ruling in this appeal could result in approximately $280 million of
potential write-offs (net of tax) and $199 million in refunds of previously
collected revenue. Such write-offs and charges could result in additional
substantial net losses being reported in the future by the Company, with
resulting adverse adjustments to common equity of the Company. Adverse
resolution of these matters could adversely affect the Company's' ability to
obtain financing, which in turn could affect its liquidity and ability to pay
dividends.
24
<PAGE>
SIGNIFICANT FACTORS AND KNOWN TRENDS
COMPETITION AND INDUSTRY CHALLENGES
See "Management's Financial Discussion and Analysis -- Significant Factors
and Known Trends" for the year ended December 31, 1995, for a discussion of the
increasing competitive pressures facing the Company and the electric utility
industry.
On April 24, 1996, the FERC issued Order No. 888 affirming its initial
proposal that all public utilities subject to its jurisdiction provide
comparable wholesale transmission access through the filing of a single open
access tariff. FERC established the minimum conditions that must be included in
such open access tariffs and also set forth certain provisions concerning the
structuring of transactions within power pools, public utility holding
companies, and bilateral coordination arrangements. The rules took effect sixty
days after they were published in the Federal Register. In addition, FERC ruled
that public utilities are entitled to full recovery of prudently incurred costs
allocable to FERC jurisdictional customers. If the costs are stranded by retail
wheeling, public utilities should first seek recovery of these costs from the
appropriate state or local regulators.
Concurrent with the issuance of Order No. 888, FERC issued Order No. 889
which prescribes the requirements and procedures for the implementation and
maintenance of an open access same-time information system by each public
utility. In addition, FERC issued a Notice of Proposed Rulemaking concerning
capacity reservation tariffs as the next phase of FERC's efforts to promote
wholesale competition. On July 9, 1996, Entergy filed, on behalf of its
subsidiaries including the Company, an open access proforma tariff.
On September 20, 1996, FERC issued an order revising the original
requirement in Order No. 889 that open access same-time information service
sites and Standards of Conduct be in place for all transmission providers by
November 1, 1996. The Commission has now scheduled a two-step compliance
procedure where the operation of open access same-time information service sites
must begin on a test basis starting on December 2, 1996, with full commercial
operations and compliance with the Standards of Conduct to begin January 3,
1997.
As discussed in "Management's Financial Discussion And
Analysis -- Significant Factors And Known Trends" for the year ended December
31, 1995, Entergy proposed that FERC serve in a federal "back-stop" role for
wholesale stranded cost recovery in a holding company or other multi-state
situation. FERC's final rule in Order No. 888 recognized that denial of retail
stranded cost recovery by a state regulatory authority could inappropriately
shift the disallowed costs to affiliated operating companies in other states.
FERC encouraged the affected state regulators in such situations to seek a
mutually agreeable approach to this potential problem. If the approach results
in a filing to modify a jurisdictional agreement, FERC could agree with such a
proposal, particularly if other interested parties support the filing. In the
event the state or local regulators cannot reach a consensus, FERC would
ultimately have to resolve the appropriate treatment of such stranded costs.
The Company has initiated discussions with its state and local (Texas
Cities) regulators regarding an orderly transition to a more competitive market
for electricity.
On October 5, 1996, the Company filed a proposal with the LPSC designed to
achieve an orderly transition to retail electric competition in Louisiana, while
protecting certain classes of ratepayers from unfairly bearing the burden of
cost shifting. The proposal does not increase rates for any customer class.
However, the proposal does provide for a universal service charge for customers
that remain connected to the Company's electric facilities and choose to
purchase their electricity from another source. In addition, the proposal
includes a base rate freeze, which would be put into effect for seven years in
the Louisiana areas serviced by the Company. This proposal also allows for the
complete amortization of the remaining plant investment associated with River
Bend over a seven year period.
25
<PAGE>
RETAIL AND WHOLESALE RATE ISSUES
See Note 2 in the Annual Financial Statements for a discussion of the
ongoing trend of regulatory-ordered rate reductions including recent LPSC orders
for the Company.
POTENTIAL CHANGES IN THE ELECTRIC UTILITY INDUSTRY
Refer to "Management's Financial Discussion and Analysis -- Significant
Factors And Known Trends" for the year ended December 31, 1995 for a discussion
of legislative and regulatory developments relating to the potential for retail
competition in the areas served by the Company.
SIGNIFICANT INDUSTRIAL COGENERATION EFFECTS
The development of proposals for cogeneration projects by certain
industrial customers of the Company over the last several years has caused the
Company to develop and secure approval for rate tariffs lower than those
previously approved by the PUCT and the LPSC for such industrial customers. In
certain cases, contracts or special tariffs that use flexible pricing have been
negotiated with industrial customers to keep these customers as the Company's
customers. The contracts and tariffs are not at fully allocated cost-of-service
rates. Although the rates fully recover operating expenses and depreciation,
they provide no more than a minimal return on investment. During the nine months
ended September 30, 1996, kWh sales to industrial customers of the Company at
less than fully allocated cost-of-service rates made up approximately 30% of
total industrial sales.
DEREGULATED UTILITY OPERATIONS
The Company discontinued regulatory accounting principles in 1989 for its
wholesale jurisdiction and steam department and in 1991 for the Louisiana
deregulated portion of River Bend. The recent improving trend in net income from
these operations continued during the three months and nine months ended
September 30, 1996, when the related operating income was $3.3 million and $11.3
million, respectively, compared to $1.2 million for the fiscal year ended 1995.
The improvement in net income from deregulated operations in the three
months and nine months ended September 30, 1996, was principally due to
increased revenues, partially offset by increased income taxes. The future
impact of the deregulated utility operations on the Company's results of
operations and financial position will depend on future operating costs, future
efficiency and availability of generating units, and future market prices for
energy over the remaining life of the assets. The Company expects the
performance of its deregulated utility operations to continue to improve due to
ongoing reductions in operation and maintenance expenses.
PROPERTY TAX EXEMPTIONS
As discussed in "Management's Financial Discussion And
Analysis -- Significant Factors And Known Trends" for the year ended December
31, 1995, River Bend's local property tax exemption will expire in December
1996. The Company is working with tax authorities to determine the method for
calculating the amount of property taxes to be paid when River Bend's local
property tax exemption expires in December 1996.
ENVIRONMENTAL ISSUES
The Company has been notified by the EPA that it has been designated as a
PRP for the clean-up of certain hazardous waste disposal sites. See Note 1 in
the Annual Financial Statements for additional information.
ACCOUNTING ISSUES
Continued Application of SFAS 71 -- As a result of the EPAct, the actions
of regulatory commissions, and other factors, the electric utility industry is
moving toward a combination of competition and a
26
<PAGE>
modified regulatory environment. The Company's financial statements currently
reflect, for the most part, assets and costs based on existing cost-based
ratemaking regulations in accordance with SFAS 71. Continued applicability of
SFAS 71 to the Company's financial statements requires that rates set by an
independent regulator on a cost-of-service basis be charged to and collected
from customers.
In the event that all or a portion of a utility's operations cease to meet
those criteria for various reasons, including deregulation, a change in the
method of regulation, or a change in the competitive environment for the
utility's regulated services, the utility shall discontinue application of SFAS
71 for the relevant portion of its operations by eliminating from the balance
sheet the effects of any actions of regulators recorded as regulatory assets and
liabilities.
The Company's financial statements continue to follow SFAS 71 for their
regulated operations, except for those portions of the Company's business
described in "Deregulated Utility Operations" above.
Accounting for Decommissioning Costs -- In February 1996, the FASB issued
an exposure draft of a proposed SFAS addressing the accounting for
decommissioning costs of nuclear generating units as well as liabilities related
to the closure and removal of all long-lived assets. See Note 1 in the Interim
Financial Statements for a discussion of proposed changes in the accounting for
decommissioning/closure costs and the potential impact of these changes on the
Company.
27
<PAGE>
RESULTS OF OPERATIONS
NET INCOME
Net income increased for the three months ended September 30, 1996,
primarily due to the reversal of an accrual for the Cajun-River Bend litigation.
In September 1994, the Company recorded a reserve for the anticipated costs of
the Cajun-River Bend litigation. Based on the Bankruptcy Court's approval of the
settlement (refer to Note 1 in the Interim Financial Statements ), the
litigation accrual was reversed resulting in miscellaneous income. Excluding the
effects of the reversal of the litigation reserve, net income for the three
months ended September 30, 1996 would have decreased approximately 11% due to an
increase in other operation and maintenance expenses and other interest expense.
Net income decreased for the nine months ended September 30, 1996, due to
the $174 million net of tax write-off of River Bend rate deferrals required by
the adoption of SFAS 121. Excluding the write-off and the third quarter reversal
of the Cajun-River Bend litigation accrual, net income for the nine months ended
September 30, 1996, would have increased due to reduced other operation and
maintenance expenses.
Significant factors affecting the results of operations and causing
variances between the three months and nine months ended September 30, 1996, and
1995 are discussed under "Revenues and Sales," "Expenses," and "Other" below.
REVENUES AND SALES
The changes in electric operating revenues for the three months and nine
months ended September 30, 1996, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DESCRIPTION INCREASE/(DECREASE) INCREASE/(DECREASE)
---------------------------------------------- ------------------- -------------------
<S> <C> <C>
Change in base revenues....................... $ (11.2) $ (30.4)
Fuel cost recovery............................ 44.1 135.4
Sales volume/weather.......................... 13.8 60.2
Other revenue (including unbilled)............ 4.0 (8.3)
Sales for resale.............................. (3.6) (21.3)
------ ------
Total............................... $ 47.1 $ 135.6
====== ======
</TABLE>
Electric operating revenues increased for the three months and nine months
ended September 30, 1996, as a result of higher fuel adjustment revenues, which
do not affect net income, increased number of customers, and increased customer
usage. These increases were partially offset by a rate reduction ordered for
Texas in 1995 and lower sales for resale to associated companies, due to
changing generation availability and requirements among the operating companies
of Entergy.
Gas operating revenues and steam operating revenues increased for the three
months and nine months ended September 30, 1996, primarily due to higher fuel
prices and increased usage.
EXPENSES
Operating expenses increased for the three months and nine months ended
September 30, 1996, as a result of higher fuel expenses, including purchased
power, and higher income taxes. Fuel and purchased power expenses, taken
together, increased because of higher gas prices. In addition, increased energy
requirements resulting from higher energy sales contributed to the increase in
fuel and purchased power for the nine months ended September 30, 1996. Income
taxes increased primarily due to higher pre-tax income, excluding the net effect
of the write-off of River Bend rate deferrals discussed below. For the three
months ended September 30, 1996, other operation and maintenance expenses
increased as a result of increased litigation reserves and higher lease expenses
relating to computer equipment. These increases were partially offset by lower
payroll-related expenses due to employee
28
<PAGE>
attrition. Other operation and maintenance expenses decreased for the nine
months ended September 30, 1996, principally due to lower payroll-related
expenses associated with restructuring programs recorded in 1995.
Other interest charges increased for the three months and nine months ended
September 30, 1996 due to interest charges recorded in connection with a fuel
cost refund.
OTHER
Other income increased for the three months ended September 30, 1996, due
to the reversal of the Cajun-River Bend litigation accrual, as discussed above.
Other income decreased for the nine months ended September 30, 1996,
primarily due to the write-off of River Bend rate deferrals pursuant to the
adoption of SFAS 121, which became effective January 1, 1996. See Note 2 in the
Interim Financial Statements for further discussion. This decrease was partially
offset by the reversal of the Cajun-River Bend litigation accrual, as discussed
above.
---------------------
Investors are cautioned that forward-looking statements contained herein
with respect to the revenues, earnings, competitive performance, or other
prospects for the business of the Company may be influenced by factors that
could cause actual outcomes and results to be materially different than
projected. Such factors include, but are not limited to, the effects of weather,
the performance of generating units, fuel prices and availability, regulatory
decisions and the effects of changes in law, capital spending requirements, the
evolution of competition, changes in accounting standards, and other factors.
---------------------
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer will be treated as a
subsidiary of the Company and, accordingly, the accounts of the Issuer will be
included in the consolidated financial statements of the Company. The Preferred
Securities will be presented as a separate line item in the consolidated balance
sheet of the Company entitled "Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely Company Junior
Subordinated Deferrable Debentures" and appropriate disclosures about the
Preferred Securities, the Guarantee and the Junior Subordinated Debentures will
be included in the notes to the consolidated financial statements. For financial
reporting purposes, the Company will record Distributions payable on the
Preferred Securities as an expense.
USE OF PROCEEDS
All of the proceeds from the sale of the Preferred Securities will be
invested by the Issuer in the Junior Subordinated Debentures. The Company
intends to use the proceeds from the sale of such Junior Subordinated
Debentures, together with general corporate funds, to redeem shares of its
outstanding preferred stock. The series of preferred stock that may be redeemed
are as follows: $35 million in aggregate par value of the Company's 9.96%
Preferred Stock and $50 million in aggregate par value of the Company's 8.52%
Preferred Stock.
DESCRIPTION OF THE PREFERRED SECURITIES
Pursuant to the terms of the Trust Agreement, the Issuer will issue the
Preferred Securities and the Common Securities. The Preferred Securities will
represent preferred undivided beneficial interests in the assets of the Issuer
and the holders thereof will be entitled to a preference in certain
circumstances with respect to Distributions and amounts payable on redemption or
liquidation over the Common Securities of the Issuer, as well as other benefits
as described in the Trust Agreement. This summary of certain provisions of the
Trust Agreement does not purport to be complete and is subject to, and is
qualified in its
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entirety by reference to, all the provisions of the Trust Agreement, including
the definitions therein of certain terms, and the Trust Indenture Act. Wherever
particular defined terms of the Trust Agreement are referred to, such defined
terms are incorporated herein by reference. The form of the Trust Agreement has
been filed as an exhibit to the Registration Statement of which this Prospectus
forms a part.
GENERAL
The Preferred Securities of the Issuer will rank pari passu and payments
will be made thereon pro rata with the Common Securities of the Issuer except as
described under "-- Subordination of Common Securities". Legal title to the
Junior Subordinated Debentures will be held by the Property Trustee in trust for
the benefit of the holders of the Preferred Securities and Common Securities.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement, taken
together, fully, irrevocably and unconditionally guaranteed all of the Issuer's
obligations under the Preferred Securities.
DISTRIBUTIONS
Distributions on each Preferred Security will be payable at the rate of
8.75% per annum of the stated Liquidation Preference Amount of $25, payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of each
year. Distributions that are in arrears for more than one quarter will
accumulate additional Distributions thereon at the rate of 8.75% per annum
thereof, compounded quarterly ("Additional Amounts"). The term "Distributions"
as used herein shall include any such Additional Amounts. Distributions will
accumulate from January 28, 1997, the date of original issuance. The first
Distribution payment date for the Preferred Securities will be March 31, 1997.
The amount of Distributions payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months.
So long as no Debenture Event of Default under the Indenture has occurred
and is continuing, the Company has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time and from
time to time, for one or more Extension Periods, each of which, together with
all previous and further extensions of such Extension Period prior to its
termination, may not exceed 20 consecutive quarters and may not extend beyond
the maturity of the Junior Subordinated Debentures. As a consequence of any such
election, quarterly Distributions on the Preferred Securities would be deferred
(but would continue to accumulate additional Distributions thereon at the rate
of 8.75% per annum, compounded quarterly) by the Issuer during any such
Extension Period. In the event that the Company exercises this right, during any
such Extension Period, the Company may not (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities (including other Indenture Debentures (as defined herein)) that
rank pari passu with or junior in interest to the Junior Subordinated Debentures
or make any guarantee payments with respect to the foregoing (other than (a)
dividends or distributions in common stock of the Company and (b) payments under
the Guarantee and all other guarantees issued by the Company with respect to any
preferred securities issued by any trust, partnership or other entity which is a
financing vehicle of the Company). Upon the termination of any such Extension
Period and the payment of all amounts then due, the Company may elect to begin a
new Extension Period, subject to the above requirements. See "Description of the
Junior Subordinated Debentures -- Option to Extend Interest Payment Period" and
"Certain United States Federal Income Tax Considerations -- Potential Extension
of Interest Payment Period and Original Issue Discount".
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
In the event that any date on which Distributions are payable on the
Preferred Securities is not a Business Day (as defined below), payment of the
Distributions payable on such date will be made on the next succeeding day that
is a Business Day (and without any interest or other payment in respect of any
such delay) except that, if such Business Day is in the next succeeding calendar
year, payment of such
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Distributions shall be made on the immediately preceding Business Day, in each
case with the same force and effect as if made on such date (each date on which
Distributions are payable in accordance with the foregoing, a "Distribution
Date"). A "Business Day" shall mean any day other than a Saturday or a Sunday,
or a day on which banking institutions in The City of New York are authorized or
required by law or executive order to remain closed or a day on which the
corporate trust office of the Property Trustee or the Debenture Trustee is
closed for business.
It is anticipated that the revenue of the Issuer available for distribution
to holders of its Preferred Securities will be limited to payments under the
Junior Subordinated Debentures in which the Issuer will invest the proceeds from
the issuance and sale of its Preferred Securities and its Common Securities. See
"Description of the Junior Subordinated Debentures". If the Company does not
make interest payments on the Junior Subordinated Debentures, the Property
Trustee will not have funds available to pay Distributions on the Preferred
Securities. The payment of Distributions (if and to the extent the Issuer has
funds available for the payment of such Distributions and cash sufficient to
make such payments) is guaranteed by the Company on a limited basis as set forth
herein under "Description of the Guarantee".
Distributions on the Preferred Securities of the Issuer will be payable to
the holders of record thereof as they appear on the register of the Issuer on
the relevant record dates, which, as long as the Preferred Securities remain in
book-entry only form, will be one Business Day prior to the relevant
Distribution Date. Subject to any applicable laws and regulations and the
provisions of the Trust Agreement, each such payment will be made as described
under "-- Book-Entry Issuance". In the event any Preferred Securities are not in
book-entry only form, the relevant record date for such Preferred Securities
shall be the date 15 days prior to the relevant Distribution Date.
REDEMPTIONS
Mandatory Redemption. Upon the repayment or redemption, in whole or in
part, of the Junior Subordinated Debentures, whether at maturity or upon earlier
redemption as provided in the Indenture, the proceeds from such repayment or
redemption shall be applied by the Property Trustee to redeem a Like Amount of
the Preferred Securities, upon not less than 30 nor more than 60 days notice to
each holder of Preferred Securities at its registered address, at a Redemption
Price equal to the aggregate Liquidation Preference Amount of the Preferred
Securities plus accumulated and unpaid Distributions thereon to the Redemption
Date.
Optional Redemption of Junior Subordinated Debentures. The Company will
have the right to redeem the Junior Subordinated Debentures on or after January
28, 2002, in whole at any time or in part from time to time, at a redemption
price equal to the accrued and unpaid interest on the Junior Subordinated
Debentures so redeemed to the date fixed for redemption plus 100% of the
principal amount thereof and thereby cause a mandatory redemption of a Like
Amount of Preferred Securities at the Redemption Price. See "Description of the
Junior Subordinated Debentures -- Redemption."
Special Event Redemption or Distribution of Junior Subordinated
Debentures. -- If a Special Event in respect of the Preferred Securities and
Common Securities shall occur and be continuing, the Company has the right to
redeem the Junior Subordinated Debentures at any time in whole (but not in part)
at a redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption plus 100%
of the principal amount thereof, and thereby cause a mandatory redemption of the
Preferred Securities and Common Securities in whole (but not in part) at the
Redemption Price within 90 days following the occurrence of such Special Event.
Whether or not a Special Event has occurred, the Company has the right, at
any time, to terminate the Issuer and, after satisfaction of liabilities to
creditors of the Issuer, if any, as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer. Under current
United States federal income tax law, provided the Issuer is treated as a
"grantor trust" at the time of such distribution, such distribution would not be
a taxable event to holders of the Preferred Securities. See "Certain United
States Federal Income Tax Considerations -- Receipt of the Junior Subordinated
Debentures or Cash
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Upon Liquidation of the Issuer". If the Company does not elect any of the
options described above, the Preferred Securities will remain outstanding and,
in the event a Tax Event has occurred and is continuing, Additional Interest (as
described under "Description of the Junior Subordinated Debentures -- Certain
Covenants of the Company") will be payable on the Junior Subordinated
Debentures. See "-- Liquidation Distribution Upon Termination", "Description of
the Junior Subordinated Debentures -- Redemption" and "-- Distribution of the
Junior Subordinated Debentures".
"Tax Event" means the receipt by the Issuer or the Company of an Opinion of
Counsel experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein affecting taxation, or as a
result of any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities by the Issuer under the Trust Agreement,
there is more than an insubstantial risk that (i) the Issuer is, or will be
within 90 days of the date thereof, subject to United States Federal income tax
with respect to income received or accrued on the Junior Subordinated
Debentures, (ii) interest payable by the Company on the Junior Subordinated
Debentures is not, or within 90 days of the date thereof, will not be,
deductible by the Company, in whole or in part, for United States Federal income
tax purposes, or (iii) the Issuer is, or will be within 90 days of the date
thereof, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
"Investment Company Event" means the occurrence of a change in law or
regulation or a change in interpretation or application of law or regulation by
any legislative body, court, governmental agency or regulatory authority (a
"Change in 1940 Act Law") to the effect that the Issuer is or will be considered
an "investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which Change in
1940 Act Law becomes effective on or after the date of original issuance of the
Preferred Securities.
"Special Event" means the occurrence of a Tax Event or an Investment
Company Event.
"Like Amount" means (i) with respect to a redemption of any Preferred
Securities, Preferred Securities and Common Securities having a Liquidation
Preference Amount equal to that portion of the principal amount of Junior
Subordinated Debentures to be contemporaneously redeemed in accordance with the
Indenture and the proceeds of which will be used to pay the Redemption Price of
such Preferred Securities and Common Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of the Preferred
Securities in connection with a termination and liquidation of the Issuer,
Junior Subordinated Debentures having a principal amount equal to the
Liquidation Preference Amount of the Preferred Securities of the holder to whom
such Junior Subordinated Debentures are distributed.
"Liquidation Preference Amount" means the stated amount of $25 per
Preferred Security and Common Security.
After the liquidation date fixed for any distribution of Junior
Subordinated Debentures for the Preferred Securities (i) the Preferred
Securities will no longer be deemed to be outstanding, (ii) DTC or its nominee,
as the record holder of the Preferred Securities, will receive a registered
global certificate or certificates representing the Junior Subordinated
Debentures to be delivered upon such distribution, (iii) the Company will use
its reasonable efforts to list the Junior Subordinated Debentures on the NYSE or
such other exchanges or other organizations, if any, on which the Preferred
Securities are then listed or traded and (iv) any certificates representing the
Preferred Securities not held by DTC or its nominee will be deemed to represent
the Junior Subordinated Debentures having a principal amount equal to the stated
liquidation preference of the Preferred Securities, and bearing accrued and
unpaid interest in an amount equal to the accrued and unpaid Distributions on
the Preferred Securities until such certificates are presented to the
Administrative Trustees or their agent for transfer or reissuance.
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There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Preferred Securities if a termination and liquidation of the
Issuer were to occur. Accordingly, the Preferred Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive
upon termination and liquidation of the Issuer, may trade at a discount to the
price that the investor paid to purchase the Preferred Securities offered
hereby.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Preferred
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that the Issuer has funds on hand available
for the payment of such Redemption Price. See also "-- Subordination of Common
Securities".
If the Issuer gives a notice of redemption in respect of the Preferred
Securities, then, by 12:00 noon, New York City time, on the Redemption Date, to
the extent funds are available, the Property Trustee will deposit irrevocably
with DTC funds sufficient to pay the applicable Redemption Price and will give
DTC irrevocable instructions and authority to pay the Redemption Price to the
holders of such Preferred Securities. See "-- Book-Entry Issuance". If the
Preferred Securities are no longer in book-entry form, the Issuer, to the extent
funds are available, will irrevocably deposit with the paying agent for the
Preferred Securities funds sufficient to pay the applicable Redemption Price and
will give such paying agent irrevocable instructions and authority to pay the
Redemption Price to the holders thereof upon surrender of their certificates
evidencing such Preferred Securities. Notwithstanding the foregoing,
Distributions payable on or prior to the Redemption Date for any Preferred
Securities called for redemption shall be payable to the holders of such
Preferred Securities as of the relevant record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
deposited as required, then upon the date of such deposit, all rights of the
holders of such Preferred Securities so called for redemption will cease, except
the right of the holders of such Preferred Securities to receive the Redemption
Price, but without interest on such Redemption Price, and such Preferred
Securities will cease to be outstanding. In the event that any date fixed for
redemption of Preferred Securities is not a Business Day, then payment of the
Redemption Price payable on such date will be made on the next succeeding day
which is a Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day falls in the next succeeding
calendar year, such payment will be made on the immediately preceding Business
Day. In the event that payment of the Redemption Price in respect of Preferred
Securities called for redemption is improperly withheld or refused and not paid
either by the Issuer or by the Company pursuant to the Guarantee as described
under "Description of the Guarantee", Distributions on the Preferred Securities
will continue to accrue at the then applicable rate, from the Redemption Date
originally established by the Issuer for such Preferred Securities to the date
such Redemption Price is actually paid, in which case the actual payment date
will be the date fixed for redemption for purposes of calculating the Redemption
Price.
Subject to applicable law (including, without limitation, United States
Federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by tender, in the
open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Junior Subordinated Debentures to holders of Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register for the Preferred Securities as of the relevant record date,
which shall be one Business Day prior to the relevant Redemption Date or
liquidation date, as applicable; provided, however, that in the event that the
Preferred Securities are not in book-entry form, the relevant record date for
the Preferred Securities shall be the date 15 days prior to the Redemption Date
or liquidation date, as applicable.
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If less than all of the Preferred Securities and Common Securities are to
be redeemed on a Redemption Date, then the aggregate Liquidation Preference
Amount of such Preferred Securities and Common Securities to be redeemed shall
be allocated pro rata among the Preferred Securities and the Common Securities.
The particular Preferred Securities to be redeemed shall be selected on a pro
rata basis not more than 60 days prior to the Redemption Date by the Property
Trustee from the outstanding Preferred Securities not previously called for
redemption, by such method as the Property Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
(equal to $25 or an integral multiple of $25 in excess thereof) of the
Liquidation Preference Amount of Preferred Securities of a denomination larger
than $25. The Property Trustee shall promptly notify the transfer agent and
registrar in writing of the Preferred Securities selected for redemption and, in
the case of any Preferred Securities selected for partial redemption, the
aggregate Liquidation Preference Amount thereof to be redeemed. For all purposes
of the Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of Preferred Securities shall relate, in the case of
any Preferred Securities redeemed or to be redeemed only in part, to the portion
of the aggregate Liquidation Preference Amount of Preferred Securities which has
been or is to be redeemed.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions (including Additional Amounts, if applicable) on,
and the Redemption Price of, the Preferred Securities and Common Securities, as
applicable, shall be made pro rata based on the Liquidation Preference Amount of
such Preferred Securities and Common Securities; provided, however, that if on
any Distribution Date or Redemption Date, any Event of Default resulting from a
Debenture Event of Default shall have occurred and be continuing, no payment of
any Distribution (including Additional Amounts, if applicable) on, or Redemption
Price of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
(including Additional Amounts, if applicable) on all of the outstanding
Preferred Securities for all Distribution periods terminating on or prior
thereto, or in the case of payment of the Redemption Price the full amount of
such Redemption Price on all of the outstanding Preferred Securities, shall have
been made or provided for, and all funds available to the Property Trustee shall
first be applied to the payment in full in cash of all Distributions (including
Additional Amounts, if applicable) on, or Redemption Price of, the Preferred
Securities then due and payable.
In the case of any Event of Default resulting from a Debenture Event of
Default, the Company, as holder of the Common Securities, will be deemed to have
waived any right to act with respect to any such Event of Default under the
Trust Agreement until the effect of all such Events of Default with respect to
the Preferred Securities have been cured, waived or otherwise eliminated. Until
any such Events of Default under the Trust Agreement with respect to the
Preferred Securities have been so cured, waived or otherwise eliminated, the
Property Trustee shall act solely on behalf of the holders of the Preferred
Securities and not on behalf of the Company as holder of the Common Securities,
and only the holders of the Preferred Securities will have the right to direct
the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
Pursuant to the Trust Agreement, the Issuer shall automatically terminate
upon expiration of its term and shall be terminated on the first to occur of:
(i) the occurrence of certain events of bankruptcy, dissolution or liquidation
of the Company; (ii) the delivery of written direction to the Property Trustee
to terminate the Issuer (which direction is optional and wholly within the
discretion of the Company as Depositor of the Issuer) (see
"-- Redemptions -- Special Event Redemption or Distribution of Junior
Subordinated Debentures"); (iii) the redemption of all of the Preferred
Securities as described under "-- Redemptions -- Mandatory Redemption"; and (iv)
an order for the termination of the Issuer shall have been entered by a court of
competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (iv)
above, the Issuer shall be liquidated by the Issuer Trustees as expeditiously as
the Issuer Trustees determine to be possible by
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distributing, after satisfaction of liabilities to creditors of the Issuer, if
any, as provided by applicable law, to the holders of such Preferred Securities
and Common Securities a Like Amount of the Junior Subordinated Debentures,
unless such distribution is determined by the Property Trustee not to be
practical, in which event the holders will be entitled to receive out of the
assets of the Issuer available for distribution to holders, after satisfaction
of liabilities to creditors of the Issuer, if any, as provided by applicable
law, an amount equal to, in the case of holders of Preferred Securities, the
aggregate of the Liquidation Preference Amount plus accumulated and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). See "Description of the Junior Subordinated
Debentures -- Distribution of the Junior Subordinated Debentures". If such
Liquidation Distribution can be paid only in part because the Issuer has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Issuer on the Preferred
Securities shall be paid on a pro rata basis. The holder(s) of the Common
Securities will be entitled to receive distributions upon any such liquidation
pro rata with the holders of the Preferred Securities, except that if a
Debenture Event of Default has occurred and is continuing, the Preferred
Securities shall have a priority over the Common Securities.
LIQUIDATION VALUE
The amount payable on the Preferred Securities in the event of any
liquidation of the Issuer is $25 per Preferred Security plus accumulated and
unpaid Distributions, unless, subject to certain exceptions, in connection with
such liquidation, the Junior Subordinated Debentures are distributed to the
holders of the Preferred Securities. See "-- Liquidation Distribution upon
Termination".
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under the
Trust Agreement (an "Event of Default") (whatever the reason for such Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) the occurrence of a Debenture Event of Default under the Indenture
(see "Description of the Junior Subordinated Debentures -- Debenture Events
of Default"); or
(ii) default by the Issuer in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period of
30 days; or
(iii) default by the Issuer in the payment of any Redemption Price of
any Preferred Security or Common Security when it becomes due and payable;
or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Issuer Trustees in the Trust Agreement
(other than a covenant or warranty a default in the performance of which or
the breach of which is dealt with in clause (ii) or (iii) above), and
continuation of such default or breach for a period of 60 days after there
has been given, by registered or certified mail, to the defaulting Issuer
Trustee or Trustees by the holders of at least 10% in aggregate Liquidation
Preference Amount of the outstanding Preferred Securities, a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" under the Trust
Agreement; or
(v) the occurrence of certain events of bankruptcy with respect to the
Issuer.
Within five Business Days after the occurrence of any Event of Default
known to the Property Trustee, the Property Trustee shall transmit notice of
such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default shall have been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
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If a Debenture Event of Default with respect to the Junior Subordinated
Debentures has occurred and is continuing, the Preferred Securities shall have a
preference over the Common Securities upon termination of the Issuer as
described above. See "-- Liquidation Distribution upon Termination".
REMOVAL OF ISSUER TRUSTEES
Unless a Debenture Event of Default with respect to the Junior Subordinated
Debentures shall have occurred and be continuing, any Issuer Trustee may be
removed at any time by the holder of the Common Securities. If such a Debenture
Event of Default has occurred and is continuing, the Property Trustee and the
Delaware Trustee may be removed at such time by the holders of a majority in
aggregate Liquidation Preference Amount of the outstanding Preferred Securities.
In no event will the holders of the Preferred Securities have the right to vote
to appoint, remove or replace the Administrative Trustees, which voting rights
are vested exclusively in the Company as the holder of the Common Securities. No
resignation or removal of an Issuer Trustee and no appointment of a successor
trustee shall be effective until the acceptance of appointment by a successor
trustee in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the applicable Trust
Property may at the time be located, the Company, as the holder of the Common
Securities, and the Property Trustee shall have the power to appoint one or more
persons either to act as a co-trustee, jointly with the Property Trustee, of all
or any part of such Trust Property, or to act as separate trustee of any such
property, in either case with such powers as may be provided in the instrument
of appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. In case a Debenture Event of Default with
respect to the Junior Subordinated Debentures has occurred and is continuing,
the Property Trustee alone shall have power to make such appointment.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any entity into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any entity resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
entity succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee under the Trust Agreement,
provided such entity shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE ISSUER
The Issuer may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below or as otherwise described in the Trust Agreement. The Issuer
may, at the request of the Company, with the consent of the Administrative
Trustees and without the consent of the holders of the Preferred Securities,
merge with or into, consolidate, amalgamate, be replaced by or convey, transfer
or lease its properties and assets substantially as an entirety to a trust
organized as such under the laws of any State; provided, that (i) such successor
entity either (a) expressly assumes all of the obligations of the Issuer with
respect to the Preferred Securities or (b) substitutes for the Preferred
Securities other securities (the "Successor Securities") so long as the
Successor Securities rank the same as the Preferred Securities rank in priority
with respect to distributions and payments upon liquidation, redemption and
otherwise, (ii) the Company expressly appoints a trustee of such successor
entity possessing substantially the same powers and duties as the Property
Trustee as the holder of the Junior Subordinated Debentures, (iii) the Successor
Securities are listed or traded, or any Successor Securities will be listed or
traded upon notification of issuance, on any national securities exchange or
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other organization on which the Preferred Securities are then listed, if any,
(iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Preferred Securities (including any
Successor Securities) in any material respect, (vi) such successor entity has a
purpose substantially identical to that of the Issuer, (vii) prior to such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease,
the Company has received an opinion from independent counsel to the Issuer
experienced in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect, and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Issuer nor such successor entity will be required
to register as an investment company under the Investment Company Act and (viii)
the Company or any permitted successor or assignee owns all of the common
securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Issuer shall not, except
with the consent of holders of 100% in aggregate Liquidation Preference Amount
of the Preferred Securities, consolidate, amalgamate, merge with or into, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger or replacement would cause the Issuer or the successor
entity to be classified as other than a "grantor trust" for United States
Federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of the
Guarantee -- Amendments and Assignment" and as otherwise required by law and the
Trust Agreement, the holders of the Preferred Securities will have no voting
rights.
The Trust Agreement may be amended from time to time by the Company and the
Administrative Trustees, without the consent of the holders of the Preferred
Securities (i) to cure any ambiguity, correct or supplement any provisions in
the Trust Agreement which may be inconsistent with any other provision, or to
make any other provisions with respect to matters or questions arising under the
Trust Agreement, that shall not be inconsistent with the other provisions of the
Trust Agreement, (ii) to modify, eliminate or add to any provisions of the Trust
Agreement to such extent as shall be necessary to ensure that the Issuer will be
classified for United States Federal income tax purposes as a grantor trust at
all times that any of its Preferred Securities and Common Securities are
outstanding or to ensure that the Issuer will not be required to register as an
"investment company" under the Investment Company Act, or (iii) to effect the
acceptance of appointment by a successor Issuer Trustee; provided, however, that
in the case of clause (ii), such action shall not adversely affect in any
material respect the interests of any holder of the Preferred Securities or
Common Securities, and, in the case of clause (i), any amendments of the Trust
Agreement shall become effective when notice thereof is given to the holders of
Preferred Securities and Common Securities. The Trust Agreement may be amended
by the Administrative Trustees and the Company with (i) the consent of holders
representing a majority (based upon aggregate Liquidation Preference Amount) of
the outstanding Preferred Securities and Common Securities and (ii) receipt by
the Issuer Trustees of an Opinion of Counsel to the effect that such amendment
or the exercise of any power granted to the Issuer Trustees in accordance with
such amendment will not affect the Issuer's status as a grantor trust for United
States Federal income tax purposes or the Issuer's exemption from status of an
"investment company" under the Investment Company Act, provided that without the
consent of each holder of the Preferred Securities and Common Securities, the
Trust Agreement may not be amended to (i) change the amount or timing of any
Distribution on the Preferred Securities and Common Securities or otherwise
adversely affect the amount of any Distribution required to be made in respect
of the Preferred Securities and Common Securities as of a specified date or (ii)
restrict the right
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of holders of the Preferred Securities and Common Securities to institute suit
for the enforcement of any such payment on or after such date as described
below.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
such Junior Subordinated Debentures, (ii) waive any past default that is
waiveable under Section 813 of the Indenture, (iii) exercise any right to
rescind or annul a declaration that the principal of all the Junior Subordinated
Debentures shall be due and payable or (iv) consent to any amendment,
modification or termination of the Indenture or the Junior Subordinated
Debentures, where such consent shall be required, without, in each case,
obtaining the prior approval of the holders of a majority in aggregate
Liquidation Preference Amount of all outstanding Preferred Securities; provided,
however, that where a consent under the Indenture would require the consent of
each holder of Junior Subordinated Debentures affected thereby, no such consent
shall be given by the Property Trustee without the prior written consent of each
holder of the Preferred Securities. The Issuer Trustees shall not revoke any
action previously authorized or approved by a vote of the Preferred Securities
except by subsequent vote of the holders of the Preferred Securities. The
Property Trustee shall notify all holders of Preferred Securities of any notice
of default with respect to the Junior Subordinated Debentures. In addition to
obtaining the foregoing approvals of the holders of the Preferred Securities,
prior to taking any of the foregoing actions, the Issuer Trustees shall obtain
an Opinion of Counsel experienced in such matters to the effect that the Issuer
will be classified as a "grantor trust" and not as an association taxable as a
corporation for United States Federal income tax purposes on account of such
action.
If the Property Trustee fails to enforce its rights under the Junior
Subordinated Debentures or the Trust Agreement, a holder of Preferred Securities
may institute a legal proceeding directly against the Company to enforce the
Property Trustee's rights with respect to the Junior Subordinated Debentures or
the Trust Agreement, to the fullest extent permitted by law, without first
instituting any legal proceeding against the Property Trustee or any other
person. Notwithstanding the foregoing, a holder of Preferred Securities may
directly institute a proceeding for enforcement of payment to such holder of
principal of or interest on the Junior Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Preference Amount of the
Preferred Securities of such holder on or after the due dates specified in the
Junior Subordinated Debentures. See "Description of the Guarantee".
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of Preferred Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for the Issuer to redeem and cancel the Preferred Securities in accordance with
the Trust Agreement.
Notwithstanding that holders of Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities that are owned by the Company, the Issuer Trustee or any affiliate of
the Company or any Issuer Trustees, shall, for purposes of such vote or consent,
be treated as if they were not outstanding.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities shall be made to DTC, which
shall credit the relevant accounts at DTC on the applicable Distribution Dates
or, if any Preferred Securities are not held by DTC, such payments shall be made
by check mailed to the address of the holder entitled thereto as such address
shall appear on the Securities Register. The paying agent (the "Paying Agent")
shall initially be the Property Trustee and any co-paying agent chosen by the
Property Trustee and acceptable to the Administrative Trustees and the Company.
The Paying Agent shall be permitted to resign as Paying Agent upon 30 days'
written notice to the Administrative Trustees and the Company. In the event that
the
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Property Trustee shall no longer be the Paying Agent, the Administrative
Trustees shall appoint a successor to act as Paying Agent (which shall be a bank
or trust company acceptable to the Property Trustee and the Company).
BOOK-ENTRY ISSUANCE
DTC will act as securities depositary for the Preferred Securities. The
Preferred Securities will be issued only as fully-registered securities
registered in the name of Cede & Co. (DTC's nominee). One or more
fully-registered global certificates will be issued for the Preferred
Securities, representing the aggregate total number of the Preferred Securities,
and will be deposited with DTC.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the NYSE, the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain custodial
relationships with Direct Participants, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Commission.
Purchases of Preferred Securities within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Preferred
Securities on DTC's records. The ownership interest of each actual purchaser of
each Preferred Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Preferred Securities.
Transfers of ownership interests in the Preferred Securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in Preferred Securities, except in the event that use
of the book-entry system for the Preferred Securities is discontinued.
To facilitate subsequent transfers, all of the Preferred Securities
deposited by the Participants with DTC are registered in the name of DTC's
nominee, Cede & Co. The deposit of Preferred Securities with DTC and their
registration in the name of Cede & Co. effect no change in beneficial ownership.
DTC has no knowledge of the actual Beneficial Owners of the Preferred
Securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Preferred Securities are credited, which may or may not
be the Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. as the registered holder of
the Preferred Securities. If less than all of the Preferred Securities are being
redeemed, DTC's current practice is to determine by lot the amount of the
interest of each Direct Participant to be redeemed.
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Although voting with respect to the Preferred Securities is limited to the
holders of record of the Preferred Securities, in those instances in which a
vote is required, neither DTC nor Cede & Co. will itself consent or vote with
respect to Preferred Securities. Under its usual procedures, DTC would mail an
omnibus proxy (the "Omnibus Proxy") to the Issuer as soon as possible after the
record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights
to those Direct Participants to whose accounts such Preferred Securities are
credited on the record date (identified in a listing attached to the Omnibus
Proxy).
Distribution payments on the Preferred Securities will be made to DTC.
DTC's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payments on such
payment date. Payments by Participants to Beneficial Owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participant and not of DTC, the Property Trustee, the Issuer or the
Company, subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment of Distributions to DTC is the responsibility of the
Issuer, disbursement of such payments to Direct Participants is the
responsibility of DTC, and disbursements of such payments to the Beneficial
Owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depositary with
respect to the Preferred Securities at any time by giving reasonable notice to
the Issuer and the Company. In the event that a successor securities depositary
is not obtained, definitive Preferred Security certificates representing the
Preferred Securities are required to be printed and delivered. The Company, at
its option, may decide to discontinue use of the system of book-entry transfers
through DTC (or a successor depositary). After a Debenture Event of Default, the
holders of a majority in aggregate Liquidation Preference Amount of Preferred
Securities may determine to discontinue the system of book-entry transfers
through DTC. In any such event, definitive certificates for the Preferred
Securities will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Issuer and the Company believe to be
accurate, but the Issuer and the Company assume no responsibility for the
accuracy thereof. Neither the Issuer nor the Company has any responsibility for
the performance by DTC or its Participants of their respective obligations as
described herein or under the rules and procedures governing their respective
operations.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Preferred Securities.
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Issuer, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Issuer will not be required to register or cause to be registered
the transfer of Preferred Securities after such Preferred Securities have been
called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and, after such Event of Default, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Property
Trustee is under no obligation to exercise any of the powers vested in it by the
Trust Agreement at the request of any holder of Preferred Securities unless it
is offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby. If no Event of Default has occurred and is continuing
and the Property Trustee is required to decide between alternative causes of
action, construe ambiguous provisions in the Trust Agreement or is unsure of the
application of any provision of the Trust Agreement, and the matter is not one
on which holders of Preferred Securities are entitled under the Trust Agreement
to vote, then the Property Trustee shall take such action as is directed by the
Company and if not so directed, shall take such action as it deems advisable and
in the best interests of the holders of the Preferred Securities and
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the Common Securities and will have no liability except for its own bad faith,
negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Issuer in such a way that the Issuer will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified other than as a "grantor trust" for United
States Federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
Federal income tax purposes. In this connection, the Company and the
Administrative Trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust of the Issuer or the Trust Agreement,
that the Company and the Administrative Trustees determine in their discretion
to be necessary or desirable for such purposes, as long as such action does not
materially adversely affect the interests of the holders of the Preferred
Securities.
Holders of the Preferred Securities have no preemptive or similar rights.
The Issuer may not borrow money or issue debt or mortgage or pledge any of
its assets.
DESCRIPTION OF THE GUARANTEE
The Guarantee will be executed and delivered by the Company concurrently
with the issuance by the Issuer of the Preferred Securities for the benefit of
the holders from time to time of the Preferred Securities. The Bank of New York
will act as indenture trustee (the "Guarantee Trustee") under the Guarantee for
the purposes of compliance with the Trust Indenture Act, and the Guarantee will
be qualified as an Indenture under the Trust Indenture Act. This summary of
certain provisions of the Guarantee does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Guarantee Agreement, including the definitions therein of certain terms,
and the Trust Indenture Act. The form of the Guarantee has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Preferred Securities.
GENERAL
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Preferred Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that the Issuer may have or assert other than
the defense of payment. The following payments with respect to the Preferred
Securities, to the extent not paid by or on behalf of the Issuer (the "Guarantee
Payments"), will be subject to the Guarantee: (i) any accumulated and unpaid
Distributions required to be paid on the Preferred Securities, to the extent
that the Issuer has funds on hand available therefor, (ii) the Redemption Price
with respect to any Preferred Securities called for redemption to the extent
that the Issuer has funds on hand available therefor, or (iii) upon a voluntary
or involuntary dissolution, winding-up or liquidation of the Issuer (unless the
Junior Subordinated Debentures are distributed to holders of the Preferred
Securities), the lesser of (a) the aggregate of the Liquidation Preference
Amount and all accumulated and unpaid Distributions on the Preferred Securities
to the date of payment and (b) the amount of assets of the Issuer remaining
available for distribution to holders of the Preferred Securities. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Company to the holders of the Preferred Securities or by
causing the Issuer to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Issuer's obligations under the Preferred Securities, but will apply only to
the extent that the Issuer has funds sufficient to make such payments, and is
not a guarantee of collection.
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If the Company does not make interest payments on the Junior Subordinated
Debentures held by the Issuer, it is expected that the Issuer will not pay
Distributions on the Preferred Securities and will not have funds available
therefor. The Guarantee will rank subordinate and junior in right of payment to
all Senior Debt. See "-- Status of the Guarantee". The Guarantee will not limit
the incurrence or issuance of other secured or unsecured debt of the Company,
whether under the Indenture, any other indenture that the Company may enter into
in the future or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement, taken
together, fully, irrevocably and unconditionally guaranteed all of the Issuer's
obligations under the Preferred Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
such a guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Issuer's obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debentures and the Guarantee".
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt.
The Guarantee will rank pari passu with all other guarantees issued by the
Company with respect to any preferred securities issued by any trust,
partnership or other entity which is a financing vehicle of the Company. The
Guarantee will constitute a guarantee of payment and not of collection (i.e.,
the guaranteed party may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against any other person or entity). The Guarantee will be held
for the benefit of the holders of the Preferred Securities. The Guarantee will
not be discharged except by payment of the Guarantee Payments in full to the
extent not paid by the Issuer or upon distribution to the holders of the
Preferred Securities of the Junior Subordinated Debentures. The Guarantee does
not place a limitation on the amount of additional Senior Debt that may be
incurred by the Company. The Company expects from time to time to incur
additional indebtedness constituting Senior Debt.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of a majority of the aggregate Liquidation Preference Amount of the
outstanding Preferred Securities. The manner of obtaining any such approval is
set forth under "Description of the Preferred Securities -- Voting Rights;
Amendment of Trust Agreement". All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Company and shall inure to the benefit of the holders of
the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of a majority in aggregate Liquidation Preference Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Issuer, the Guarantee Trustee
or any other person or entity.
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The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than prior to the occurrence and after the
curing of a default by the Company in performance of the Guarantee, undertakes
to perform only such duties as are specifically set forth in the Guarantee and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Notwithstanding this provision, the Guarantee Trustee is
under no obligation to exercise any of the powers vested in it by the Guarantee
at the request of any holder of the Preferred Securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Preferred Securities, upon full
payment of the amounts payable upon liquidation of the Issuer or upon
distribution of the Junior Subordinated Debentures to the holders of the
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Preferred
Securities must restore payment of any sums paid under the Preferred Securities
or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
THE EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by the Company under the
Trust Agreement (the "Expense Agreement"), the Company will irrevocably and
unconditionally guarantee to each person or entity to whom the Issuer becomes
indebted or liable, the full payment, when and as due, of any costs, expenses or
liabilities of the Issuer, other than obligations of the Issuer to pay to the
holders of the Preferred Securities the amounts due such holders pursuant to the
terms of the Preferred Securities.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the Indenture
with terms corresponding to the terms of the Preferred Securities. This summary
of certain terms and provisions of the Junior Subordinated Debentures and the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Indenture, the form of which is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part, and
the Trust Indenture Act. Whenever particular defined terms of the Indenture (as
supplemented or amended from time to time) are referred to herein, such defined
terms are incorporated herein or therein by reference.
GENERAL
Concurrently with the issuance of the Preferred Securities, the Issuer will
invest the proceeds thereof and the consideration paid by the Company for the
Common Securities in the Junior Subordinated Debentures issued by the Company.
The Junior Subordinated Debentures will bear interest at the rate of 8.75% per
annum of the principal amount thereof, payable quarterly in arrears on March 31,
June 30, September 30 and December 31 of each year (each, an "Interest Payment
Date"), commencing March 31, 1997, to the person in whose name each Junior
Subordinated Debenture is registered, subject to certain exceptions, as of the
close of business on the Business Day (as defined in the Indenture) next
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preceding such Interest Payment Date. Each Junior Subordinated Debenture will be
held in the name of the Property Trustee in trust for the benefit of the holders
of the Preferred Securities. The amount of interest payable for any period will
be computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which interest is payable on the Junior Subordinated Debentures
is not a Business Day, then payment of the interest payable on such date will be
made on the next succeeding day which is a Business Day (and without any
interest or other payment in respect of any such delay), except that, if such
Business Day is in the next succeeding calendar year, such payment shall be made
on the immediately preceding Business Day, in each case with the same force and
effect as if made on the date such payment was originally payable. Interest that
is in arrears for more than one quarter will bear additional interest on the
amount thereof (to the extent permitted by law) at the rate of 8.75% per annum
thereof, compounded quarterly. The term "interest" as used herein shall include
quarterly interest payments, interest on quarterly interest payments in arrears
and Additional Interest, as applicable.
The Junior Subordinated Debentures will mature on March 31, 2046. The
Junior Subordinated Debentures will be unsecured and will rank junior and be
subordinate in right of payment to all Senior Debt of the Company. Additional
series of debentures (together with the Junior Subordinated Debentures, the
"Indenture Debentures") may be issued, without limitation as to amount, under
the Indenture and the Indenture does not limit the incurrence or issuance of
other secured or unsecured debt of the Company, whether under the Indenture, any
other indenture that the Company may enter into in the future or otherwise. See
"-- Subordination".
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default under the Indenture has occurred
and is continuing, the Company has the right under the Indenture at any time
during the term of the Junior Subordinated Debentures to defer the payment of
interest at any time or from time to time for one or more Extension Periods,
each of which, together with all previous and further extensions of such
Extension Period prior to its termination, may not exceed 20 consecutive
quarters and may not extend beyond the maturity of the Junior Subordinated
Debentures. At the end of such Extension Period, the Company must pay all
interest then accrued and unpaid (together with interest thereon at the rate of
8.75% per annum to the extent permitted by applicable law). During an Extension
Period, interest will continue to accrue and holders of the Junior Subordinated
Debentures will be required to accrue interest income for United States Federal
income tax purposes. See "Certain United States Federal Income Tax
Considerations -- Potential Extension of Interest Payment Period and Original
Issue Discount".
In the event that the Company exercises this right, during any such
Extension Period, the Company may not (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities (including other Indenture Debentures) that rank pari passu with
or junior in interest to the Junior Subordinated Debentures or make any
guarantee payments with respect to the foregoing (other than (a) dividends or
distributions in common stock of the Company and (b) payments under the
Guarantee). Upon the termination of any such Extension Period and the payment of
all amounts then due, the Company may elect to begin a new Extension Period,
subject to the above requirements. No interest shall be due and payable during
an Extension Period, except at the end thereof. The Company must give the
Property Trustee, the Administrative Trustees and the Debenture Trustee notice
of its selection of such Extension Period at least one Business Day prior to the
earlier of (i) the date the Distributions on the Preferred Securities are
payable and (ii) the date the Administrative Trustees are required to give
notice to the NYSE or other applicable self-regulatory organization or to
holders of such the Preferred Securities of the record date or the date such
Distributions are payable, but in any event not less than one Business Day prior
to such record date. An Administrative Trustee shall give notice of the
Company's election to begin such Extension Period to the holders of the
Preferred Securities within five Business Days of the receipt of notice thereof.
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REDEMPTION
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after January 28, 2002, in whole at any time or
in part from time to time, at a redemption price equal to the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption plus 100% of the principal amount thereof, or (ii) at any time, in
whole (but not in part), within 90 days following the occurrence of a Special
Event, at a redemption price equal to the accrued and unpaid interest on the
Junior Subordinated Debentures so redeemed to the date fixed for redemption plus
100% of the principal amount thereof.
For so long as the Issuer is the holder of the Junior Subordinated
Debentures, the proceeds of any such redemption will be used by the Issuer to
redeem the Preferred Securities in accordance with their terms. The Company may
not redeem less than all of Junior Subordinated Debentures unless all accrued
and unpaid interest if any, has been paid in full on all outstanding Junior
Subordinated Debentures for all interest periods terminating on or prior to the
Redemption Date.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Junior Subordinated
Debentures to be redeemed at his registered address. Unless the Company defaults
in payment of the redemption price, on and after the Redemption Date interest
ceases to accrue on the Junior Subordinated Debentures or portions thereof
called for redemption.
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES
Whether or not a Special Event has occurred, at any time, the Company has
the right to terminate the Issuer, and, in such event, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities in liquidation of the Issuer after satisfaction of liabilities to
creditors of the Issuer as provided by applicable law. See "Description of the
Preferred Securities -- Liquidation Distribution upon Termination". If
distributed to holders of the Preferred Securities in liquidation, the Junior
Subordinated Debentures will initially be issued in the form of one or more
global securities and DTC, or any successor depositary for the Preferred
Securities, will act as depositary for the Junior Subordinated Debentures. It is
anticipated that the depositary arrangements for the Junior Subordinated
Debentures would be substantially identical to those in effect for the Preferred
Securities. If the Junior Subordinated Debentures are distributed to the holders
of the Preferred Securities upon the liquidation of the Issuer, the Company will
use its best efforts to list the Junior Subordinated Debentures on the NYSE or
such other stock exchanges or other organizations, if any, on which the
Preferred Securities are then listed. There can be no assurance as to the market
price of the Junior Subordinated Debentures that may be distributed to the
holders of the Preferred Securities. For a description of DTC and the terms of
the depositary arrangements relating to payments, transfers, voting rights,
redemption and other notices and other matters, see "Description of the
Preferred Securities -- Book-Entry Issuance".
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to a series of Indenture Debentures that has occurred and is
continuing constitutes a "Debenture Event of Default" with respect to such
series of Indenture Debentures:
(i) failure for 60 days to pay any interest on such series of
Indenture Debentures, when due and payable (subject to the deferral of any
interest payments in the case of an Extension Period); or
(ii) failure to pay any principal or premium, if any, on such series
of Indenture Debentures when due and payable; or
(iii) failure to perform, or breach of, any covenant or warranty of
the Company contained in the Indenture for 60 days after written notice to
the Company from the Debenture Trustee or to the Company and the Debenture
Trustee by the holders of at least 33% in aggregate principal amount of
such series of outstanding Indenture Debentures as provided in the
Indenture; or
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(iv) certain events in bankruptcy, insolvency or reorganization of the
Company; or
(v) any other Event of Default specified with respect to such series
of Indenture Debentures.
If a Debenture Event of Default due to the default in payment of principal
of, or interest on, any series of Indenture Debentures or due to the default in
the performance or breach of any other covenant or warranty of the Company
applicable to the Indenture Debentures of such series but not applicable to all
series occurs and is continuing, then either the Debenture Trustee or the
holders of not less than 33% in aggregate principal amount of the outstanding
Indenture Debentures of such series may declare the principal of all of the
Indenture Debentures of such series and interest accrued thereon to be due and
payable immediately (subject to the subordination provisions of the Indenture)
and, in the case of the Junior Subordinated Debentures, should the Debenture
Trustee or such holders of such Junior Subordinated Debentures fail to make such
declaration, the holders of at least 33% in aggregate Liquidation Preference
Amount of the Preferred Securities shall have such right. If a Debenture Event
of Default due to the default in the performance of any other covenants or
agreements in the Indenture applicable to all outstanding Indenture Debentures
or due to certain events of bankruptcy, insolvency or reorganization of the
Company has occurred and is continuing, either the Debenture Trustee or the
holders of not less than 33% in aggregate principal amount of all outstanding
Indenture Debentures (or Preferred Securities, as described above), considered
as one class, and not the holders of the Indenture Debentures (or Preferred
Securities) of any one of such series may make such declaration of acceleration
(subject to the subordination provisions of the Indenture).
At any time after such a declaration of acceleration with respect to the
Indenture Debentures of any series has been made and before a judgment or decree
for payment of the money due has been obtained, the Debenture Event or Events of
Default giving rise to such declaration of acceleration will, without further
act, be deemed to have been waived, and such declaration and its consequences
will, without further act, be deemed to have been rescinded and annulled, if
(a) the Company has paid or deposited with the Debenture Trustee a sum
sufficient to pay
(1) all overdue interest on all Indenture Debentures of such series;
(2) the principal of and premium, if any, on any Indenture Debentures
of such series which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate or rates prescribed therefor
in such Indenture Debentures;
(3) interest upon overdue interest at the rate or rates prescribed
therefor in such Indenture Debentures, to the extent that payment of such
interest is lawful; and
(4) all amounts due to the Debenture Trustee under the Indenture;
(b) any other Debenture Event or Events of Default with respect to
Indenture Debentures of such series, other than the nonpayment of the principal
of the Indenture Debentures of such series which has become due solely by such
declaration of acceleration, have been cured or waived as provided in the
Indenture.
The holders of a majority in aggregate principal amount of the Indenture
Debentures of all series then outstanding may waive compliance by the Company
with certain restrictive provisions of the Indenture. The holders of a majority
in principal amount of the outstanding Indenture Debentures of any series may,
on behalf of the holders of all the Indenture Debentures of such series, waive
any past default under the Indenture with respect to such series, except a
default in the payment of principal or interest (unless such default has been
cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
Debenture Trustee) or a default in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Indenture Debenture of such series affected. With
respect to the Junior Subordinated Debentures, the Issuer may not waive
compliance by the Company with certain
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restrictive provisions of the Indenture or waive any past defaults thereunder
without the consent of a majority in aggregate Liquidation Preference Amount of
the outstanding Preferred Securities.
The Company is required to file annually with the Debenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
In case a Debenture Event of Default shall occur and be continuing as to
the Junior Subordinated Debentures, the Property Trustee will have the right to
declare the principal of and the interest on the Junior Subordinated Debentures
and any other amounts payable under the Indenture, to be forthwith due and
payable and to enforce its other rights as a creditor with respect to the Junior
Subordinated Debentures. If the Property Trustee fails to enforce its rights
with respect to the Junior Subordinated Debentures or the Trust Agreement, a
holder of Preferred Securities may institute a legal proceeding directly against
the Company to enforce the Property Trustee's rights with respect to the Junior
Subordinated Debentures or the Trust Agreement, to the fullest extent permitted
by law, without first instituting any legal proceeding against the Property
Trustee or any other person. See "Description of the Preferred
Securities -- Voting Rights; Amendment of Trust Agreement". Notwithstanding the
foregoing, a holder of Preferred Securities may directly institute a proceeding
for enforcement of payment to such holder of principal of or interest on the
Junior Subordinated Debentures having a principal amount equal to the aggregate
liquidation preference amount of the Preferred Securities of such holder on or
after the due dates specified in the Junior Subordinated Debentures. See
"Description of the Guarantee".
MODIFICATION OF INDENTURE
Without the consent of any holder of Indenture Debentures, the Company and
the Debenture Trustee may enter into one or more supplemental indentures for any
of the following purposes: (a) to evidence the assumption by any permitted
successor to the Company of the covenants of the Company in the Indenture and in
the Indenture Debentures; or (b) to add one or more covenants of the Company or
other provisions for the benefit of the holders of outstanding Indenture
Debentures or to surrender any right or power conferred upon the Company by the
Indenture; or (c) to add any additional Debenture Events of Default with respect
to outstanding Indenture Debentures; or (d) to change or eliminate any provision
of the Indenture or to add any new provision to the Indenture, provided that if
such change, elimination or addition will adversely affect the interests of the
holders of any series of Indenture Debentures in any material respect, such
change, elimination or addition will become effective with respect to such
series only (1) when the consent of the holders of Indenture Debentures of such
series has been obtained in accordance with the Indenture, or (2) when no
Indenture Debentures of such series remain outstanding under the Indenture; or
(e) to provide collateral security for the Indenture Debentures; or (f) to
establish the form or terms of Indenture Debentures of any other series as
permitted by the Indenture; or (g) to provide for the authentication and
delivery of bearer securities and coupons appertaining thereto representing
interest, if any, thereon and for the procedures for the registration, exchange
and replacement thereof and for the giving of notice to, and the solicitation of
the vote or consent of, the holders thereof, and for any and all other matters
incidental thereto; or (h) to evidence and provide for the acceptance of
appointment of a separate or successor Debenture Trustee under the Indenture
with respect to the Indenture Debentures of one or more series and to add to or
change any of the provisions of the Indenture as shall be necessary to provide
for or to facilitate the administration of the trusts under the Indenture by
more than one trustee; or (i) to provide for the procedures required to permit
the utilization of a noncertificated system of registration for the Indenture
Debentures of all or any series; or (j) to change any place where (1) the
principal of and premium, if any, and interest, if any, on all or any series of
Indenture Debentures shall be payable, (2) all or any series of Indenture
Debentures may be surrendered for registration of transfer or exchange and (3)
notices and demands to or upon the Company in respect of Indenture Debentures
and the Indenture may be served; or (k) to cure any ambiguity or inconsistency
or to add or change any other provisions with respect to matters and questions
arising under the Indenture, provided such changes or additions shall not
adversely affect the interests of the holders of Indenture Debentures of any
series in any material respect. The Indenture contains provisions permitting the
Company and the Debenture Trustee, with the consent of the holders
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of a majority in principal amount of each outstanding series of Indenture
Debentures affected, to modify the Indenture in a manner affecting the rights of
the holders of such series of the Indenture Debentures; provided, that no such
modification may (i) change the Stated Maturity of any series of Indenture
Debentures, or reduce the principal amount thereof, or reduce the rate or extend
the time of payment of interest thereon (except such extension as is
contemplated thereby), (ii) reduce the percentage of principal amount of
Indenture Debentures of any series, the holders of which are required to consent
to any such modification of the Indenture, or (iii) modify certain of the
provisions of the Indenture relating to supplemental indentures, waivers of
certain covenants and waivers of past defaults with respect to the Indenture
Debentures of any series, without the consent of the holder of each outstanding
Indenture Debenture affected thereby, provided that, in the case of the Junior
Subordinated Debentures, so long as any of the Preferred Securities remain
outstanding, no such modification may be made that adversely affects the holders
of the Preferred Securities, and no termination of the Indenture may occur, and
no waiver of any Debenture Event of Default or compliance with any covenant
under the Indenture may be effective, without the prior consent of the holders
of a majority of the aggregate Liquidation Preference Amount of such Preferred
Securities unless and until the principal of the Junior Subordinated Debentures
and all accrued and unpaid interest thereon have been paid in full and certain
other conditions are satisfied.
CERTAIN COVENANTS OF THE COMPANY
The Company will covenant in the Indenture that it will not (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal, premium, if any, or interest on or repay or
repurchase or redeem any debt securities (including the Indenture Debentures)
that rank pari passu with or junior in interest to the Indenture Debentures or
make any guarantee payments with respect to the foregoing (other than (a)
dividends or distributions in common stock of the Company, and (b) payments
under the Guarantee and all other guarantees issued by the Company with respect
to any preferred securities issued by any trust, partnership or other entity
which is a financing vehicle of the Company) if at such time (i) there shall
have occurred and be continuing a payment default (whether before or after
expiration of any period of grace) or a Debenture Event of Default with respect
to any series of Indenture Debentures, (ii) the Company shall be in default with
respect to its payment of any obligations under the Guarantee or any other such
guarantee as described above or (iii) the Company shall have given notice of its
election of an Extension Period as provided in the Indenture with respect to any
series of Indenture Debentures and shall not have rescinded such notice, and
such Extension Period, or any extension thereof, shall be continuing.
The Company also will covenant that so long as any Preferred Securities
remain outstanding, if the Issuer shall be required to pay, with respect to its
income derived from the interest payments on the Junior Subordinated Debentures,
any amounts for or on account of any taxes, duties, assessments or governmental
charges of whatever nature imposed by the United States, or any other taxing
authority, then, in any such case, the Company will pay as interest on the
Junior Subordinated Debentures such Additional Interest as may be necessary in
order that the net amounts received and retained by the Issuer after the payment
of such taxes, duties, assessments or governmental charges shall result in the
Issuer's having such funds as it would have had in the absence of the payment of
such taxes, duties, assessments or governmental charges.
The Company will also covenant, (i) to maintain directly or indirectly 100%
ownership of the Common Securities, provided that certain successors which are
permitted pursuant to the Indenture may succeed to the Company's ownership of
the Common Securities, (ii) not to voluntarily terminate, wind-up or liquidate
the Issuer, except (a) in connection with a distribution of Junior Subordinated
Debentures to the holders of the Preferred Securities in liquidation of the
Issuer, or (b) in connection with certain mergers, consolidations or
amalgamations permitted by the Trust Agreement, (iii) to remain the sole
depositor under the Trust Agreement of the Issuer and timely perform in all
material respects all of its duties as depositor of the Issuer, and (iv) to use
its reasonable efforts, consistent with the terms and
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provisions of the Trust Agreement, to cause the Issuer to remain a business
trust and otherwise continue to be treated as a "grantor trust" for United
States Federal income tax purposes.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other corporation or convey, transfer or lease its properties and
assets substantially as an entirety to any person, unless (i) in case the
Company consolidates with or merges into another corporation or conveys or
transfers its properties and assets substantially as an entirety to any person,
the successor corporation is organized under the laws of the United States or
any State or the District of Columbia, and such successor corporation expressly
assumes the Company's obligations on all Indenture Debentures; (ii) immediately
after giving effect thereto, no Debenture Event of Default, and no event which,
after notice or lapse of time or both, would become a Debenture Event of
Default, shall have occurred and be continuing; and (iii) certain other
conditions as prescribed in the Indenture are met.
The general provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving the Company that may adversely affect holders of the
Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The principal amount of Junior Subordinated Debentures will be deemed to
have been paid for purposes of the Indenture and the entire indebtedness of the
Company in respect thereof will be deemed to have been satisfied and discharged,
if there shall have been irrevocably deposited with the Debenture Trustee or any
Paying Agent, in trust: (a) money in an amount which will be sufficient, or (b)
in the case of a deposit made prior to the maturity of the Junior Subordinated
Debentures, Government Obligations (as defined herein), which do not contain
provisions permitting the redemption or other prepayment thereof at the option
of the issuer thereof, the principal of and the interest on which when due,
without any regard to reinvestment thereof, will provide moneys which, together
with the money, if any, deposited with or held by the Debenture Trustee, will be
sufficient, or (c) a combination of (a) and (b) which will be sufficient, to pay
when due the principal of and premium, if any, and interest, if any, due and to
become due on the Junior Subordinated Debentures that are outstanding. For this
purpose, Government Obligations include direct obligations of, or obligations
unconditionally guaranteed by, the United States of America entitled to the
benefit of the full faith and credit thereof and certificates, depositary
receipts or other instruments which evidence a direct ownership interest in such
obligations or in any specific interest or principal payments due in respect
thereof.
SUBORDINATION
In the Indenture, the Company has covenanted and agreed that any Indenture
Debentures issued thereunder will be subordinate and junior in right of payment
to all Senior Debt to the extent provided in the Indenture. Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution,
winding-up, reorganization, assignment for the benefit of creditors, marshaling
of assets or any bankruptcy, insolvency, debt restructuring or similar
proceedings in connection with any insolvency or bankruptcy proceeding of the
Company, the holders of Senior Debt will first be entitled to receive payment in
full of principal of (and premium, if any) and interest, if any, on such Senior
Debt before the holders of Indenture Debentures will be entitled to receive or
retain any payment in respect of the principal of, premium, if any, or interest,
if any, on the Indenture Debentures.
In the event of the acceleration of the maturity of any Indenture
Debentures, the holders of all Senior Debt outstanding at the time of such
acceleration will be entitled to receive payment in full of all amounts due
thereon (including any amounts due upon acceleration) before the holders of
Indenture Debentures will be entitled to receive any payment upon the principal
of, premium, if any, or interest, if any, on the Indenture Debentures.
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No payments on account of principal, premium, if any, or interest, if any,
in respect of any Indenture Debentures may be made if there shall have occurred
and be continuing a default in any payment with respect to Senior Debt, or an
event of default with respect to any Senior Debt resulting in the acceleration
of the maturity thereof remaining incurred.
The term Senior Debt is defined in the Indenture to mean all obligations
(other than non-recourse obligations and the indebtedness issued under the
Indenture) of, or guaranteed or assumed by, the Company for borrowed money,
including both senior and subordinated indebtedness for borrowed money (other
than Indenture Debentures), or for the payment of money relating to any lease
which is capitalized on the consolidated balance sheet of the Company and its
subsidiaries in accordance with generally accepted accounting principles as in
effect from time to time, or evidenced by bonds, debentures, notes or other
similar instruments, and in each case, amendments, renewals, extensions,
modifications and refundings of any such indebtedness or obligations, whether
existing as of the date of the Indenture or subsequently incurred by the Company
unless, in the case of any particular indebtedness, renewal, extension or
refunding, the instrument creating or evidencing the same or the assumption or
guarantee of the same expressly provides that such indebtedness, renewal,
extension or refunding is not superior in right of payment to or is pari passu
with the Indenture Debentures; provided that the Company's obligations under the
Guarantee and all other guarantees issued by the Company with respect to any
preferred securities issued by any trust, partnership or other entity which is a
financing vehicle of the Company shall not be deemed to be Senior Debt.
The Indenture places no limitation on the amount of additional Senior Debt
that may be incurred by the Company. The Company expects from time to time to
incur additional indebtedness constituting Senior Debt.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of New York.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee shall have, and shall be subject to, all the duties
and responsibilities specified with respect to an indenture trustee under the
Trust Indenture Act. Subject to such provisions, the Debenture Trustee is under
no obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because (i) the aggregate principal amount of the Junior Subordinated Debentures
will be equal to the sum of the aggregate Liquidation Preference Amount of the
Preferred Securities and the Common Securities; (ii) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution rate and Distribution and other payment dates for the
Preferred Securities; (iii) the Company shall pay for all and any costs,
expenses and liabilities of the Issuer except the Issuer's obligations to
holders of the Preferred Securities under such Preferred Securities; and (iv)
the Trust Agreement further provides that the Issuer will not engage in any
activity that is not consistent with the limited purposes of the Issuer.
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Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Issuer has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee". Taken together, the Company's
obligations under the Junior Subordinated Debentures, the Indenture, the Trust
Agreement, the Expense Agreement, and the Guarantee provide a full, irrevocable
and unconditional guarantee of payments of distributions and other amounts due
on the Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Issuer's obligations under the Preferred Securities. If and to the extent that
the Company does not make payments on the Junior Subordinated Debentures, the
Issuer will not pay Distributions or other amounts due on the Preferred
Securities. The Guarantee does not cover payment of Distributions when the
Issuer does not have sufficient funds to pay such Distributions. In such event,
the remedies of holders of the Preferred Securities are as described above under
"Description of the Junior Subordinated Debentures -- Debenture Events of
Default" and "Description of the Preferred Securities -- Voting Rights;
Amendment of Trust Agreement". The obligations of the Company under the
Guarantee are subordinate and junior in right of payment to all Senior Debt of
the Company.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Issuer
or any other person or entity.
The Preferred Securities evidence the rights of the holders thereof to the
benefits of the Issuer, and the Issuer exists for the sole purpose of issuing
the Preferred Securities and Common Securities and investing the proceeds
thereof in the Junior Subordinated Debentures. A principal difference between
the rights of a holder of a Preferred Security and the rights of a holder of a
Junior Subordinated Debenture is that a holder of a Junior Subordinated
Debenture is entitled to receive the principal amount of and interest accrued on
Junior Subordinated Debentures held, while a holder of Preferred Securities is
entitled to receive Distributions only from the Issuer (or from the Company
under the Guarantee) if and to the extent the Issuer has funds available for the
payment of such Distributions.
Upon any voluntary or involuntary termination, winding-up or liquidation of
the Issuer not involving the distribution of the Junior Subordinated Debentures,
after satisfaction of creditors of the Issuer, if any, as provided by applicable
law, the holders of Preferred Securities will be entitled to receive, out of
assets held by the Issuer, the Liquidation Distribution in cash. See
"Description of the Preferred Securities -- Liquidation Distribution upon
Termination". Upon any voluntary or involuntary liquidation or bankruptcy of the
Company, the Property Trustee, as holder of the Junior Subordinated Debentures,
would be a subordinated creditor of the Company, subordinated in right of
payment to all Senior Debt, but entitled to receive payment in full of principal
and interest, before any stockholders of the Company receive payments or
distributions. Since the Company is the guarantor under the Guarantee and has
agreed to pay for all costs, expenses and liabilities of the Issuer (other than
the Issuer's obligations to the holders of the Preferred Securities), the
positions of a holder of Preferred Securities and a holder of Junior
Subordinated Debentures relative to other creditors and to stockholders of the
Company in the event of liquidation or bankruptcy of the Company would be
substantially the same.
A default or event of default under any Senior Debt would not constitute a
default or Debenture Event of Default. However, in the event of payment defaults
under, or acceleration of, Senior Debt, the subordination provisions of the
Indenture provide that no payments may be made in respect of the Junior
Subordinated Debentures until such Senior Debt has been paid in full or any
payment default thereunder has been cured or waived. Failure to make required
payments on any Junior Subordinated Debentures would constitute a Debenture
Event of Default.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain United States Federal income tax
consequences relevant to the purchase, ownership and disposition of the
Preferred Securities as of the date hereof and represents the opinion of Reid &
Priest LLP, counsel to the Company, insofar as it relates to matters of law or
legal conclusions. Except where noted, it deals only with the Preferred
Securities held as capital assets and does not deal with special situations,
such as those of dealers in securities or currencies, financial institutions,
life insurance companies, persons holding the Preferred Securities as part of a
hedging or conversion transaction or a straddle, United States Holders (as
defined herein) whose "functional currency" is not the United States dollar, or
persons who are not United States Holders. In addition, this discussion does not
address the tax consequences to persons who purchase the Preferred Securities
other than pursuant to their initial issuance and distribution. Furthermore, the
discussion below is based upon the provisions of the Internal Revenue Code of
1986, as amended, and regulations, rulings and judicial decisions thereunder as
of the date hereof, and such authorities may be repealed, revoked or modified at
any time so as to result in United States Federal income tax consequences
different from those discussed below. These authorities are subject to various
interpretations and it is therefore possible that the United States Federal
income tax treatment of the Preferred Securities may differ from the treatment
described below.
PROSPECTIVE PURCHASERS OF PREFERRED SECURITIES, INCLUDING PERSONS WHO ARE
NOT UNITED STATES HOLDERS AND PERSONS WHO PURCHASE PREFERRED SECURITIES IN THE
SECONDARY MARKET, ARE ADVISED TO CONSULT WITH THEIR TAX ADVISORS AS TO THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF PREFERRED SECURITIES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES,
AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR OTHER TAX LAWS.
UNITED STATES HOLDERS
As used herein, a "United States Holder" means a Preferred Security holder
that is a citizen or a resident of the United States, a corporation, partnership
or other entity created or organized in or under the laws of the United States
or any political subdivision thereof, or an estate or trust the income of which
is subject to United States Federal income taxation regardless of its source.
CLASSIFICATION OF ENTERGY GULF STATES CAPITAL I
Reid & Priest LLP, counsel to the Company and the Issuer, is of the opinion
that, under current law and assuming full compliance with the terms of the
Indenture and the instruments establishing the Issuer (and certain other
documents), the Issuer will be classified as a "grantor trust" for United States
Federal income tax purposes and will not be classified as an association taxable
as a corporation. Each United States Holder will be treated as owning an
undivided beneficial interest in the Junior Subordinated Debentures.
Accordingly, each United States Holder will be required to include in its gross
income interest (in the form of original issue discount ("OID")) accrued with
respect to its allocable share of the Junior Subordinated Debentures as
described below. No amount included in income with respect to the Preferred
Securities will be eligible for the dividends received deduction. Investors
should be aware that the opinion of Reid & Priest LLP is not binding on the
Internal Revenue Service (the "IRS") or the courts.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
Based on the advice of its counsel, the Company believes and intends to
take the position that the Junior Subordinated Debentures will constitute
indebtedness for United States Federal income tax purposes. No assurance can be
given that such position will not be challenged by the IRS, or, if challenged,
that such challenge will not be successful. By purchasing and accepting the
Preferred Securities, each holder thereof covenants to treat the Junior
Subordinated Debentures as indebtedness and the Preferred Securities as evidence
of an indirect beneficial ownership in the Junior Subordinated
52
<PAGE>
Debentures. The remainder of this discussion assumes that the Junior
Subordinated Debentures will be classified as indebtedness of the Company for
United States Federal income tax purposes.
POSSIBLE TAX LAW CHANGES
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill"),
the revenue portion of President Clinton's budget proposal, was released. The
Bill would, among other things, generally have denied interest deductions for
interest on an instrument issued by a corporation that has a maximum weighted
average maturity of more than 40 years. The Bill would also generally have
treated as equity an instrument, issued by a corporation, that has a maximum
term of more than 20 years and that is not shown as indebtedness on the separate
balance sheet of the issuer or, where the instrument is issued to a related
party (other than a corporation), where the holder or some other related party
issues a related instrument that is not shown as indebtedness on the issuer's
consolidated balance sheet. The above-described provisions were proposed to be
effective generally for instruments issued on or after December 7, 1995. If
either provision were to apply to the Junior Subordinated Debentures, the
Company would be unable to deduct interest on the Junior Subordinated
Debentures. However, on March 29, 1996, the Chairmen of the Senate Finance and
House Ways and Means Committees issued a joint statement to the effect that it
was their intention that the effective date of the President's legislative
proposals, if adopted, will be no earlier than the date of appropriate
Congressional action. The 104th Congress adjourned without such action having
been taken. There can be no assurance, however, that future legislative
proposals or final legislation will not affect the ability of the Company to
deduct interest on the Junior Subordinated Debentures. If legislation were
enacted limiting, in whole or in part, the deductibility by the Company of
interest on the Junior Subordinated Debentures for United States Federal income
tax purposes, such enactment could give rise to a Tax Event. A Tax Event would
permit the Company to cause a redemption of the Preferred Securities as
described more fully under "Description of the Preferred
Securities -- Redemptions -- Special Event Redemption or Distribution of Junior
Subordinated Debentures".
POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Under the terms of the Junior Subordinated Debentures, the Company has the
option to defer payments of interest for up to 20 consecutive quarterly interest
payment periods and to pay as a lump sum at the end of such period all of the
interest that has accrued during such period. During any such Extension Period,
Distributions on the Preferred Securities will also be deferred. Because of this
option to extend the interest payment periods, the Junior Subordinated
Debentures will be treated as having been issued with OID for United States
Federal income tax purposes. As a result, United States Holders will be required
to accrue interest income (in the form of OID) on an economic accrual basis even
if they use the cash method of accounting. In the event of an Extension Period,
a United States Holder will be required to continue to include OID in income
notwithstanding that the Issuer will not make any Distribution on the Preferred
Securities during such Extension Period. As a result, any United States Holder
who disposes of the Preferred Securities prior to the record date for the
payment of Distributions following such Extension Period will include interest
in gross income but will not receive any Distributions related thereto from the
Issuer. The tax basis of a Preferred Security will be increased by the amount of
any OID that is included in income, and will be decreased when and if
Distributions are subsequently received from the Issuer by such holders.
RECEIPT OF THE JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE
ISSUER
At any time, the Company has the right to cause the Junior Subordinated
Debentures to be distributed to holders of the Preferred Securities in exchange
for the Preferred Securities and in liquidation of the Issuer. Under current
law, for United States Federal income tax purposes, if the Issuer is treated as
a "grantor trust" at the time of distribution, such distribution would be
treated as a non-taxable event to each United States Holder, and each United
States Holder would receive an aggregate tax basis in the Junior Subordinated
Debentures equal to such holder's aggregate tax basis in the Preferred
53
<PAGE>
Securities. A United States Holder's holding period for the Junior Subordinated
Debentures received in liquidation of the Issuer would include the period during
which such holder held the Preferred Securities.
Under certain circumstances, as described under the caption "Description of
the Preferred Securities -- Redemptions," the Junior Subordinated Debentures may
be redeemed for cash and the proceeds of such redemption distributed to holders
of the Preferred Securities in redemption of the Preferred Securities. Under
current law, such a redemption would, for United States Federal income tax
purposes, constitute a taxable disposition of the Preferred Securities, and a
United States Holder would recognize gain or loss as if such holder had sold
such redeemed Preferred Securities. See "-- Sale, Exchange and Redemption of the
Preferred Securities" below.
SALE, EXCHANGE AND REDEMPTION OF THE PREFERRED SECURITIES
Upon the sale, exchange or redemption of the Preferred Securities, a United
States Holder will recognize gain or loss equal to the difference between the
amount realized upon the sale, exchange or redemption and such holder's adjusted
tax basis in the Preferred Securities. A United States Holder's adjusted tax
basis will, in general, be the issue price of the Preferred Securities,
increased by the OID previously included in income by the United States Holder
and reduced by any Distributions on the Preferred Securities. Such gain or loss
will be capital gain or loss and will be long-term capital gain or loss if at
the time of sale, exchange or redemption, the Preferred Securities have been
held for more than one year. Under current law, net capital gains of individuals
are, under certain circumstances, taxed at lower rates than items of ordinary
income. The deductibility of capital losses is subject to limitations.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Subject to the qualification discussed below, income on the Preferred
Securities will be reported to holders on Form 1099, which should be mailed to
such holders by January 31 following each calendar year.
The Issuer will report annually to Cede & Co., as holder of record of the
Preferred Securities, the OID related to the Junior Subordinated Debentures that
accrued during the year. The Issuer currently intends to report such information
on Form 1099 prior to January 31 following each calendar year. The Underwriters
have indicated to the Issuer that, to the extent that they hold the Preferred
Securities as nominees for beneficial holders, they currently expect to report
the OID that accrued during the calendar year on such Preferred Securities to
such beneficial holders on Form 1099 by January 31 following each calendar year.
Under current law, holders of the Preferred Securities who hold as nominees for
beneficial holders will not have any obligation to report information regarding
the beneficial holders to the Issuer. The Issuer, moreover, will not have any
obligation to report to beneficial holders who are not also record holders.
Thus, beneficial holders of the Preferred Securities who hold their Preferred
Securities through the Underwriters will receive Forms 1099 reflecting the
income on their Preferred Securities from such Underwriters rather than from the
Issuer.
Payments made in respect of, and proceeds from the sale of, the Preferred
Securities (or the Junior Subordinated Debentures distributed to holders of the
Preferred Securities) may be subject to "backup" withholding tax of 31% unless
the holder complies with certain identification requirements or if such holder
has previously failed to report in full dividend and interest income. Any
withheld amounts will be allowed as a refund or a credit against the holder's
United States Federal income tax liability, provided the required information is
provided to the IRS.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Issuer have agreed that the Issuer will sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Prudential Securities
Incorporated and Smith Barney Inc. are acting as representatives, has severally
agreed to purchase from the Issuer the respective number of Preferred Securities
set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
PREFERRED
UNDERWRITER SECURITIES
------------------------------------------------------------------------ ----------
<S> <C>
Goldman, Sachs & Co..................................................... 580,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................ 580,000
Prudential Securities Incorporated...................................... 580,000
Smith Barney Inc ....................................................... 580,000
Advest, Inc. ........................................................... 30,000
Robert W. Baird & Co. Incorporated...................................... 30,000
J.C. Bradford & Co. .................................................... 60,000
Alex. Brown & Sons Incorporated......................................... 60,000
Cowen & Company......................................................... 30,000
Crowell, Weedon & Co. .................................................. 30,000
Dain Bosworth Incorporated.............................................. 30,000
EVEREN Securities, Inc. ................................................ 60,000
Fahnestock & Co. Inc. .................................................. 30,000
Interstate/Johnson Lane Corporation..................................... 30,000
Kennedy, Cabot & Co. ................................................... 30,000
Legg Mason Wood Walker Incorporated..................................... 60,000
McDonald & Company Securities, Inc. .................................... 30,000
McGinn, Smith & Co., Inc. .............................................. 30,000
Morgan Keegan & Company, Inc. .......................................... 60,000
The Ohio Company........................................................ 30,000
Oppenheimer & Co., Inc. ................................................ 60,000
Piper Jaffray Inc. ..................................................... 30,000
Principal Financial Securities, Inc. ................................... 30,000
Rauscher Pierce Refsnes, Inc. .......................................... 30,000
Raymond James & Associates, Inc. ....................................... 30,000
The Robinson-Humphrey Company, Inc. .................................... 30,000
Roney & Co., L.L.C. .................................................... 30,000
Stephens Inc. .......................................................... 60,000
Sutro & Co. Incorporated................................................ 30,000
Trilon International Inc. .............................................. 30,000
Tucker Anthony Incorporated............................................. 30,000
U.S. Clearing Corp. .................................................... 30,000
Wheat First Butcher Singer.............................................. 30,000
----------
Total......................................................... 3,400,000
==========
</TABLE>
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Underwriters are committed to take and pay for all such Preferred
Securities offered hereby, if any are taken, provided, that under certain
circumstances involving a default of one or more Underwriters, less than all of
the Preferred Securities may be purchased. Default by one Underwriter would not
relieve any non-defaulting Underwriter from its several obligation, and in the
event of such a default, the non-defaulting Underwriters may be required by the
Company to purchase the Preferred Securities that it has severally agreed to
purchase
55
<PAGE>
and, in addition, to purchase the Preferred Securities that the defaulting
Underwriter or Underwriters shall have failed to purchase up to an amount equal
to one-ninth of the Preferred Securities that such non-defaulting Underwriter or
Underwriters have otherwise agreed to purchase.
The Underwriters propose to offer the Preferred Securities in part directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus, and in part to certain securities dealers at such price less
a concession of $0.50 per Preferred Security. The Underwriters may allow, and
such dealers may reallow, a concession not to exceed of $0.35 per Preferred
Security to certain brokers and dealers. After the Preferred Securities are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the representatives.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures, the
Underwriting Agreement provides that the Company will pay as Underwriters'
Compensation for the Underwriters arranging the investment therein of such
proceeds an amount of $0.7875 per Preferred Security for the accounts of the
several Underwriters.
The Company and the Issuer have agreed that, during the period beginning
from the date of the Underwriting Agreement and continuing to and including the
earlier of (i) the termination of trading restrictions on the Preferred
Securities, as determined by the Underwriters, and (ii) 30 days after the
closing date, they will not offer, sell, contract to sell or otherwise dispose
of any Preferred Securities, any other beneficial interests in the assets of the
Issuer, or any preferred securities or any other securities of the Issuer or the
Company that are substantially similar to the Preferred Securities, including
any guarantee of such securities, or any securities convertible into or
exchangeable for or that represent the right to receive securities, preferred
securities or any such substantially similar securities of either the Issuer or
the Company, without the prior written consent of the representatives, except
for the Preferred Securities, the Common Securities and the Guarantee.
Prior to this offering, there has been no public market for the Preferred
Securities. The Preferred Securities will be listed on the NYSE under the symbol
"EGS PrA". In order to meet one of the requirements for listing the Preferred
Securities on the NYSE, the Underwriters will undertake to sell lots of 100 or
more Preferred Securities to a minimum of 400 beneficial holders. Trading of the
Preferred Securities on the NYSE is expected to commence within a seven-day
period after the initial delivery of the Preferred Securities. The
representatives of the Underwriters have advised the Company that they intend to
make a market in the Preferred Securities prior to commencement of trading on
the NYSE, but are not obligated to do so and may discontinue market making at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the Preferred Securities.
The Company and the Issuer have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to the Company and its affiliates, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
EXPERTS
The Company's balance sheets as of December 31, 1995 and 1994 and the
statements of income (loss), retained earnings, and cash flows for each of the
three years in the period ended December 31, 1995, included in this Prospectus,
have been included herein in reliance on the report, which include emphasis
paragraphs related to rate-related contingencies, legal proceedings and changes
in accounting for income taxes, post retirement benefits and unbilled revenues,
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The statements attributed to Clark, Thomas & Winters, a Professional
Corporation, as to legal conclusions with respect to the Company's rate
regulation in Texas in Note 2, "Rate and Regulatory Matters", to the Interim
Financial Statements and in Note 2, "Rate and Regulatory Matters", to the
56
<PAGE>
Annual Financial Statements have been reviewed by such firm and are included
herein upon the authority of such firm as experts.
The statements attributed to Sandlin Associates regarding the analysis of
River Bend construction costs of the Company in Note 2 "Rate and Regulatory
Matters", to the Interim Financial Statements and in Note 2, "Rate and
Regulatory Matters", to the Annual Financial Statements have been reviewed by
such firm and are included herein upon the authority of such firm as experts.
LEGAL OPINIONS
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the creation of the
Issuer are being passed upon by Richards, Layton & Finger, P.A., special
Delaware counsel to the Company and the Issuer. The validity of the Guarantee
and the Junior Subordinated Debentures will be passed upon for the Company by
Laurence M. Hamric, Esq., General Attorney -- Corporate and Securities of
Entergy Services, Inc., and by Reid & Priest LLP, New York counsel to the
Company. Matters pertaining to New York law will be passed upon by Reid & Priest
LLP, New York counsel to the Company, and matters pertaining to Texas law will
be passed upon by Laurence M. Hamric, Esq., General Attorney-Corporate and
Securities of Entergy Services, Inc. Certain legal matters will be passed upon
for the Underwriters by Winthrop, Stimson, Putnam & Roberts, New York, New York.
Certain matters relating to United States Federal income tax considerations are
being passed upon by Reid & Priest LLP, special counsel to the Company and the
Issuer.
57
<PAGE>
ENTERGY GULF STATES, INC.
(FORMERLY GULF STATES UTILITIES COMPANY)
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Definitions.......................................................................... F-2
Annual Financial Statements:
Report of Independent Accountants.................................................. F-3
Balance Sheets as of December 31, 1995 and 1994.................................... F-4
Statements of Income (Loss) for the years ended December 31, 1995, 1994, and
1993............................................................................ F-6
Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993..... F-7
Statements of Retained Earnings and Paid-In-Capital................................ F-8
Notes to Financial Statements...................................................... F-9
Interim Financial Statements:
Balance Sheets (Unaudited) as of September 30, 1996 and December 31, 1995.......... F-34
Statements of Income (Loss) (Unaudited) for the three and nine month periods ended
September 30, 1996 and 1995..................................................... F-36
Statements of Cash Flows (Unaudited) for the nine month periods ended September 30,
1996 and 1995................................................................... F-37
Notes to the Interim Financial Statements (Unaudited).............................. F-38
</TABLE>
F-1
<PAGE>
DEFINITIONS
Certain abbreviations or acronyms used in the text and notes are defined
below:
<TABLE>
<CAPTION>
ABBREVIATION OR ACRONYM TERM
- ----------------------- ------------------------------------------------------------------
<S> <C>
AFUDC.................. Allowance for Funds Used During Construction
ALJ.................... Administrative Law Judge
Cajun.................. Cajun Electric Power Cooperative, Inc.
D.C. Circuit Court..... United States Court of Appeals for the District of Columbia
Circuit
DOE.................... United States Department of Energy
Entergy Arkansas....... Entergy Arkansas, Inc., formerly Arkansas Power & Light Company
Entergy Gulf States.... Entergy Gulf States, Inc., formerly Gulf States Utilities Company
Entergy Louisiana...... Entergy Louisiana, Inc., formerly Louisiana Power & Light Company
Entergy Mississippi.... Entergy Mississippi, Inc., formerly Mississippi Power & Light
Company
Entergy New Orleans.... Entergy New Orleans, Inc., formerly New Orleans Public Service,
Inc.
EPAct.................. Energy Policy Act of 1992
EPA.................... Environmental Protection Agency
FASB................... Financial Accounting Standards Board
FERC................... Federal Energy Regulatory Commission
KWh.................... kilowatt-hour(s)
LPSC................... Louisiana Public Service Commission
Merger................. The combination transaction, consummated on December 31, 1993, by
which Entergy Gulf States became a subsidiary of Entergy
Corporation and Entergy Corporation became a Delaware corporation
Nelson Unit 6.......... Unit No. 6 (coal) of the Nelson Steam Electric Generating Station,
owned 70% by Entergy Gulf States
NISCO.................. Nelson Industrial Steam Company
Operating Companies.... Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy
Mississippi, and Entergy New Orleans
PRP.................... Potentially Responsible Party (a person or entity that may be
responsible for remediation of environmental contamination)
PUCT................... Public Utility Commission of Texas
PUHCA.................. Public Utility Holding Company Act of 1935, as amended
PURPA.................. Public Utility Regulatory Policies Act
Rate Cap............... The level of Entergy Gulf States' retail electric base rates in
effect at December 31, 1993, for the Louisiana retail
jurisdiction, and the level of such rates in effect prior to the
settlement agreement with the PUCT on July 21, 1994, for the Texas
retail jurisdiction, which may not be exceeded before December 31,
1998
River Bend............. River Bend Steam Electric Generating Station (nuclear), owned 70%
by Entergy Gulf States
RUS.................... Rural Utilities Services (formerly the Rural Electrification
Administration or "REA")
SEC.................... Securities and Exchange Commission
System Agreement....... Agreement, effective January 1, 1983, as modified, among Entergy
Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy
Mississippi and Entergy New Orleans, all wholly owned subsidiaries
of Entergy Corporation, relating to the sharing of generating
capacity and other power resources
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Gulf States Utilities Company
We have audited the accompanying balance sheets of Gulf States Utilities
Company as of December 31, 1995 and 1994 and the related statements of income
(loss), retained earnings and paid-in-capital and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the net amount of
capitalized costs for its River Bend Unit I Nuclear Generating Plant (River
Bend) exceed those costs currently being recovered through rates. At December
31, 1995, approximately $482 million is not currently being recovered through
rates. If current regulatory and court orders are not modified, a write-off of
all or a portion of such costs may be required. Additionally, other rate-related
contingencies exist which may result in refunds of revenues previously
collected. The extent of such write-off of capitalized River Bend costs or
refunds of revenues previously collected, if any, will not be determined until
appropriate rate proceedings and court appeals have been concluded. Accordingly,
the accompanying financial statements do not include any adjustments or
provision for write-off or refund that might result from the outcome of these
uncertainties. As also discussed in Note 2, approximately $187 million of
additional deferred River Bend operating costs which exceed those costs
currently being recovered through rates are expected to be written-off upon the
adoption of Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Adoption of this Statement is required on January 1, 1996.
As discussed in Note 8 to the financial statements, civil actions have been
initiated against Gulf States Utilities Company to, among other things, recover
the co-owner's investment in River Bend and to annul the River Bend Joint
Ownership Participation and Operating Agreement. The ultimate outcome of these
proceedings cannot presently be determined.
As discussed in Note 13 to the financial statements, the common stock of
the Company was acquired on December 31, 1993.
As discussed in Note 3 to the financial statements, in 1993, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." As discussed in Note 10 to the financial statements, the Company
adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," as of January 1,
1993. As discussed in Note 1 to the financial statements, as of January 1, 1993,
the Company began accruing revenues for energy delivered to customers but not
yet billed.
COOPERS & LYBRAND L.L.P.
New Orleans, Louisiana
February 14, 1996
F-3
<PAGE>
GULF STATES UTILITIES COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Utility Plant:
Electric........................................................ $6,942,983 $6,842,726
Natural gas..................................................... 45,789 44,505
Steam products.................................................. 77,551 77,307
Property under capital leases................................... 77,918 82,914
Construction work in progress................................... 148,043 96,176
Nuclear fuel under capital lease................................ 69,853 80,042
---------- ----------
Total................................................... 7,362,137 7,223,670
Less -- accumulated depreciation and amortization............... 2,664,943 2,504,826
---------- ----------
Utility plant -- net.................................... 4,697,194 4,718,844
---------- ----------
Other Property and Investments:
Decommissioning trust fund...................................... 32,943 21,309
Other -- at cost (less accumulated depreciation)................ 28,626 29,315
---------- ----------
Total................................................... 61,569 50,624
---------- ----------
Current Assets:
Cash and cash equivalents:
Cash......................................................... 13,751 8,063
Temporary cash investments -- at cost, which approximates
market:
Associated companies....................................... 46,336 5,085
Other...................................................... 174,517 91,496
---------- ----------
Total cash and cash equivalents......................... 234,604 104,644
Accounts receivable:
Customer (less allowance for doubtful accounts of $1.6
million in 1995 and $0.7 million in 1994)................... 110,187 167,745
Associated companies......................................... 1,395 12,732
Other........................................................ 15,497 20,706
Accrued unbilled revenues.................................... 73,381 39,470
Deferred fuel costs............................................. 31,154 6,314
Accumulated deferred income taxes............................... 43,465 49,457
Fuel inventory.................................................. 32,141 25,784
Materials and supplies -- at average cost....................... 91,288 90,054
Rate deferrals.................................................. 97,164 100,478
Prepayments and other........................................... 15,566 13,754
---------- ----------
Total................................................... 745,842 631,138
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets:
Rate deferrals............................................... 419,904 506,974
SFAS 109 regulatory asset -- net............................. 453,628 426,358
Unamortized loss on reacquired debt.......................... 61,233 63,994
Other regulatory assets...................................... 27,836 35,168
Long-term receivables........................................ 224,727 264,752
Other........................................................... 169,125 145,609
---------- ----------
Total................................................... 1,356,453 1,442,855
---------- ----------
TOTAL................................................... $6,861,058 $6,843,461
========== ==========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
GULF STATES UTILITIES COMPANY
BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Capitalization:
Common stock, no par value, authorized 200,000,000 shares;
issued and outstanding 100 shares in 1995 and 1994........... $ 114,055 $ 114,055
Paid-in capital................................................. 1,152,505 1,152,336
Retained earnings............................................... 357,704 264,626
---------- ----------
Total common shareholder's equity....................... 1,624,264 1,531,017
Preference stock................................................ 150,000 150,000
Preferred stock:
Without sinking fund......................................... 136,444 136,444
With sinking fund............................................ 87,654 94,934
Long-term debt.................................................. 2,175,471 2,318,417
---------- ----------
Total................................................... 4,173,833 4,230,812
---------- ----------
Other Noncurrent Liabilities:
Obligations under capital leases................................ 108,078 125,691
Other........................................................... 78,245 68,753
---------- ----------
Total................................................... 186,323 194,444
---------- ----------
Current Liabilities:
Currently maturing long-term debt............................... 145,425 50,425
Accounts payable:
Associated companies......................................... 31,349 31,722
Other........................................................ 136,528 140,975
Customer deposits............................................... 21,983 22,216
Taxes accrued................................................... 37,413 12,478
Interest accrued................................................ 56,837 55,327
Nuclear refueling reserve....................................... 22,627 10,117
Obligations under capital lease................................. 37,773 37,265
Reserve for rate refund......................................... -- 56,972
Other........................................................... 86,653 111,963
---------- ----------
Total................................................... 576,588 529,460
---------- ----------
Deferred Credits:
Accumulated deferred income taxes............................... 1,177,144 1,100,396
Accumulated deferred investment tax credits..................... 208,618 199,428
Deferred River Bend finance charges............................. 58,047 82,406
Other........................................................... 480,505 506,515
---------- ----------
Total................................................... 1,924,314 1,888,745
---------- ----------
Commitments and Contingencies (Notes 2, 8, and 9)
TOTAL................................................... $6,861,058 $6,843,461
========== ==========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
GULF STATES UTILITIES COMPANY
STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Revenues:
Electric........................................... $1,788,964 $1,719,201 $1,747,961
Natural gas........................................ 23,715 31,605 32,466
Steam products..................................... 49,295 46,559 47,193
---------- ---------- ----------
Total...................................... 1,861,974 1,797,365 1,827,620
---------- ---------- ----------
Operating Expenses:
Operation and maintenance:
Fuel, fuel-related expenses, and gas purchased
for resale.................................... 516,812 517,177 559,416
Purchased power................................. 169,767 192,937 123,949
Nuclear refueling outage expenses............... 10,607 12,684 10,706
Other operation and maintenance................. 432,647 505,701 469,664
Depreciation, amortization, and decommissioning.... 202,224 197,151 190,405
Taxes other than income taxes...................... 102,228 98,096 95,742
Income taxes....................................... 57,235 (6,448) 46,007
Amortization of rate deferrals..................... 66,025 66,416 61,115
---------- ---------- ----------
Total...................................... 1,557,545 1,583,714 1,557,004
---------- ---------- ----------
Operating Income..................................... 304,429 213,651 270,616
---------- ---------- ----------
Other Income (Deductions):
Allowance for equity funds used during
construction.................................... 1,125 1,334 726
Write-off of plant held for future use............. -- (85,476) --
Miscellaneous -- net............................... 22,573 (64,843) 19,996
Income taxes....................................... (6,009) 55,638 (12,009)
---------- ---------- ----------
Total...................................... 17,689 (93,347) 8,713
---------- ---------- ----------
Interest Charges:
Interest on long-term debt......................... 191,341 195,414 202,235
Other interest -- net.............................. 8,884 8,720 8,364
Allowance for borrowed funds used during
construction.................................... (1,026) (1,075) (731)
---------- ---------- ----------
Total...................................... 199,199 203,059 209,868
---------- ---------- ----------
Income (Loss) before Extraordinary Items and the
Cumulative Effect of an Accounting Change.......... 122,919 (82,755) 69,461
Extraordinary Items (net of income taxes)............ -- -- (1,259)
Cumulative Effect of an Accounting Change (net of
income taxes)...................................... -- -- 10,660
---------- ---------- ----------
Net Income (Loss).................................... 122,919 (82,755) 78,862
Preferred and Preference Stock Dividend Requirements
and Other.......................................... 29,643 29,919 35,581
---------- ---------- ----------
Earnings (Loss) Applicable to Common Stock........... $ 93,276 $ (112,674) $ 43,281
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
GULF STATES UTILITIES COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net income (loss).............................................. $ 122,919 $ (82,755) $ 78,862
Noncash items included in net income:
Extraordinary items.......................................... -- -- 1,259
Cumulative effect of a change in accounting principle........ -- -- (10,660)
Change in rate deferrals..................................... 66,025 96,979 61,115
Depreciation, amortization, and decommissioning.............. 202,224 197,151 190,405
Deferred income taxes and investment tax credits............. 63,231 (62,171) 41,302
Allowance for equity funds used during construction.......... (1,125) (1,334) (726)
Write-off of plant held for future use....................... -- 85,476 --
Changes in working capital:
Receivables.................................................. 40,193 (72,341) 6,879
Fuel inventory............................................... (6,357) (2,336) (2,289)
Accounts payable............................................. (4,820) 60,112 11,072
Taxes accrued................................................ 24,935 (10,378) 3,764
Interest accrued............................................. 1,510 (4,189) (2,497)
Reserve for rate refund...................................... (56,972) 56,972 --
Other working capital accounts............................... (40,919) 33,781 (9,915)
Decommissioning trust contributions............................ (8,147) (3,202) (2,710)
Purchased power settlement..................................... -- -- (169,300)
Provision for estimated losses and reserves.................... 10,119 4,181 20,349
Other.......................................................... (12,062) 30,413 38,525
---------- ---------- ----------
Net cash flow provided by operating activities.......... 400,754 326,359 255,435
---------- ---------- ----------
Investing Activities:
Construction expenditures...................................... (185,944) (155,989) (115,481)
Allowance for equity funds used during construction............ 1,125 1,334 726
Nuclear fuel purchases......................................... (1,425) (31,178) (2,118)
Proceeds from sale/leaseback of nuclear fuel................... 542 29,386 2,118
Refund of escrow account and other property.................... -- -- 5,921
---------- ---------- ----------
Net cash flow used in investing activities................... (185,702) (156,447) (108,834)
---------- ---------- ----------
Financing Activities:
Proceeds from the issuance of:
First mortgage bonds......................................... -- -- 338,379
Other long-term debt......................................... 2,277 101,109 21,440
Preference stock............................................. -- -- 146,625
Retirement of:
First mortgage bonds......................................... -- -- (360,199)
Other long-term debt......................................... (50,425) (102,425) (18,398)
Redemption of preferred and preference stock................... (7,283) (6,070) (174,841)
Dividends paid:
Common stock................................................. -- (289,100) --
Preferred and preference stock............................... (29,661) (30,131) (35,999)
---------- ---------- ----------
Net cash flow used in financing activities................... (85,092) (326,617) (82,993)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents............. 129,960 (156,705) 63,608
Cash and cash equivalents at beginning of period................. 104,644 261,349 197,741
---------- ---------- ----------
Cash and cash equivalents at end of period....................... $ 234,604 $ 104,644 $ 261,349
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest -- net of amount capitalized........................ $ 187,918 $ 191,850 $ 197,058
Income taxes................................................. $ 208 $ 251 $ 15,600
Noncash investing and financing activities:
Capital lease obligations incurred........................... -- $ 31,178 $ 17,143
Change in unrealized appreciation/depreciation of
decommissioning trust assets............................... $ 2,121 $ (915) --
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
GULF STATES UTILITIES COMPANY
STATEMENTS OF RETAINED EARNINGS AND PAID-IN CAPITAL
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Retained Earnings, January 1........................ $ 264,626 $ 666,401 $ 631,462
Add:
Net income (loss).............................. 122,919 (82,755) 78,862
---------- ---------- ----------
Total..................................... 387,545 583,646 710,324
---------- ---------- ----------
Deduct:
Dividends declared:
Preferred and preference stock............... 29,482 29,831 35,581
Common stock................................. -- 289,100 --
Preferred and preference stock redemption and
other..................................... 359 89 8,342
---------- ---------- ----------
Total..................................... 29,841 319,020 43,923
---------- ---------- ----------
Retained Earnings, December 31 (Note 7)............. $ 357,704 $ 264,626 $ 666,401
========== ========== ==========
Paid-in Capital, January 1.......................... $1,152,336 $1,152,304 $ 67,316
Add:
Issuance of 100 shares of no par common stock
with a stated value of $114,055 net of the
retirement of 114,055,065 shares of no par
common stock................................. -- -- 1,086,868
Gain (loss) on reacquisition of preferred and
preference stock............................. 169 32 (1,880)
---------- ---------- ----------
Paid-in Capital, December 31........................ $1,152,505 $1,152,336 $1,152,304
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
the Company and its direct subsidiaries Varibus Corporation, Prudential Oil and
Gas, Inc., GSG&T, and Southern Gulf Railway Company. All significant
intercompany transactions have been eliminated. The Company and its subsidiaries
maintain accounts in accordance with FERC and other regulatory guidelines.
Certain previously reported amounts have been reclassified to conform to current
classifications with no effect on net income or shareholder's equity. The
Company became a wholly-owned subsidiary of Entergy Corporation through the
Merger which was consummated on December 31, 1993.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of the Company and its subsidiaries' financial statements,
in conformity with generally accepted accounting principles, requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of December
31, 1995 and 1994, and the reported amounts of revenues and expenses during
fiscal years 1995, 1994, and 1993. Adjustments to the reported amounts of assets
and liabilities may be necessary in the future to the extent that future
estimates or actual results are different from the estimates used in 1995
financial statements.
REVENUES AND FUEL COSTS
The Company generates, transmits, and distributes electricity primarily to
retail customers in the States of Texas and Louisiana; distributes gas at retail
in the City of Baton Rouge, Louisiana, and vicinity; and also sells steam to a
large refinery complex in Baton Rouge.
The Company accrues estimated revenues for energy delivered since the
latest billings. However, prior to January 1, 1993, the Company recognized
electric and gas revenues when billed. To provide a better matching of revenues
and expenses, effective January 1, 1993, the Company adopted a change in
accounting principle to provide for the accrual of estimated unbilled revenues.
In accordance with a LPSC rate order, the Company recorded a deferred credit of
$16.6 million for the January 1, 1993, amount of unbilled revenues. See Note 2
herein regarding the Company's subsequent appeals of the LPSC order regarding
deferred unbilled revenues.
The Company's Texas retail rate schedules include a fixed fuel factor
approved by the PUCT, which remains in effect until changed as part of a general
rate case, fuel reconciliation, or fixed fuel factor filing.
UTILITY PLANT
Utility plant is stated at original cost. The original cost of utility
plant retired or removed, plus the applicable removal costs, less salvage, is
charged to accumulated depreciation. Maintenance, repairs, and minor replacement
costs are charged to operating expenses. Substantially all of the utility plant
is subject to liens of the Company's mortgage bond indentures.
Net electric utility plant in service, by functional category, as of
December 31, 1995 (excluding owned and leased nuclear fuel and the plant
acquisition adjustment related to the Merger), is shown below:
<TABLE>
<CAPTION>
PRODUCTION TRANSMISSION DISTRIBUTION OTHER TOTAL
- ---------- ------------ ------------ ----- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
$3,110 $430 $725 $ 179 $4,444
</TABLE>
F-9
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is computed on the straight-line basis at rates based on the
estimated service lives and costs of removal of the various classes of property.
The depreciation rate on average depreciable property was 2.7% for 1995, 1994
and 1993.
AFUDC represents the approximate net composite interest cost of borrowed
funds and a reasonable return on the equity funds used for construction.
Although AFUDC increases both utility plant and earnings, it is only realized in
cash through depreciation provisions included in rates.
JOINTLY-OWNED GENERATING STATIONS
The Company owns undivided interests in several jointly-owned electric
generating facilities and records the investments and expenses associated with
these generating stations to the extent of its respective ownership interests.
As of December 31, 1995, the Company's investment and accumulated depreciation
in each of these generating stations were as follows:
<TABLE>
<CAPTION>
TOTAL
MEGAWATT ACCUMULATED
GENERATING STATION FUEL TYPE CAPABILITY OWNERSHIP INVESTMENT DEPRECIATION
----------------------- --------- ---------- --------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
River Bend Unit 1...... Nuclear 936 70.00% $3,067,996 $ 670,020
Roy S. Nelson Unit 6... Coal 550 70.00% 390,036 155,997
Big Cajun 2 Unit 3..... Coal 540 42.00% 219,990 80,522
</TABLE>
INCOME TAXES
Entergy Corporation and its subsidiaries, including the Company, file a
consolidated federal income tax return. Income taxes are allocated to the
Company in proportion to its contribution to consolidated taxable income.
Commission regulations require that no Entergy Corporation subsidiary pay more
taxes than it would have paid if a separate income tax return had been filed.
Deferred income taxes are recorded for all temporary differences between the
book and tax basis of assets and liabilities and for certain credits available
for carryforward.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Investment tax credits are deferred and amortized based upon the average
useful life of the related property in accordance with rate treatment. As
discussed in Note 3 herein, in 1993 the Company changed its accounting for
income taxes to conform with SFAS 109, "Accounting for Income Taxes."
REACQUIRED DEBT
The premiums and costs associated with reacquired debt are being amortized
over the life of the related new issuances, in accordance with ratemaking
treatment.
CASH AND CASH EQUIVALENTS
The Company considers all unrestricted highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
CONTINUED APPLICATION OF SFAS 71
As a result of the EPAct, other Federal laws, and actions of regulatory
commissions, the electric utility industry is moving toward a combination of
competition and a modified regulatory environment, the
F-10
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's financial statements currently reflect, for the most part, assets and
costs based on cost-based ratemaking regulation, in accordance with SFAS 71,
"Accounting for the Effects of Certain Types of Regulation." Continued
applicability of SFAS 71 to the Company's financial statements requires that
rates set by an independent regulator on a cost-of-service basis (including a
reasonable rate of return on invested capital) can actually be charged to and
collected from customers.
In the event either all or a portion of a utility's operations cease to
meet those criteria for various reasons, including deregulation, a change in the
method of regulation or a change in the competitive environment for the
utility's regulated services, the utility should discontinue application of SFAS
71 for the relevant portion. That discontinuation would be reported by
elimination from the balance sheet of the effects of any actions of regulators
recorded as regulatory assets and liabilities.
As of December 31, 1995, and for the foreseeable future the Company's
financial statements continue to follow SFAS 71, with the exceptions noted
below.
SFAS 101
SFAS 101, "Accounting for the Discontinuation of Application of FASB
Statement No. 71," specifies how an enterprise that ceases to meet the criteria
for application of SFAS 71 to all or part of its operations should report that
event in its financial statements. The Company discontinued regulatory
accounting principles for its wholesale jurisdiction and its steam department
during 1989 and for the Louisiana retail deregulated portion of River Bend in
1991. The results of the Company's deregulated operations (before interest
charges) for the years ended December 31, 1995, 1994, and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Revenues.............................. $141,171 $138,822 $141,399
Operating Expenses
Fuel, operating, and maintenance.............. 105,733 116,386 120,177
Depreciation.................................. 31,129 27,890 28,554
Income taxes.................................. (2,914) (249) (4,411)
-------- -------- --------
Total Operating Expenses.............. 133,948 144,027 144,320
-------- -------- --------
Net Income (Loss) From Deregulated
Utility Operations.................. $ 7,223 $ (5,205) $ (2,921)
======== ======== ========
</TABLE>
SFAS 121
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), which
became effective January 1, 1996. This statement describes circumstances that
may result in certain Long-Lived assets being impaired. The statement also
provides criteria for recognition and measurement of asset impairment. Note 2
herein describes regulatory assets of $169 million (net of tax) related to Texas
retail deferred River Bend operating and carrying costs. These deferred costs
will be required to be written off upon the adoption of SFAS 121.
Certain other assets and operations of the Company totaling approximately
$1.7 billion (pre-tax) could be affected by SFAS 121 in the future. Those assets
include the Company's Louisiana deregulated asset plan, and its Texas
jurisdiction abeyed portion of the River Bend plant, in addition to the
wholesale jurisdiction and steam department operations. As discussed above, the
Company has previously discontinued the application of SFAS 71 for the Louisiana
deregulated asset plan, operations under the wholesale jurisdiction, and the
steam department.
F-11
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company periodically reviews these assets and operations in order to
determine if the carrying value of such assets will be recovered. Generally,
this determination is based on the net cash flows expected to result from such
operations and assets. Projected net cash flows depend on the future operating
costs associated with the assets, the efficiency and availability of the assets
and generating units, and the future market and price for energy over the
remaining life of the assets. Based on current estimates of future cash flows as
prescribed under SFAS 121, management anticipates that future revenues from such
assets and operations of the Company will fully recover all related costs.
FAIR VALUE DISCLOSURES
The estimated fair value of financial instruments was determined using bid
prices reported by dealer markets and by nationally recognized investment
banking firms. Considerable judgment is required in developing the estimates of
fair value. Therefore, estimates are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. In addition, gains
or losses realized on financial instruments may be reflected in future rates and
not accrue to the benefit of stockholders.
The Company considers the carrying amounts of financial instruments
classified as current assets and liabilities to be a reasonable estimate of
their fair value because of the short maturity of these instruments. In
addition, the Company does not expect that performance of its obligations will
be required in connection with certain off-balance sheet commitments and
guarantees considered financial instruments. Due to this factor, and because of
the related-party nature of these commitments and guarantees, determination of
fair value is not considered practicable. See Notes 5, 6, and 8 herein for
additional disclosure concerning fair value methodologies.
NOTE 2. RATE AND REGULATORY MATTERS
MERGER-RELATED RATE AGREEMENTS
In 1993, the LPSC and the PUCT approved separate regulatory proposals for
the Company that include the following elements: (1) a five-year Rate Cap on the
Company's retail electric base rates in the respective states, except for force
major (defined to include, among other things, war, natural catastrophes, and
high inflation); (2) a provision for passing through to retail customers the
jurisdictional portion of the fuel savings created by the Merger; and (3) a
mechanism for tracking nonfuel operation and maintenance savings created by the
Merger. The LPSC regulatory plan provides that such nonfuel savings will be
shared 60% by shareholders and 40% by ratepayers during the eight years
following the Merger. The LPSC plan requires annual regulatory filings by the
end of May through the year 2001. The PUCT regulatory plan provides that such
savings will be shared equally by shareholders and ratepayers, except that the
shareholders' portion will be reduced by $2.6 million per year on a total
company basis in years four through eight. The PUCT plan also requires a series
of future regulatory filings in November 1996, 1998, and 2001 to ensure that the
ratepayers' share of such savings be reflected in rates on a timely basis. In
addition, the plan requires Entergy Corporation to hold the Company's Texas
retail customers harmless from the effects of the removal by FERC of a 40% cap
on the amount of fuel savings the Company may be required to transfer to other
subsidiaries of Entergy Corporation under the FERC tracking mechanism (see
below). On January 14, 1994, Entergy Corporation filed a petition for review
before the D.C. Circuit Court seeking review of FERC's deletion of the 40% cap
provision in the fuel cost protection mechanism. The matter is currently being
held in abeyance.
FERC approved the Company's inclusion in the System Agreement. Commitments
were adopted to provide reasonable assurance that the ratepayers of the
Operating Companies will not be allocated higher costs including, among other
things, (1) a tracking mechanism to protect the Operating Companies from certain
unexpected increases in fuel costs, (2) the distribution of profits from power
sales contracts entered into prior to the Merger, (3) a methodology to estimate
the cost of capital in
F-12
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
future FERC proceedings, and (4) a stipulation that the Operating Companies will
be insulated from certain direct effects on capacity equalization payments if
the Company were to acquire Cajun's 30% share in River Bend. The Operating
Companies' regulatory authorities can elect to "opt out" of the fuel tracker,
but are not required to make such an election until FERC has approved the
respective Operating Company's compliance filing. The City of New Orleans and
the Mississippi Public Service Commission have made such an election.
RIVER BEND
In May 1988, the PUCT granted the Company a permanent increase in annual
revenues of $59.9 million resulting from the inclusion in rate base of
approximately $1.6 billion of company-wide River Bend plant investment and
approximately $182 million of related Texas retail jurisdiction deferred River
Bend costs (Allowed Deferrals). In addition, the PUCT disallowed as imprudent
$63.5 million of company-wide River Bend plant costs and placed in abeyance,
with no finding of prudence, approximately $1.4 billion of company-wide River
Bend plant investment and approximately $157 million of Texas retail
jurisdiction deferred River Bend operating and carrying costs. The PUCT affirmed
that the rate treatment of such amounts would be subject to future demonstration
of the prudence of such costs. The Company and intervening parties appealed this
order (Rate Appeal) and the Company filed a separate rate case asking, among
other things, that the abeyed River Bend plant costs be found prudent (Separate
Rate Case). Intervening parties filed suit in a Texas district court to prohibit
the Separate Rate Case and prevailed. The district court's decision in favor of
the intervenors was ultimately appealed to the Texas Supreme Court, which ruled
in 1990 that the prudence of the purported abeyed costs could not be relitigated
in a separate rate proceeding. The Texas Supreme Court's decision stated that
all issues relating to the merits of the original PUCT order, including the
prudence of all River Bend-related costs, should be addressed in the Rate
Appeal.
In October 1991, the Texas district court in the Rate Appeal issued an
order holding that, while it was clear the PUCT made an error in assuming it
could set aside $1.4 billion of the total costs of River Bend and consider them
in a later proceeding, the PUCT, nevertheless, found that the Company had not
met its burden of proof related to the amounts placed in abeyance. The court
also ruled that the Allowed Deferrals should not be included in rate base. The
court further stated that the PUCT had erred in reducing the Company's deferred
costs by $1.50 for each $1.00 of revenue collected under the interim rate
increases authorized in 1987 and 1988. The court remanded the case to the PUCT
with instructions as to the proper handling of the Allowed Deferrals. The
Company's motion for rehearing was denied and, in December 1991, the Company
filed an appeal of the October 1991 district court order. The PUCT also appealed
the October 1991 district court order, which served to supersede the district
court's judgment, rendering it unenforceable under Texas law.
In August 1994, the Texas Third District Court of Appeals (the Appellate
Court) affirmed the district court's decision that there was substantial
evidence to support the PUCT's 1988 decision not to include the abeyed
construction costs in the Company's rate base. While acknowledging that the PUCT
had exceeded its authority in attempting to defer a decision on the inclusion of
those costs in rate base in order to allow the Company a further opportunity to
demonstrate the prudence of those costs in a subsequent proceeding, the
Appellate Court found that the Company had suffered no harm or lack of due
process as a result of the PUCT's error. Accordingly, the Appellate Court held
that the PUCT's action had the effect of disallowing the company-wide $1.4
billion of River Bend construction costs for ratemaking purposes. In its August
1994 opinion, the Appellate Court also held that the Company's deferred
operating and maintenance costs associated with the allowed portion of River
Bend, as well as the Company's deferred River Bend carrying costs included in
the Allowed Deferrals, should be included in rate base. The Appellate Court's
August 1994 opinion affirmed the PUCT's original order in this case.
F-13
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Appellate Court's August 1994 opinion was entered by two judges, with a
third judge dissenting. The dissenting opinion stated that the result of the
majority opinion was, among other things, to deprive the Company of due process
at the PUCT because the PUCT never reached a finding on the $1.4 billion of
construction costs.
In October 1994, the Appellate Court denied the Company's motion for
rehearing on the August 1994 opinion as to the $1.4 billion in River Bend
construction costs and other matters. The Company appealed the Appellate Court's
decision to the Texas Supreme Court. On February 9, 1996, the Texas Supreme
Court agreed to hear the appeal. Oral arguments are scheduled for March 19,
1996.
As of December 31, 1995, the River Bend plant costs disallowed for retail
ratemaking purposes in Texas, the River Bend plant costs held in abeyance, and
the related operating and carrying cost deferrals totaled (net of taxes)
approximately $13 million, $276 million (both net of depreciation), and $169
million, respectively. Allowed Deferrals were approximately $83 million, net of
taxes and amortization, as of December 31, 1995. The Company estimates it has
collected approximately $182 million of revenues as of December 31, 1995, as a
result of the originally ordered rate treatment by the PUCT of these deferred
costs. If recovery of the Allowed Deferrals is not upheld, future revenues based
upon those allowed deferrals could also be lost, and no assurance can be given
as to whether or not refunds to customers of revenue received based upon such
deferred costs will be required.
No assurance can be given as to the timing or outcome of the remands or
appeals described above. Pending further developments in these cases, the
Company has made no write-offs or reserves for the River Bend-related costs. See
below for a discussion of the write-off of deferred operating and carrying cost
required under SFAS 121 in 1996. Based on advice from Clark, Thomas & Winters, A
Professional Corporation, legal counsel of record in the Rate Appeal, management
believes that it is reasonably possible that the case will be remanded to the
PUCT, and the PUCT will be allowed to rule on the prudence of the abeyed River
Bend plant costs. At this time, management and legal counsel are unable to
predict the amount, if any, of the abeyed and previously disallowed River Bend
plant costs that ultimately may be disallowed by the PUCT. A net of tax
write-off as of December 31, 1995, of up to $289 million could be required based
on an ultimate adverse ruling by the PUCT on the abeyed and disallowed costs.
In prior proceedings, the PUCT has held that the original cost of nuclear
power plants will be included in rates to the extent those costs were prudently
incurred. Based upon the PUCT's prior decisions, management believes that River
Bend construction costs were prudently incurred and that it is reasonably
possible that it will recover in rate base, or otherwise through means such as a
deregulated asset plan, all or substantially all of the abeyed River Bend plant
costs. However, management also recognizes that it is reasonably possible that
not all of the abeyed River Bend plant costs may ultimately be recovered.
As part of its direct case in the Separate Rate Case, the Company filed a
cost reconciliation study prepared by Sandlin Associates, management consultants
with expertise in the cost analysis of nuclear power plants, which supports the
reasonableness of the River Bend costs held in abeyance by the PUCT. This
reconciliation study determined that approximately 82% of the River Bend cost
increase above the amount included by the PUCT in rate base was a result of
changes in federal nuclear safety requirements, and provided other support for
the remainder of the abeyed amounts.
There have been four other rate proceedings in Texas involving nuclear
power plants. Disallowed investment in the plants ranged from 0% to 15%. Each
case was unique, and the disallowances in each were made for different reasons.
Appeals of two of these PUCT decisions are currently pending.
F-14
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following factors support management's position that a loss contingency
requiring accrual has not occurred, and its belief that all, or substantially
all, of the abeyed plant costs will ultimately be recovered:
1. The $1.4 billion of abeyed River Bend plant costs have never been
ruled imprudent and disallowed by the PUCT;
2. Analysis by Sandlin Associates, which supports the prudence of
substantially all of the abeyed construction costs;
3. Historical inclusion by the PUCT of prudent construction costs in
rate base; and
4. The analysis of the Company's legal staff, which has considerable
experience in Texas rate case litigation.
Based on advice from Clark, Thomas & Winters, A Professional Corporation,
legal counsel of record in the Rate Appeal, management believes that it is
reasonably possible that the Allowed Deferrals will continue to be recovered in
rates, and that it is reasonably possible that the deferred costs related to the
$1.4 billion of abeyed River Bend plant costs will be recovered in rates to the
extent that the $1.4 billion of abeyed River Bend plant is recovered.
The adoption of SFAS 121 became effective January 1, 1996. SFAS 121 changes
the standard for continued recognition of regulatory assets and, as a result the
Company will be required to write-off $169 million of rate deferrals in 1996.
The standard also describes circumstances that may result in assets being
impaired and provides criteria for recognition and measurement of asset
impairment. See Note 1 herein for further information regarding SFAS 121.
FILINGS WITH THE PUCT AND TEXAS CITIES
In March 1994, the Texas Office of Public Utility Counsel and certain
cities served by the Company instituted an investigation of the reasonableness
of the Company's rates. On March 20, 1995, the PUCT ordered a $72.9 million
annual base rate reduction for the period March 31, 1994, through September 1,
1994, decreasing to an annual base rate reduction of $52.9 million after
September 1, 1994. In accordance with the Merger agreement, the rate reduction
was applied retroactively to March 31, 1994.
On May 26, 1995, the PUCT amended its previously issued March 20, 1995 rate
order, reducing the $52.9 million annual base rate reduction to an annual level
of $36.5 million. The PUCT's action was based, in part, upon a Texas Supreme
Court decision not to require a utility to use the prospective tax benefits
generated by disallowed expenses to reduce rates. The PUCT's May 26, 1995,
amended order no longer required the Company to pass such prospective tax
benefits onto its customers. The rate refund, retroactive to March 31, 1994, was
approximately $61.8 million (including interest) and was refunded to customers
in September, October, and November 1995.
The Company and other parties have appealed the PUCT order, but no
assurance can be given as to the timing or outcome of the appeal.
FILINGS WITH THE LPSC
In May 1994, the Company filed a required earnings analysis with the LPSC
for the test year preceding the Merger (1993). On December 14, 1994, the LPSC
ordered a $12.7 million annual rate reduction for the Company, effective January
1995. The Company received a preliminary injunction from the District Court
regarding $8.3 million of the reduction relating to the earnings effect of a
1994 change in accounting for unbilled revenues. On January 1, 1995, the Company
reduced rates by $4.4 million. The Company filed an appeal of the entire $12.7
million rate reduction with the District Court, which denied
F-15
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the appeal in July 1995. The Company has appealed the order to the Louisiana
Supreme Court. The preliminary injunction relating to $8.3 million of the
reduction will remain in effect during the appeal.
On May 31, 1995, the Company filed its second required post-Merger earnings
analysis with the LPSC. Hearings on this review were held and a decision is
expected in mid-1996.
LPSC FUEL COST REVIEW
In November 1993, the LPSC ordered a review of the Company's fuel costs for
the period October 1988 through September 1991 (Phase 1) based on the number of
outages at River Bend and the findings in the June 1993 PUCT fuel reconciliation
case. In July 1994, the LPSC ruled in the Phase 1 fuel review case and ordered
the Company to refund approximately $27 million to its customers. Under the
order, a refund of $13.1 million was made through a billing credit on August
1994 bills. In August 1994, the Company appealed the remaining $13.9 million of
the LPSC-ordered refund to the district court. The Company has made no reserve
for the remaining portion, pending outcome of the district court appeal, and no
assurance can be given as to the timing or outcome of the appeal.
The LPSC is currently conducting the second phase of its review of the
Company's fuel costs for the period October 1991 through December 1994. On June
30, 1995, the LPSC consultants filed testimony recommending a disallowance of
$38.7 million of fuel costs. Hearings began in December 1995 and are expected to
be completed in early March 1996.
DEREGULATED ASSET PLAN
A deregulated asset plan representing an unregulated portion (approximately
24%) of River Bend (plant costs, generation, revenues, and expenses) was
established pursuant to a January 1992 LPSC order. The plan allows the Company
to sell such generation to Louisiana retail customers at 4.6 cents per KWh or
off-system at higher prices, with certain sharing provisions for sharing such
incremental revenue above 4.6 cents per KWh between ratepayers and shareholders.
RIVER BEND COST DEFERRALS
The Company deferred approximately $369 million of River Bend operating and
purchased power costs, and accrued carrying charges, pursuant to a 1986 PUCT
accounting order. Approximately $182 million of these costs are being amortized
over a 20-year period, and the remaining $187 million are not being amortized
pending the outcome of the Rate Appeal. As of December 31, 1995, the unamortized
balance of these costs was $312 million. The Company deferred approximately
$400.4 million of similar costs pursuant to a 1986 LPSC accounting order, of
which approximately $83 million were unamortized as of December 31, 1995, and
are being amortized over a 10-year period ending in 1998.
In accordance with a phase-in plan approved by the LPSC, the Company
deferred $294 million of its River Bend costs related to the period February
1988 through February 1991. The Company has amortized $172 million through
December 31, 1995. The remainder of $122 million will be recovered over
approximately 2.2 years.
F-16
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. INCOME TAXES
The Company's income tax expense consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
------------------------------
1995 1994 1993
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................... $ 13 $ 71 $16,714
State...................................................... -- 14 --
------- -------- -------
Total.............................................. 13 85 16,714
Deferred -- net.............................................. 67,703 (57,911) 46,477
Investment tax credit adjustments -- net..................... (4,472) (4,260) 1,093
------- -------- -------
Recorded income tax expense................................ $63,244 $(62,086) $64,284
======= ======== =======
Charged to operations........................................ $57,235 $ (6,448) $46,007
Charged (credited) to other income........................... 6,009 (55,638) 12,009
Charged to extraordinary items............................... -- -- (671)
Charged to cumulative effect................................. -- -- 6,939
------- -------- -------
Total income taxes................................. $63,244 $(62,086) $64,284
======= ======== =======
</TABLE>
The Company's total income taxes differ from the amounts computed by
applying the statutory Federal income tax rate to income before taxes. The
reasons for the differences are:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
% OF % OF % OF
PRE-TAX PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed at statutory rate....... $ 65,157 35.0 $(50,694) (35.0) $ 50,101 35.0
Increases (reductions) in tax
resulting from:
State income taxes net of
federal income tax effect... 8,375 4.5 (6,571) (4.5) 1,332 0.9
Rate deferrals -- net.......... 6,240 3.4 6,551 4.5 6,193 4.3
Depreciation................... (13,073) (7.0) (8,188) (5.7) (11,343) (7.9)
Impact of change in tax rate... -- -- -- -- 5,179 3.6
Book expenses not deducted for
tax......................... -- -- 151 0.1 15,134 10.6
Amortization of investment tax
credits..................... (4,475) (2.4) (4,472) (3.1) (4,435) (3.1)
Other -- net................... 1,020 0.5 1,137 0.8 2,123 1.5
-------- ---- -------- ----- -------- ----
Total income taxes..... $ 63,244 34.0 $(62,086) (42.9) $ 64,284 44.9
======== ==== ======== ===== ======== ====
</TABLE>
F-17
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's net deferred tax liabilities as of
December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Net regulatory assets/(liabilities).................. $ (512,281) $ (494,443)
Plant related basis differences...................... (1,060,241) (1,065,053)
Rate deferrals....................................... (104,695) (132,213)
Other................................................ (1,814) (23,163)
----------- -----------
Total........................................ $(1,679,031) $(1,714,872)
=========== ===========
Deferred Tax Assets:
Net operating loss carryforwards..................... $ 151,141 $ 251,000
Investment tax credit carryforward................... 167,713 173,852
Valuation allowance -- investment tax credit
carryforward...................................... (44,597) (64,407)
Accumulated deferred investment tax credit........... 58,653 69,269
Alternative minimum tax credit....................... 39,709 39,743
Other................................................ 172,733 194,476
----------- -----------
Total........................................ $ 545,352 $ 663,933
=========== ===========
Net deferred tax liability................... $(1,133,679) $(1,050,939)
=========== ===========
</TABLE>
As of December 31, 1995, the Company had investment tax credit (ITC)
carryforwards of $167.7 million, federal net operating loss (NOL) carryforwards
of $384.6 million and state NOL carryforwards of $355.0 million. The ITC
carryforwards include the 35% reduction required by the Tax Reform Act of 1986
and may be applied against federal income tax liability of the Company and, if
not utilized, will expire between 1996 and 2002. It is currently anticipated
that approximately $44.6 million of ITC carryforward will expire unutilized. A
valuation allowance has been provided for deferred tax assets relating to that
amount. The alternative minimum tax (AMT) credit carryforward as of December 31,
1995, was $39.7 million. This AMT credit can be carried forward indefinitely and
will reduce the Company's federal income tax liability in the future.
In 1993, the Company adopted SFAS 109. SFAS 109 required that deferred
income taxes be recorded for all carryforwards and temporary differences between
the book and tax basis of assets and liabilities, and that deferred tax balances
be based on enacted tax laws at tax rates that are expected to be in effect when
the temporary differences reverse. SFAS 109 required that regulated enterprises
recognize adjustments resulting from implementation as regulatory assets or
liabilities if it is probable that such amounts will be recovered from or
returned to customers in future rates. The Company recorded the adoption of SFAS
109 by restating 1990, 1991, and 1992 financial statements and including a
charge of $96.5 million for the cumulative effect of the adoption of SFAS 109 in
1990 primarily for that portion of the operations on which the Company has
discontinued regulatory accounting principles.
NOTE 4. LINES OF CREDIT AND RELATED BORROWINGS
The Commission has authorized the Company to effect short-term borrowings
up to $125 million. This limit may be increased to as much as $395 million after
further Commission approval. This authorization is effective through November
30, 1996. The Company did not have any outstanding borrowings as of December 31,
1995.
F-18
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. PREFERRED, PREFERENCE, AND COMMON STOCK
The number of shares, authorized and outstanding, and dollar value of
preferred and preference stock for the Company as of December 31, 1995, and 1994
were:
<TABLE>
<CAPTION>
CALL PRICE
SHARES AUTHORIZED TOTAL PER
AND OUTSTANDING DOLLAR VALUE SHARE AS OF
----------------------- -------------------- DECEMBER 31,
1995 1994 1995 1994 1995
---------- ---------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
GSU PREFERRED AND
PREFERENCE STOCK
PREFERENCE STOCK
Cumulative, without par value
7% Series(a)(b)............. 6,000,000 6,000,000 $150,000 $150,000 --
========= ========= ======== ========
PREFERRED STOCK
Authorized 6,000,000, $100 par
value, cumulative
WITHOUT SINKING FUND:
4.40% Series.............. 51,173 51,173 $ 5,117 $ 5,117 $ 108.00
4.50% Series.............. 5,830 5,830 583 583 $ 105.00
4.40% -- 1949 Series...... 1,655 1,655 166 166 $ 103.00
4.20% Series.............. 9,745 9,745 975 975 $ 102.82
4.44% Series.............. 14,804 14,804 1,480 1,480 $ 103.75
5.00% Series.............. 10,993 10,993 1,099 1,099 $ 104.25
5.08% Series.............. 26,845 26,845 2,685 2,685 $ 104.63
4.52% Series.............. 10,564 10,564 1,056 1,056 $ 103.57
6.08% Series.............. 32,829 32,829 3,283 3,283 $ 103.34
7.56% Series.............. 350,000 350,000 35,000 35,000 $ 101.80
8.52% Series.............. 500,000 500,000 50,000 50,000 $ 102.43
9.96% Series.............. 350,000 350,000 35,000 35,000 $ 102.64
--------- --------- -------- --------
Total without sinking
fund................. 1,364,438 1,364,438 $136,444 $136,444
========= ========= ======== ========
WITH SINKING FUND:
8.80% Series.............. 204,495 226,807 $ 20,450 $ 22,680 $ 100.00
9.75% Series.............. 19,543 21,565 1,954 2,154 $ 100.00
8.64% Series.............. 168,000 182,000 16,800 18,200 $ 101.00
Adjustable Rate -- A,
7.00%(c)............... 192,000 204,000 19,200 20,400 $ 100.00
Adjustable Rate -- B,
7.00%(c)............... 292,500 315,000 29,250 31,500 $ 100.00
--------- --------- -------- --------
Total with sinking
fund................. 876,538 949,372 $ 87,654 $ 94,934
========= ========= ======== ========
FAIR VALUE OF PREFERENCE STOCK
AND PREFERRED STOCK WITH
SINKING FUND(D)................ $219,191 $227,800
======== ========
</TABLE>
- ---------------
(a) The total dollar value represents the involuntary liquidation value of $25
per share.
(b) These series are not redeemable as of December 31, 1995.
(c) Rates are as of December 31, 1995.
(d) Fair values were determined using bid prices reported by dealer markets and
by nationally recognized investment banking firms. See Note 1 herein for
additional disclosure of fair value of financial instruments.
F-19
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the preferred stock, with and without sinking fund, preference
stock, and common stock for the Company during the last three years were:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------------
1995 1993 1994
------- ------- ------------
<S> <C> <C> <C>
Preferred stock retirements $100 par value...... (72,834) (60,667) (1,683,834)
Preference stock issuances...................... -- -- 6,000,000
Common stock issuances.......................... -- -- 100
Common stock retirements........................ -- -- (114,055,065)
</TABLE>
Cash sinking fund requirements for the next five years for preferred stock,
outstanding as of December 31, 1995 are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1996............................................ $ 6,067
1997............................................ 6,067
1998............................................ 6,067
1999............................................ 6,067
2000............................................ 156,067
</TABLE>
The Company has the annual noncumulative option to redeem, at par,
additional amounts of certain series of their outstanding preferred stock.
Employees of the Company are eligible to participate in the Entergy
Corporation Employee Stock Investment Plan (ESIP). ESIP is authorized to issue
or acquire, through March 31, 1997, up to 2,000,000 shares of its common stock
to be held as treasury shares and reissued to meet the requirements of the ESIP.
Under the ESIP, employees may be granted the opportunity to purchase (for up to
10% of their regular annual salary, but not more than $25,000) common stock at
85% of the market value on the first or last business day of the plan year,
whichever is lower. Through this program, employees purchased 329,863 shares for
the 1994 plan year. The 1995 plan year runs from April 1, 1995, to March 31,
1996.
F-20
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. LONG-TERM DEBT
The long-term debt of the Company as of December 31, 1995, was:
<TABLE>
<CAPTION>
MATURITIES INTEREST RATES
- ------------------ -----------------------
FROM TO FROM TO
- ---- ----- ------ --------
<S> <C> <C> <C> <C> <C>
First Mortgage Bonds
1996 1999 5% 10.5%........................ $ 445,000
2000 2004 6% 9.75%........................ 670,000
2005 2009 6.25% 11.375%...................... 120,000
2020 2024 7% 10.375%...................... 450,000
Governmental Obligations(a)
1996 2008 5.9% 10%.......................... 46,300
2009 2023 5.95% 12.50%....................... 435,735
Debentures
1996 2008 9.72%....................................... 150,000
Other Long-Term Debt...................................................... 9,156
Unamortized Premium and Discount -- Net................................... (5,295)
Total Long-Term Debt...................................................... 2,320,896
Less Amount Due Within One Year........................................... 145,425
Long-Term Debt Excluding Amount Due Within One Year....................... $2,175,471
Fair Value of Long-Term Debt(b)........................................... $2,416,932
</TABLE>
The long-term debt of the Company as of December 31, 1994, was:
<TABLE>
<CAPTION>
MATURITIES INTEREST RATES
- ------------------ -----------------------
FROM TO FROM TO
- ---- ----- ------ --------
<S> <C> <C> <C> <C> <C>
First Mortgage Bonds
1995 1999 4.625% 14%.......................... $ 445,000
2000 2004 6% 9.75%........................ 670,000
2005 2009 6.25% 11.375%...................... 120,000
2020 2024 7% 10.375%...................... 450,000
Governmental Obligations(a)
1995 2008 5.9% 10%.......................... 46,725
2009 2023 5.95% 12.50%....................... 435,735
Debentures -- Due 1998, 9.72%............................................. 200,000
Other Long-Term Debt...................................................... 6,879
Unamortized Premium and Discount -- Net................................... (5,497)
Total Long-Term Debt...................................................... 2,368,842
Less Amount Due Within One Year........................................... 50,425
Long-Term Debt Excluding Amount Due Within One Year....................... $2,318,417
Fair Value of Long-Term Debt(b)........................................... $2,277,300
</TABLE>
- ---------------
(a) Consists of pollution control bonds, certain series of which are secured by
non-interest bearing first mortgage bonds.
(b) The fair value excludes lease obligations and other long-term debt and was
determined using bid prices reported by dealer markets and by nationally
recognized investment banking firms. See Note 1 herein for additional
information on disclosure of fair value of financial instruments.
F-21
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The annual long-term debt maturities (excluding lease obligations) and
annual cash sinking fund requirements for the next five years are as follows:
<TABLE>
<CAPTION>
YEAR IN THOUSANDS
- ---- ------------
<S> <C> <C>
1996.............................................. $145,425
1997.............................................. 160,865
1998.............................................. 190,890
1999.............................................. 100,915
2000.............................................. 945
</TABLE>
Not included are other sinking fund requirements of approximately $13.8
million annually which may be satisfied by cash or by certification of property
additions at the rate of 167% of such requirements.
The Company has two outstanding series of pollution control bonds
collateralized by irrevocable letters of credit, which are scheduled to expire
before the scheduled maturity of the bonds. The letter of credit collateralizing
the $28.4 million variable rate series, due December 1, 2015, expires in
September 1996 and the letter of credit collateralizing the $20 million variable
rate series, due April 1, 2016, expires in April 1996. The Company plans to
refinance these series or renew the letters of credit.
NOTE 7. DIVIDEND RESTRICTIONS
Provisions within the Articles of Incorporation or pertinent Indentures and
various other agreements related to the long-term debt and preferred stock of
Entergy Corporation's subsidiaries restrict the payment of cash dividends or
other distributions on their common and preferred stock. Additionally, PUHCA
prohibits Entergy Corporation's subsidiaries from making loans or advances to
Entergy Corporation. Approximately $1,266.5 million of restricted common equity
was unavailable for distribution to Entergy Corporation by the Company as of
December 31, 1995.
NOTE 8. COMMITMENTS AND CONTINGENCIES
CAJUN -- RIVER BEND LITIGATION
The Company has significant business relationships with Cajun, including
co-ownership of River Bend (operated by the Company) and Big Cajun 2, Unit 3
(operated by Cajun). The Company and Cajun, respectively, own 70% and 30%
undivided interests in River Bend and 42% and 58% undivided interests in Big
Cajun 2, Unit 3.
In June 1989, Cajun filed a civil action against the Company in the United
States District Court for the Middle District of Louisiana (District Court).
Cajun's complaint seeks to annul, rescind, terminate, and/or dissolve the Joint
Ownership Participation and Operating Agreement (Operating Agreement) entered
into on August 28, 1979, relating to River Bend. Cajun alleges fraud and error
by the Company, breach of its fiduciary duties owed to Cajun, and/or the
Company's repudiation, renunciation, abandonment, or dissolution of its core
obligations under the Operating Agreement, as well as the lack or failure of
cause and/or consideration for Cajun's performance under the Operating
Agreement. The suit also seeks to recover Cajun's alleged $1.6 billion
investment in the unit as damages, plus attorneys' fees, interest, and costs.
Two member cooperatives of Cajun have brought an independent action to declare
the Operating Agreement void, based upon failure to get prior LPSC approval
alleged to be necessary. The Company believes the suits are without merit and is
contesting them vigorously.
A trial on the portion of the suit by Cajun to rescind the Operating
Agreement began in April 1994 and was completed in March 1995. On October 24,
1995, the District Court issued a memorandum opinion ruling in favor of the
Company. The District Court found that Cajun did not prove that the
F-22
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company fraudulently induced it to execute the Operating Agreement and that
Cajun failed to timely assert its claim. A final judgment on this portion of the
suit will not be entered until all claims asserted by Cajun have been heard. The
second portion of the suit is scheduled to begin on July 2, 1996. If the Company
is ultimately unsuccessful in this litigation and is required to pay substantial
damages, the Company would probably be unable to make such payments and could be
forced to seek relief from its creditors under the United States Bankruptcy
Code. If the Company prevails in this litigation, there can be no assurance that
the United States Bankruptcy Court will allow funding of all required costs of
Cajun's ownership in River Bend.
Cajun has not paid its full share of capital costs, operating and
maintenance expenses, or other costs for repairs and improvements to River Bend
since 1992. In addition, certain costs and expenses paid by Cajun were paid
under protest. These actions were taken by Cajun based on its contention, with
which the Company disagrees, that River Bend's operating and maintenance
expenses were excessive. Cajun's unpaid portion of River Bend operating and
maintenance expenses (including nuclear fuel) and capital costs for 1995 was
approximately $58.7 million. Cajun continues to pay its share of decommissioning
costs for River Bend.
During the period in which Cajun is not paying its share of River Bend
costs, the Company intends to fund all costs necessary for the safe, continuing
operation of the unit. The responsibilities of Entergy Operations, Inc. as the
licensed operator of River Bend, for safely operating and maintaining the unit,
are not affected by Cajun's actions.
In view of Cajun's failure to fund its share of River Bend-related
operating, maintenance, and capital costs, the Company has (i) credited the
Company's share of expenses for Big Cajun 2, Unit 3 against amounts due from
Cajun to the Company, and (ii) sought to market Cajun's share of the power from
River Bend and apply the proceeds to the amounts due from Cajun to the Company.
As a result, on November 2, 1994, Cajun discontinued supplying the Company with
its share of power from Big Cajun 2, Unit 3. The Company requested an order from
the District Court requiring Cajun to supply the Company with this energy and
allowing the Company to credit amounts due to Cajun for Big Cajun 2, Unit 3
energy against amounts Cajun owed to the Company for River Bend. In December
1994, by means of a preliminary injunction, the District Court ordered Cajun to
supply the Company with its share of energy from Big Cajun 2, Unit 3 and ordered
the Company to make payments for its share of Big Cajun 2, Unit 3 expenses to
the registry of the District Court. In October 1995, the Fifth Circuit affirmed
the District Court's preliminary injunction. As of December 31, 1995, $38
million had been paid by the Company into the registry of the District Court.
On December 21, 1994, Cajun filed a petition in the United States
Bankruptcy Court for the Middle District of Louisiana seeking bankruptcy relief
under Chapter 11 of the Bankruptcy Code. Cajun's bankruptcy could have a
material adverse effect on the Company. However, the Company is taking
appropriate steps to protect its interests and its claims against Cajun arising
from the co-ownership in River Bend and Big Cajun 2, Unit 3. On December 31,
1994, the District Court issued an order lifting an automatic stay as to certain
proceedings, with the result that the preliminary injunction granted by the
Court in December 1994 remains in effect. Cajun filed a Notice of Appeal on
January 18, 1995, to the Fifth Circuit seeking a reversal of the District
Court's grant of the preliminary injunction. No hearing date has been set on
Cajun's appeal.
In the bankruptcy proceedings, Cajun filed on January 10, 1995, a motion to
reject the Operating Agreement as a burdensome executory contract. The Company
responded on January 10, 1995, with a memorandum opposing Cajun's motion. Should
the court grant Cajun's motion to reject the Operating Agreement, Cajun would be
relieved of its financial obligations under the contract, while the Company
would likely have a substantial damage claim arising from any such rejection.
Although the Company
F-23
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
believes that Cajun's motion to reject the Operating Agreement is without merit,
it is not possible to predict the outcome or ultimate impact of these
proceedings.
The cumulative cost (excluding nuclear fuel) to the Company resulting from
Cajun's failure to pay its full share of River Bend-related costs, reduced by
the proceeds from the sale by the Company of Cajun's share of River Bend power
and payments for the Company's portion of expenses for Big Cajun 2, Unit 3 into
the registry of the District Court, was $31.1 million as of December 31, 1995.
These amounts are reflected in long-term receivables with an offsetting reserve
in other deferred credits. Cajun's bankruptcy may affect the ultimate
collectibility of the amounts owed to the Company, including any amounts that
may be awarded in litigation.
CAJUN -- TRANSMISSION SERVICE
The Company and Cajun are parties to FERC proceedings relating to
transmission service charge disputes. In April 1992, FERC issued a final order
in these disputes. In May 1992, the Company and Cajun filed motions for
rehearings on certain portions of the order, which are still pending at FERC. In
June 1992, the Company filed a petition for review in the United States Court of
Appeals regarding certain of the other issues decided by FERC. In August 1993,
the United States Court of Appeals rendered an opinion reversing FERC's order
regarding the portion of such disputes relating to the calculations of certain
credits and equalization charges under the Company's service schedules with
Cajun. The opinion remanded the issues to FERC for further proceedings
consistent with its opinion. In February 1995, FERC eliminated an issue from the
remand that the Company believes the Court of Appeals directed FERC to
reconsider. In orders issued on August 3, 1995, and October 2, 1995, FERC
affirmed an April 1995 ruling by an ALJ in the remanded portion of the Company's
and Cajun's ongoing transmission service charge disputes before FERC. Both the
Company and Cajun have petitioned for appeal. No hearing dates have been set in
the appeals.
Under the Company's interpretation of the 1992 FERC order, as modified by
its August 3, 1995, and October 2, 1995, orders, Cajun would owe the Company
approximately $64.9 million as of December 31, 1995. The Company further
estimates that if it were to prevail in its May 1992 motion for rehearing and on
certain other issues decided adversely to the Company in the February 1995,
August 1995, and October 1995 FERC orders, which the Company has appealed, Cajun
would owe the Company approximately $143.5 million, as of December 31, 1995. If
Cajun were to prevail in its May 1992 motion for rehearing to FERC, and if the
Company were not to prevail in its May 1992 motion for rehearing to FERC, and if
Cajun were to prevail in appealing FERC's August and October 1995 orders, the
Company estimates it would owe Cajun approximately $96.4 million as of December
31, 1995. The above amounts are exclusive of a $7.3 million payment by Cajun on
December 31, 1990, which the parties agreed to apply to the disputed
transmission service charges. Pending FERC's ruling on the May 1992 motions for
rehearing, the Company has continued to bill Cajun, utilizing the historical
billing methodology, and has recorded underpaid transmission charges, including
interest, in the amount of $137.2 million as of December 31, 1995. This amount
is reflected in long-term receivables, with an offsetting reserve in other
deferred credits. Cajun's bankruptcy may affect the Company's collection of the
above amounts. FERC has determined that the collection of the pre-petition debt
of Cajun is an issue properly decided in the bankruptcy proceeding.
CAPITAL REQUIREMENTS AND FINANCING
Construction expenditures (excluding nuclear fuel) for the years 1996,
1997, and 1998 are estimated to total $155 million, $127 million, and $131
million, respectively. The Company will also require $515 million during the
period 1996-1998 to meet long-term debt and preferred stock maturities and cash
sinking fund requirements. The Company plans to meet the above requirements
primarily with
F-24
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
internally generated funds and cash on hand, supplemented by the issuance of
debt and preferred stock. The Company may also continue with the acquisition or
refinancing of all or a portion of certain outstanding series of preferred stock
and long-term debt. See Notes 5 and 6 herein for further information.
FUEL PURCHASE AGREEMENTS
The Company has a contract for a supply of low-sulfur Wyoming coal for
Nelson Unit 6, which should be sufficient to satisfy the fuel requirements at
Nelson Unit 6 through 2004. Cajun has advised the Company that it has contracts
that should provide an adequate supply of coal until 1999 for the operation of
Big Cajun 2, Unit 3.
The Company has long-term gas contracts, which will satisfy approximately
75% of its annual requirements. Such contracts generally require the Company to
purchase in the range of 40% of expected total gas needs. Additional gas
requirements are satisfied under less expensive short-term contracts. The
Company has a transportation service agreement with a gas supplier that provides
flexible natural gas service to the Sabine and Lewis Creek generating stations.
This service is provided by the supplier's pipeline and salt dome gas storage
facility, which has a present capacity of 5.3 billion cubic feet of natural gas.
POWER PURCHASES/SALES AGREEMENTS
In 1988, the Company entered into a joint venture with a primary term of 20
years with Conoco, Inc., Citgo Petroleum Corporation, and Vista Chemical Company
(Industrial Participants) whereby the Company's Nelson Units 1 and 2 were sold
to a partnership (NISCO) consisting of the Industrial Participants and the
Company. The Industrial Participants supply the fuel for the units, while the
Company operates the units at the discretion of the Industrial Participants and
purchases the electricity produced by the units. The Company is continuing to
sell electricity to the Industrial Participants. For the years ended December
31, 1995, 1994, and 1993, the purchases by the Company of electricity from the
joint venture totaled $59.7 million, $58.3 million, and $62.6 million,
respectively.
NUCLEAR INSURANCE
The Price-Anderson Act limits public liability for a single nuclear
incident to approximately $8.92 billion. Through Entergy Corporation, the
Company has protection for this liability through a combination of private
insurance (currently $200 million) and an industry assessment program. Under the
assessment program, the maximum payment requirement for each nuclear incident
would be $79.3 million per reactor, payable at a rate of $10 million per
licensed reactor per incident per year. With respect to River Bend, any
assessments pertaining to this program are allocated in accordance with the
respective ownership interests of the Company and Cajun. In addition, the
Company participates through Entergy Corporation in a private insurance program
which provides coverage for worker tort claims filed for bodily injury caused by
radiation exposure. The program provides for a maximum assessment of
approximately $16 million for Entergy's five nuclear units in the event losses
exceed accumulated reserve funds.
The Company is also a member of certain insurance programs that provide
coverage for property damage, including decontamination and premature
decommissioning expense, to members' nuclear generating plants. As of December
31, 1995, the Company was insured against such losses up to $2.75 billion. In
addition, the Company is a member of an insurance program that covers certain
replacement power and business interruption costs incurred due to prolonged
nuclear unit outages. Under the property damage and replacement power/business
interruption insurance programs, the Company could be subject to assessments if
losses exceed the accumulated funds available to the
F-25
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
insurers. As of December 31, 1995, the maximum amounts of such possible
assessments were $22.0 million. Cajun shares approximately $4.6 million of the
Company's obligation.
The Company is insured for property losses through Entergy. The amount of
property insurance presently carried by Entergy exceeds the NRC's minimum
requirement for nuclear power plant licensees of $1.06 billion per site. NRC
regulations provide that the proceeds of this insurance must be used, first, to
place and maintain the reactor in a safe and stable condition and, second, to
complete decontamination operations. Only after proceeds are dedicated for such
use and regulatory approval is secured would any remaining proceeds be made
available for the benefit of plant owners or their creditors.
SPENT NUCLEAR FUEL AND DECOMMISSIONING COSTS
The Company provides for estimated future disposal costs for spent nuclear
fuel in accordance with the Nuclear Waste Policy Act of 1982. The Company
entered into a contract with the DOE, whereby the DOE will furnish disposal
service at a cost of one mill per net KWh generated and sold after April 7,
1983, plus a onetime fee for generation prior to that date. The Company
considers all costs incurred or to be incurred, except accrued interest, for the
disposal of spent nuclear fuel to be proper components of nuclear fuel expense,
and provisions to recover such costs have been or will be made in applications
to regulatory authorities.
Delays have occurred in the DOE's program for the acceptance and disposal
of spent nuclear fuel at a permanent repository. In a statement released
February 17, 1993, the DOE asserted that it does not have a legal obligation to
accept spent nuclear fuel without an operational repository for which it has not
yet arranged. Currently, the DOE projects it will begin to accept spent fuel no
earlier than 2015. In the meantime, the Company is responsible for spent fuel
storage. Current on-site spent fuel storage capacity at River Bend is estimated
to be sufficient until 2003. Thereafter, the Company will provide additional
storage. The initial cost of providing the additional on-site spent fuel storage
capability required at River Bend is expected to be approximately $5 million to
$10 million. In addition, about $3 million to $5 million will be required every
four to five years subsequent to 2003 for River Bend until the DOE's repository
begins accepting the unit's spent fuel.
Total decommissioning costs for River Bend (based on a 1991 cost study
reflecting 1990 dollars) have been estimated at $268 million as of December 31,
1995.
In the Texas retail jurisdiction, the Company is recovering in rates
decommissioning costs (based on the 1991 cost study) that, with adjustments,
total $204.9 million. In the Louisiana retail jurisdiction, the Company is
currently recovering in rates decommissioning costs (based on a 1985 cost study)
which total $141 million. The Company included decommissioning costs (based on
the 1991 study) in the LPSC rate review filed in May 1995 which has not yet been
concluded. The Company periodically reviews and updates estimated
decommissioning costs and applications are periodically made to the appropriate
regulatory authorities to reflect in rates any future change in projected
decommissioning costs. The amounts recovered in rates are deposited in trust
funds and reported at market value as quoted on nationally traded markets. These
trust fund assets largely offset the accumulated decommissioning liability that
is recorded as accumulated depreciation for the Company.
The cumulative liability as of December 31, 1994, the 1995 trust earnings,
the 1995 decommissioning expenses and the cumulative liability as of December
31, 1995 for River Bend were $22.2 million, $1.4 million, $8.1 million and $31.7
million, respectively.
River Bend's decommissioning expense was $3.0 million in 1994. The actual
decommissioning costs may vary from the estimates because of regulatory
requirements, changes in technology, and increased costs of labor, materials,
and equipment. Management believes that actual decommissioning costs are likely
to be higher than the estimated amounts presented above.
F-26
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The staff of the Commission has questioned certain of the financial
accounting practices of the electric utility industry regarding the recognition,
measurement, and classification of decommissioning costs for nuclear generating
stations in the financial statements of electric utilities. In response to these
questions, the FASB has been reviewing the accounting for decommissioning and
has expanded the scope of its review to include liabilities related to the
closure and removal of all long-lived assets. An exposure draft of the proposed
SFAS issued in February 1996 would be effective in 1997. The proposed SFAS would
require measurement of the liability for closure and removal of long-lived
assets (including decommissioning) based on discounted future cash flows. Those
future cash flows should be determined by estimating current costs and adjusting
for inflation, efficiencies that may be gained from experience with similar
activities, and consideration of reasonable future advances in technology. It
also would require that changes in the decommissioning/closure cost liability
resulting from changes in assumptions should be recognized with a corresponding
adjustment to the plant asset, and depreciation should be revised prospectively.
The proposed SFAS stated that the initial recognition of the
decommissioning/closure cost liability would result in an asset that should be
presented with other plant costs on the financial statements because the cost of
decommissioning/closing the plant is recognized as part of the total cost of the
plant asset. In addition there would be a regulatory asset recognized on the
financial statements to the extent the initial decommissioning/closure liability
has increased due to the passage of time, and such costs are probable of future
recovery.
If current electric utility industry accounting practices with respect to
nuclear decommissioning and other closure costs are changed, annual provisions
for such costs could increase, the estimated cost for decommissioning/closure
could be recorded as a liability rather than as accumulated depreciation, and
trust fund income from decommissioning trusts could be reported as investment
income rather than as a reduction to decommissioning expense.
The EPAct has a provision that assesses domestic nuclear utilities with
fees for the decontamination and decommissioning of the DOE's past uranium
enrichment operations. The decontamination and decommissioning assessments will
be used to set up a fund into which contributions from utilities and the federal
government will be placed. The Company's annual assessments, which will be
adjusted annually for inflation, are approximately $0.9 million (in 1995
dollars) for approximately 15 years. At December 31, 1995 the Company had
recorded a liability of $6.0 million for decontamination and decommissioning
fees in other current liabilities and other noncurrent liabilities, and these
liabilities were offset in the consolidated financial statements by regulatory
assets. FERC requires that utilities treat these assessments as costs of fuel as
they are amortized and are recovered through rates in the same manner as other
fuel costs.
ENVIRONMENTAL ISSUES
The Company has been designated as a PRP for the clean-up of certain
hazardous waste disposal sites. The Company is currently negotiating with the
EPA and state authorities regarding the clean-up of these sites. Several class
action and other suits have been filed in state and federal courts seeking
relief from the Company and others for damages caused by the disposal of
hazardous waste and for asbestos-related disease allegedly resulting from
exposure on Company premises. While the amounts at issue in the clean-up efforts
and suits may be substantial, the Company believes that its results of
operations and financial condition will not be materially adversely affected by
the outcome of the suits. Through December 31, 1995, $7.9 million has been
expended on the clean-up. As of December 31, 1995, a remaining recorded
liability of $21.7 million existed relating to the clean-up of five sites at
which the Company has been designated a PRP.
F-27
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. LEASES
GENERAL
As of December 31, 1995, the Company had capital leases and noncancelable
operating leases for equipment, buildings, vehicles, and fuel storage facilities
(excluding nuclear fuel leases and the sale and leaseback transactions) with
minimum lease payments as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
------------------------------------------------------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C>
1996......................................................... $ 12,475 $ 12,871
1997......................................................... 12,475 12,566
1998......................................................... 12,475 16,499
1999......................................................... 12,475 16,499
2000......................................................... 12,049 16,326
Years thereafter............................................. 69,331 60,518
-------- --------
Minimum lease payments....................................... 131,280 135,279
Less: Amount representing interest........................... 47,921
--------
Present value of net minimum lease payments.................. $ 83,359
========
</TABLE>
Rental expense for leases (excluding nuclear fuel leases and the sale and
leaseback transactions) was approximately $15.1 million, $15.3 million, and
$31.9 million, in 1995, 1994 and 1993, respectively.
NUCLEAR FUEL LEASES
The Company has arrangements to lease nuclear fuel in an aggregate amount
up to $85 million as of December 31, 1995. The lessors finance the acquisition
and ownership of nuclear fuel through credit agreements and the issuance of
notes. These agreements are subject to annual renewal with the consent of the
lenders. The credit agreements for the Company have been extended and now have
termination dates of December 1998. The debt securities issued pursuant to these
fuel lease arrangements have varying maturities through January 31, 1999. It is
expected that the credit agreements will be extended or alternative financing
will be secured by each lessor upon the maturity of the current arrangements. If
extensions or alternative financing cannot be arranged, the lessee in each case
must purchase sufficient nuclear fuel to allow the lessor to retire such
borrowings.
Lease payments are based on nuclear fuel use. Nuclear fuel lease expense
charged to operations was $41.4 million, $37.2 million, and $43.6 million
(including interest of $6.0 million, $8.7 million, and $10.2 million), in 1995,
1994 and 1993, respectively.
NOTE 10. POSTRETIREMENT BENEFITS
Company employees participate in plans sponsored by Entergy Corporation and
its subsidiaries which have various postretirement benefit plans covering
substantially all of their employees. The pension plans are noncontributory and
provide pension benefits that are based on employees' credited service and
compensation during the final years before retirement. Entergy Corporation and
its subsidiaries fund pension costs in accordance with contribution guidelines
established by the Employee Retirement Income Security Act of 1974, as amended,
and the Internal Revenue Code of 1986, as amended. The assets of the plans
include common and preferred stocks, fixed income securities, interest in a
money market fund, and insurance contracts. Prior to January 1, 1995, Entergy
Corporations' non-bargaining employees were generally included in a plan
sponsored by the individual subsidiary company where they
F-28
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
were employed. Effective January 1, 1995, these employees became participants in
a new plan with provisions substantially identical to their previous plan.
Total 1995, 1994, and 1993 pension cost of the Company, including amounts
capitalized, included the following components (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the
period.......................................... $ 6,686 $ 9,497 $ 10,417
Interest cost on projected benefit obligation..... 21,098 21,335 17,643
Actual return on plan assets...................... (82,624) 6,785 (43,400)
Net amortization and deferral..................... 53,921 (39,405) 14,863
Other............................................. -- 17,963 --
-------- -------- --------
Net pension cost.................................. $ (919) $ 16,175 $ (477)
======== ======== ========
</TABLE>
The funded status of the Company's various pension plans as of December 31,
1995 and 1994 was (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Actuarial present value of accumulated pension plan
obligation:
Vested.................................................... $ 256,173 $273,509
Nonvested................................................. 792 1,502
--------- --------
Accumulated benefit obligation.............................. 256,965 275,011
--------- --------
Plan assets at fair value................................... 374,010 313,035
Projected benefit obligation................................ 289,666 290,802
--------- --------
Plan assets in excess of (less than) projected benefit
obligation................................................ 84,344 22,233
Unrecognized prior service cost............................. 12,021 13,720
Unrecognized transition asset............................... (11,937) (14,324)
Unrecognized net loss (gain)................................ (135,303) (73,423)
--------- --------
Accrued pension asset (liability)........................... $ (50,875) $(51,794)
========= ========
</TABLE>
The significant actuarial assumptions used in computing the information
above for 1995, 1994, and 1993 were as follows: weighted average discount rate,
7.5% for 1995, 8.5% for 1994, and 7.5% for 1993, weighted average rate of
increase in future compensation levels, 4.6% for 1995, 5.1% for 1994 and 5% for
1993; and expected long-term rate of return on plan assets, 8.5% . Transition
assets of the Company are being amortized over the greater of the remaining
service period of active participants or 15 years.
In 1994, the Company recorded an $18.0 million charge related to early
retirement programs in connection with the Merger, of which $15.2 million was
expensed.
OTHER POSTRETIREMENT BENEFITS
The Company also provides certain health care and life insurance benefits
for retired employees. Substantially all employees may become eligible for these
benefits if they reach retirement age while still working for the Company.
Effective January 1, 1993, the Company adopted SFAS 106. The new standard
required a change from a cash method to an accrual method of accounting for
postretirement benefits other than pensions. The Company continues to fund these
benefits on a pay-as-you-go basis. At January 1, 1993, the actuarially
determined accumulated postretirement benefit obligation (APBO) earned by
retirees and
F-29
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
active employees was estimated to be approximately $128 million. Such obligation
is being amortized over a 20-year period beginning in 1993.
The Company has sought approval, in its respective regulatory
jurisdictions, to implement the appropriate accounting requirements related to
SFAS 106 for ratemaking purposes. The LPSC ordered the Company to continue the
use of the pay-as-you-go method for ratemaking purposes for postretirement
benefits other than pensions, but the LPSC retains the flexibility to examine
the individual company's accounting for postretirement benefits to determine if
special exceptions to this order are warranted. Pursuant to the PUCT's May 26,
1995, amended order, the Company is currently collecting its SFAS 106 costs in
rates.
Total 1995, 1994 and 1993 postretirement benefit cost of the Company
including amounts capitalized and deferred, included the following components
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period..... $ 1,864 $ 2,169 $ 5,467
Interest cost on APBO................................. 8,526 6,449 9,976
Actual return on plan assets.......................... -- -- --
Net amortization and deferral......................... 4,477 2,832 6,402
------- ------- -------
Net postretirement benefit cost....................... $14,867 $11,450 $21,845
======= ======= =======
</TABLE>
The funded status of the Company's postretirement plans as of December 31,
1995 and 1994, was (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees.................................................. $ 101,698 $ 39,695
Other fully eligible participants......................... 17,334 26,069
Other active participants................................. 15,980 13,445
--------- --------
Accumulated benefit obligation.............................. 135,012 79,209
Plan assets at fair value................................... -- --
--------- --------
Plan assets less than APBO.................................. (135,012) (79,209)
Unrecognized transition obligation.......................... 107,975 115,232
Unrecognized net loss (gain)/other.......................... (617) (57,410)
--------- --------
Accrued postretirement benefit liability.................... $ (27,654) $(21,387)
========= ========
</TABLE>
The assumed health care cost trend rate used in measuring the APBO of the
Company was 8.4% for 1996, gradually decreasing each successive year until it
reaches 5.0% in 2005. A one percentage-point increase in the assumed health care
cost trend rate for each year would have increased the APBO of the Company, as
of December 31, 1995, by 10.4%, and the sum of the service cost and interest
cost by approximately 12.8%. The assumed discount rate and rate of increase in
future compensation used in determining the APBO were 7.5% for 1995, 8.5% for
1994 and 7.5% for 1993, and 4.6% for 1995, 5.1% for 1994 and 5% for 1993,
respectively. The expected long-term rate of return on plan assets was 8.5% for
1995.
F-30
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. RESTRUCTURING COSTS
The restructuring programs announced by Entergy Corporation and its
subsidiaries, including the Company, in 1994 and 1995 included anticipated
reductions in the number of employees and the consolidation of offices and
facilities. The programs are designed to reduce costs, improve operating
efficiencies, and increase shareholder value in order to enable Entergy and its
subsidiaries to become low-cost producers. The balances as of December 31, 1994,
and 1995, for restructuring liabilities associated with these programs are shown
below along with the actual termination benefits paid under the programs.
<TABLE>
<CAPTION>
RESTRUCTURING RESTRUCTURING
LIABILITY AS OF ADDITIONAL PAYMENTS LIABILITY AS OF
DECEMBER 31, 1995 MADE IN DECEMBER 31,
1994 CHARGES 1995 1995
- --------------- ---------- -------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
$ 6.5 $ 13.1 $(14.2) $ 5.4
</TABLE>
The restructuring charges shown above primarily included employee severance
costs related to the expected termination of approximately 649 employees in
various groups. As of December 31, 1995, 497 employees had either been
terminated or accepted voluntary separation packages under the restructuring
plan.
Additionally, the Company recorded $23.8 million for remaining severance
and augmented retirement benefits related to the Merger. Actual termination
benefits paid under the program during 1995 amounted to $11.6 million. At
December 31, 1995, the total remaining liability for expected future Merger-
related outlays was $2.3 million.
NOTE 12. TRANSACTIONS WITH AFFILIATES
The various subsidiaries of Entergy Corporation, including the Company,
purchase electricity from and/or sell electricity to each other under rate
schedules filed with FERC. In addition, the Company purchases fuel from System
Fuels, Inc. receives technical, advisory, and administrative services from
Entergy Services, Inc. and receives management and operating services from
Entergy Operations, Inc., all of which are wholly-owned subsidiaries of Entergy
Corporation. The Company recorded $62.7 million and $44.4 million of
intercompany revenues and $266.5 million, $296.9 million and $25.5 million of
intercompany operating expenses in 1995, 1994, and 1993, respectively. In
addition, the Company recorded $129.1 million and $210.2 million in 1995 and
1994, respectively, for operating expenses paid or reimbursed to Entergy
Operations, Inc.
NOTE 13. ENTERGY CORPORATION-GULF STATES UTILITIES COMPANY MERGER
On December 31, 1993, Entergy Corporation and the Company consummated the
Merger. The Company became a wholly owned subsidiary of Entergy Corporation and
continues to operate as an electric utility corporation under the regulation of
FERC, the Commission, the PUCT, and the LPSC. As consideration to the Company's
shareholders, Entergy Corporation paid $250 million and issued 56,695,724 shares
of its common stock in exchange for the 114,055,065 outstanding shares of the
Company's common stock. In addition, $33.5 million of transaction costs were
capitalized in connection with the Merger.
F-31
<PAGE>
GULF STATES UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The business of the Company is subject to seasonal fluctuations with the
peak period occurring during the third quarter. Operating results for the four
quarters of 1995 and 1994 were:
<TABLE>
<CAPTION>
OPERATING OPERATING NET INCOME
REVENUES(A) INCOME(A)(B) (LOSS)(A)(B)
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
1995:
First Quarter........................... $ 399,346 $ 47,371 $ 3,635
Second Quarter.......................... 479,609 88,778 43,353
Third Quarter........................... 540,287 113,531 68,112
Fourth Quarter.......................... 442,732 54,749 7,819
1994:
First Quarter........................... 429,658 58,561 11,043
Second Quarter.......................... 456,855 83,357 33,084
Third Quarter........................... 545,531 64,853 (31,662)
Fourth Quarter.......................... 365,321 6,880 (95,220)
</TABLE>
- ---------------
(a) See Note 2 herein for information regarding the recording of a reserve for
rate refund in December 1994.
(b) See Note 11 herein for information regarding the recording of certain
restructuring costs in 1994 and 1995.
F-32
<PAGE>
(This page intentionally left blank)
F-33
<PAGE>
ENTERGY GULF STATES, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Utility Plant:
Electric......................................................... $7,037,184 $6,942,983
Natural gas...................................................... 45,435 45,789
Steam products................................................... 79,701 77,551
Property under capital leases.................................... 74,384 77,918
Construction work in progress.................................... 166,053 148,043
Nuclear fuel under capital lease................................. 53,737 69,853
---------- ----------
Total.................................................... 7,456,494 7,362,137
Less -- accumulated depreciation and amortization................ 2,802,750 2,664,943
---------- ----------
Utility plant -- net.......................................... 4,653,744 4,697,194
---------- ----------
Other Property and Investments:
Decommissioning trust fund....................................... 37,753 32,943
Other -- at cost (less accumulated depreciation)................. 26,804 28,626
---------- ----------
Total.................................................... 64,557 61,569
---------- ----------
Current Assets:
Cash and cash equivalents:
Cash.......................................................... 22,504 13,751
Temporary cash investments -- at cost, which approximates
market:
Associated companies........................................ 47,980 46,336
Other....................................................... 148,121 174,517
---------- ----------
Total cash and cash equivalents.......................... 218,605 234,604
Accounts receivable:
Customer (less allowance for doubtful accounts of $1.6 million
in 1996 and 1995)............................................ 121,376 110,187
Associated companies.......................................... 1,158 1,395
Other......................................................... 21,442 15,497
Accrued unbilled revenues..................................... 80,836 73,381
Deferred fuel costs.............................................. 84,692 31,154
Accumulated deferred income taxes................................ 58,324 43,465
Fuel inventory -- at average cost................................ 43,875 32,141
Materials and supplies -- at average cost........................ 90,117 91,288
Rate deferrals................................................... 103,498 97,164
Prepayments and other............................................ 23,215 15,566
---------- ----------
Total.................................................... 847,138 745,842
---------- ----------
Deferred Debits and Other Assets:
Regulatory assets:
Rate deferrals................................................ 146,522 419,904
SFAS 109 regulatory asset -- net.............................. 378,843 453,628
Unamortized loss on reacquired debt........................... 55,570 61,233
Other regulatory assets....................................... 23,072 27,836
Long-term receivables............................................ 218,246 224,727
Other............................................................ 180,883 169,125
---------- ----------
Total.................................................... 1,003,136 1,356,453
---------- ----------
TOTAL.................................................... $6,568,575 $6,861,058
========== ==========
</TABLE>
See Notes to Financial Statements.
F-34
<PAGE>
ENTERGY GULF STATES, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Capitalization:
Common stock, no par value, authorized 200,000,000 shares; issued
and outstanding 100 shares.................................... $ 114,055 $ 114,055
Paid-in capital.................................................. 1,152,689 1,152,505
Retained earnings................................................ 322,054 357,704
----------- -----------
Total common shareholder's equity........................ 1,588,798 1,624,264
Preference stock................................................. 150,000 150,000
Preferred stock:
Without sinking fund.......................................... 136,444 136,444
With sinking fund............................................. 77,460 87,654
Long-term debt................................................... 2,030,294 2,175,471
----------- -----------
Total.................................................... 3,982,996 4,173,833
----------- -----------
Other Noncurrent Liabilities:
Obligations under capital leases................................. 88,778 108,078
Other............................................................ 75,904 78,245
----------- -----------
Total.................................................... 164,682 186,323
----------- -----------
Current Liabilities:
Currently maturing long-term debt................................ 160,865 145,425
Accounts payable:
Associated companies.......................................... 39,146 31,349
Other......................................................... 92,823 136,528
Customer deposits................................................ 24,479 21,983
Taxes accrued.................................................... 50,077 37,413
Interest accrued................................................. 60,428 56,837
Nuclear refueling reserve........................................ 8,544 22,627
Obligations under capital leases................................. 39,343 37,773
Other............................................................ 34,660 86,653
----------- -----------
Total.................................................... 510,365 576,588
----------- -----------
Deferred Credits:
Accumulated deferred income taxes................................ 1,207,996 1,177,144
Accumulated deferred investment tax credits...................... 204,612 208,618
Deferred River Bend finance charges.............................. 39,778 58,047
Other............................................................ 458,146 480,505
----------- -----------
Total.................................................... 1,910,532 1,924,314
----------- -----------
Commitments and Contingencies (Notes 1 and 2)
TOTAL.................................................... $6,568,575 $6,861,058
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-35
<PAGE>
ENTERGY GULF STATES, INC.
STATEMENTS OF INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
--------------------- -------------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Revenues:
Electric............................... $572,040 $524,982 $1,501,707 $1,366,070
Natural gas............................ 4,946 3,210 26,685 17,654
Steam products......................... 15,144 12,095 45,936 35,518
-------- -------- ---------- ----------
Total.......................... 592,130 540,287 1,574,328 1,419,242
-------- -------- ---------- ----------
Operating Expenses:
Operation and maintenance:
Fuel, fuel-related expenses, and gas
purchased for resale.............. 171,451 149,535 413,917 391,364
Purchased power..................... 68,619 44,798 223,213 123,273
Nuclear refueling outage expenses... 1,132 2,580 6,064 8,354
Other operation and maintenance..... 102,333 95,042 296,805 304,918
Depreciation, amortization, and
decommissioning..................... 51,417 50,606 154,172 151,337
Taxes other than income taxes.......... 26,837 26,951 78,376 77,082
Income taxes........................... 44,582 40,737 85,435 63,715
Amortization of rate deferrals......... 18,319 16,507 54,281 49,519
-------- -------- ---------- ----------
Total.......................... 484,690 426,756 1,312,263 1,169,562
-------- -------- ---------- ----------
Operating Income......................... 107,440 113,531 262,065 249,680
-------- -------- ---------- ----------
Other Income (Deductions):
Allowance for equity funds used during
construction........................ 705 253 1,937 770
Write-off of River Bend rate
deferrals........................... -- -- (194,498) --
Miscellaneous -- net................... 55,140 6,213 65,770 17,823
Income taxes........................... (17,988) (2,110) (1,277) (5,139)
-------- -------- ---------- ----------
Total.......................... 37,857 4,356 (128,068) 13,454
-------- -------- ---------- ----------
Interest Charges:
Interest on long-term debt............. 44,583 47,426 137,547 144,053
Other interest -- net.................. 10,349 2,588 12,258 4,681
Allowance for borrowed funds used
during construction................. (600) (239) (1,656) (700)
-------- -------- ---------- ----------
Total.......................... 54,332 49,775 148,149 148,034
-------- -------- ---------- ----------
Net Income (Loss)........................ 90,965 68,112 (14,152) 115,100
Preferred and Preference Stock Dividend
Requirements and Other................. 7,212 7,341 21,497 22,357
-------- -------- ---------- ----------
Earnings (Loss) Applicable to Common
Stock.................................. $ 83,753 $ 60,771 $ (35,649) $ 92,743
========= ========= ========== ==========
</TABLE>
See Notes to Financial Statements.
F-36
<PAGE>
ENTERGY GULF STATES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net income (loss).................................................. $ (14,152) $ 115,100
Noncash items included in net income (loss):
Write-off of River Bend rate deferrals........................... 194,498 --
Change in rate deferrals......................................... 54,281 49,519
Depreciation, amortization, and decommissioning.................. 154,172 151,337
Deferred income taxes and investment tax credits................. 86,063 69,060
Allowance for equity funds used during construction.............. (1,937) (770)
Changes in working capital:
Receivables...................................................... (24,352) 41,808
Fuel inventory................................................... (11,734) (3,598)
Accounts payable................................................. (35,908) (21,476)
Taxes accrued.................................................... 12,664 35,701
Interest accrued................................................. 3,591 4,254
Reserve for rate refund.......................................... -- (51,268)
Other working capital accounts................................... (123,596) (53,032)
Decommissioning trust contributions................................ (4,442) (2,959)
Provision for estimated losses and reserves........................ (3,085) 7,417
Other.............................................................. (22,663) 3,174
--------- ---------
Net cash flow provided by operating activities........... 263,400 344,267
--------- ---------
Investing Activities:
Construction expenditures........................................ (122,349) (112,237)
Allowance for equity funds used during construction.............. 1,937 770
Nuclear fuel purchases........................................... (22,193) --
Proceeds from sale/leaseback of nuclear fuel..................... 23,592 --
--------- ---------
Net cash flow used in investing activities............... (119,013) (111,467)
--------- ---------
Financing Activities:
Proceeds from the issuance of long-term debt..................... 780 2,277
Retirement of:
First mortgage bonds.......................................... (79,234) --
Other long-term debt.......................................... (50,425) (50,425)
Redemption of preferred and preference stock..................... (10,179) (4,850)
Dividends paid on preferred and preference stock................. (21,328) (22,208)
--------- ---------
Net cash flow used in financing activities............... (160,386) (75,206)
--------- ---------
Net increase (decrease) in cash and cash equivalents............... (15,999) 157,594
Cash and cash equivalents at beginning of period................... 234,604 104,644
--------- ---------
Cash and cash equivalents at end of period......................... $ 218,605 $ 262,238
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest -- net of amount capitalized......................... $ 128,496 $ 136,526
Income taxes.................................................. $ 80 $ 288
Noncash investing and financing activities:
Change in unrealized appreciation (depreciation) of
decommissioning trust assets................................. $ (765) $ 1,738
</TABLE>
See Notes to Financial Statements.
F-37
<PAGE>
ENTERGY GULF STATES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. COMMITMENTS AND CONTINGENCIES
CAJUN -- RIVER BEND
The Company and Cajun, respectively, own 70% and 30% undivided interests in
River Bend (operated by the Company), and 42% and 58% undivided interests in Big
Cajun 2, Unit 3 (operated by Cajun). These relationships have spawned a number
of long-standing disputes and claims between the parties. An agreement setting
forth terms for the resolution of all such disputes has been reached by the
Company, the Cajun bankruptcy trustee, and the RUS, and approved by the United
States District Court for the Middle District of Louisiana (District Court) on
August 26, 1996 (Cajun Settlement). On September 6, 1996, the Committee of
Unsecured Creditors in the Cajun bankruptcy proceeding filed a Notice of Appeal
to the United States Court of Appeals for the Fifth Circuit (Fifth Circuit),
objecting that the order approving the settlement was separate from the approval
of a plan of reorganization and therefore, improper. The Cajun Settlement is
subject to this appeal and approvals by the appropriate regulatory agencies.
Management believes that it is probable that the Cajun Settlement will
ultimately be approved and consummated.
The Cajun Settlement resolved Cajun's civil action against the Company in
which Cajun sought to rescind or terminate the Joint Ownership Participation and
Operating Agreement (Operating Agreement) entered into on August 28, 1979,
relating to River Bend. In that suit, Cajun also sought to recover its alleged
$1.6 billion investment in the unit plus attorneys' fees, interest, and costs. A
trial on the portion of the suit by Cajun to rescind the Operating Agreement was
completed in March 1995. On October 24, 1995, the District Court issued a
memorandum opinion rejecting Cajun's fraud claims and denying rescission. An
appeal to the Fifth Circuit by the Cajun bankruptcy trustee was stayed pending
the Court's trial of the breach of contract phase of the case. The Cajun
Settlement resolves both the issues on appeal and the breach of contract claims
which have not been tried.
In 1992, two member cooperatives of Cajun brought an additional independent
action to declare the Operating Agreement null and void, based upon the
Company's failure to get prior LPSC approval alleged to be necessary. Prior to
the bankruptcy proceedings, Cajun intervened as a plaintiff in this action. The
nullity claim of Cajun in this action is encompassed in the Cajun Settlement.
The Company believes the suits are without merit and believes these cases are
resolved by the Cajun Settlement.
The Cajun Settlement, agreed to in principle on April 26, 1996, by the
Company, the Cajun bankruptcy trustee, and the RUS, Cajun's largest creditor,
was approved by the District Court on August 26, 1996. The terms include, but
are not limited to, the following: (i) Cajun's interest in River Bend will be
turned over to the RUS, which will have the option to retain the interest, sell
it to a third party, or transfer it to the Company at no cost; (ii) Cajun will
set aside a total of $125 million for its share of the decommissioning costs of
River Bend; (iii) Cajun will transfer certain transmission assets to the
Company; (iv) Cajun will settle transmission disputes and be released from
claims for payment under transmission arrangements with the Company as discussed
under "Cajun -- Transmission Service" below; (v) all funds paid by the Company
into the registry of the District Court will be returned to the Company; (vi)
Cajun will be released from its unpaid past, present, and future liability for
River Bend costs and expenses; and (vii) all litigation between Cajun and the
Company will be dismissed. Based on the District Court's approval of the Cajun
Settlement, the litigation accrual established in 1994 for possible losses
associated with the Cajun-River Bend litigation was reversed in September 1996.
Cajun has not paid its full share of capital costs, operating and
maintenance expenses, and other costs for repairs and improvements to River Bend
since 1992. Cajun's unpaid portion of River Bend operating and maintenance
expenses (including nuclear fuel) and capital costs for the nine months ended
September 30, 1996, was approximately $42.9 million. The cumulative cost to the
Company
F-38
<PAGE>
ENTERGY GULF STATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
resulting from Cajun's failure to pay its full share of River Bend-related
costs, reduced by the proceeds from the sale by the Company of Cajun's share of
River Bend power, and payments into the registry of the District Court for the
Company's portion of expenses for Big Cajun 2, Unit 3, was $17.0 million as of
September 30, 1996, compared with $31.1 million as of December 31, 1995. Cajun's
unpaid portion of the River Bend related costs is reflected in long-term
receivables with an offsetting reserve in other deferred credits. As discussed
above, the Cajun Settlement will conclude all disputes regarding the non-payment
by Cajun operating and maintenance expenses. Cajun continues to pay its share of
decommissioning costs for River Bend.
In its bankruptcy proceedings, Cajun filed a motion on January 10, 1995, to
reject the Operating Agreement as a burdensome executory contract. The Company
responded on January 10, 1995, with a memorandum opposing Cajun's motion. As
discussed above, this matter will be ended as a result of the Cajun Settlement.
On March 8, 1996, Southwestern Electric Power Company (SWEPCO), the
Company, and certain member cooperatives of Cajun filed with the Bankruptcy
Court a joint proposal to bring an end to the Cajun bankruptcy proceeding. The
proposal was submitted in response to a bid procedure established by the Cajun
bankruptcy trustee. On April 19, 1996, SWEPCO, the Company, and certain Cajun
member cooperatives filed a separate plan of reorganization with the court based
upon their earlier proposal. On April 22, 1996, the Cajun bankruptcy trustee
filed a plan of reorganization with the Bankruptcy Court based on the proposal
of two non-affiliated companies to take over the non-nuclear operations of
Cajun. All of the plans of reorganization submitted to the Bankruptcy Court have
incorporated the Cajun Settlement as an integral condition to the effectiveness
of their plan. The timing and completion of the reorganization plan depends on
Bankruptcy Court approval and any required regulatory approvals.
See Note 8 in the Annual Financial Statements for additional information
regarding the Cajun litigation, Cajun's bankruptcy proceedings, and related
filings.
CAJUN -- TRANSMISSION SERVICE
The Company and Cajun are parties to FERC proceedings relating to
transmission service charge disputes. As discussed above, these disputes will
end upon the implementation of the Cajun Settlement. See Note 8 in the Annual
Financial Statements for additional information regarding these FERC proceedings
and FERC orders issued as a result of such proceedings.
Under the Company's interpretation of a 1992 FERC order, as modified by
FERC's orders issued on August 3, 1995, and October 2, 1995, and as agreed to by
the Cajun bankruptcy trustee, Cajun would owe the Company approximately $68.8
million as of September 30, 1996. The Company further estimates that if it were
to prevail in its May 1992 motion for rehearing and on certain other issues
decided adversely to the Company in the February 1995, August 1995, and October
1995 FERC orders, which the Company has appealed, Cajun would owe the Company
approximately $154.1 million as of September 30, 1996. If Cajun were to prevail
in its May 1992 motion for rehearing to FERC, and if the Company were not to
prevail in its May 1992 motion for rehearing to FERC, and if Cajun were to
prevail in appealing FERC's August and October 1995 orders, the Company
estimates it would owe Cajun approximately $107.6 million as of September 30,
1996. The above amounts are exclusive of a $7.3 million payment by Cajun on
December 31, 1990, which the parties agreed to apply to the disputed
transmission service charges. Pending FERC's ruling on the May 1992 motions for
rehearing, the Company has continued to bill Cajun utilizing the historical
billing methodology and has recorded underpaid transmission charges, including
interest, in the amount of $142.3 million as of September 30, 1996. This amount
is reflected in long-term receivables with an offsetting reserve in other
deferred credits. FERC has determined that the collection of the pre-petition
debt of Cajun is an issue properly
F-39
<PAGE>
ENTERGY GULF STATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
decided in the bankruptcy proceeding. Refer to "Cajun -- River Bend" above for a
discussion of the Cajun Settlement.
CAPITAL REQUIREMENTS AND FINANCING
See Note 8 in the Annual Financial Statements for information on the
Company's construction expenditures (excluding nuclear fuel), and long-term debt
& preferred stock maturities and cash sinking fund requirements for the period
1996-1998.
NUCLEAR INSURANCE, SPENT NUCLEAR FUEL, AND DECOMMISSIONING COSTS
See Note 8 in the Annual Financial Statements for information on nuclear
liability, property and replacement power insurance, related NRC regulations,
the disposal of spent nuclear fuel, other high-level radioactive waste, and
decommissioning costs associated with River Bend.
The Commission has questioned certain of the financial accounting practices
of the electric utility industry regarding the recognition, measurement, and
classification of decommissioning costs for nuclear plants in the financial
statements of electric utilities. In response to these questions, the FASB has
been reviewing the accounting for decommissioning and has expanded the scope of
its review to include liabilities related to the closure and removal of all
long-lived assets. An exposure draft of the proposed SFAS (which proposed a 1997
effective date) was issued in February 1996. The proposed SFAS would require
measurement of the liability for closure and removal of long-lived assets
(including decommissioning) based on discounted future cash flows. Those future
cash flows should be determined by estimating current costs and adjusting for
inflation, efficiencies that may be gained from experience with similar
activities, and consideration of reasonable future advances in technology. It
would also require that changes in the decommissioning/closure cost liability
resulting from changes in assumptions be recognized with a corresponding
adjustment to the plant asset, and depreciation should be revised prospectively.
The proposed SFAS states that the initial recognition of the
decommissioning/closure cost liability would result in an asset that should be
presented with other plant costs on the financial statements because the cost of
decommissioning/closing the plant would be recognized as part of the total cost
of the plant asset. In addition, there would be a regulatory asset recognized on
the financial statements to the extent the initial decommissioning/closure
liability has increased due to the passage of time, and such costs are probable
of future recovery.
After receiving comments on the exposure draft, the FASB has decided that
the effective date for the proposed SFAS will be later than 1997, although a
final effective date has not yet been announced. If current electric utility
industry accounting practices with respect to nuclear decommissioning and other
closure costs are changed, annual provisions for such costs could increase, the
estimated cost for decommissioning/closure could be recorded as a liability
rather than as accumulated depreciation, and trust fund income from
decommissioning trusts could be reported as investment income rather than as a
reduction to decommissioning expense.
ENVIRONMENTAL ISSUES
The Company has been designated as a potentially responsible party for the
clean-up of certain hazardous waste disposal sites. The Company is currently
negotiating with the EPA and state authorities regarding the clean-up of certain
of these sites.
Through September 30, 1996, $8.2 million has been expended on the clean-up.
As of September 30, 1996, a remaining recorded liability of $21.5 million
existed relating to the clean-up of the sites at which the Company has been
designated a potentially responsible party.
F-40
<PAGE>
ENTERGY GULF STATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 2. RATE AND REGULATORY MATTERS
RIVER BEND
In May 1988, the PUCT granted the Company a permanent increase in annual
revenues of $59.9 million resulting from the inclusion in rate base of
approximately $1.6 billion of company-wide River Bend plant investment and
approximately $182 million of related Texas retail jurisdiction deferred River
Bend costs (Allowed Deferrals). In addition, the PUCT disallowed as imprudent
$63.5 million of company-wide River Bend plant costs and placed in abeyance,
with no finding as to prudence, approximately $1.4 billion of company-wide River
Bend plant investment and approximately $157 million of Texas retail
jurisdiction deferred River Bend operating and carrying costs (Abeyed
Deferrals).
As discussed in Note 2 in the Annual Financial Statements, various appeals
of the PUCT's order have been filed (Rate Appeal). The Company filed an appeal
with the Texas Supreme Court and, on February 9, 1996, the Texas Supreme Court
agreed to hear the appeal. Oral arguments were held on March 19, 1996. The
timing of a decision by the Texas Supreme Court is not certain.
As of September 30, 1996, the River Bend plant costs disallowed for retail
ratemaking purposes in Texas and the River Bend plant costs held in abeyance
totaled (net of taxes and depreciation) approximately $12 million and $268
million, respectively. Allowed Deferrals were approximately $78 million, net of
taxes and amortization, as of September 30, 1996. The Company estimates it has
collected approximately $199 million of revenues as of September 30, 1996, as a
result of the originally ordered rate treatment by the PUCT of these deferred
costs. If recovery of the Allowed Deferrals is not upheld, future revenues based
thereon could be lost, and no assurance can be given as to whether or not
refunds to customers of revenue received based upon such deferred costs would be
required.
During the first quarter of 1996, the Company wrote off Abeyed Deferrals of
$169 million, net of tax, in accordance with SFAS 121, which became effective
January 1, 1996, but it has made no write-offs or reserves for the River Bend
plant-related costs. A general remand by the Texas Supreme Court in the Rate
Appeal would enable the Company to seek recovery of the Abeyed Deferrals. Based
on advice from Clark, Thomas & Winters, A Professional Corporation, legal
counsel of record in the Rate Appeal, management believes that it is reasonably
possible that the case will be remanded to the PUCT and that the PUCT will be
allowed to rule on the prudence of the abeyed River Bend plant costs. Management
and legal counsel are unable to predict the amount, if any, of abeyed and
previously disallowed River Bend plant costs that ultimately might be disallowed
by the PUCT. As of September 30, 1996, a net of tax write-off of up to $280
million could be required if the PUCT ultimately issues an adverse ruling on the
abeyed and disallowed plant costs.
The following factors support management's position that a loss contingency
requiring accrual has not occurred, and its belief that all, or substantially
all, of the abeyed plant costs will ultimately be recovered:
1. The $1.4 billion of abeyed River Bend plant costs have never been
ruled imprudent and disallowed by the PUCT;
2. Analysis by Sandlin Associates, which supports the prudence of
substantially all of the abeyed construction costs;
3. Historical inclusion by the PUCT of prudent construction costs in
rate base; and
4. The analysis of the Company's internal legal staff, which has
considerable experience in Texas rate case litigation.
F-41
<PAGE>
ENTERGY GULF STATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Additionally, based on advice from Clark, Thomas & Winters, management
believes that it is reasonably possible that the Allowed Deferrals will continue
to be recovered in rates, and that it is reasonably possible that the Abeyed
Deferrals will be recovered in rates to the extent that the $1.4 billion of
abeyed River Bend plant is recovered.
FILINGS WITH THE LPSC
See Note 2 in the Annual Financial Statements for a discussion of the
Company's required earnings analysis filing with the LPSC for the test year
preceding the Merger (1993). The Company appealed to the Louisiana Supreme Court
the 1994 LPSC order for an annual rate reduction of $12.7 million. During the
appeal, the Company's preliminary injunction from the appropriate state District
Court, relating to the $8.3 million earnings effect of a 1994 change in
accounting for unbilled revenues, remained in effect. On July 2, 1996, the
Louisiana Supreme Court ruled on the appeal. The Court found that the LPSC ruled
incorrectly on the treatment of the initial balance of unbilled revenues and the
revenue annualization adjustment. As a result, the Company will not be required
to refund the $8.3 million. The case, which included other disputed matters, was
remanded to the LPSC for further proceedings.
On May 31, 1995, the Company filed its second required post-Merger earnings
analysis with the LPSC. Hearings on this review were held in December 1995. On
October 4, 1996, the LPSC issued an order requiring a $33.3 million annual base
rate reduction and a $9.6 million refund. One component of the rate reduction
removes from base rates approximately $13.4 million annually of costs that will
be recovered in the future through the fuel adjustment clause. On October 23,
1996, the Company obtained an injunction to stay this order, except insofar as
the order requires the $13.4 million reduction, which the Company has agreed to
implement. The Company plans to appeal the order to the appropriate state
District Court. In addition, the LPSC order provides for the recovery of $6.8
million annually related to certain gas transportation and storage facilities
costs (see "LPSC Fuel Cost Review" below).
On May 31, 1996, the Company filed its third required post-Merger earnings
analysis with the LPSC. Based on this earnings filing, on June 1, 1996, a $5.3
million annual rate reduction went into effect. Hearings on this filing are
scheduled for December 1996.
FILINGS WITH THE PUCT
On December 6, 1995, the Company filed a petition with the PUCT for
reconciliation of fuel and purchased power expenses for the period January 1,
1994, through June 30, 1995. The Company believes that there was an
under-recovered fuel balance, including interest, of $22.4 million as of June
1995. Hearings began in September 1996, and a final action by the PUCT is not
expected until January 1997. Management is unable to predict the final outcome
of this proceeding.
In accordance with the Merger agreement, the Company is required to file a
rate proceeding with the PUCT in November 1996. However, in April 1996, certain
cities served by the Company (Cities) instituted investigations of the
reasonableness of the Company's rates. In May 1996, the Cities agreed to forego
their investigation based on the assurance that any rate decrease ordered in the
November 1996 filing will be retroactive to June 1, 1996, and accrue interest
until refunded. The agreement further provides that no base rate increase will
be retroactive.
LPSC FUEL COST REVIEW
See Note 2 in the Annual Financial Statements for a discussion of the
LPSC's review of the Company's fuel costs for the period October 1988 through
September 1991 (Phase I) and the Company's subsequent appeal of $13.9 million of
fuel costs disallowed by the LPSC. On April 15, 1996,
F-42
<PAGE>
ENTERGY GULF STATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
the appropriate state District Court affirmed the LPSC decision. The Company has
appealed this decision to the Louisiana Supreme Court. The Company has reached a
settlement with the LPSC on one of the components of the disallowed fuel costs.
See "October 1996 LPSC Settlement" below.
In September 1996, the LPSC completed the second phase of their review of
the Company's fuel costs, which review covered the period October 1991 through
December 1994 (Phase II). On October 7, 1996, the LPSC issued an order requiring
a $34.2 million refund. The ordered refund includes a disallowance of $14.3
million of capital costs (including interest) related to certain gas
transportation and storage facilities, which were recovered through the fuel
clause. However, the LPSC order provides that the Company may recover these
costs in the future through base rates by establishing a regulatory asset. As
discussed above, the LPSC order in the second post-Merger earnings analysis
provides for the recovery of $6.8 million annually related to gas transportation
and storage facilities costs through base rates. On October 23, 1996, the
Company received an injunction to stay this order, except insofar as the order
requires the $14.3 million refund, and plans to appeal the order to the
appropriate state District Court. See "October 1996 LPSC Settlement" below.
OCTOBER 1996 LPSC SETTLEMENT
In October 1996, the Company and the LPSC reached an agreement whereby the
Company agreed to (i) refund certain capital costs related to gas transportation
and storage facilities that were at issue in the Phase I and Phase II fuel cost
reviews and (ii) refund similar costs recovered subsequent to the Phase II fuel
cost review. This will result in a total refund to customers of approximately
$32.1 million including interest. In the future, the Company will be permitted
to recover through base rates the capital costs related to such gas
transportation and storage facilities. As a part of the settlement, which
covered post-Phase II costs of such facilities in addition to the costs
addressed by the LPSC's order for the second post-Merger earnings analysis, the
Company will be permitted to recover through base rates $1.3 million annually in
addition to the $6.8 million annual recovery discussed above for a total annual
recovery of $8.1 million. The settlement provides that this amount will be
applied as an offset against a refund, if any, required by a final judgment in
the Company's appeal of the second post-Merger earnings review order.
NOTE 3. LONG-TERM DEBT
On November 1, 1996, the Company retired $75 million of its 6.67% Series
First Mortgage Bonds upon maturity.
NOTE 4. RESTRUCTURING COSTS
In 1994 and 1995, Entergy Corporation and its subsidiaries, including the
Company, implemented various restructuring programs to reduce the number of
employees and consolidate offices and facilities. The programs were designed to
reduce costs and improve operating efficiencies in order to enable Entergy and
its subsidiaries to become low-cost producers. The liability as of December 31,
1995, the adjustments made in 1996, the payments made in 1996 and the liability
as of September 30, 1996, were $5.4 million, $.8 million, $5.2 million and $1.0
million, respectively
The restructuring charges shown above primarily include employee severance
costs related to the expected termination of approximately 625 employees in
various groups. As of September 30, 1996, approximately 650 employees had either
been terminated or accepted voluntary separation packages under the
restructuring plan.
F-43
<PAGE>
ENTERGY GULF STATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 5. ACCOUNTING ISSUES
New Accounting Standard -- In March 1995, the FASB issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", which became effective January 1, 1996. This statement
describes circumstances which may result in assets being impaired, in addition
to providing criteria for recognition and measurement of asset impairment. In
the first quarter of 1996, the Company's regulatory assets of $169 million (net
of tax) related to Texas retail deferred River Bend operating and carrying costs
and $5 million (net of tax) related to Louisiana retail deferred River Bend
operating costs were written off under the provisions of SFAS 121. See Note 1 in
the Annual Financial Statements for additional details regarding other assets
and operations potentially impacted in the future by the requirements of SFAS
121 and the process for periodically reviewing those assets and operations for
impairment.
In the opinion of the Company the accompanying unaudited condensed
financial statements contain all adjustments (consisting primarily of normal
recurring accruals and reclassifying previously reported amounts to conform to
current classifications) necessary for a fair statement of the results for the
interim periods presented. However, the business of the Company is subject to
seasonal fluctuations, with the peak period occurring during the summer months.
The results for the interim periods presented should not be used as a basis for
estimating results of operations for a full year.
F-44
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
DESCRIBED IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THE ISSUER SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 4
Incorporation of Certain Documents by
Reference........................... 5
Risk Factors.......................... 6
The Company........................... 11
Entergy Gulf States Capital I......... 14
Selected Financial Data............... 15
Capitalization........................ 16
Ratio of Earnings to Fixed Charges.... 16
Management's Financial Discussion and
Analysis (December 31, 1995)........ 17
Management's Financial Discussion and
Analysis (September 30, 1996)....... 24
Accounting Treatment.................. 29
Use of Proceeds....................... 29
Description of the Preferred
Securities.......................... 29
Description of the Guarantee.......... 41
Description of the Junior Subordinated
Debentures.......................... 43
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures and the Guarantee........ 50
Certain United States Federal Income
Tax Considerations.................. 52
Underwriting.......................... 55
Experts............................... 56
Legal Opinions........................ 57
Index to the Financial Statements..... F-1
</TABLE>
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3,400,000 PREFERRED SECURITIES
ENTERGY GULF STATES
CAPITAL I
8.75% CUMULATIVE QUARTERLY
INCOME PREFERRED SECURITIES,
SERIES A (QUIPS(SM))
FULLY AND UNCONDITIONALLY GUARANTEED,
AS SET FORTH HEREIN, BY
ENTERGY GULF STATES, INC.
---------------------------------
PROSPECTUS
---------------------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES
INCORPORATED
SMITH BARNEY INC.
REPRESENTATIVES OF THE UNDERWRITERS
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