UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 1-7629
HOUSTON INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-1885573
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
5 Post Oak Park
4400 Post Oak Parkway
Houston, Texas 77027
(Address of principal executive offices) (Zip Code)
(713) 629-3000
(Registrant's telephone number, including area code)
------------------------------
Commission file number 1-3187
HOUSTON LIGHTING & POWER COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-0694415
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
611 Walker Avenue
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 228-9211
(Registrant's telephone number, including area code)
------------------------------
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 1995, Houston Industries Incorporated had 131,336,234 shares
of common stock outstanding, including 7,265,430 ESOP shares not deemed
outstanding for financial statement purposes. As of October 31, 1995, all of
Houston Lighting & Power Company's outstanding common stock was held, directly
or indirectly, by Houston Industries Incorporated.
HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
This combined Form 10-Q is separately filed by Houston Industries Incorporated
and Houston Lighting & Power Company. Information contained herein relating to
Houston Lighting & Power Company is filed by Houston Industries Incorporated and
separately by Houston Lighting & Power Company on its own behalf. Houston
Lighting & Power Company makes no representation as to information relating to
Houston Industries Incorporated (except as it may relate to Houston Lighting &
Power Company) or to any other affiliate or subsidiary of Houston Industries
Incorporated.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Houston Industries Incorporated and Subsidiaries
Statements of Consolidated Income
Three Months and Nine Months Ended
September 30, 1995 and 1994 3
Consolidated Balance Sheets
September 30, 1995 and December 31, 1994 5
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 1995 and 1994 7
Statements of Consolidated Retained Earnings
Three Months and Nine Months Ended
September 30, 1995 and 1994 9
Notes to Consolidated Financial Statements 15
Houston Lighting & Power Company
Statements of Income
Three Months and Nine Months Ended
September 30, 1995 and 1994 10
Balance Sheets
September 30, 1995 and December 31, 1994 11
Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994 13
Statements of Retained Earnings
Three Months and Nine Months Ended
September 30, 1995 and 1994 14
Notes to Financial Statements 15
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 33
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(Restated) (Restated)
REVENUES...................................................... $1,171,789 $1,150,946 $2,896,180 $2,977,433
---------- ---------- ---------- ----------
EXPENSES:
Fuel...................................................... 269,159 211,235 691,226 663,937
Purchased power........................................... 50,160 102,225 166,570 304,680
Operation and maintenance................................. 228,913 212,507 645,092 610,447
Taxes other than income taxes............................. 62,227 65,184 197,793 191,255
Depreciation and amortization............................. 127,148 99,831 343,630 299,022
---------- ---------- ---------- ----------
Total.................................................. 737,607 690,982 2,044,311 2,069,341
---------- ---------- ---------- ----------
OPERATING INCOME.............................................. 434,182 459,964 851,869 908,092
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Allowance for other funds used
during construction.................................... 1,676 1,170 6,319 2,579
Dividend income........................................... 9,730 9,730
Other - net............................................... (8,103) (7,509) (35,756) (20,938)
---------- ---------- ---------- ----------
Total ....................................................... 3,303 (6,339) (19,707) (18,359)
---------- ---------- ---------- ----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt................................ 75,178 66,368 204,436 199,369
Other interest............................................ 2,777 5,475 21,454 18,510
Allowance for borrowed funds used
during construction.................................... (943) (1,616) (3,881) (3,433)
Preferred dividends of subsidiary............................. 6,772 8,305 23,207 24,981
---------- ---------- ---------- ----------
Total ....................................................... 83,784 78,532 245,216 239,427
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING............................ 353,701 375,093 586,946 650,306
INCOME TAXES.................................................. 117,840 132,854 193,976 232,160
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING...................................... 235,861 242,239 392,970 418,146
DISCONTINUED OPERATIONS (NET OF INCOME
TAXES):
Gain on sale of cable television
subsidiary............................................. 618,088 708,695
Loss from discontinued cable
television operations.................................. (6,271) (21,355)
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING...................................... 853,949 235,968 1,101,665 396,791
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS (NET OF INCOME TAXES OF
$4,415)................................................... (8,200)
---------- ---------- ---------- ----------
NET INCOME.................................................... $ 853,949 $ 235,968 $1,101,665 $ 388,591
========== ========== ========== ==========
-3-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING .......................................... $ 1.90 $ 1.97 $ 3.17 $ 3.41
DISCONTINUED OPERATIONS:
Gain on sale of cable television
subsidiary........................................ 4.99 5.73
Loss from discontinued cable
television operations............................. (0.05) (0.17)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS............................................. (0.07)
--------- --------- --------- ---------
EARNINGS PER COMMON SHARE............................... $ 6.89 $ 1.92 $ 8.90 $ 3.17
========= ========= ========= =========
DIVIDENDS DECLARED PER COMMON
SHARE................................................ $ 0.75 $ 0.75 $ 2.25 $ 2.25
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000).................................... 123,947 123,060 123,773 122,665
Pro forma per share and weighted average share information reflecting the stock
split effective November 16, 1995.
CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING .......................................... $ 0.95 $ 0.98 $ 1.59 $ 1.70
DISCONTINUED OPERATIONS:
Gain on sale of cable television
subsidiary........................................ 2.49 2.86
Loss from discontinued cable
television operations............................. (0.02) (0.09)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS............................................. (0.03)
--------- --------- --------- ---------
EARNINGS PER COMMON SHARE............................... $ 3.44 $ 0.96 $ 4.45 $ 1.58
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000).................................... 247,894 246,120 247,546 245,331
See Notes to Consolidated Financial Statements.
-4-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- -------------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Plant in service............................................................ $ 11,976,652 $ 11,743,070
Construction work in progress............................................... 340,423 333,180
Nuclear fuel................................................................ 216,494 212,795
Plant held for future use................................................... 48,631 201,741
Electric plant acquisition adjustments......................................... 3,166 3,166
Other property................................................................. 91,975 85,529
------------- -------------
Total................................................................. 12,677,341 12,579,481
Less accumulated depreciation and amortization................................. 3,807,327 3,527,598
------------- -------------
Property, plant and equipment - net................................... 8,870,014 9,051,883
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents...................................................... 64,527 10,443
Special deposits............................................................... 3,932 10
Accounts receivable - net...................................................... 81,684 22,149
Accrued unbilled revenues...................................................... 74,928 38,372
Time Warner dividends receivable............................................... 9,640
Fuel stock, at lifo cost....................................................... 49,430 56,711
Materials and supplies, at average cost........................................ 144,040 148,007
Prepayments.................................................................... 18,183 14,398
------------- -------------
Total current assets.................................................. 446,364 290,090
------------- -------------
OTHER ASSETS:
Net assets of discontinued cable television
operations.................................................................. 618,982
Deferred plant costs - net..................................................... 619,580 638,917
Deferred debits................................................................ 343,909 281,204
Regulatory asset - net......................................................... 230,813 235,463
Unamortized debt expense and premium on
reacquired debt............................................................. 161,456 161,885
Recoverable project costs - net................................................ 237,562 98,954
Investment in Time Warner equity securities.................................... 1,033,250
Equity investment in foreign electric utility.................................. 28,280 25,699
------------- -------------
Total other assets.................................................... 2,654,850 2,061,104
------------- -------------
Total.............................................................. $ 11,971,228 $ 11,403,077
============= =============
See Notes to Consolidated Financial Statements.
-5-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ -----------
CAPITALIZATION:
Common Stock Equity:
Common stock, no par value .................................................. $ 2,439,461 $ 2,437,638
Unearned ESOP shares ........................................................ (272,414) (289,611)
Retained earnings ........................................................... 2,044,245 1,221,221
------------ ------------
Total common stock equity ......................................... 4,211,292 3,369,248
------------ ------------
Preference Stock, no par value, authorized
10,000,000 shares; none outstanding
Cumulative Preferred Stock of Subsidiary, no par value:
Not subject to mandatory redemption ...................................... 351,345 351,345
Subject to mandatory redemption .......................................... 51,055 121,910
------------ ------------
Total cumulative preferred stock .................................. 402,400 473,255
------------ ------------
Long-Term Debt:
Debentures .................................................................. 548,867 548,729
Long-term debt of subsidiaries:
First mortgage bonds ..................................................... 2,997,668 3,020,400
Pollution control revenue bonds .......................................... 4,419 155,247
Other .................................................................... 6,908 9,757
------------ ------------
Total long-term debt .............................................. 3,557,862 3,734,133
------------ ------------
Total capitalization ........................................... 8,171,554 7,576,636
------------ ------------
CURRENT LIABILITIES:
Notes payable .................................................................. 423,291
Accounts payable ............................................................... 115,451 159,225
Taxes accrued .................................................................. 231,193 169,690
Interest accrued ............................................................... 87,669 73,527
Dividends accrued .............................................................. 98,502 98,469
Accrued liabilities to municipalities .......................................... 27,531 21,307
Customer deposits .............................................................. 62,897 64,905
Current portion of long-term debt and preferred stock .......................... 179,449 49,475
Other .......................................................................... 70,376 64,026
------------ ------------
Total current liabilities ...................................... 873,068 1,123,915
------------ ------------
DEFERRED CREDITS:
Accumulated deferred federal income taxes ...................................... 2,036,986 1,763,230
Unamortized investment tax credit .............................................. 397,007 411,580
Fuel-related credits ........................................................... 119,087 242,912
Other .......................................................................... 373,526 284,804
------------ ------------
Total deferred credits ......................................... 2,926,606 2,702,526
------------ ------------
COMMITMENTS AND CONTINGENCIES
Total ....................................................... $ 11,971,228 $ 11,403,077
============ ============
See Notes to Consolidated Financial Statements.
-6-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1995 1994
--------- ---------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations ....................................................... $ 392,970 $ 418,146
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization ........................................................ 343,630 299,022
Amortization of nuclear fuel ......................................................... 21,892 13,352
Deferred income taxes ................................................................ 53,855 69,898
Investment tax credit ................................................................ (14,573) (14,560)
Allowance for other funds used during
construction ...................................................................... (6,319) (2,579)
Fuel refund .......................................................................... (189,389)
Fuel cost over recovery .............................................................. 55,905 152,130
Net cash provided by discontinued cable television
operations ........................................................................ 16,391 12,180
Changes in other assets and liabilities:
Accounts receivable and accrued unbilled revenues ................................. (96,091) (21,422)
Inventory ......................................................................... 11,248 6,896
Other current assets .............................................................. (17,347) 15,464
Accounts payable .................................................................. (43,774) (72,471)
Interest and taxes accrued ........................................................ 75,645 7,978
Other current liabilities ......................................................... 10,569 13,475
Other - net ....................................................................... 31,058 55,114
--------- ---------
Net cash provided by operating activities ..................................... 645,670 952,623
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital and nuclear fuel expenditures
(including allowance for borrowed funds used
during construction) ................................................................. (206,474) (297,861)
Non-regulated electric power project expenditures ....................................... (12,388) (431)
Corporate headquarters expenditures (including
capitalized interest) ................................................................ (78,828) (22,558)
Settlement of subsidiary debt in connection with sale
of cable television subsidiary ....................................................... 621,954
Net cash used in discontinued cable television
operations ........................................................................... (47,601) (32,601)
Other - net ............................................................................. (9,807) (10,419)
--------- ---------
Net cash provided by(used in)investing
activities ................................................................. 266,856 (363,870)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of first mortgage bonds .............................................. 142,988
Payment of matured bonds ................................................................ (19,500)
Redemption of preferred stock ........................................................... (91,400) (20,000)
Payment of common stock dividends ....................................................... (278,611) (276,202)
Decrease in notes payable - net ......................................................... (423,291) (212,785)
Extinguishment of long-term debt ........................................................ (174,140)
Net cash used in discontinued cable television
operations ........................................................................... (40,798) (72,298)
Other - net ............................................................................. 6,810 5,026
--------- ---------
Net cash used in financing activities ......................................... (858,442) (595,759)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................................... 54,084 (7,006)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................................. 10,443 14,884
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................... $ 64,527 $ 7,878
========= =========
-7-
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ................................................ $ 261,292 $ 262,570
Income taxes ................................................................................. 61,691 136,933
See Notes to Consolidated Financial Statements.
-8-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
Balance at Beginning of Period ................. $ 1,283,326 $ 1,160,081 $ 1,221,221 $ 1,191,230
Net Income for the Period ...................... 853,949 235,968 1,101,665 388,591
----------- ----------- ----------- -----------
Total ................................ 2,137,275 1,396,049 2,322,886 1,579,821
Common Stock Dividends ......................... (93,030) (92,910) (278,641) (276,682)
----------- ----------- ----------- -----------
Balance at End of Period ....................... $ 2,044,245 $ 1,303,139 $ 2,044,245 $ 1,303,139
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
-9-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
OPERATING REVENUES ................................. $ 1,171,789 $ 1,150,946 $ 2,896,180 $ 2,977,433
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Fuel ............................................ 269,159 211,235 691,226 663,937
Purchased power ................................. 50,160 102,225 166,570 304,680
Operation ....................................... 169,248 156,809 464,174 431,611
Maintenance ..................................... 59,665 55,698 180,918 178,836
Depreciation and amortization ................... 126,849 99,571 342,723 298,175
Income taxes .................................... 126,223 139,365 222,533 248,359
Other taxes ..................................... 62,227 65,184 197,793 191,255
----------- ----------- ----------- -----------
Total ...................................... 863,531 830,087 2,265,937 2,316,853
----------- ----------- ----------- -----------
OPERATING INCOME ................................... 308,258 320,859 630,243 660,580
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Allowance for other funds used
during construction .......................... 1,676 1,170 6,319 2,579
Other - net ..................................... 1,807 (1,494) (8,701) (7,253)
----------- ----------- ----------- -----------
Total ...................................... 3,483 (324) (2,382) (4,674)
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES ..................... 311,741 320,535 627,861 655,906
----------- ----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt ...................... 62,038 61,565 184,955 184,964
Other interest .................................. 2,715 1,189 6,639 5,938
Allowance for borrowed funds used
during construction .......................... (943) (1,616) (3,881) (3,433)
----------- ----------- ----------- -----------
Total ...................................... 63,810 61,138 187,713 187,469
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING ............................ 247,931 259,397 440,148 468,437
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS (NET OF INCOME TAXES OF
$4,415) ......................................... (8,200)
----------- ----------- ----------- -----------
NET INCOME ......................................... 247,931 259,397 440,148 460,237
DIVIDENDS ON PREFERRED STOCK ....................... 6,772 8,305 23,207 24,981
----------- ----------- ----------- -----------
INCOME AFTER PREFERRED DIVIDENDS ................... $ 241,159 $ 251,092 $ 416,941 $ 435,256
=========== =========== =========== ===========
See Notes to Financial Statements.
-10-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant in service...................................................... $ 11,976,652 $ 11,743,070
Construction work in progress.................................................. 340,423 333,180
Nuclear fuel................................................................... 216,494 212,795
Plant held for future use...................................................... 48,631 201,741
Electric plant acquisition adjustments......................................... 3,166 3,166
------------ ------------
Total.................................................................... 12,585,366 12,493,952
Less accumulated depreciation and
amortization................................................................ 3,797,095 3,517,923
------------ ------------
Property, plant and equipment - net...................................... 8,788,271 8,976,029
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents...................................................... 268,992 235,867
Special deposits............................................................... 432 10
Accounts receivable:
Affiliated companies........................................................ 3,724 4,213
Others...................................................................... 47,481 8,896
Accrued unbilled revenues...................................................... 74,928 38,372
Inventory:
Fuel stock, at lifo cost.................................................... 49,430 56,711
Materials and supplies, at average cost..................................... 143,624 147,922
Prepayments.................................................................... 13,924 9,665
------------ ------------
Total current assets..................................................... 602,535 501,656
------------ ------------
OTHER ASSETS:
Deferred plant costs - net..................................................... 619,580 638,917
Deferred debits................................................................ 290,195 241,611
Unamortized debt expense and premium on
reacquired debt............................................................. 159,493 158,351
Regulatory asset - net......................................................... 230,813 235,463
Recoverable project costs - net................................................ 237,562 98,954
------------ ------------
Total other assets....................................................... 1,537,643 1,373,296
------------ ------------
Total................................................................ $ 10,928,449 $ 10,850,981
============ ============
See Notes to Financial Statements.
-11-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
SEPTEMBER 30, DECEMBER 31,
1995 1994
----------- -----------
CAPITALIZATION:
Common Stock Equity:
Common stock, class A; no par value .......................................... $ 1,524,949 $ 1,524,949
Common stock, class B; no par value .......................................... 150,978 150,978
Retained earnings ............................................................ 2,323,300 2,153,109
----------- -----------
Total common stock equity ................................................. 3,999,227 3,829,036
----------- -----------
Cumulative Preferred Stock:
Not subject to mandatory redemption ......................................... 351,345 351,345
Subject to mandatory redemption ............................................. 51,055 121,910
----------- -----------
Total cumulative preferred stock .......................................... 402,400 473,255
----------- -----------
Long-Term Debt:
First mortgage bonds ........................................................ 2,997,668 3,020,400
Pollution control revenue bonds ............................................. 4,419 155,247
Other ....................................................................... 6,908 9,757
----------- -----------
Total long-term debt ...................................................... 3,008,995 3,185,404
----------- -----------
Total capitalization ................................................. 7,410,622 7,487,695
----------- -----------
CURRENT LIABILITIES:
Accounts payable ............................................................... 100,892 148,042
Accounts payable to affiliated companies ....................................... 4,845 10,936
Taxes accrued .................................................................. 258,113 181,043
Interest accrued ............................................................... 73,358 64,732
Accrued liabilities to municipalities .......................................... 27,531 21,307
Customer deposits .............................................................. 62,897 64,905
Current portion of long-term debt and preferred stock .......................... 179,449 49,475
Other .......................................................................... 66,576 59,912
----------- -----------
Total current liabilities ............................................ 773,661 600,352
----------- -----------
DEFERRED CREDITS:
Accumulated deferred federal income taxes ...................................... 1,926,487 1,876,300
Unamortized investment tax credit .............................................. 397,007 411,580
Fuel-related credits ........................................................... 119,087 242,912
Other .......................................................................... 301,585 232,142
----------- -----------
Total deferred credits ............................................... 2,744,166 2,762,934
----------- -----------
COMMITMENTS AND CONTINGENCIES
Total ............................................................. $10,928,449 $10,850,981
=========== ===========
See Notes to Financial Statements.
-12-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1995 1994
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................. $ 440,148 $ 460,237
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ....................................................... 342,723 298,175
Amortization of nuclear fuel ........................................................ 21,892 13,352
Deferred income taxes ............................................................... 50,187 83,088
Investment tax credits .............................................................. (14,573) (14,560)
Allowance for other funds used during
construction ..................................................................... (6,319) (2,579)
Fuel refund ......................................................................... (189,389)
Fuel cost over recovery ............................................................. 55,905 152,130
Cumulative effect of change in accounting for
postemployment benefits .......................................................... 8,200
Changes in other assets and liabilities:
Accounts receivable - net ........................................................ (74,652) (12,950)
Materials and supplies ........................................................... 4,298 5,320
Fuel stock ....................................................................... 7,281 1,612
Accounts payable ................................................................. (53,241) (58,821)
Interest and taxes accrued ....................................................... 85,696 12,441
Other current liabilities ........................................................ 12,869 14,537
Other - net ...................................................................... 36,884 43,109
--------- -----------
Net cash provided by operating activities ................................... 719,709 1,003,291
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction) ........................................................... (291,474) (297,861)
Other - net ............................................................................ (6,906) (9,808)
--------- -----------
Net cash used in investing activities ....................................... (298,380) (307,669)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from first mortgage bonds ..................................................... 142,988
Payment of matured bonds ............................................................... (19,500)
Payment of dividends ................................................................... (271,979) (272,259)
Decrease in notes payable .............................................................. (171,100)
Redemption of preferred stock .......................................................... (91,400) (20,000)
Extinguishment of long-term debt ....................................................... (174,140)
Other - net ............................................................................ 6,327 3,911
--------- -----------
Net cash used in financing activities ....................................... (388,204) (478,948)
--------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................................. 33,125 216,674
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................................... 235,867 12,413
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................. $ 268,992 $ 229,087
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ............................................... $ 184,485 $ 186,778
Income taxes ........................................................................ 67,743 136,889
See Notes to Financial Statements.
-13-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
Balance at Beginning of
Period .................................... $2,164,391 $2,048,593 $2,153,109 $2,028,924
Net Income for the Period ...................... 247,931 259,397 440,148 460,237
---------- ---------- ---------- ----------
Total ..................................... 2,412,322 2,307,990 2,593,257 2,489,161
---------- ---------- ---------- ----------
Deductions - Cash Dividends:
Preferred ................................. 6,772 8,305 23,207 24,981
Common .................................... 82,250 82,251 246,750 246,746
---------- ---------- ---------- ----------
Total ................................. 89,022 90,556 269,957 271,727
---------- ---------- ---------- ----------
Balance at End of Period ....................... $2,323,300 $2,217,434 $2,323,300 $2,217,434
========== ========== ========== ==========
See Notes to Financial Statements.
-14-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim consolidated financial statements and notes contained in
this Form 10-Q should be read in conjunction with the financial
statements and notes contained in the Combined Form 8-K (File Nos. 1-7629
and 1-3187) dated May 12, 1995 of Houston Industries Incorporated
(Company) and Houston Lighting & Power Company (HL&P) (Combined Form
8-K).
The results of interim periods are not necessarily indicative of results
expected for the year due to, among other things, the seasonal nature of
HL&P's business and the timing of scheduled and unscheduled maintenance.
In the opinion of management, the interim financial information reflects
all adjustments, including accruals of estimated expenses, necessary for
a fair presentation of the results for the interim periods. Certain
amounts from the previous year have been reclassified to conform to the
1995 presentation of financial statements. Such reclassifications do not
affect earnings.
(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four co-owners)
of the South Texas Project Electric Generating Station (South Texas
Project), which consists of two 1,250 megawatt (MW) nuclear generating
units. HL&P has a 30.8 percent interest in the project and bears a
corresponding share of capital and operating costs associated with the
project. As of September 30, 1995, HL&P's investments (net of $422.9
million plant accumulated depreciation and $135.8 million nuclear fuel
amortization) in the South Texas Project and in nuclear fuel, including
allowance for funds used during construction, were $2.0 billion and $80.7
million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. Between June 1993 and February 1995, the South Texas Project
was listed on the NRC's "watch list" of plants with weaknesses that
warrant increased NRC regulatory attention. For information on these
proceedings, see Note 2(b) of the notes to the financial statements
included in the Combined Form 8-K, which note is incorporated herein by
reference.
In October 1995, the NRC issued a Notice of Violation and Proposed
Imposition of Civil Penalties of $160,000 against HL&P based on
conclusions that HL&P had discriminated against two former members of the
South Texas Project's nuclear security department in retaliation for
their having identified and reported safety concerns to the NRC. Certain
current and former employees of
-15-
HL&P or contractors of HL&P have asserted claims that their employment
was terminated or disrupted in retaliation for their having made
safety-related complaints to the NRC. Although no prediction can be made
as to the ultimate outcome of these claims, the Company and HL&P do not
believe they will have a material adverse effect on the Company's or
HL&P's financial condition or results of operations. For information
regarding these claims, see Note 2(b) of the notes to the financial
statements included in the Company's and HL&P's Combined Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995 (Combined First Quarter
Form 10-Q), which note is incorporated herein by reference.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February 1994,
the City of Austin (Austin), one of the four co-owners of the South Texas
Project, filed suit (Austin II Litigation) against HL&P. The suit, which
is pending in the 11th District Court of Harris County, Texas, is not
anticipated to be tried before March 1996. Austin alleges that the
outages at the South Texas Project from early 1993 to early 1994 were due
to HL&P's failure to perform obligations it owed to Austin under the
Participation Agreement among the four co-owners of the South Texas
Project (Participation Agreement). Austin also asserts that HL&P breached
certain undertakings voluntarily assumed by HL&P on behalf of the
co-owners under the terms of the NRC Operating Licenses and Technical
Specifications relating to the South Texas Project.
Under amended pleadings in the Austin II Litigation, Austin claims HL&P's
failure to perform obligations it owed to Austin under the Participation
Agreement have caused Austin damages of at least $150 million due to the
incurrence of increased operating and maintenance costs, the cost of
replacement power and lost profits on wholesale transactions that did not
occur. In May 1994, the City of San Antonio (San Antonio), another
co-owner of the South Texas Project, intervened in the litigation filed
by Austin against HL&P and asserted claims similar to those asserted by
Austin. Although San Antonio has not specified the damages sought in its
complaint, expert reports filed in the litigation have indicated that San
Antonio's claims may be in excess of $275 million. HL&P's motion to
strike San Antonio's intervention and compel arbitration of San Antonio's
claims under the Participation Agreement has been denied.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as to
the ultimate outcome of these matters.
(d) NUCLEAR INSURANCE. For a discussion of the nuclear property and nuclear
liability insurance maintained in connection with the South Texas Project
and potential assessments associated therewith, see Note 2(d) of the
notes to the financial statements included in the Combined Form 8-K.
(e) NUCLEAR DECOMMISSIONING. For a discussion of nuclear decommissioning
costs, the Company's decommissioning funding level and the accounting for
debt and equity securities held by the decommissioning trust, see Note
2(e) of the notes to the financial statements included in the Combined
Form 8-K.
(f) DEFERRED PLANT COSTS. The amortization of deferred plant costs associated
with the South Texas Project totaled $6.4 million and $19.3 million for
the three and nine months ended September 30,
-16-
1995, respectively, and is included on the Company's Statements of
Consolidated Income and HL&P's Statements of Income in depreciation and
amortization expense.
(3) SETTLEMENT OF RATE PROCEEDING AND OTHER MATTERS
In August 1995, the Public Utility Commission of Texas (Utility
Commission) unanimously approved a settlement agreement (Settlement),
entered into in February 1995, resolving HL&P's pending rate case (Docket
No. 12065) as well as a separate proceeding (Docket No. 13126) regarding
the prudence of operation of the South Texas Project. Subject to certain
changes in existing regulation or legislation, the Settlement precludes
HL&P from seeking rate increases until after December 31, 1997. HL&P
began recording the estimated effects of the Settlement in the first
quarter of 1995.
In the third quarter and first nine months of 1995, HL&P's earnings were
reduced by approximately $42 million and $79 million, respectively, as a
result of the Settlement. The after-tax effects are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
------------------- ------------------
(Millions of Dollars)
Reduction in Base Revenues........................... $25 $47
South Texas Project Write Down....................... 14 19
One-Time Write-Off of Mine-Related
Costs........................................... 6
Other Expenses....................................... 3 7
--- ---
Total Settlement Effect on
Net Income.................................. $42 $79
=== ===
The Settlement gives HL&P the option to write down up to $50 million per
year of its investment in the South Texas Project for a five year period
commencing January 1, 1995. The parties to the Settlement agreed that any
such write down will be treated as a reasonable and necessary expense
during routine reviews of HL&P's earnings and any rate review proceeding
initiated against HL&P. HL&P recorded in the third quarter a $21 million
pre-tax write down (in addition to a $7 million pre-tax write down
recorded during the second quarter) of this investment, which amounts are
included in the Company's Statements of Consolidated Income and HL&P's
Statements of Income in depreciation and amortization expense. HL&P began
accruing decommissioning expense for its interest in the South Texas
Project at an annual rate of $14.8 million, a $9 million annual increase
over its 1994 expense.
In addition, the Settlement requires that HL&P commence amortizing, no
later than January 1996, its investment in certain lignite reserves
associated with the cancelled Malakoff Electric Generating Station
(Malakoff) project ($153 million as of September 30, 1995) over a period
not to exceed seven years. This additional amortization will equal
approximately $22 million per year. HL&P does not currently anticipate
beginning amortization of this investment until January 1996. As a result
of this additional amortization, all of HL&P's remaining investment in
Malakoff will be fully amortized no later than December 31, 2002.
-17-
During the second quarter of 1995, HL&P recorded a one-time pre-tax
charge of $9 million incurred in connection with certain Malakoff
mine-related costs which were not previously recorded and are not
recoverable under the terms of the Settlement.
Also, the parties to the Settlement agreed to dismiss their respective
appeals of certain Utility Commission orders as discussed below.
(4) APPEALS OF PRIOR UTILITY COMMISSION ORDERS
The following is a summary of the status of judicial review of the
following Utility Commission orders:
(a) 1991 RATE CASE. In accordance with the terms of the Settlement, the
Office of Public Utility Counsel has dismissed with prejudice its appeal
of the Utility Commission's order in Docket No. 9850 (1991 Rate Case). As
a result of this action, the Utility Commission's decision in Docket No.
9850 has become final.
(b) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT (DOCKET
NO. 6668). Parties to the Settlement have either dismissed their
respective appeals from the Utility Commission's 1986 order concerning
the prudence of the construction of the South Texas Project or are
committed to do so in the near future. However, an appeal by a party who
did not join in the Settlement remains pending. For a discussion of
Docket No. 6668, see Note 4(d) of the notes to the financial statements
included in the Combined Form 8-K.
(c) DEFERRED ACCOUNTING. In June 1994, the Texas Supreme Court held that the
Utility Commission had statutory authority to grant deferred accounting
treatment for both carrying costs and maintenance expenses. All remaining
challenges to the Utility Commission's approval of deferred accounting
for HL&P were rejected in August 1995 by the Court of Appeals, following
remand to that court by the Texas Supreme Court. As a result, the Utility
Commission's decisions in Docket Nos. 8230 and 9010 have become final.
(d) 1988 RATE CASE. Two issues concerning HL&P's 1988 rate case (Docket No.
8425) are currently pending decision by the Texas Supreme Court: (i) the
treatment by HL&P of certain costs associated with the Malakoff
generating station as "plant held for future use" and (ii) the treatment
by HL&P of certain tax savings associated with federal income tax
deductions for expenses not included in cost of service for ratemaking
purposes. For additional information regarding these issues, see Note
4(b) of the notes to the financial statements included in the Company's
and HL&P's Combined Quarterly Form 10-Q for the quarter ended June 30,
1995, which note is incorporated herein by reference, and Note 4(b) of
the notes to the financial statements included in the Combined Form 8-K.
(5) CAPITAL STOCK
(a) COMPANY COMMON STOCK. At September 30, 1995 and December 31, 1994 the
Company had authorized 400,000,000 shares of common stock, of which
124,040,835 and 123,526,350 shares, respectively, were outstanding.
Outstanding shares exclude the unallocated Employee Stock
-18-
Ownership Plan shares which as of September 30, 1995 and December 31,
1994 were 7,295,399 and 7,770,313, respectively. For information about
the common stock split recently declared by the Company, see Note 9.
(b) HL&P COMMON STOCK. All issued and outstanding Class A voting common stock
of HL&P is held by the Company and all issued and outstanding Class B
non-voting common stock of HL&P is held by Houston Industries (Delaware)
Incorporated, a wholly-owned subsidiary of the Company.
(c) HL&P PREFERRED STOCK. At September 30, 1995 and December 31, 1994, HL&P
had 10,000,000 shares of preferred stock authorized, of which 4,318,397
and 5,232,397 shares, respectively, were outstanding.
In April 1995, HL&P redeemed, at $100 per share, 514,000 shares of its
$9.375 cumulative preferred stock. The redemption included 257,000 shares
in satisfaction of mandatory sinking fund requirements, and an additional
257,000 shares as an optional redemption.
In June 1995, HL&P redeemed, at $100 per share, all 400,000 shares of its
$8.50 cumulative preferred stock. The redemption included 200,000 shares
in satisfaction of mandatory sinking fund requirements, and the remaining
200,000 shares as an optional redemption.
(6) HL&P LONG-TERM DEBT
In June 1995, HL&P purchased from a third party $19.0 million aggregate
principal amount of its 8 3/4% first mortgage bonds due 2022 for a total
purchase price of $20.7 million.
In July 1995, $150.9 million aggregate principal amount of revenue
refunding bonds collateralized by HL&P's first mortgage bonds were issued
on behalf of HL&P. The new bonds bear an initial interest rate of 5.8%,
variable at HL&P's option after a five-year no-call period, and mature in
2015. Proceeds from these issuances were used in 1995 to redeem, at 102%
of their aggregate principal amount, pollution control revenue bonds
aggregating $150.9 million (bearing a weighted average interest rate of
9.9%).
(7) DISCONTINUED CABLE TELEVISION OPERATIONS
In July 1995, the Company completed the sale of KBLCOM Incorporated
(KBLCOM), its cable television subsidiary, to Time Warner Inc. (Time
Warner). The Company's 1995 earnings include a gain on the sale of $709
million, subject to post closing adjustments, $91 million of which was
recorded during the first quarter and the balance during the third
quarter. Effective January 1, 1995, the operations of KBLCOM were
accounted for as discontinued and prior periods were restated for
consistency in reflecting KBLCOM as a discontinued operation. For a
presentation of the Company's consolidated financial statements for the
years 1992 through 1994 which reflects KBLCOM on a discontinued
operations basis, see the Combined Form 8-K.
In exchange for KBLCOM's common stock, the Company received 1 million
shares of Time Warner common stock and 11 million shares of non-publicly
traded convertible preferred stock. Time Warner also purchased from the
Company for cash approximately $622 million of
-19-
KBLCOM's intercompany indebtedness and assumed approximately $650 million
of KBLCOM's external debt and other liabilities. The convertible
preferred stock has an aggregate liquidation preference (redeemable after
July 6, 2000) of $100 per share (plus accrued and unpaid dividends), is
entitled to cumulative annual dividends of $3.75 per share until July 6,
1999, is currently convertible by the Company and after four years is
exchangeable by Time Warner into approximately 22.9 million shares of
Time Warner common stock. Under the terms of the sale, the Company may
make up to four demands for registration of its shares of Time Warner
common stock. Subject to certain exceptions, the terms of the sale
prohibit the Company from acquiring additional shares of Time Warner
securities or selling shares of Time Warner securities to any holder of
more than 5 percent of any class of Time Warner voting securities.
The Time Warner securities were recorded at a combined fair value of
approximately $1 billion on the closing date of the sale (previously
estimated to be approximately $1.1 billion) and are reflected on the
Company's Consolidated Balance Sheets as investment in Time Warner equity
securities. Investment in the Time Warner common stock is considered an
"available for sale" equity security under Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," and, therefore, unrealized net changes in
the fair value of the securities (exclusive of dividends and write downs)
will be excluded from earnings and reported as a net amount in a separate
component of shareholders' equity until realized. Investment in the Time
Warner convertible preferred stock is not subject to the requirements of
SFAS No. 115 since it is a non-publicly traded equity security and,
therefore, is accounted for under the cost method. Dividends on the
securities will be recognized as income as earned. Based on current
rates, after-tax dividends of approximately $37 million are expected to
be received annually through July 1999. The Company recorded pre-tax
dividend income of $9.7 million in the third quarter of 1995.
Operating results from discontinued operations for the nine months ended
September 30, 1995 and 1994 were as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1995 1994
--------- --------
(Thousands of Dollars)
Revenues ..................................................... $ 143,925 $187,308
Operating expenses (1)......................................... 86,938 118,092
--------- --------
Gross operating margin (1)..................................... 56,987 69,216
Depreciation, amortization, interest and other................. 81,570 96,245
Income tax benefit............................................. (4,997) (5,674)
Deferred loss (2).............................................. (19,586)
--------- --------
Loss from discontinued operations (3).......................... $ 0 ($21,355)
========= ========
---------------
(1) Exclusive of depreciation and amortization.
(2) The net loss from discontinued operations of KBLCOM through the
date of sale (July 6, 1995) was deferred by the Company. Upon
closing of the sale the deferred loss was
-20-
included as an adjustment to the gain on sale of cable television
subsidiary on the Company's Statements of Consolidated Income.
(3) Loss from discontinued operations of KBLCOM excludes the effects
of corporate overhead charges and includes interest expense
relating to the amount of intercompany debt that Time Warner
purchased from the Company.
In March 1995, KBL Cable, Inc. (KBL Cable), a subsidiary of KBLCOM, made
a scheduled repayment of $15.8 million principal amount of its senior
notes and senior subordinated notes. In the first quarter of 1995, KBL
Cable repaid borrowings under its senior bank credit facility in the
amount of $25.0 million.
(8) EARLY RETIREMENT PLAN
The Company offered eligible employees (excluding officers) of the
Company, HL&P and Houston Industries Energy, Inc. (HI Energy), who were
55 years of age or older and had at least 10 years of service as of July
31, 1995 an incentive program to retire early. For employees electing
early retirement, the program would add five years of service credit and
five years in age up to 35 years of service and age 65, respectively, in
determining an employee's pension. Each participating employee (under age
62) would also receive a supplemental benefit to age 62. During July
1995, the early retirement incentive was accepted by approximately 300
employees.
Pension benefits and supplemental benefits (if applicable) are being paid
out from the Houston Industries Incorporated Retirement Trust. Based on
the projected costs associated with the program, HL&P increased its
retirement plan and supplemental benefits by approximately $28 million
and $5 million, respectively. Pursuant to SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation", HL&P deferred the costs
associated with the increases in these benefit obligations and is
amortizing the costs over the period ending December 31, 1997.
(9) SUBSEQUENT EVENT
In November 1995, the Board of Directors of the Company approved a
two-for-one common stock split in the form of a 100 percent stock
dividend. This stock dividend will be effective for shareholders of
record at the close of business on November 16, 1995 and distributed on
December 9, 1995.
The pro forma effect of the stock split on shareholders' equity would
have been to double the number of common stock shares issued and
outstanding to 248,081,670 and 247,052,700 at September 30, 1995 and
December 31, 1994, respectively.
The quarterly common stock dividend of $0.75 per share declared on
September 6, 1995 and payable on December 9, 1995 will be paid on the
basis of pre-stock split shares of common stock. The Board of Directors
has no current plans to change the Company's total dividend payout
following the stock split.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CURRENT ISSUES
HL&P
In August 1995, the Utility Commission unanimously approved a settlement
agreement relating to HL&P's most recent rate case (including separate
proceedings regarding the prudence of operation of the South Texas Project).
Subject to certain changes in existing regulation or legislation, the Settlement
precludes HL&P from seeking rate increases through December 31, 1997. HL&P began
recording the estimated effects of the Settlement in the first quarter of 1995.
Effective retroactive to January 1, 1995, the Settlement reduced HL&P's base
revenues $73 million for the first nine months of 1995. The Settlement also
provides HL&P the option to write down up to $50 million per year of its
investment in the South Texas Project, which amount will be treated as a
reasonable and necessary expense during routine reviews of HL&P's earnings and
any rate review proceeding initiated against HL&P. HL&P is also accruing
decommissioning expenses for its interest in the South Texas Project at an
annual rate of $14.8 million, a $9 million annual increase over its 1994
expense. The Settlement requires that HL&P commence amortizing, no later than
January 1996, its investment in certain lignite reserves associated with the
cancelled Malakoff project ($153 million as of September 30, 1995) over a period
not to exceed seven years. This additional amortization will equal approximately
$22 million per year. HL&P does not currently anticipate beginning amortization
of this investment until January 1996. As a result of this additional
amortization, all of HL&P's remaining investment in Malakoff will be fully
amortized no later than December 31, 2002.
As a result of the Settlement, in the third quarter and first nine months of
1995, HL&P's earnings were reduced by approximately $42 million and $79 million,
respectively. These reductions include HL&P's decision to write down $21 million
($14 million after-tax) and $28 million ($19 million after-tax) of its
investment in the South Texas Project in the third quarter and first nine months
of 1995, respectively. For additional information , see Note 3 to the Company's
Consolidated and HL&P's Financial Statements (Financial Statements) in Item 1 of
this Report.
-22-
RESULTS OF OPERATIONS
COMPANY
Summary of selected financial data for the Company and its subsidiaries is set
forth below:
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------- PERCENT
1995 1994 CHANGE
---------- ---------- --------
(Restated)
(Thousands of Dollars)
Revenues......................................... $1,171,789 $1,150,946 2
Operating Expenses............................... 737,607 690,982 7
Operating Income................................. 434,182 459,964 (6)
Interest and Other Charges....................... 83,784 78,532 7
Income Taxes..................................... 117,840 132,854 (11)
Income from Continuing Operations................ 235,861 242,239 (3)
Net Income....................................... 853,949 235,968 262
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------- PERCENT
1995 1994 CHANGE
---------- ---------- --------
(Restated)
(Thousands of Dollars)
Revenues......................................... $2,896,180 $2,977,433 (3)
Operating Expenses............................... 2,044,311 2,069,341 (1)
Operating Income................................. 851,869 908,092 (6)
Interest and Other Charges....................... 245,216 239,427 2
Income Taxes..................................... 193,976 232,160 (16)
Income from Continuing Operations................ 392,970 409,946 (4)
Net Income....................................... 1,101,665 388,591 184
The references to per share amounts below contemplate the effects of the
two-for-one stock split which will be effective November 16, 1995. See Note 9 of
the notes to the Financial Statements in Item 1 of this Report.
The Company had consolidated earnings per share of $3.44 ($6.89 pre-split) for
the third quarter of 1995, including a one-time gain of $618 million on the sale
of KBLCOM. Excluding the gain from the KBLCOM sale, consolidated earnings per
share from continuing operations for the third quarter of 1995 were $0.95 ($1.90
pre-split) compared to $0.98 ($1.97 pre-split) for the third quarter of 1994.
Consolidated earnings per share for the nine months ended September 30, 1995
were $4.45 ($8.90 pre-split) per share, including the gain on the KBLCOM sale of
$709 million. Excluding the gain from the KBLCOM sale, consolidated earnings per
share from continuing operations for the nine months ended September 30, 1995
were $1.59 ($3.17 pre-split) compared to $1.67 ($3.34 pre-split) per share for
the same period in 1994. The decline in earnings from continuing operations is
primarily
-23-
attributable to (i) a decrease in HL&P's earnings as discussed below
and (ii) increased expenses associated with HI Energy's project development
activities, partially offset by dividends from Time Warner securities.
HL&P
Summary of selected financial data for HL&P is set forth below:
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------- PERCENT
1995 1994 CHANGE
---------- ---------- --------
(Thousands of Dollars)
Base Revenues (1)................................ $ 869,950 $ 888,015 (2)
Reconcilable Fuel Revenues....................... 301,839 262,931 15
Operating Expenses (2)........................... 863,531 830,087 4
Operating Income (2)............................. 308,258 320,859 (4)
Interest Charges................................. 63,810 61,138 4
Income After Preferred Dividends................. 241,159 251,092 (4)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------- PERCENT
1995 1994 CHANGE
---------- ---------- --------
(Thousands of Dollars)
Base Revenues (1)................................ $2,099,964 $2,155,702 (3)
Reconcilable Fuel Revenues....................... 796,216 821,731 (3)
Operating Expenses (2)........................... 2,265,937 2,316,853 (2)
Operating Income (2)............................. 630,243 660,580 (5)
Interest Charges................................. 187,713 187,469 -
Income After Preferred Dividends................. 416,941 435,256 (4)
-----------------
(1) Includes miscellaneous revenues, certain non-reconcilable
fuel revenues and certain purchased power related revenues.
(2) Inclusive of income taxes.
The decrease in HL&P's earnings for the third quarter and first nine months of
1995 compared to the same periods in 1994 resulted primarily from the impact of
the Settlement. For information regarding the terms of the Settlement and its
effect on HL&P's financial position and results of operation, see Note 3 to the
Financial Statements in Item 1 of this Report. The negative effects of the
Settlement were partially offset by an increase in residential and commercial
kilowatt-hour (KWH) sales for the third quarter and first nine months of 1995,
as discussed below.
-24-
OPERATING REVENUES AND SALES
The decreases in base revenues of $18.1 million and $55.7 million for the third
quarter and first nine months of 1995, respectively, compared to the same
periods in 1994, were due to the impact of the Settlement and a reduction in
revenues associated with recovery of certain purchased power costs, partially
offset by increases in residential and commercial KWH sales. The base revenues
associated with certain purchased power costs were substantially reduced in 1995
upon expiration of a purchased power contract. The related expenses are equally
reduced, resulting in no impact on earnings.
For the third quarter and first nine months of 1995, residential KWH sales
increased 7% and 5%, respectively, and commercial KWH sales were up 4% and 5%,
respectively, from the same periods in 1994. The increases in residential and
commercial sales reflect hotter weather in 1995 and modest growth in both the
number of customers and usage per customer. Firm industrial KWH sales decreased
5% and 4% for the third quarter and first nine months of 1995, respectively,
compared to the same periods in 1994. Contributing to these decreases were a
decline in sales to the chemicals and refining industries, primarily due to the
loss of a large industrial customer to self generation, and the expiration of an
economic development rate which caused some customers to make greater use of
interruptible service or switch to alternative rates. Firm industrial sales
exclude electricity sold at a reduced rate under agreements which allow HL&P to
interrupt service under some circumstances.
Reconcilable fuel revenues are revenues that are collected through an energy
component of electric rates. These revenues, which have no effect on earnings,
are required to be periodically reconciled to fuel expenses. For information
regarding the recovery of HL&P's fuel costs, see the Recovery of Fuel Costs
section in Part 1 of the Company's and HL&P's Annual Report on Form 10-K for the
year ended December 31, 1994 (1994 Combined Form 10-K).
FUEL AND PURCHASED POWER EXPENSES
Fuel expenses increased $57.9 million for the third quarter of 1995 and $27.3
million for the first nine months of 1995 compared to the same periods of 1994.
These increases were primarily due to a $66.1 million reduction to reconcilable
fuel expense recorded in July 1994 resulting from payments HL&P received upon
the transfer of its rights to receive certain railroad settlement payments. The
increase was partially offset by a decline in the unit cost of gas and increased
nuclear generation which has a per unit fuel cost that is substantially lower
than HL&P's other fuel sources. For information regarding the railroad
settlement payments, see Note 18 of the notes to the financial statements
included in the Combined Form 8-K. The average cost of fuel for the third
quarter and first nine months of 1995 was $1.52 per million British Thermal
Units (MMBtu) and $1.59 per MMBtu, respectively. This compares to $1.23 per
MMBtu and $1.52 per MMBtu for the same periods in 1994, inclusive of the effects
of the railroad settlement payments discussed above. Purchased power expense
decreased $52.1 million and $138.1 million for the third quarter and first nine
months of 1995, respectively, when compared to the same periods in 1994
primarily due to the expiration of firm purchased power contracts.
-25-
OPERATION AND MAINTENANCE, DEPRECIATION AND AMORTIZATION, AND OTHER
Operation and maintenance expense for the third quarter and first nine months of
1995 increased $16.4 million and $34.6 million, respectively, compared to the
same periods in 1994. Substantially all of the increase in operation and
maintenance expense resulted from (i) increased litigation and rate case
expenses, (ii) lump sum wage payments primarily associated with the renewal of
labor union contracts, and (iii) employee severance expenses. HL&P continues to
review its staffing levels in light of the changing operating environment and
may incur additional severance costs in the future. However, specific additional
expenses cannot be determined at this time. Depreciation and amortization
expense for the third quarter and first nine months of 1995 increased $27.3
million and $44.5 million, respectively, compared to 1994, primarily due to
amortizations recorded as a result of the Settlement (see Note 3 to the
Financial Statements in Item 1 of this Report). Other taxes increased $6.5
million in the first nine months of 1995 compared to the same period in 1994,
primarily due to increased state franchise tax obligations.
LIQUIDITY AND CAPITAL RESOURCES
COMPANY
GENERAL
The Company's cash requirements stem primarily from operating expenses, capital
expenditures, payment of common stock dividends, payment of interest and
principal payments on debt. Net cash provided by operating activities totaled
$645.7 million for the nine months ended September 30, 1995.
Net cash provided by investing activities for the nine months ended September
30, 1995 totaled $266.9 million reflecting $622 million received in connection
with the Company's sale of KBLCOM less electric capital expenditures of $206.5
million (including allowance for borrowed funds used during construction),
corporate headquarters expenditures (including capitalized interest) of $78.8
million, discontinued cable television operations expenditures of $47.6 million
and other expenditures.
Financing activities for the first nine months of 1995 resulted in a net cash
outflow of $858.4 million. The Company's primary financing activities were the
decrease in short-term borrowings, the payment of dividends, the redemption of
subsidiary preferred stock and the extinguishment and repayment of long-term
debt, partially offset by the issuance of HL&P long-term debt. For information
with respect to these matters, reference is made to Notes 5 and 6 to the
Financial Statements in Item 1 of this Report.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
The Company has registered with the Securities and Exchange Commission (SEC)
$250 million of debt securities which remain unissued. Proceeds from any sales
of these securities are expected to be used for general corporate purposes
including investments in and loans to subsidiaries.
The Company also has registered with the SEC five million shares of its common
stock (10 million shares of common stock after giving effect to the stock
split). Proceeds from the sale of these
-26-
securities will be used for general corporate purposes, including, but not
limited to, the redemption, repayment or retirement of outstanding indebtedness
of the Company or the advance or contribution of funds to one or more of the
Company's subsidiaries to be used for their general corporate purposes,
including, without limitation, the redemption, repayment or retirement of
indebtedness or preferred stock.
At September 30, 1995, the Company had approximately $54 million in cash and
cash equivalents invested in short-term investments. In addition, the Company
has a commercial paper program supported by three bank credit facilities, the
borrowing capacity under which was increased in the third quarter from $800
million to $1.1 billion. The Company had no commercial paper outstanding at
September 30, 1995, reflecting the application of $622 million of cash proceeds
received in connection with the KBLCOM sale.
During the nine months ended September 30, 1995, HI Energy expended
approximately $12.4 million (compared to $431,000 during the comparable period
in 1994) on non-regulated electric power projects.
In June 1995, a subsidiary of HI Energy, the Company's non-regulated electric
power subsidiary, entered into an agreement to construct, own and operate a 160
MW cogeneration facility to be built adjacent to a steel plant in San Nicolas,
Argentina. In September 1995, various governmental approvals were obtained which
allowed work to proceed. The project is expected to be completed in the fourth
quarter of 1997. The plant is to be constructed by a consortium composed of GE
Power Systems, Inc. and an Argentine construction company. The construction
contract provides, subject to certain adjustments, for a contract price of
approximately $65 million to be paid in installments during the construction of
the project. Upon completion, the project will sell steam to the steel plant and
sell electricity on the wholesale Argentina electricity market.
On October 3, 1995, Texas Energy Partners plc (Texas Energy Partners), an
English public limited company, jointly owned in equal shares by the Company and
Central and South West Corporation, made an offer for all of the issued share
capital of NORWEB plc (NORWEB), an English regional electricity company serving
the northwest of England, including Manchester, for a total price equivalent to
approximately $2.7 billion. Texas Energy Partners withdrew the offer on October
12, 1995 after North West Water plc made a higher competing offer for all NORWEB
shares. The Company expects that it may from time to time consider and evaluate
other investment opportunities in foreign electric utility businesses.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratios of earnings to fixed charges for the nine and twelve months
ended September 30, 1995 were 3.23 and 2.69, respectively. The Company believes
that the ratio for the nine-month period is not necessarily indicative of the
ratio for a twelve-month period due to the seasonal nature of HL&P's business.
-27-
HL&P
GENERAL
HL&P's cash requirements stem primarily from operating expenses, capital
expenditures, payment of dividends and interest and principal payments on debt.
HL&P's net cash provided by operating activities for the first nine months of
1995 totaled $719.7 million.
Net cash used in HL&P's investing activities for the first nine months of 1995
totaled $298.4 million. HL&P's capital and nuclear fuel expenditures (excluding
allowance for funds used during construction) for the first nine months of 1995
totaled $287.6 million out of the $449 million revised annual budget. HL&P
expects to finance substantially all of its 1995 capital expenditures through
funds generated internally from operations.
HL&P's financing activities for the first nine months of 1995 resulted in a net
cash outflow of approximately $388.2 million. Included in these activities were
the payment of dividends, the redemption of preferred stock, and the
extinguishment of long-term debt, partially offset by the issuance of long-term
debt. For information with respect to these matters, reference is made to Notes
5 and 6 to the Financial Statements in Item 1 of this Report.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
HL&P has registered with the SEC $230 million aggregate liquidation value of
preferred stock and $580 million aggregate principal amount of debt securities
that may be issued as first mortgage bonds and/or as debt securities
collateralized by first mortgage bonds. Proceeds from any sale of these
securities are expected to be used for general corporate purposes including the
purchase, redemption (to the extent permitted by the terms of the outstanding
securities), repayment or retirement of outstanding indebtedness or preferred
stock of HL&P.
At September 30, 1995, HL&P had approximately $269 million in cash and cash
equivalents invested in short-term investments. In addition, HL&P has a
commercial paper program supported by a bank credit facility of $400 million.
HL&P had no commercial paper outstanding at September 30, 1995.
RATIOS OF EARNINGS TO FIXED CHARGES
HL&P's ratios of earnings to fixed charges for the nine and twelve months ended
September 30, 1995, were 4.30 and 3.59, respectively. HL&P's ratios of earnings
to fixed charges and preferred dividends requirements for the nine and twelve
months ended September 30, 1995, were 3.66 and 3.05, respectively. HL&P believes
that the ratios for the nine-month period are not necessarily indicative of the
ratios for a twelve-month period due to the seasonal nature of HL&P's business.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This accounting standard, effective for fiscal years beginning
after December 15, 1995, requires companies to review certain assets for
impairment whenever events or changes in circumstances indicate that the
carrying
-28-
amount of an asset may not be recoverable (such determination generally being
made on the basis of whether net cash flows expected to result from such assets
will recover the carrying amount of the assets). If an impairment is found to
exist, the impairment loss to be recognized is the amount by which the carrying
amount exceeds the fair value. The Company and HL&P are currently reviewing the
provisions of SFAS No. 121, but, based on current estimates, the Company and
HL&P do not expect the adoption of SFAS No. 121 to have a material impact on the
Company's or HL&P's financial condition or results of operations.
-29-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the
Company and its subsidiaries, including HL&P, reference is
made to the information set forth in Item 3 of the 1994
Combined Form 10-K, Item 1 of Part II of the Combined Forms
10-Q for each of the quarters ended March 31, 1995 and June
30, 1995, Notes 2, 3 and 4 to the Company's Consolidated and
HL&P's Financial Statements in the Combined Form 8-K and Notes
2(b) and 3 to the Company's Consolidated and HL&P's Financial
Statements in the Combined Forms 10-Q for each of the quarters
ended March 31, 1995 and June 30, 1995, which information, as
qualified and updated by the description of developments in
regulatory and litigation matters contained in Notes 2, 3 and
4 of the Notes to the Financial Statements included in Part I
of this Report, is incorporated herein by reference.
BICKI, ET AL V. HOUSTON INDUSTRIES INCORPORATED,
formerly pending in the 129th District Court of Harris County,
Texas, was dismissed without prejudice by the plaintiffs in
September 1995. This lawsuit, previously reported in Part I of
the Combined Form 10-K under BUSINESS OF HL&P - Environmental
Quality, involved allegations concerning injuries suffered as
a result of exposure to electric and magnetic fields.
ITEM 5. OTHER INFORMATION
ADDITIONAL SHARES REGISTERED AS A RESULT OF STOCK SPLIT
Pursuant to Rule 416(b) under the Securities Act of
1933 (Securities Act), the number of shares of the Company's
common stock registered for sale under the Securities Act by
the following Registration Statements on Forms S-3 and S-8
will be deemed to be increased by the Company's two for one
stock split (effected in the form of a 100% stock dividend) on
December 9, 1995 to cover the additional shares resulting from
the application of the stock split to the registered shares of
the Company's common stock remaining unsold under the
following Registration Statements as of the November 16, 1995
record date for the stock split:
REGISTRATION PRE-SPLIT
STATEMENT SHARES
NUMBER TYPE OF REGISTRATION REGISTERED
------------ -------------------- ----------
33-60756 Shelf Registration, Form S-3 5,000,000
33-55445 Shelf Registration, Form S-3 587,646
33-52207 Houston Industries Incorporated 4,000,000
Investor's Choice Plan, Form S-3
33-55391 Houston Industries Incorporated 5,000,000
Savings Plan, Form S-8
33-50629 Houston Industries Incorporated 100,000
Stock Benefit Plan, Form S-8
33-37493 Houston Industries Incorporated Long-Term 500,000
Incentive Compensation Plan (1989), Form S-8
33-52279 Houston Industries Incorporated Long-Term 2,000,000
Incentive Compensation Plan (1994), Form S-8
33-56855 Houston Industries Energy, Inc. Long-Term 250,000
Project Incentive Compensation Plan, Form S-8
-30-
The foregoing Registration Statements, which
incorporate by reference this Report on Form 10-Q, are hereby
amended pursuant to Rule 416(b) under the Securities Act to
increase the amount of shares of the Company's common stock
registered thereunder to reflect the 100% stock dividend.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
HOUSTON INDUSTRIES INCORPORATED:
Exhibit 10(a) - Termination of Houston Industries Incorporated Savings Plan
and Trust Agreement as to KBLCOM Incorporated Effective as of
June 30, 1995.
Exhibit 11 - Computation of Earnings per Common Share and Common
Equivalent Share.
Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a) - Notes 2, 3, 4 and 18 to the Company's Consolidated Financial
Statements included on pages 41 through 48 and 64 of the
Combined Form 8-K.
Exhibit 99(b) - Notes 2(b) and 3 to the Company's Consolidated and HL&P's
Financial Statements included on pages 14 through 18 of the
Combined Form 10-Q for the quarter ended March 31, 1995.
Exhibit 99(c) - Notes 2(b), 3 and 4(b) to the Company's Consolidated and
HL&P's Financial Statements included on pages 14 through 19 of
the Combined Form 10-Q for the quarter ended June 30, 1995.
Exhibit 99(d) - Part I, Item 3 - Legal Proceedings included on pages 31
through 32 of the 1994 Combined Form 10-K.
Exhibit 99(e) - Part II, Item 1 - Legal Proceedings included on page 32 of the
Combined Form 10-Q for the quarter ended March 31, 1995.
Exhibit 99(f) - Part II, Item 1 - Legal Proceedings included on page 33 of the
Combined Form 10-Q for the quarter ended June 30, 1995.
Exhibit 99(g) - Part I, Item 1 - BUSINESS OF HL&P - Recovery of Fuel Costs and
Environmental Quality included on pages 11 through 13 of the
1994 Combined Form 10-K.
HOUSTON LIGHTING & POWER COMPANY:
Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges and Ratios
of Earnings to Fixed Charges and Preferred Dividends.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a) - Notes 2, 3, 4 and 18 to the Company's Consolidated Financial
Statements included on pages 41 through 48 and 64 of the
Combined Form 8-K.
-31-
Exhibit 99(b) - Notes 2(b) and 3 to the Company's Consolidated and HL&P's
Financial Statements included on pages 14 through 18 of the
Combined Form 10-Q for the quarter ended March 31, 1995.
Exhibit 99(c) - Notes 2(b), 3 and 4 to the Company's Consolidated and HL&P's
Financial Statements included on pages 14 through 19 of the
Combined Form 10-Q for the quarter ended June 30, 1995.
Exhibit 99(d) - Part I, Item 3 - Legal Proceedings included on pages 31
through 32 of the 1994 Combined Form 10-K.
Exhibit 99(e) - Part II, Item 1 - Legal Proceedings included on page 32 of the
Combined Form 10-Q for the quarter ended March 31, 1995.
Exhibit 99(f) - Part II, Item 1 - Legal Proceedings included on page 33 of the
Combined Form 10-Q for the quarter ended June 30, 1995.
Exhibit 99(g) - Part I, Item 1 - BUSINESS OF HL&P - Recovery of Fuel Costs and
Environmental Quality included on pages 11 through 13 of the
1994 Combined Form 10-K.
(b) Reports on Form 8-K.
HOUSTON INDUSTRIES INCORPORATED:
Current Report on Form 8-K dated July 6, 1995 (Item 2.
Acquisition or Disposition of Assets).
-32-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSTON INDUSTRIES INCORPORATED
(Registrant)
/s/ MARY P. RICCIARDELLO
---------------------------------------------
Mary P. Ricciardello
Comptroller and
Principal Accounting Officer
Date: November 14, 1995
-33-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSTON LIGHTING & POWER COMPANY
(Registrant)
/s/ KEN W. NABORS
---------------------------------------------
Ken W. Nabors
Vice President and Comptroller
and Principal Accounting Officer
Date: November 14, 1995
-34-
TERMINATION OF HOUSTON INDUSTRIES INCORPORATED
SAVINGS PLAN AND TRUST AGREEMENT
AS TO KBLCOM INCORPORATED
RECITALS
WHEREAS, effective January 1, 1994, the KBLCOM Incorporated
Savings Plan, as established effective July 1, 1989 (the "KBLCOM Plan"), was
amended, restated, consolidated with, merged into and continued in the form of
and by the adoption of the Houston Industries Incorporated Savings Plan, as
amended and restated effective January 1, 1994 (the "Plan"), so as to provide
for a continuation of substantially identical benefits for the former
participants of the KBLCOM Plan and the Plan, and to provide for the merger of
all the assets held under the Houston Industries Incorporated Master Savings
Trust, as established effective July 1, 1989, and thereafter amended (the
"Trust") for the benefit of the participants in the KBLCOM Plan with all the
assets held under the Trust for the benefit of the participants in the Plan so
that from and after January 1, 1994, such Plans constituted a "single plan"
within the meaning and purview of Section 414(l) of the Internal Revenue Code of
1986, as amended; and
WHEREAS, by Agreement and Plan of Merger, dated as of January
26, 1995, by and among HOUSTON INDUSTRIES INCORPORATED, a Texas corporation
("HII"), KBLCOM INCORPORATED, a Delaware corporation ("the Company"), TIME
WARNER, INC., a Delaware corporation, ("TW"), and TW KBLCOM ACQUISITION CORP., a
Delaware corporation and wholly owned subsidiary of TW, TW will acquire by
merger all of the issued and outstanding common stock of the Company on or about
July 6, 1995 (the "Merger).
TERMINATION OF PLAN AND TRUST
NOW, THEREFORE, in connection with said Merger and as
authorized by the resolutions of the Board of Directors of the Company dated
January 24, 1995, the Company hereby (i) terminates the Plan and Trust,
effective as of the close of business on June 30, 1995, with respect to its
current and former employees and the current and former employees of all of its
subsidiaries, (ii) fully vests each KBLCOM Participant who was an active
Employee at any time between January 1, 1995 and June 30, 1995, inclusive, and
each other KBLCOM Participant with an Account balance under the Plan as of
January 1, 1995 which was subject to forfeiture as of such date in their Account
balances under the Plan (as such terms are defined in the Plan), (iii) gives
notice of such termination to The Northern Trust Company, Trustee (the
"Trustee") and (iv) directs the Trustee to make distributions from the Trust
Fund as directed by the HII Benefits Committee (the "Committee") after receipt
of appropriate directions from the Committee in accordance with the terms of the
Plan.
-1-
IN WITNESS WHEREOF, the Company has caused these presents to
be executed by its duly authorized officers in a number of copies, all of which
shall constitute one and the same instrument, which may be sufficiently
evidenced by any executed copy hereof, this 30th day of June, 1995, but
effective as of the close of business June 30, 1995.
KBLCOM INCORPORATED
By JONATHAN F. MYERS
Jonathan F. Myers
Senior Vice President
ATTEST:
HUGH RICE KELLY
Secretary
Exhibit 11
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
1995 1994 1995 1994
-------------- -------------- -------------- --------------
Primary Earnings Per Share:
(1) Weighted average shares of
common stock outstanding................... 123,947,087 123,060,083 123,772,849 122,665,312
(2) Effect of issuance of shares
from assumed exercise of
stock options
(treasury stock method).................... 5,571 (51,776) (5,200) (43,374)
-------------- -------------- -------------- --------------
(3) Weighted average shares........................ 123,952,658 123,008,307 123,767,649 122,621,938
============== ============== ============== ==============
(4) Net income..................................... $ 853,949 $ 235,968 $ 1,101,665 $ 388,591
(5) Primary earnings per share
(line 4/line 3)............................ $ 6.89 $ 1.92 $ 8.90 $ 3.17
Fully Diluted Earnings Per Share:
(6) Weighted average shares per
computation on line 3 above................ 123,952,658 123,008,307 123,767,649 122,621,938
(7) Shares applicable to options
included on line 2 above................... (5,571) 51,776 5,200 43,374
(8) Dilutive effect of stock
options based on the average
price for the period or period-
end price, whichever is higher,
of $44.13 and $35.25 for the
third quarter of 1995 and 1994,
respectively, and $44.13 and
$36.39 for the first nine months
of 1995 and 1994, respectively
(treasury stock method)......................... 8,610 (50,426) 8,610 (43,374)
-------------- -------------- -------------- --------------
(9) Weighted average shares........................ 123,955,697 123,009,657 123,781,459 122,621,938
============== ============== ============== ==============
(10) Net income..................................... $ 853,949 $ 235,968 $ 1,101,665 $ 388,591
(11) Fully diluted earnings per
share (line 10/line 9)..................... $ 6.89 $ 1.92 $ 8.90 $ 3.17
Notes:
These calculations are submitted in accordance with Regulation S-K item 601(b)
(11) although it is not required for financial presentation disclosure per
footnote 2 to paragraph 14 of Accounting Principles Board (APB) Opinion No. 15
because it does not meet the 3% dilutive test.
The calculations for the nine months ended September 30, 1995 and the three and
nine months ended September 30, 1994 are submitted in accordance with Regulation
S-K item 601(b) (11) although they are contrary to paragraphs 30 and 40 of APB
Opinion No. 15 because they produce anti-dilutive results.
For information about the common stock split recently declared by the Company,
see Note 9 of the notes to the Company's Consolidated Financial Statements in
Item 1 of this Report.
EXHIBIT 12
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
NINE TWELVE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
------------------ ------------------
Fixed Charges as Defined:
(1) Interest on Long-Term Debt........................... $ 204,436 $ 270,561
(2) Other Interest....................................... 21,454 28,020
(3) Preferred Dividends Factor
of Subsidiary................................... 34,578 47,077
(4) Interest Component of Rentals
Charged to Operating Expense.................... 2,686 3,688
------------------ ------------------
(5) Total Fixed Charges.................................. $ 263,154 $ 349,346
================== ==================
Earnings as Defined:
(6) Income from Continuing Operations
Before Cumulative Effect of
Change in Accounting............................ $ 392,970 $ 398,809
(7) Income Taxes for Continuing
Operations Before Cumulative
Effect of Change in Accounting.................. 193,976 192,240
(8) Total Fixed Charges (line 5)......................... 263,154 349,346
------------------ ------------------
(9) Income from Continuing Operations
Before Cumulative Effect of
Change in Accounting, Income
Taxes and Fixed Charges......................... $ 850,100 $ 940,395
================== ==================
Preferred Dividends Factor of
Subsidiary:
(10) Preferred Stock Dividends of
Subsidiary...................................... $ 23,207 $ 31,809
(11) Ratio of Pre-Tax Income from
Continuing Operations to Income
from Continuing Operations
(line 6 plus line 7 divided
by line 6)...................................... 1.49 1.48
------------------ ------------------
(12) Preferred Dividends Factor of
Subsidiary (line 10 times
line 11)........................................ $ 34,578 $ 47,077
================== ==================
Ratio of Earnings to Fixed Charges
(line 9 divided by line 5).................................. 3.23 2.69
UT
0000202131
HOUSTON INDUSTRIES
1000
9-MOS
DEC-31-1995
SEP-30-1995
PER-BOOK
8,788,271
1,143,273
446,364
1,593,320
0
11,971,228
2,167,047
0
2,044,245
4,211,292
51,055
351,345
3,551,797
0
0
0
150,130
25,700
6,065
3,619
3,620,225
11,971,228
2,896,180
193,976
2,044,311
2,044,311
851,869
(19,707)
832,162
222,009
1,124,872
23,207
1,101,665
278,641
184,899
645,670
$8.90
$8.90
Exhibit 99(a)
(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four
co-owners) of the South Texas Project, which consists of two 1,250
megawatt nuclear generating units. HL&P has a 30.8 percent interest in
the project and bears a corresponding share of capital and operating
costs associated with the project. As of December 31, 1994, HL&P's
investments (net of accumulated depreciation and amortization) in the
South Texas Project and in nuclear fuel, including AFUDC, were $2.1
billion and $99 million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. Both generating units at the South Texas Project were out
of service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994.
HL&P removed the units from service in February 1993 when a problem
was encountered with certain of the units' auxiliary feedwater pumps.
In February 1995, the NRC removed the South Texas Project from its
"watch list" of plants with weaknesses that warranted increased NRC
attention. The NRC placed the South Texas Project on the "watch list"
in June 1993, following the issuance of a report by an NRC Diagnostic
Evaluation Team (DET) which conducted a review of the South Texas
Project operations.
Certain current and former employees of HL&P or contractors of HL&P
have asserted claims that their employment was terminated or disrupted
in retaliation for their having made safetyrelated complaints to the
NRC. Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P,
and the NRC has jurisdiction to take enforcement action against HL&P
and/or individual employees with respect to these matters. Based on
its own internal investigation, in October 1994 the NRC issued a
notice of violation and proposed a $100,000 civil penalty against HL&P
in one such case in which HL&P had terminated the site access of a
former contractor employee. In that action, the NRC also requested
information relating to possible further enforcement action in this
matter against two HL&P managers involved in such termination. HL&P
strongly disagrees with the NRC's conclusions, and has requested the
NRC to give further consideration of its notice. In February 1995, the
NRC conducted an enforcement conference with respect to that matter,
but no result has been received.
HL&P has provided documents and other assistance to a subcommittee of
the U. S. House of Representatives (Subcommittee) that is conducting
an inquiry related to the South Texas Project. Although the precise
focus and timing of the inquiry has not been identified by the
Subcommittee, it is anticipated that the Subcommittee will inquire
into matters related to HL&P's handling of employee concerns and to
issues related to the NRC's 1993 DET review of the South Texas
Project. In connection with that inquiry, HL&P has been advised that
the U. S. General Accounting Office (GAO) is conducting a review of
the NRC's inspection process as it relates to the South Texas Project
and other plants, and HL&P is cooperating with the GAO in its
investigation and with the NRC in a similar review it has initiated.
While no prediction can
-41-
be made at this time as to the ultimate outcome of these matters, the
Company and HL&P do not believe that they will have a material adverse
effect on the Company's or HL&P's financial condition or results of
operations.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February
1994, the City of Austin (Austin), one of the four co-owners of the
South Texas Project, filed suit (Austin II Litigation) against HL&P.
That suit is pending in the 152nd District Court for Harris County,
Texas, which has set a trial date for October 1995. Austin alleges
that the outages at the South Texas Project from early 1993 to early
1994 were due to HL&P's failure to perform obligations it owed to
Austin under the Participation Agreement among the four co-owners of
the South Texas Project (Participation Agreement). Austin also asserts
that HL&P breached certain undertakings voluntarily assumed by HL&P
under the terms and conditions of the Operating Licenses and Technical
Specifications relating to the South Texas Project. Austin claims that
such failures have caused Austin damages of at least $125 million due
to the incurrence of increased operating and maintenance costs, the
cost of replacement power and lost profits on wholesale transactions
that did not occur. In May 1994, the City of San Antonio (San
Antonio), another co-owner of the South Texas Project, intervened in
the litigation filed by Austin against HL&P and asserted claims
similar to those asserted by Austin. San Antonio has not identified
the amount of damages it intends to seek from HL&P. HL&P is contesting
San Antonio's intervention and has called for arbitration of San
Antonio's claim under the arbitration provisions of the Participation
Agreement. The trial court has denied HL&P's requests, but review of
these decisions is currently pending before the 1st Court of Appeals
in Houston.
In a previous lawsuit (Austin I Litigation) filed in 1983 against the
Company and HL&P, Austin alleged that it had been fraudulently induced
to participate in the South Texas Project and that HL&P had failed to
perform properly its duties as project manager. In May 1993, the
courts entered a judgement in favor of the Company and HL&P,
concluding, among other things, that the Participation Agreement did
not impose on HL&P a duty to exercise reasonable skill and care as
project manager. During the course of the Austin I Litigation, San
Antonio and Central Power and Light Company (CPL), a subsidiary of
Central and South West Corporation, two of the co-owners in the South
Texas Project, also asserted claims for unspecified damages against
HL&P as project manager of the South Texas Project, alleging HL&P
breached its duties and obligations. San Antonio and CPL requested
arbitration of their claims under the Participation Agreement. In
1992, the Company and HL&P entered into a settlement agreement with
CPL (CPL Settlement) providing for CPL's withdrawal of its demand for
arbitration. San Antonio's claims for arbitration remain pending.
Under the Participation Agreement, San Antonio's arbitration claims
will be heard by a panel of five arbitrators consisting of four
arbitrators named by each co-owner and a fifth arbitrator selected by
the four appointed arbitrators.
Although the CPL Settlement did not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL reached certain
understandings in such agreement which contemplated that: (i) CPL's
previously appointed arbitrator would be replaced by CPL; (ii)
arbitrators approved by CPL or HL&P in any future arbitrations would
be mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL would
resolve any future disputes between them concerning the South Texas
Project without resorting to the arbitration provision of the
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Participation Agreement. Austin and San Antonio have asserted in the
pending Austin II Litigation that such understandings have rendered
the arbitration provisions of the Participation Agreement void and
that neither Austin nor San Antonio should be required to participate
in or be bound by such proceedings.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability insurance
coverage as required by law and periodically review available limits
and coverage for additional protection. The owners of the South Texas
Project currently maintain the maximum amount of property damage
insurance currently available through the insurance industry,
consisting of $500 million in primary property damage insurance and
excess property insurance in the amount of $2.25 billion. Under the
excess property insurance which became effective on March 1, 1995 and
under portions of the excess property insurance coverage in effect
prior to March 1, 1995, HL&P and the other owners of the South Texas
Project are subject to assessments, the maximum aggregate assessment
under current policies being $26.9 million during any one policy year.
The application of the proceeds of such property insurance is subject
to the priorities established by the NRC regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.0 billion to $8.92 billion effective in
November 1994. Owners are required under the Act to insure their
liability for nuclear incidents and protective evacuations by
maintaining the maximum amount of financial protection available from
private sources and by maintaining secondary financial protection
through an industry retrospective rating plan. The assessment of
deferred premiums provided by the plan for each nuclear incident is up
to $75.5 million per reactor subject to indexing for inflation, a
possible 5 percent surcharge (but no more than $10 million per reactor
per incident in any one year) and a 3 percent state premium tax. HL&P
and the other owners of the South Texas Project currently maintain the
required nuclear liability insurance and participate in the industry
retrospective rating plan.
There can be no assurance that all potential losses or liabilities
will be insurable, or that the amount of insurance will be sufficient
to cover them. Any substantial losses not covered by insurance would
have a material effect on HL&P's and the Company's financial
condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South
Texas Project are required by the NRC to meet minimum decommissioning
funding requirements to pay the costs of decommissioning the South
Texas Project. Pursuant to the terms of the order of the Utility
Commission in Docket No. 9850, HL&P is currently funding
decommissioning costs for the South Texas Project with an independent
trustee at an annual amount of $6 million, which is recorded in
depreciation and amortization expense. HL&P's funding level is
estimated to provide approximately $146 million, in 1989 dollars, an
amount which exceeds the current NRC minimum.
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The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective January 1, 1994. At December
31, 1994, the securities held in the Company's nuclear decommissioning
trust totaling $25.1 million (reflected on the Company's Consolidated
and HL&P's Balance Sheets in deferred debits and deferred credits) are
classified as available for sale. Such securities are reported on the
balance sheets at fair value, which at December 31, 1994 approximates
cost, and any unrealized gains or losses will be reported as a
separate component of common stock equity. Earnings, net of taxes and
administrative costs, are reinvested in the funds.
In May 1994, an outside consultant estimated HL&P's portion of
decommissioning costs to be approximately $318 million, in 1994
dollars. The consultant's calculation of decommissioning costs for
financial planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the
NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration
of their 40 year operating licenses. Under the terms of the Proposed
Settlement, HL&P would increase funding of decommissioning costs to an
annual amount of approximately $14.8 million consistent with such
study. While the current and projected funding levels presently exceed
minimum NRC requirements, no assurance can be given that the amounts
held in trust will be adequate to cover the actual decommissioning
costs of the South Texas Project or the assumptions used in estimating
decommissioning costs will ultimately prove to be correct.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Utility Commission initiated a proceeding
(Docket No. 12065) to determine whether HL&P's existing rates are just
and reasonable. Subsequently, the scope of the docket was expanded to
include reconciliation of HL&P's fuel costs from April 1, 1990 to July
31, 1994. The Utility Commission also initiated a separate proceeding
(Docket No. 13126) to review issues regarding the prudence of
operation of the South Texas Project from the date of commercial
operation through the present. That review would encompass the outage
at the South Texas Project during 1993 through 1994.
Hearings began in Docket No. 12065 in January 1995, and the Utility
Commission has retained a consultant to review the South Texas Project
for the purpose of providing testimony in Docket No. 13126 regarding
the prudence of HL&P's management of operation of the South Texas
Project. In February 1995, all major parties to these proceedings
signed the Proposed Settlement resolving the issues with respect to
HL&P, including the prudence issues related to operation of the South
Texas Project. Approval of the Proposed Settlement by the Utility
Commission will be required. To that end, the parties have established
procedural dates for a hearing on issues raised by the parties who are
opposed to the Proposed Settlement. A decision by the Utility
Commission on the Proposed Settlement is not anticipated before early
summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and rates would be frozen for three years, subject to certain
conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment of $218 million in the cancelled Malakoff plant
over a period not to exceed
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seven years. HL&P also would increase its decommissioning expense for
the South Texas Project by $9 million per year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This
$70 million was recorded as a one-time, pre-tax charge to reconcilable
fuel revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately
17 percent below that currently in effect and would refund to
customers the balance in its fuel over-recovery account, estimated to
be approximately $180 million after giving effect to the amounts not
recoverable from ratepayers.
HL&P recovers fuel costs incurred in electric generation through a
fixed fuel factor that is set by the Utility Commission. The
difference between fuel revenues billed pursuant to such factor and
fuel expense incurred is recorded as an addition to or a reduction of
revenue, with a corresponding entry to under- or over-recovered fuel,
as appropriate. Amounts collected pursuant to the fixed fuel factor
must be reconciled periodically against actual, reasonable costs as
determined by the Utility Commission. Currently, HL&P has an
over-recovery fuel account balance that will be refunded pursuant to
the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the
Utility Commission, including issues related to the South Texas
Project, Docket No. 12065 will be remanded to an Administrative Law
Judge (ALJ) to resume detailed hearings in this docket. Prior to
reaching agreement on the terms of the Proposed Settlement, HL&P
argued that its existing rates were just and reasonable and should not
be reduced. Other parties argued that rate decreases in annual amounts
ranging from $26 million to $173 million were required and that
additional decreases might be justified following an examination of
the prudence of the management of the South Texas Project and the
costs incurred in connection with the outages at the South Texas
Project. Testimony filed by the Utility Commission staff included a
recommendation to remove from rate base $515 million of HL&P's
investment in the South Texas Project to reflect the staff's view that
such investment was not fully "used and useful" in providing service,
a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did
not result from imprudent management. HL&P also filed testimony
analyzing the extent to which regulatory issues extended the outages.
In that testimony an outside consultant retained by HL&P concluded
that the duration of the outages was controlled by both the resolution
of NRC regulatory issues as well as necessary equipment repairs
unrelated to NRC regulatory issues and that the incremental effect of
NRC regulatory issues on the duration of the outages was only 39 days
per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range
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of assumptions would result in replacement fuel costs of less than $10
million for the 39 day periods identified by HL&P's consultant and
less than $100 million for the entire length of the outages. Any fuel
costs determined to have been unreasonably incurred would not be
recoverable from customers and would be charged against the Company's
earnings.
Although the Company and HL&P believe that the Proposed Settlement is
in the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility
Commission ultimately will approve the terms of the Proposed
Settlement or (ii) in the event the Proposed Settlement is not
approved and proceedings against HL&P resumed, that the outcome of
such proceedings would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years,
the Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant
construction, including the South Texas Project. Although Utility
Commission action on those applications has been completed, judicial
review of a number of the Utility Commission orders is pending. In
Texas, Utility Commission orders may be appealed to a District Court
in Travis County, and from that Court's decision an appeal may be
taken to the Court of Appeals for the 3rd District at Austin (Austin
Court of Appeals). Discretionary review by the Supreme Court of Texas
may be sought from decisions of the Austin Court of Appeals. The
pending appeals from the Utility Commission orders are in various
stages. In the event the courts ultimately reverse actions of the
Utility Commission in any of these proceedings, such matters would be
remanded to the Utility Commission for action in light of the courts'
orders. Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and HL&P
generally are not in a position at this time to predict the outcome of
the matters on appeal or the ultimate effect that adverse action by
the courts could have on the Company and HL&P. On remand, the Utility
Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the
Utility Commission approved a non-unanimous settlement agreement
providing for a $313 million increase in HL&P's base rates,
termination of deferrals granted with respect to Unit No. 2 of the
South Texas Project and of the qualified phase-in plan deferrals
granted with respect to Unit No. 1 of the South Texas Project, and
recovery of deferred plant costs. The settlement authorized a 12.55
percent return on common equity for HL&P. Rates contemplated by the
settlement agreement were implemented in May 1991 and remain in effect
(subject to the outcome of the current rate proceeding described in
Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on
review by a District Court, and the Austin Court of Appeals affirmed
that decision on procedural grounds due to the failure of the
appellant to file the record with the court in a timely manner. On
review, the Texas
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Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility
Commission's order, which include issues regarding deferred
accounting, the treatment of federal income tax expense and certain
other matters. As to federal tax issues, a recent decision of the
Austin Court of Appeals, in an appeal involving GTE-SW (and to which
HL&P was not a party), held that when a utility pays federal income
taxes as part of a consolidated group, the utility's ratepayers are
entitled to a fair share of the tax savings actually realized, which
can include savings resulting from unregulated activities. The Texas
Supreme Court has agreed to hear an appeal of that decision, but on
points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any
disallowance that might be required if the court's ruling in the GTE
decision were applied in Docket No. 9850 would be offset by that
greater amount. However, that amount may not be sufficient if the
Austin Court of Appeals also concludes that the Utility Commission's
inclusion of deferred accounting costs in the settlement was improper.
For a discussion of the Texas Supreme Court's decision on deferred
accounting treatment, see Note 4(c). Although HL&P believes that it
could demonstrate entitlement to rate relief equal to that agreed to
in the stipulation in Docket No. 9850, HL&P cannot rule out the
possibility that a remand and reopening of that settlement would be
required if decisions unfavorable to HL&P are rendered on both the
deferred accounting treatment and the calculation of tax expense for
rate making purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the
Utility Commission granted HL&P a $227 million increase in base
revenues, allowed a 12.92 percent return on common equity, authorized
a qualified phase-in plan for Unit No. 1 of the South Texas Project
(including approximately 72 percent of HL&P's investment in Unit No. 1
of the South Texas Project in rate base) and authorized HL&P to use
deferred accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented
by HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with
deductions taken for expenses disallowed in cost of service. The court
held that the Utility Commission had failed to require that such tax
savings be passed on to ratepayers, and ordered that the case be
remanded to the Utility Commission with instructions to adjust HL&P's
cost of service accordingly. Discretionary review is being sought from
the Texas Supreme Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing
its appeal in Docket No. 6668. A separate party to this appeal,
however, has not agreed to dismiss its appeal.
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(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized
by the Utility Commission in Docket No. 8230 and was extended in
Docket No. 9010. Similar deferred accounting treatment with respect to
Unit No. 2 of the South Texas Project was authorized in Docket No.
8425. For a discussion of the deferred accounting treatment granted,
see Note 1(f).
In June 1994, the Texas Supreme Court decided the appeal of Docket
Nos. 8230 and 9010, as well as all other pending deferred accounting
cases involving other utilities, upholding deferred accounting
treatment for both carrying costs and operation and maintenance
expenses as within the Utility Commission's statutory authority and
reversed the Austin Court of Appeals decision to the extent that the
Austin Court of Appeals had rejected deferred accounting treatment for
carrying charges. Because the lower appellate court had upheld
deferred accounting only as to operation and maintenance expenses, the
Texas Supreme Court remanded Docket Nos. 8230 and 9010 to the Austin
Court of Appeals to consider the points of error challenging the
granting of deferred accounting for carrying costs which it had not
reached in its earlier consideration of the case. The Texas Supreme
Court opinion did state, however, that when deferred costs are
considered for addition to the utility's rate base in an ensuing rate
case, the Utility Commission must then determine to what extent
inclusion of the deferred costs is necessary to preserve the utility's
financial integrity. Under the terms of the Proposed Settlement, South
Texas Project deferrals will continue to be amortized under the
schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant
to the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In
June 1990, the Utility Commission ruled in a separate docket (Docket
No. 6668) that had been created to review the prudence of HL&P's
planning and construction of the South Texas Project that $375.5
million out of HL&P's $2.8 billion investment in the two units of the
South Texas Project had been imprudently incurred. That ruling was
incorporated into HL&P's 1988 and 1991 rate cases and resulted in
HL&P's recording an after-tax charge of $15 million in 1990. Several
parties appealed the Utility Commission's decision, but a District
Court dismissed these appeals on procedural grounds. The Austin Court
of Appeals reversed and directed consideration of the appeals, and the
Texas Supreme Court denied discretionary review in 1994. At this time,
no action has been taken by the appellants to proceed with the
appeals. Unless the order in Docket No. 6668 is modified or reversed
on appeal, the amount found imprudent by the Utility Commission will
be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
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(18) RAILROAD SETTLEMENT PAYMENTS
In July 1994, HL&P contributed as equity its rights to receive certain
railroad settlement payments to HL&P Receivables, Inc. (HLPR), a
wholly-owned subsidiary of HL&P. HLPR transferred the receivables to a
trust. A bank purchased certificates evidencing a senior interest in
the trust and HLPR holds a certificate evidencing a subordinate
interest in the trust. HL&P received as a dividend from HLPR
approximately $66.1 million, an amount equal to HLPR's proceeds from
the sale. Consistent with the manner in which HL&P recorded receipts
of the settlement payments, HL&P recorded the transaction as a $66.1
million reduction to reconcilable fuel expense in July 1994. The
reduction to reconcilable fuel expense had no effect on earnings.
EXHIBIT 99(b)
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. HL&P removed both generating units at the South Texas
Project from service in February 1993 when a problem was encountered
with certain of the units' auxiliary feedwater pumps. The units were out
of service from February 1993 to February 1994, when Unit No. 1 was
returned to service.
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Unit No. 2 was returned to service in May 1994. In June 1993, the NRC
placed the South Texas Project on its "watch list" of plants with
weaknesses that warrant increased attention after a review of the South
Texas Project operations. In February 1995, the NRC removed the South
Texas Project from its "watch list".
Certain current and former employees or contractors of HL&P have
asserted claims that their employment was terminated or disrupted in
retaliation for their having made safety-related complaints to the NRC.
Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P, and
the NRC has jurisdiction to take enforcement action against HL&P and/or
individual employees with respect to these matters. On May 8, 1995, the
NRC announced that it was withdrawing a previously proposed Notice of
Violation and $100,000 civil penalty, as well as possible individual
enforcement action against two HL&P managers in connection with one such
case, involving a contractor employee whose site access was terminated.
Allegations of retaliation by that individual remain pending before an
Administrative Law Judge (ALJ) of the Department of Labor. In another
such case, involving two former HL&P employees who were terminated
during a reduction in force, another Department of Labor ALJ in April
1995 issued his recommended decision in favor of the former employees,
ordering reinstatement of one with back-pay and back-pay without
reinstatement to another. The ALJ ruled out ordering HL&P to pay
exemplary damages to the individuals, but indicated his intention to
hold a further hearing to consider whether additional compensatory
damages should be awarded. HL&P considers the ALJ's conclusions to be
erroneous and is asking the Secretary of Labor not to adopt the ALJ's
recommendation. If the recommendation is adopted by the Secretary of
Labor, HL&P could appeal that decision to the United States Court of
Appeals. Civil actions by these employees remain pending. For additional
information, see Note 2(b) of the notes to the financial statements
included in the Combined Form 8-K.
While no prediction can be made at this time as to the ultimate outcome
of these matters, the Company and HL&P do not believe that they will
have a material adverse effect on the Company's or HL&P's financial
condition or results of operations.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Public Utility Commission of Texas (Utility
Commission) initiated a proceeding (Docket No. 12065) to determine
whether HL&P's existing rates are just and reasonable. Subsequently, the
scope of the docket was expanded to include reconciliation of HL&P's
fuel costs from April 1, 1990 to July 31, 1994. The Utility Commission
also initiated a
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separate proceeding (Docket No. 13126) to review issues regarding the
prudence of operation of the South Texas Project from the date of
commercial operation through the present. That review would encompass
the outage at the South Texas Project during 1993 and 1994.
Hearings began in Docket No. 12065 in January 1995. In February 1995,
all major parties to these proceedings signed an agreement resolving the
issues with respect to HL&P, including the prudence issues related to
operation of the South Texas Project (Proposed Settlement). Approval of
the Proposed Settlement by the Utility Commission will be required.
Hearings on the Proposed Settlement are currently scheduled to begin in
early June 1995. A decision by the Utility Commission on the Proposed
Settlement is not anticipated before late summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and HL&P would be precluded from seeking rate increases for
three years, subject to certain conditions. Under the Proposed
Settlement, HL&P would amortize its remaining investment of $218 million
in the cancelled Malakoff Electric Generating Station (Malakoff) plant
over a period not to exceed seven years. HL&P also would increase its
decommissioning expense for the South Texas Project by $9 million per
year.
The Proposed Settlement also provides HL&P the option to write down up
to $50 million per year of its investment in the South Texas Project
during the five-year period commencing January 1, 1995. The parties to
the Proposed Settlement agreed that any write down would be treated as a
reasonable and necessary expense during routine reviews of HL&P's
earnings and any rate review proceeding initiated against HL&P.
Until the approval of the Proposed Settlement by the Utility Commission,
HL&P's existing rates will continue in effect; however, HL&P's financial
statements for the first quarter of 1995 reflect the estimated effects
of the Proposed Settlement. In the first quarter of 1995, HL&P's pre-tax
earnings were reduced by approximately $17 million in the aggregate as a
result of reflecting the estimated effects of the Proposed Settlement on
revenues and expenses for the quarter. Deferred revenues are included on
the Company's Consolidated and HL&P's Balance Sheets in other deferred
credits subject to refund when the Proposed Settlement is approved.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This $70
million was recorded in the fourth quarter of 1994 as a one-time,
pre-tax charge to reconcilable fuel revenues to reflect the anticipation
of approval of the Proposed Settlement. Under the Proposed Settlement,
HL&P would also establish a new fuel factor approximately 17 percent
below that currently in effect and would refund to customers the balance
in its fuel over-recovery account, estimated to be approximately $180
million after giving effect to the amounts not recoverable from
ratepayers. As contemplated by the Proposed Settlement and approved by
an ALJ, HL&P implemented a new fuel factor 17 percent lower than its
previous factor and refunded to customers approximately $110 million of
the approximately $180 million in fuel cost overrecoveries in April
1995. The remaining $70 million will be refunded if the Proposed
Settlement is approved by the Utility Commission.
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In the event the Proposed Settlement is not approved by the Utility
Commission, Docket No. 12065 would be remanded to an ALJ to resume
detailed hearings in this docket and with respect to issues related to
the South Texas Project. Prior to reaching agreement on the terms of the
Proposed Settlement, HL&P argued that its existing rates were just and
reasonable and should not be reduced. Other parties argued that rate
decreases in annual amounts ranging from $26 million to $173 million
were required and that additional decreases might be justified following
an examination of the prudence of the management of the South Texas
Project and the costs incurred in connection with the outages at the
South Texas Project. Testimony filed by the Utility Commission staff
included a recommendation to remove from rate base $515 million of
HL&P's investment in the South Texas Project to reflect the staff's view
that such investment was not fully "used and useful" in providing
service, a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 would be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. The Utility Commission has retained a consultant to
review the South Texas Project for the purpose of providing testimony in
Docket No. 13126 regarding the prudence of HL&P's management of
operation of the South Texas Project. HL&P filed testimony in Docket No.
13126, which testimony concluded that the outages at the South Texas
Project did not result from imprudent management. HL&P also filed
testimony analyzing the extent to which regulatory issues extended the
outages. In that testimony an outside consultant retained by HL&P
concluded that the duration of the outages was controlled by both the
resolution of NRC regulatory issues as well as necessary equipment
repairs unrelated to NRC regulatory issues and that the incremental
effect of NRC regulatory issues on the duration of the outages was only
39 days per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range of assumptions would
result in replacement fuel costs of less than $10 million for the 39 day
periods identified by HL&P's consultant and less than $100 million for
the entire length of the outages. Any fuel costs determined to have been
unreasonably incurred would not be recoverable from customers and would
be charged against the Company's earnings.
Although the Company and HL&P believe that the Proposed Settlement is in
the best interest of HL&P, its ratepayers, the Company and its
shareholders, no assurance can be given that (i) the Utility Commission
ultimately will approve the terms of the Proposed Settlement or (ii) in
the event the Proposed Settlement is not approved and proceedings
against HL&P are resumed, that the outcome of such proceedings would be
favorable to HL&P.
EXHIBIT 99(c)
(2) JOINTLY-OWNED NUCLEAR PLANT
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. HL&P removed both generating units at the South Texas
Project from service in February 1993 when a problem was encountered
with certain of the units' auxiliary feedwater pumps. The units were
-14-
out of service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994. In
June 1993, the NRC placed the South Texas Project on its "watch list" of
plants with weaknesses that warrant increased attention after a review
of the South Texas Project operations. In February 1995, the NRC removed
the South Texas Project from its "watch list".
For a discussion concerning litigation by certain current and former
employees or contractors of HL&P asserting that their employment was
terminated or disrupted in retaliation for their having made
safety-related complaints to the NRC, see Note 2(b) of the notes to the
financial statements included in the Combined Form 8-K and Note 2(b) to
the financial statements included in the Company's and HL&P's Combined
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995
(Combined Form 10-Q).
While no prediction can be made at this time as to the ultimate outcome
of these matters, the Company and HL&P do not believe that they will
have a material adverse effect on the Company's or HL&P's financial
condition or results of operations.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Public Utility Commission of Texas (Utility
Commission) initiated a proceeding (Docket No. 12065) to determine whether
HL&P's existing rates are just and reasonable and to reconcile HL&P's fuel
costs from April 1, 1990 to July 31, 1994. The Utility Commission also
initiated a separate proceeding (Docket No. 13126) to review issues
regarding the prudence of operation of the South Texas Project from the date
of commercial operation through the present (a period including the outage
at the South Texas Project during 1993 and 1994).
In February 1995, all major parties to these proceedings signed an agreement
resolving the issues with respect to HL&P, including the prudence issues
related to operation of the South Texas Project (Proposed Settlement). In
July 1995, an Administrative Law Judge (ALJ) recommended that the Utility
Commission issue a final order consistent with the Proposed Settlement. A
decision is expected by the Utility Commission at a Final Order Meeting
scheduled for August 30, 1995.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January 1,
1995, and HL&P would be precluded from seeking rate increases for three
years, subject to certain conditions. Under the Proposed Settlement, HL&P
would amortize its remaining investment ($211 million as of June 30, 1995)
in the cancelled Malakoff Electric Generating Station (Malakoff) plant over
a period not to exceed
-16-
seven years. HL&P also would increase its decommissioning expense for the
South Texas Project by $9 million per year.
The Proposed Settlement also provides HL&P the option to write down a
portion of its investment in the South Texas Project during the five-year
period commencing January 1, 1995. The parties to the Proposed Settlement
agreed that up to $50 million per year of any write down would be treated as
a reasonable and necessary expense during routine reviews of HL&P's earnings
and any rate review proceeding initiated against HL&P. In the second quarter
of 1995, HL&P recorded a $7 million write down of its investment in the
South Texas Project pursuant to this provision of the Proposed Settlement,
which amount is included on the Company's Consolidated and HL&P's Statements
of Income in depreciation and amortization expense.
Until the approval of the Proposed Settlement by the Utility Commission,
HL&P's existing rates will continue in effect; however, HL&P's financial
statements for 1995 reflect the estimated effects of the Proposed
Settlement. In the second quarter and first six months of 1995, HL&P's
pre-tax earnings were reduced by approximately $39 million and $56 million,
respectively, which represent the estimated effects of the Proposed
Settlement on revenues and expenses. Included in these reductions are
charges of $7 million related to the South Texas Project investment as
discussed above and a one-time, pre-tax charge of $9 million incurred in
connection with certain mine-related costs which were not previously
recorded and are not recoverable under the terms of the Proposed Settlement.
(See Note 5 to these financial statements.) Deferred revenues are included
on the Company's Consolidated and HL&P's Balance Sheets in other deferred
credits subject to refund in the event the Proposed Settlement is approved.
Under the terms of the Proposed Settlement, HL&P previously agreed that
approximately $70 million of fuel expenditures and related interest incurred
during the fuel reconciliation period would not be recoverable from
ratepayers. This $70 million was recorded in December 1994 as a one-time,
pre-tax charge to reconcilable fuel revenues and will be refunded to
ratepayers in the event that the Proposed Settlement is approved by the
Utility Commission.
For additional information regarding Docket Nos. 12065 and 13126, see Note 3
to the financial statements included in the Combined Form 10-Q, which note
is incorporated herein by reference.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years, the
Utility Commission has granted HL&P rate increases to reflect in electric
rates HL&P's substantial investment in new plant construction, including the
South Texas Project. Although Utility Commission action on those
applications has been completed, judicial review of a number of the Utility
Commission orders is pending. In the event the courts ultimately reverse
actions of the Utility Commission in any of these proceedings, such matters
would be remanded to the Utility Commission for action in light of the
courts' orders. Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and HL&P
generally are not in a position at this time to predict the outcome of the
matters on appeal or the ultimate effect that adverse action by the courts
could have on the Company and HL&P.
-17-
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the Utility
Commission granted HL&P a $227 million increase in base revenues,
allowed a 12.92 percent return on common equity, authorized a qualified
phase-in for Unit No. 1 of the South Texas Project (including
-18-
approximately 72 percent of HL&P's investment in Unit No. 1 of the South
Texas Project in rate base) and authorized HL&P to use deferred
accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented by
HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with deductions
taken for expenses disallowed from cost of service. The court held that
the Utility Commission had failed to require that such tax savings be
passed on to ratepayers. Both HL&P and other parties sought review by
the Texas Supreme Court, which granted discretionary review as to the
issue of certain Malakoff plant expenditures treated as "Plant Held for
Future Use", and brought the entire case before it for consideration,
including the tax issue raised by HL&P. The case has been scheduled for
oral argument in September 1995 by the Texas Supreme Court.
Although no assurance can be given in this matter, the Company believes
that if the principles and rationale of the GTE-SW decision discussed in
Note 4(a) above were applied, the Utility Commission's treatment of the
tax issue in Docket No. 8425 should be upheld.
EXHIBIT 99(d)
ITEM 3. LEGAL PROCEEDINGS.
For a description of certain legal and regulatory proceedings affecting
the Company and its subsidiaries (including (i) HL&P's rate cases, (ii) certain
environmental matters and (iii) litigation related to the South Texas Project),
see "Business - Regulatory Matters - Environmental Quality" in Item 1 of this
Report, "LIQUIDITY AND CAPITAL RESOURCES - HL&P - Environmental Expenditures" in
Item 7 of this Report and Notes 1(f) and 2 through 5 to the Financial Statements
in Item 8 of this Report, which sections and notes are incorporated herein by
reference.
HL&P is a defendant in litigation arising out of the environmental
remediation of a site in Corpus Christi, Texas. The site in question was
operated as a metals reclaiming operation for a number of years, and, though
HL&P neither operated nor had any ownership interest in the site, some
transformers and other equipment that HL&P sold as surplus allegedly were
delivered to that site, where the site operators subsequently disposed of the
materials in ways that caused environmental damage. In one case, DUMES, ET AL.
V. HL&P, ET AL., pending in the U.S. District Court for the Southern District of
Texas, Corpus Christi Division, a group of approximately 70 landowners near the
site are seeking damages primarily for lead contamination to their property.
They have pled damages of approximately $1 million each and also seek punitive
damages totaling $51 million. The Plaintiffs seek to impose responsibility on
HL&P and the other utility that undertook to clean up the property, neither of
which contributed more than an insignificant amount of lead to the site, on the
theory that lead was deposited on their properties during the site remediation
itself. In addition, Gulf States Utilities Company (Gulf States) filed suit
(GULF STATES UTILITIES CO. V. HOUSTON LIGHTING & POWER CO., ET AL.) in the
United States District Court for the Southern District of Texas, Houston
Division, against HL&P and two other utilities concerning a site in Houston,
Texas, which allegedly has been contaminated by polychlorinated biphenyls and
which Gulf States has undertaken to remediate pursuant to an EPA order. HL&P
does not believe, based on its records, that it contributed material to that
site and in October 1994, Gulf States dismissed its claims against HL&P. HL&P
remains in the case on cross-claims asserted by two co-defendants. The ultimate
outcome of these pending cases cannot be predicted at this time. Based on
information currently available, the Company and HL&P believe that none of these
cases will result in a material adverse effect on the Company's or HL&P's
financial condition or results of operations.
HL&P and the other owners of the South Texas Project filed suit in 1990
against Westinghouse Electric Corporation (Westinghouse) in the 23rd District
Court for Matagorda County, Texas (Cause No. 90-S-0684-C), alleging breach of
warranty and misrepresentation in connection with the steam generators supplied
by Westinghouse for the South Texas Project. In recent years, other utilities
have encountered stress corrosion cracking in steam generator tubes in
Westinghouse units similar to those supplied for the South Texas Project.
Failure of such tubes can result in a reduction of plant efficiency, and, in
some cases, utilities have replaced their steam generators. During an inspection
concluded in the fall of 1993, evidence was found of stress corrosion cracking
consistent with that encountered with Westinghouse steam generators at other
facilities, and a small number of tubes were found to require plugging. To date,
stress corrosion cracking has not had a significant impact on operation of
either unit; however, the owners of the South Texas Project have approved
remedial operating
-31-
plans and have undertaken expenditures to minimize and delay further corrosion.
The litigation, which is in discovery, seeks appropriate damages and other
relief from Westinghouse and is currently scheduled for trial in July 1995. No
prediction can be made as to the ultimate outcome of this litigation.
In April 1994, two former employees of HL&P filed a class action and
shareholder derivative suit on behalf of all shareholders of the Company. This
lawsuit (PACE AND FUENTEZ V. HOUSTON INDUSTRIES INCORPORATED) alleges various
acts of mismanagement against certain officers and directors of the Company and
HL&P and, seeks unspecified actual and punitive damages for the benefit of
shareholders of the Company. The Company and HL&P believe that the suit is
without merit. The lawsuit is pending in the 122nd Judicial District of
Galveston County, Texas.
In June 1994, a former employee of HL&P filed a lawsuit (PACE,
INDIVIDUALLY AND AS A REPRESENTATIVE OF ALL OTHERS SIMILARLY SITUATED V. HOUSTON
LIGHTING & POWER COMPANY) in the 56th Judicial District Court of Galveston
County, Texas alleging that HL&P has been overcharging ratepayers and owes a
refund of more than $500 million. The claim was based on the argument that the
Utility Commission failed to allocate to ratepayers alleged tax benefits
accruing to the Company and HL&P because HL&P's federal income taxes are paid as
part of a consolidated group. The court has granted HL&P's motion for summary
judgment, which has now become final.
In July 1990, the Company paid approximately $104.5 million to the
Internal Revenue Service (IRS) in connection with an IRS audit of the Company's
1983 and 1984 federal income tax returns. In November 1991, the Company filed a
refund suit in the U.S. Court of Federal Claims seeking the return of $52.1
million of tax, $36.3 million of accrued interest, plus interest on both of
those amounts accruing after July 1990. The major contested issue in the refund
case involved the IRS's allegation that certain amounts related to the
over-recovery of fuel costs should have been included as taxable income in 1983
and 1984 even though HL&P had an obligation to refund the over-recoveries to its
ratepayers. In October 1994, the Court granted the Company's Motion for Partial
Summary Judgment on the fuel cost over-recovery issue. On February 21, 1995, the
Court entered partial judgment in favor of the Company for this issue. The U.S.
Government (Government) must file its notice of appeal on or before April 24,
1995. If the Government does not appeal or if the Government appeals but does
not prevail, the Company would be entitled to a refund of overpaid tax, interest
paid on the overpaid tax in July 1990 and interest on both of those amounts from
July 1990. Although, the Company would not be entitled to a refund until all
appeals are decided in its favor, the amount owed to the Company will continue
to accrue interest. If the Government appeals and prevails, the Company's
ultimate financial exposure should be immaterial because of offsetting tax
deductions to which the Company is entitled in the year the over-recovery was
refunded to ratepayers (and which the IRS has conceded).
EXHIBIT 99(e)
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company and its
subsidiaries, including HL&P, reference is made to the information set
forth in Item 3 of the Company's and HL&P's Annual Report on Form 10-K
for the year ended December 31, 1994 (1994 Combined Form 10-K) and
Notes 2, 3 and 4 to the Company's Consolidated and HL&P's Financial
Statements in the Combined Form 8-K, which information, as qualified
and updated by the description of developments in regulatory and
litigation matters contained in Notes 2, 3 and 4 of the Notes to the
Company's Consolidated and HL&P's Financial Statements included in
Part I of this Report, is incorporated herein by reference.
In April 1995, the government filed a notice of appeal with respect
to the judgment entered in favor of the Company in its refund suit
pending in the U.S. Court of Federal Claims. For additional information
regarding the Company's tax case, see Item 3 to the 1994 Combined
Form 10-K.
EXHIBIT 99(f)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company and its
subsidiaries, including HL&P, reference is made to the information set
forth in Item 3 of the 1994 Combined Form 10-K, Item 1 of Part II of the
Combined Form 10-Q, Notes 2, 3 and 4 to the Company's Consolidated and
HL&P's Financial Statements in the Combined Form 8-K and Notes 2(b) and
3 to the Company's Consolidated and HL&P's Financial Statements in the
Combined Form 10-Q, which information, as qualified and updated by the
description of developments in regulatory and litigation matters
contained in Notes 2, 3 and 4 of the Notes to the Financial Statements
included in Part I of this Report, is incorporated herein by reference.
GULF STATES UTILITIES CO. V. HOUSTON LIGHTING & POWER CO., ET AL.,
formerly pending in the United States District Court for the Southern
District of Texas, Houston Division, was dismissed upon joint
stipulation of all the parties in June 1995. Under the terms of the
Agreement of Compromise and Settlement, HL&P bears its own fees, costs
and expenses, but is not required to pay any other amounts.
Exhibit 99(g)
RECOVERY OF FUEL COSTS. For information relating to the cost of fuel
over the last three years, see "Operating Statistics of HL&P" below and
"Results of Operations - HL&P - Fuel and Purchased Power Expense" in Item 7 of
this Report. Utility Commission rules provide for the recovery of certain fuel
and purchased power costs through an energy component of electric rates (fixed
fuel factor). The fixed fuel factor is established during either a utility's
general rate proceeding or an interim fuel proceeding and is to be generally
effective for a minimum of six months, unless a substantial change in a
utility's cost of fuel occurs. In that event, a utility may be authorized to
revise the fixed fuel factor in its rates appropriately. In any event, a fuel
reconciliation is required every three years.
-13-
In October 1991, the Utility Commission approved HL&P's fixed
fuel factor as contemplated in the settlement agreement reached in February
1991 by HL&P and most other parties to Docket No. 9850. See Note 10(c) to the
Company's Consolidated and HL&P's Financial Statements in Item 8 of this
Report. In November 1993, the Utility Commission authorized HL&P to implement
a higher fuel factor under Docket No. 12370. The Company can request a
revision to its fuel factor in April and October each year.
Reconciliation of fuel costs after March 1990 is required in 1994, and
under Utility Commission rules, HL&P has anticipated that a filing would be
required in May 1994. However, the Utility Commission staff has requested that
such filing be delayed to the fourth quarter of 1994. If that request is
granted by the Utility Commission, HL&P anticipates that fuel costs through
some time in 1994 will be submitted for reconciliation at that time. No
hearing would be anticipated in that reconciliation proceeding before 1995, and
the schedule for reconciliation of those costs could be affected by the
institution of a rate proceeding by the Utility Commission and/or a prudence
inquiry concerning the outage at the South Texas Project. For a discussion of
that outage and the possibility that a rate proceeding may be instituted, see
Notes 9(f), 10(f) and 10(g), respectively, to the Company's Consolidated and
HL&P's Financial Statements in Item 8 of this Report, which notes are
incorporated herein by reference.
REGULATORY MATTERS
ENERGY ACT. In October 1992, the Energy Act became law. For a
description of the Energy Act, see "Competition" above and Note 8(a) to the
Company's Consolidated and HL&P's Financial Statements in Item 8 of this
Report.
RATES AND SERVICES. Pursuant to the PURA, the Utility Commission has
original jurisdiction over electric rates and services in unincorporated areas
of the State of Texas and in the incorporated municipalities that have
relinquished original jurisdiction. Original jurisdiction over electric rates
and services in the remaining incorporated municipalities served by HL&P is
exercised by such municipalities, including Houston, but the Utility Commission
has appellate jurisdiction over electric rates and services within those
incorporated municipalities.
In 1993, the Texas Legislature considered changes to PURA as part of a
required review under the Sunset Act. None of the proposed changes to the
Utility Commission or Texas utility regulation were enacted. However, the
legislature passed legislation continuing the current PURA until September 1,
1995. The legislature also established a joint interim committee to study
certain regulatory issues prior to the next legislative session which begins in
January 1995. These issues include, among other items, tax issues relating to
public utilities, the organization and authority of the Utility Commission and
IRP. Recommendations from this study period will be considered during the next
legislative session.
UTILITY COMMISSION PROCEEDINGS. For information concerning the
Utility Commission's orders with respect to HL&P's applications for general
rate increases with the Utility Commission (Docket No. 8425 for the 1988 rate
case and Docket No. 9850 for the 1990 rate case) and the municipalities within
HL&P's service area and the appeals of such orders, see Notes 10(b) and 10(c)
to the Company's Consolidated and HL&P's
-14-
Financial Statements in Item 8 of this Report, which notes are incorporated
herein by reference. HL&P's 1986 general rate case (Docket Nos. 6765 and
6766) and 1984 rate case (Docket No. 5779) have been affirmed and are no longer
subject to appellate review. For a discussion of the possibility that a rate
proceeding may be instituted, see Notes 10(f) and 10(g) to the Company's
Consolidated and HL&P's Financial Statements in Item 8 of this Report, which
notes are incorporated herein by reference.
PRUDENCE REVIEW OF CONSTRUCTION OF THE SOUTH TEXAS PROJECT. For
information concerning the Utility Commission's orders with respect to a
prudence review of the planning, management and construction of the South Texas
Project (Docket No. 6668) and the appeals of such orders, see Note 10(d) to the
Company's Consolidated and HL&P's Financial Statements in Item 8 of this
Report, which note is incorporated herein by reference.
DEFERRED ACCOUNTING DOCKETS. For information concerning the Utility
Commission's orders allowing deferred accounting treatment for certain costs
associated with the South Texas Project (Docket Nos. 8230, 9010 and 8425), the
appeals of such orders and related proceedings, see Notes 10(b), 10(e) and 11
to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this
Report, which notes are incorporated herein by reference.
ENVIRONMENTAL QUALITY. General. HL&P is subject to regulation with
respect to air and water quality, solid waste management and other
environmental matters by various federal, state and local authorities.
Environmental regulations continue to be affected by legislation,
administrative actions and judicial review and interpretation. As a result,
the precise effect of potential regulations upon existing and proposed
facilities and operations cannot presently be determined. However,
developments in these and other areas of regulation have required HL&P to make
substantial expenditures to modify, supplement or replace equipment and
facilities and may, in the future, delay or impede construction and operation
of new facilities or require expenditures to modify existing facilities. For
information regarding environmental expenditures, see "Capital Program" above.
Air. The TNRCC has jurisdiction and enforcement power to determine
the permissible level of air contaminants emitted in the State of Texas. The
standards established by the Texas Clean Air Act and the rules of the TNRCC are
subject to modification by standards promulgated by the EPA. Compliance with
such standards has resulted, and is expected to continue to result, in
substantial expenditures by HL&P. In addition, expanded permit and fee systems
and enforcement penalties may discourage industrial growth within HL&P's
service area.
In November 1990, significant amendments to the Clean Air Act became
law. The law is designed to control emissions of air pollutants which
contribute to acid rain, to reduce urban air pollution and to reduce emissions
of toxic air pollutants. Parts of the Clean Air Act are directed at reducing
emissions of sulfur dioxide from electric utility generating units. This
reduction program includes an "allowance" system which sets forth formulas and
criteria to establish a cap on sulfur dioxide emissions from utility generating
units. HL&P has been allocated allowances sufficient to permit continued
operation of its existing facilities and some expansion of its solid-fuel
generating facilities without substantial additional expense relating to
modification of its facilities.
-15-
HL&P has already made substantial investments in pollution control
facilities, and all of its generating facilities currently comply in all
material respects with sulfur dioxide emission standards established by the
Clean Air Act. As a result of this previous investment, HL&P does not
anticipate that significant expenditures for sulfur dioxide removal equipment
will be required. Provisions of the Clean Air Act dealing with urban air
pollution require establishing new emission limitations for nitrogen oxides
from existing sources. Although initial limitations were finalized in 1993,
further reductions may be required in the future. The cost of modifications
necessary to reduce nitrogen oxide emissions from existing sources has been
estimated at $29 million in 1994 and $10.5 million in 1995. The Clean Air Act
also calls for additional stack gas continuous emissions monitoring equipment
to be installed on various HL&P generating facilities. Capital expenditures of
$12 million in 1994 and $2 million in 1995 are anticipated for installation of
this new monitoring equipment. See "Capital Program" above.
The Clean Air Act established a new permitting program to be
administered in Texas by the TNRCC. The precise requirements of the program
cannot be determined until the permit program is approved by the EPA. However,
based on regulations promulgated by the TNRCC, HL&P anticipates that additional
expenditures may be required for administering the permitting process. The
legislation could also substantially increase the cost of constructing new
generating units.
Water. The TNRCC has jurisdiction over water discharges in the State
of Texas and is empowered to set water quality standards and issue permits
regulating water quality. The TNRCC jurisdiction is currently shared with the
EPA, which also issues water discharge permits and reviews the Texas water
quality standards program.
HL&P has obtained permits from both the TNRCC and the EPA for all
facilities currently in operation which require such permits. Applications for
renewal of permits for existing facilities have been submitted as required.
The reissued permits reflect changes in federal and state regulations which may
increase the cost of maintaining compliance. Although compliance with the new
regulations has resulted and will continue to result in additional costs to
HL&P, the costs are not expected to have a material impact on HL&P's financial
condition or results of operations.
For a description of certain Administrative Orders issued by the EPA
to HL&P under the Clean Water Act and for a description of certain other
environmental litigation, see Item 3 of this Report.
Exhibit 12
HOUSTON LIGHTING & POWER COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(THOUSANDS OF DOLLARS)
NINE TWELVE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
------------------ ------------------
Fixed Charges as Defined:
(1) Interest on Long-Term Debt................................. $ 184,955 $ 246,524
(2) Other Interest............................................. 6,639 9,194
(3) Amortization of (Premium)
Discount............................................... 6,474 8,595
(4) Interest Component of Rentals
Charged to Operating Expense........................... 2,686 3,688
------------------ ------------------
(5) Total Fixed Charges............................... $ 200,754 $ 268,001
================== ==================
Earnings as Defined:
(6) Net Income ............................................... $ 440,148 $ 466,675
------------------ ------------------
Federal Income Taxes:
(7) Current.................................................... 181,323 190,780
(8) Deferred (Net)............................................. 40,573 37,536
------------------ ------------------
(9) Total Federal Income Taxes................................. 221,896 228,316
------------------ ------------------
(10) Total Fixed Charges (line 5)............................... 200,754 268,001
------------------ ------------------
(11) Earnings Before Income Taxes and
Fixed Charges (line 6 plus
line 9 plus line 10)................................... $ 862,798 $ 962,992
================== ==================
Ratio of Earnings to Fixed Charges
(line 11 divided by line 5).................................. 4.30 3.59
Preferred Dividends Requirements:
(12) Preferred Dividends ....................................... $ 23,207 $ 31,809
(13) Less Tax Deduction for
Preferred Dividends.................................... 41 54
------------------ ------------------
(14) Total............................................. 23,166 31,755
(15) Ratio of Pre-Tax Income to Net
Income (line 6 plus line 9
divided by line 6)..................................... 1.50 1.49
------------------ ------------------
(16) Line 14 times line 15...................................... 34,749 47,315
(17) Add Back Tax Deduction
(line 13).............................................. 41 54
------------------ ------------------
(18) Preferred Dividends Factor................................. $ 34,790 $ 47,369
================== ==================
(19) Total Fixed Charges (line 5)............................... $ 200,754 $ 268,001
(20) Preferred Dividends Factor
(line 18).............................................. 34,790 47,369
------------------ ------------------
(21) Total............................................. $ 235,544 $ 315,370
================== ==================
Ratio of Earnings to Fixed Charges and
Preferred Dividends Requirements
(line 11 divided by line 21).................................. 3.66 3.05
UT
0000048732
HOUSTON LIGHTING & POWER
1000
9-MOS
DEC-31-1995
SEP-30-1995
PER-BOOK
8,788,271
0
602,535
1,537,643
0
10,928,449
1,675,927
0
2,323,300
3,999,227
51,055
351,345
3,002,930
0
0
0
150,130
25,700
6,065
3,619
3,338,378
10,928,449
2,896,180
222,533
2,043,404
2,265,937
630,243
(2,382)
627,861
187,713
440,148
23,207
416,941
246,750
184,899
719,709
0
0
Exhibit 99(a)
(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four
co-owners) of the South Texas Project, which consists of two 1,250
megawatt nuclear generating units. HL&P has a 30.8 percent interest in
the project and bears a corresponding share of capital and operating
costs associated with the project. As of December 31, 1994, HL&P's
investments (net of accumulated depreciation and amortization) in the
South Texas Project and in nuclear fuel, including AFUDC, were $2.1
billion and $99 million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. Both generating units at the South Texas Project were out
of service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994.
HL&P removed the units from service in February 1993 when a problem
was encountered with certain of the units' auxiliary feedwater pumps.
In February 1995, the NRC removed the South Texas Project from its
"watch list" of plants with weaknesses that warranted increased NRC
attention. The NRC placed the South Texas Project on the "watch list"
in June 1993, following the issuance of a report by an NRC Diagnostic
Evaluation Team (DET) which conducted a review of the South Texas
Project operations.
Certain current and former employees of HL&P or contractors of HL&P
have asserted claims that their employment was terminated or disrupted
in retaliation for their having made safetyrelated complaints to the
NRC. Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P,
and the NRC has jurisdiction to take enforcement action against HL&P
and/or individual employees with respect to these matters. Based on
its own internal investigation, in October 1994 the NRC issued a
notice of violation and proposed a $100,000 civil penalty against HL&P
in one such case in which HL&P had terminated the site access of a
former contractor employee. In that action, the NRC also requested
information relating to possible further enforcement action in this
matter against two HL&P managers involved in such termination. HL&P
strongly disagrees with the NRC's conclusions, and has requested the
NRC to give further consideration of its notice. In February 1995, the
NRC conducted an enforcement conference with respect to that matter,
but no result has been received.
HL&P has provided documents and other assistance to a subcommittee of
the U. S. House of Representatives (Subcommittee) that is conducting
an inquiry related to the South Texas Project. Although the precise
focus and timing of the inquiry has not been identified by the
Subcommittee, it is anticipated that the Subcommittee will inquire
into matters related to HL&P's handling of employee concerns and to
issues related to the NRC's 1993 DET review of the South Texas
Project. In connection with that inquiry, HL&P has been advised that
the U. S. General Accounting Office (GAO) is conducting a review of
the NRC's inspection process as it relates to the South Texas Project
and other plants, and HL&P is cooperating with the GAO in its
investigation and with the NRC in a similar review it has initiated.
While no prediction can
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be made at this time as to the ultimate outcome of these matters, the
Company and HL&P do not believe that they will have a material adverse
effect on the Company's or HL&P's financial condition or results of
operations.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February
1994, the City of Austin (Austin), one of the four co-owners of the
South Texas Project, filed suit (Austin II Litigation) against HL&P.
That suit is pending in the 152nd District Court for Harris County,
Texas, which has set a trial date for October 1995. Austin alleges
that the outages at the South Texas Project from early 1993 to early
1994 were due to HL&P's failure to perform obligations it owed to
Austin under the Participation Agreement among the four co-owners of
the South Texas Project (Participation Agreement). Austin also asserts
that HL&P breached certain undertakings voluntarily assumed by HL&P
under the terms and conditions of the Operating Licenses and Technical
Specifications relating to the South Texas Project. Austin claims that
such failures have caused Austin damages of at least $125 million due
to the incurrence of increased operating and maintenance costs, the
cost of replacement power and lost profits on wholesale transactions
that did not occur. In May 1994, the City of San Antonio (San
Antonio), another co-owner of the South Texas Project, intervened in
the litigation filed by Austin against HL&P and asserted claims
similar to those asserted by Austin. San Antonio has not identified
the amount of damages it intends to seek from HL&P. HL&P is contesting
San Antonio's intervention and has called for arbitration of San
Antonio's claim under the arbitration provisions of the Participation
Agreement. The trial court has denied HL&P's requests, but review of
these decisions is currently pending before the 1st Court of Appeals
in Houston.
In a previous lawsuit (Austin I Litigation) filed in 1983 against the
Company and HL&P, Austin alleged that it had been fraudulently induced
to participate in the South Texas Project and that HL&P had failed to
perform properly its duties as project manager. In May 1993, the
courts entered a judgement in favor of the Company and HL&P,
concluding, among other things, that the Participation Agreement did
not impose on HL&P a duty to exercise reasonable skill and care as
project manager. During the course of the Austin I Litigation, San
Antonio and Central Power and Light Company (CPL), a subsidiary of
Central and South West Corporation, two of the co-owners in the South
Texas Project, also asserted claims for unspecified damages against
HL&P as project manager of the South Texas Project, alleging HL&P
breached its duties and obligations. San Antonio and CPL requested
arbitration of their claims under the Participation Agreement. In
1992, the Company and HL&P entered into a settlement agreement with
CPL (CPL Settlement) providing for CPL's withdrawal of its demand for
arbitration. San Antonio's claims for arbitration remain pending.
Under the Participation Agreement, San Antonio's arbitration claims
will be heard by a panel of five arbitrators consisting of four
arbitrators named by each co-owner and a fifth arbitrator selected by
the four appointed arbitrators.
Although the CPL Settlement did not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL reached certain
understandings in such agreement which contemplated that: (i) CPL's
previously appointed arbitrator would be replaced by CPL; (ii)
arbitrators approved by CPL or HL&P in any future arbitrations would
be mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL would
resolve any future disputes between them concerning the South Texas
Project without resorting to the arbitration provision of the
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Participation Agreement. Austin and San Antonio have asserted in the
pending Austin II Litigation that such understandings have rendered
the arbitration provisions of the Participation Agreement void and
that neither Austin nor San Antonio should be required to participate
in or be bound by such proceedings.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability insurance
coverage as required by law and periodically review available limits
and coverage for additional protection. The owners of the South Texas
Project currently maintain the maximum amount of property damage
insurance currently available through the insurance industry,
consisting of $500 million in primary property damage insurance and
excess property insurance in the amount of $2.25 billion. Under the
excess property insurance which became effective on March 1, 1995 and
under portions of the excess property insurance coverage in effect
prior to March 1, 1995, HL&P and the other owners of the South Texas
Project are subject to assessments, the maximum aggregate assessment
under current policies being $26.9 million during any one policy year.
The application of the proceeds of such property insurance is subject
to the priorities established by the NRC regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.0 billion to $8.92 billion effective in
November 1994. Owners are required under the Act to insure their
liability for nuclear incidents and protective evacuations by
maintaining the maximum amount of financial protection available from
private sources and by maintaining secondary financial protection
through an industry retrospective rating plan. The assessment of
deferred premiums provided by the plan for each nuclear incident is up
to $75.5 million per reactor subject to indexing for inflation, a
possible 5 percent surcharge (but no more than $10 million per reactor
per incident in any one year) and a 3 percent state premium tax. HL&P
and the other owners of the South Texas Project currently maintain the
required nuclear liability insurance and participate in the industry
retrospective rating plan.
There can be no assurance that all potential losses or liabilities
will be insurable, or that the amount of insurance will be sufficient
to cover them. Any substantial losses not covered by insurance would
have a material effect on HL&P's and the Company's financial
condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South
Texas Project are required by the NRC to meet minimum decommissioning
funding requirements to pay the costs of decommissioning the South
Texas Project. Pursuant to the terms of the order of the Utility
Commission in Docket No. 9850, HL&P is currently funding
decommissioning costs for the South Texas Project with an independent
trustee at an annual amount of $6 million, which is recorded in
depreciation and amortization expense. HL&P's funding level is
estimated to provide approximately $146 million, in 1989 dollars, an
amount which exceeds the current NRC minimum.
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The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective January 1, 1994. At December
31, 1994, the securities held in the Company's nuclear decommissioning
trust totaling $25.1 million (reflected on the Company's Consolidated
and HL&P's Balance Sheets in deferred debits and deferred credits) are
classified as available for sale. Such securities are reported on the
balance sheets at fair value, which at December 31, 1994 approximates
cost, and any unrealized gains or losses will be reported as a
separate component of common stock equity. Earnings, net of taxes and
administrative costs, are reinvested in the funds.
In May 1994, an outside consultant estimated HL&P's portion of
decommissioning costs to be approximately $318 million, in 1994
dollars. The consultant's calculation of decommissioning costs for
financial planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the
NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration
of their 40 year operating licenses. Under the terms of the Proposed
Settlement, HL&P would increase funding of decommissioning costs to an
annual amount of approximately $14.8 million consistent with such
study. While the current and projected funding levels presently exceed
minimum NRC requirements, no assurance can be given that the amounts
held in trust will be adequate to cover the actual decommissioning
costs of the South Texas Project or the assumptions used in estimating
decommissioning costs will ultimately prove to be correct.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Utility Commission initiated a proceeding
(Docket No. 12065) to determine whether HL&P's existing rates are just
and reasonable. Subsequently, the scope of the docket was expanded to
include reconciliation of HL&P's fuel costs from April 1, 1990 to July
31, 1994. The Utility Commission also initiated a separate proceeding
(Docket No. 13126) to review issues regarding the prudence of
operation of the South Texas Project from the date of commercial
operation through the present. That review would encompass the outage
at the South Texas Project during 1993 through 1994.
Hearings began in Docket No. 12065 in January 1995, and the Utility
Commission has retained a consultant to review the South Texas Project
for the purpose of providing testimony in Docket No. 13126 regarding
the prudence of HL&P's management of operation of the South Texas
Project. In February 1995, all major parties to these proceedings
signed the Proposed Settlement resolving the issues with respect to
HL&P, including the prudence issues related to operation of the South
Texas Project. Approval of the Proposed Settlement by the Utility
Commission will be required. To that end, the parties have established
procedural dates for a hearing on issues raised by the parties who are
opposed to the Proposed Settlement. A decision by the Utility
Commission on the Proposed Settlement is not anticipated before early
summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and rates would be frozen for three years, subject to certain
conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment of $218 million in the cancelled Malakoff plant
over a period not to exceed
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seven years. HL&P also would increase its decommissioning expense for
the South Texas Project by $9 million per year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This
$70 million was recorded as a one-time, pre-tax charge to reconcilable
fuel revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately
17 percent below that currently in effect and would refund to
customers the balance in its fuel over-recovery account, estimated to
be approximately $180 million after giving effect to the amounts not
recoverable from ratepayers.
HL&P recovers fuel costs incurred in electric generation through a
fixed fuel factor that is set by the Utility Commission. The
difference between fuel revenues billed pursuant to such factor and
fuel expense incurred is recorded as an addition to or a reduction of
revenue, with a corresponding entry to under- or over-recovered fuel,
as appropriate. Amounts collected pursuant to the fixed fuel factor
must be reconciled periodically against actual, reasonable costs as
determined by the Utility Commission. Currently, HL&P has an
over-recovery fuel account balance that will be refunded pursuant to
the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the
Utility Commission, including issues related to the South Texas
Project, Docket No. 12065 will be remanded to an Administrative Law
Judge (ALJ) to resume detailed hearings in this docket. Prior to
reaching agreement on the terms of the Proposed Settlement, HL&P
argued that its existing rates were just and reasonable and should not
be reduced. Other parties argued that rate decreases in annual amounts
ranging from $26 million to $173 million were required and that
additional decreases might be justified following an examination of
the prudence of the management of the South Texas Project and the
costs incurred in connection with the outages at the South Texas
Project. Testimony filed by the Utility Commission staff included a
recommendation to remove from rate base $515 million of HL&P's
investment in the South Texas Project to reflect the staff's view that
such investment was not fully "used and useful" in providing service,
a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did
not result from imprudent management. HL&P also filed testimony
analyzing the extent to which regulatory issues extended the outages.
In that testimony an outside consultant retained by HL&P concluded
that the duration of the outages was controlled by both the resolution
of NRC regulatory issues as well as necessary equipment repairs
unrelated to NRC regulatory issues and that the incremental effect of
NRC regulatory issues on the duration of the outages was only 39 days
per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range
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of assumptions would result in replacement fuel costs of less than $10
million for the 39 day periods identified by HL&P's consultant and
less than $100 million for the entire length of the outages. Any fuel
costs determined to have been unreasonably incurred would not be
recoverable from customers and would be charged against the Company's
earnings.
Although the Company and HL&P believe that the Proposed Settlement is
in the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility
Commission ultimately will approve the terms of the Proposed
Settlement or (ii) in the event the Proposed Settlement is not
approved and proceedings against HL&P resumed, that the outcome of
such proceedings would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years,
the Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant
construction, including the South Texas Project. Although Utility
Commission action on those applications has been completed, judicial
review of a number of the Utility Commission orders is pending. In
Texas, Utility Commission orders may be appealed to a District Court
in Travis County, and from that Court's decision an appeal may be
taken to the Court of Appeals for the 3rd District at Austin (Austin
Court of Appeals). Discretionary review by the Supreme Court of Texas
may be sought from decisions of the Austin Court of Appeals. The
pending appeals from the Utility Commission orders are in various
stages. In the event the courts ultimately reverse actions of the
Utility Commission in any of these proceedings, such matters would be
remanded to the Utility Commission for action in light of the courts'
orders. Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and HL&P
generally are not in a position at this time to predict the outcome of
the matters on appeal or the ultimate effect that adverse action by
the courts could have on the Company and HL&P. On remand, the Utility
Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the
Utility Commission approved a non-unanimous settlement agreement
providing for a $313 million increase in HL&P's base rates,
termination of deferrals granted with respect to Unit No. 2 of the
South Texas Project and of the qualified phase-in plan deferrals
granted with respect to Unit No. 1 of the South Texas Project, and
recovery of deferred plant costs. The settlement authorized a 12.55
percent return on common equity for HL&P. Rates contemplated by the
settlement agreement were implemented in May 1991 and remain in effect
(subject to the outcome of the current rate proceeding described in
Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on
review by a District Court, and the Austin Court of Appeals affirmed
that decision on procedural grounds due to the failure of the
appellant to file the record with the court in a timely manner. On
review, the Texas
-46-
Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility
Commission's order, which include issues regarding deferred
accounting, the treatment of federal income tax expense and certain
other matters. As to federal tax issues, a recent decision of the
Austin Court of Appeals, in an appeal involving GTE-SW (and to which
HL&P was not a party), held that when a utility pays federal income
taxes as part of a consolidated group, the utility's ratepayers are
entitled to a fair share of the tax savings actually realized, which
can include savings resulting from unregulated activities. The Texas
Supreme Court has agreed to hear an appeal of that decision, but on
points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any
disallowance that might be required if the court's ruling in the GTE
decision were applied in Docket No. 9850 would be offset by that
greater amount. However, that amount may not be sufficient if the
Austin Court of Appeals also concludes that the Utility Commission's
inclusion of deferred accounting costs in the settlement was improper.
For a discussion of the Texas Supreme Court's decision on deferred
accounting treatment, see Note 4(c). Although HL&P believes that it
could demonstrate entitlement to rate relief equal to that agreed to
in the stipulation in Docket No. 9850, HL&P cannot rule out the
possibility that a remand and reopening of that settlement would be
required if decisions unfavorable to HL&P are rendered on both the
deferred accounting treatment and the calculation of tax expense for
rate making purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the
Utility Commission granted HL&P a $227 million increase in base
revenues, allowed a 12.92 percent return on common equity, authorized
a qualified phase-in plan for Unit No. 1 of the South Texas Project
(including approximately 72 percent of HL&P's investment in Unit No. 1
of the South Texas Project in rate base) and authorized HL&P to use
deferred accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented
by HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with
deductions taken for expenses disallowed in cost of service. The court
held that the Utility Commission had failed to require that such tax
savings be passed on to ratepayers, and ordered that the case be
remanded to the Utility Commission with instructions to adjust HL&P's
cost of service accordingly. Discretionary review is being sought from
the Texas Supreme Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing
its appeal in Docket No. 6668. A separate party to this appeal,
however, has not agreed to dismiss its appeal.
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(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized
by the Utility Commission in Docket No. 8230 and was extended in
Docket No. 9010. Similar deferred accounting treatment with respect to
Unit No. 2 of the South Texas Project was authorized in Docket No.
8425. For a discussion of the deferred accounting treatment granted,
see Note 1(f).
In June 1994, the Texas Supreme Court decided the appeal of Docket
Nos. 8230 and 9010, as well as all other pending deferred accounting
cases involving other utilities, upholding deferred accounting
treatment for both carrying costs and operation and maintenance
expenses as within the Utility Commission's statutory authority and
reversed the Austin Court of Appeals decision to the extent that the
Austin Court of Appeals had rejected deferred accounting treatment for
carrying charges. Because the lower appellate court had upheld
deferred accounting only as to operation and maintenance expenses, the
Texas Supreme Court remanded Docket Nos. 8230 and 9010 to the Austin
Court of Appeals to consider the points of error challenging the
granting of deferred accounting for carrying costs which it had not
reached in its earlier consideration of the case. The Texas Supreme
Court opinion did state, however, that when deferred costs are
considered for addition to the utility's rate base in an ensuing rate
case, the Utility Commission must then determine to what extent
inclusion of the deferred costs is necessary to preserve the utility's
financial integrity. Under the terms of the Proposed Settlement, South
Texas Project deferrals will continue to be amortized under the
schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant
to the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In
June 1990, the Utility Commission ruled in a separate docket (Docket
No. 6668) that had been created to review the prudence of HL&P's
planning and construction of the South Texas Project that $375.5
million out of HL&P's $2.8 billion investment in the two units of the
South Texas Project had been imprudently incurred. That ruling was
incorporated into HL&P's 1988 and 1991 rate cases and resulted in
HL&P's recording an after-tax charge of $15 million in 1990. Several
parties appealed the Utility Commission's decision, but a District
Court dismissed these appeals on procedural grounds. The Austin Court
of Appeals reversed and directed consideration of the appeals, and the
Texas Supreme Court denied discretionary review in 1994. At this time,
no action has been taken by the appellants to proceed with the
appeals. Unless the order in Docket No. 6668 is modified or reversed
on appeal, the amount found imprudent by the Utility Commission will
be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
-48-
(18) RAILROAD SETTLEMENT PAYMENTS
In July 1994, HL&P contributed as equity its rights to receive certain
railroad settlement payments to HL&P Receivables, Inc. (HLPR), a
wholly-owned subsidiary of HL&P. HLPR transferred the receivables to a
trust. A bank purchased certificates evidencing a senior interest in
the trust and HLPR holds a certificate evidencing a subordinate
interest in the trust. HL&P received as a dividend from HLPR
approximately $66.1 million, an amount equal to HLPR's proceeds from
the sale. Consistent with the manner in which HL&P recorded receipts
of the settlement payments, HL&P recorded the transaction as a $66.1
million reduction to reconcilable fuel expense in July 1994. The
reduction to reconcilable fuel expense had no effect on earnings.
EXHIBIT 99(b)
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. HL&P removed both generating units at the South Texas
Project from service in February 1993 when a problem was encountered
with certain of the units' auxiliary feedwater pumps. The units were out
of service from February 1993 to February 1994, when Unit No. 1 was
returned to service.
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Unit No. 2 was returned to service in May 1994. In June 1993, the NRC
placed the South Texas Project on its "watch list" of plants with
weaknesses that warrant increased attention after a review of the South
Texas Project operations. In February 1995, the NRC removed the South
Texas Project from its "watch list".
Certain current and former employees or contractors of HL&P have
asserted claims that their employment was terminated or disrupted in
retaliation for their having made safety-related complaints to the NRC.
Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P, and
the NRC has jurisdiction to take enforcement action against HL&P and/or
individual employees with respect to these matters. On May 8, 1995, the
NRC announced that it was withdrawing a previously proposed Notice of
Violation and $100,000 civil penalty, as well as possible individual
enforcement action against two HL&P managers in connection with one such
case, involving a contractor employee whose site access was terminated.
Allegations of retaliation by that individual remain pending before an
Administrative Law Judge (ALJ) of the Department of Labor. In another
such case, involving two former HL&P employees who were terminated
during a reduction in force, another Department of Labor ALJ in April
1995 issued his recommended decision in favor of the former employees,
ordering reinstatement of one with back-pay and back-pay without
reinstatement to another. The ALJ ruled out ordering HL&P to pay
exemplary damages to the individuals, but indicated his intention to
hold a further hearing to consider whether additional compensatory
damages should be awarded. HL&P considers the ALJ's conclusions to be
erroneous and is asking the Secretary of Labor not to adopt the ALJ's
recommendation. If the recommendation is adopted by the Secretary of
Labor, HL&P could appeal that decision to the United States Court of
Appeals. Civil actions by these employees remain pending. For additional
information, see Note 2(b) of the notes to the financial statements
included in the Combined Form 8-K.
While no prediction can be made at this time as to the ultimate outcome
of these matters, the Company and HL&P do not believe that they will
have a material adverse effect on the Company's or HL&P's financial
condition or results of operations.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Public Utility Commission of Texas (Utility
Commission) initiated a proceeding (Docket No. 12065) to determine
whether HL&P's existing rates are just and reasonable. Subsequently, the
scope of the docket was expanded to include reconciliation of HL&P's
fuel costs from April 1, 1990 to July 31, 1994. The Utility Commission
also initiated a
-16-
separate proceeding (Docket No. 13126) to review issues regarding the
prudence of operation of the South Texas Project from the date of
commercial operation through the present. That review would encompass
the outage at the South Texas Project during 1993 and 1994.
Hearings began in Docket No. 12065 in January 1995. In February 1995,
all major parties to these proceedings signed an agreement resolving the
issues with respect to HL&P, including the prudence issues related to
operation of the South Texas Project (Proposed Settlement). Approval of
the Proposed Settlement by the Utility Commission will be required.
Hearings on the Proposed Settlement are currently scheduled to begin in
early June 1995. A decision by the Utility Commission on the Proposed
Settlement is not anticipated before late summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and HL&P would be precluded from seeking rate increases for
three years, subject to certain conditions. Under the Proposed
Settlement, HL&P would amortize its remaining investment of $218 million
in the cancelled Malakoff Electric Generating Station (Malakoff) plant
over a period not to exceed seven years. HL&P also would increase its
decommissioning expense for the South Texas Project by $9 million per
year.
The Proposed Settlement also provides HL&P the option to write down up
to $50 million per year of its investment in the South Texas Project
during the five-year period commencing January 1, 1995. The parties to
the Proposed Settlement agreed that any write down would be treated as a
reasonable and necessary expense during routine reviews of HL&P's
earnings and any rate review proceeding initiated against HL&P.
Until the approval of the Proposed Settlement by the Utility Commission,
HL&P's existing rates will continue in effect; however, HL&P's financial
statements for the first quarter of 1995 reflect the estimated effects
of the Proposed Settlement. In the first quarter of 1995, HL&P's pre-tax
earnings were reduced by approximately $17 million in the aggregate as a
result of reflecting the estimated effects of the Proposed Settlement on
revenues and expenses for the quarter. Deferred revenues are included on
the Company's Consolidated and HL&P's Balance Sheets in other deferred
credits subject to refund when the Proposed Settlement is approved.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This $70
million was recorded in the fourth quarter of 1994 as a one-time,
pre-tax charge to reconcilable fuel revenues to reflect the anticipation
of approval of the Proposed Settlement. Under the Proposed Settlement,
HL&P would also establish a new fuel factor approximately 17 percent
below that currently in effect and would refund to customers the balance
in its fuel over-recovery account, estimated to be approximately $180
million after giving effect to the amounts not recoverable from
ratepayers. As contemplated by the Proposed Settlement and approved by
an ALJ, HL&P implemented a new fuel factor 17 percent lower than its
previous factor and refunded to customers approximately $110 million of
the approximately $180 million in fuel cost overrecoveries in April
1995. The remaining $70 million will be refunded if the Proposed
Settlement is approved by the Utility Commission.
-17-
In the event the Proposed Settlement is not approved by the Utility
Commission, Docket No. 12065 would be remanded to an ALJ to resume
detailed hearings in this docket and with respect to issues related to
the South Texas Project. Prior to reaching agreement on the terms of the
Proposed Settlement, HL&P argued that its existing rates were just and
reasonable and should not be reduced. Other parties argued that rate
decreases in annual amounts ranging from $26 million to $173 million
were required and that additional decreases might be justified following
an examination of the prudence of the management of the South Texas
Project and the costs incurred in connection with the outages at the
South Texas Project. Testimony filed by the Utility Commission staff
included a recommendation to remove from rate base $515 million of
HL&P's investment in the South Texas Project to reflect the staff's view
that such investment was not fully "used and useful" in providing
service, a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 would be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. The Utility Commission has retained a consultant to
review the South Texas Project for the purpose of providing testimony in
Docket No. 13126 regarding the prudence of HL&P's management of
operation of the South Texas Project. HL&P filed testimony in Docket No.
13126, which testimony concluded that the outages at the South Texas
Project did not result from imprudent management. HL&P also filed
testimony analyzing the extent to which regulatory issues extended the
outages. In that testimony an outside consultant retained by HL&P
concluded that the duration of the outages was controlled by both the
resolution of NRC regulatory issues as well as necessary equipment
repairs unrelated to NRC regulatory issues and that the incremental
effect of NRC regulatory issues on the duration of the outages was only
39 days per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range of assumptions would
result in replacement fuel costs of less than $10 million for the 39 day
periods identified by HL&P's consultant and less than $100 million for
the entire length of the outages. Any fuel costs determined to have been
unreasonably incurred would not be recoverable from customers and would
be charged against the Company's earnings.
Although the Company and HL&P believe that the Proposed Settlement is in
the best interest of HL&P, its ratepayers, the Company and its
shareholders, no assurance can be given that (i) the Utility Commission
ultimately will approve the terms of the Proposed Settlement or (ii) in
the event the Proposed Settlement is not approved and proceedings
against HL&P are resumed, that the outcome of such proceedings would be
favorable to HL&P.
EXHIBIT 99(c)
(2) JOINTLY-OWNED NUCLEAR PLANT
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. HL&P removed both generating units at the South Texas
Project from service in February 1993 when a problem was encountered
with certain of the units' auxiliary feedwater pumps. The units were
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out of service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994. In
June 1993, the NRC placed the South Texas Project on its "watch list" of
plants with weaknesses that warrant increased attention after a review
of the South Texas Project operations. In February 1995, the NRC removed
the South Texas Project from its "watch list".
For a discussion concerning litigation by certain current and former
employees or contractors of HL&P asserting that their employment was
terminated or disrupted in retaliation for their having made
safety-related complaints to the NRC, see Note 2(b) of the notes to the
financial statements included in the Combined Form 8-K and Note 2(b) to
the financial statements included in the Company's and HL&P's Combined
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995
(Combined Form 10-Q).
While no prediction can be made at this time as to the ultimate outcome
of these matters, the Company and HL&P do not believe that they will
have a material adverse effect on the Company's or HL&P's financial
condition or results of operations.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Public Utility Commission of Texas (Utility
Commission) initiated a proceeding (Docket No. 12065) to determine whether
HL&P's existing rates are just and reasonable and to reconcile HL&P's fuel
costs from April 1, 1990 to July 31, 1994. The Utility Commission also
initiated a separate proceeding (Docket No. 13126) to review issues
regarding the prudence of operation of the South Texas Project from the date
of commercial operation through the present (a period including the outage
at the South Texas Project during 1993 and 1994).
In February 1995, all major parties to these proceedings signed an agreement
resolving the issues with respect to HL&P, including the prudence issues
related to operation of the South Texas Project (Proposed Settlement). In
July 1995, an Administrative Law Judge (ALJ) recommended that the Utility
Commission issue a final order consistent with the Proposed Settlement. A
decision is expected by the Utility Commission at a Final Order Meeting
scheduled for August 30, 1995.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January 1,
1995, and HL&P would be precluded from seeking rate increases for three
years, subject to certain conditions. Under the Proposed Settlement, HL&P
would amortize its remaining investment ($211 million as of June 30, 1995)
in the cancelled Malakoff Electric Generating Station (Malakoff) plant over
a period not to exceed
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seven years. HL&P also would increase its decommissioning expense for the
South Texas Project by $9 million per year.
The Proposed Settlement also provides HL&P the option to write down a
portion of its investment in the South Texas Project during the five-year
period commencing January 1, 1995. The parties to the Proposed Settlement
agreed that up to $50 million per year of any write down would be treated as
a reasonable and necessary expense during routine reviews of HL&P's earnings
and any rate review proceeding initiated against HL&P. In the second quarter
of 1995, HL&P recorded a $7 million write down of its investment in the
South Texas Project pursuant to this provision of the Proposed Settlement,
which amount is included on the Company's Consolidated and HL&P's Statements
of Income in depreciation and amortization expense.
Until the approval of the Proposed Settlement by the Utility Commission,
HL&P's existing rates will continue in effect; however, HL&P's financial
statements for 1995 reflect the estimated effects of the Proposed
Settlement. In the second quarter and first six months of 1995, HL&P's
pre-tax earnings were reduced by approximately $39 million and $56 million,
respectively, which represent the estimated effects of the Proposed
Settlement on revenues and expenses. Included in these reductions are
charges of $7 million related to the South Texas Project investment as
discussed above and a one-time, pre-tax charge of $9 million incurred in
connection with certain mine-related costs which were not previously
recorded and are not recoverable under the terms of the Proposed Settlement.
(See Note 5 to these financial statements.) Deferred revenues are included
on the Company's Consolidated and HL&P's Balance Sheets in other deferred
credits subject to refund in the event the Proposed Settlement is approved.
Under the terms of the Proposed Settlement, HL&P previously agreed that
approximately $70 million of fuel expenditures and related interest incurred
during the fuel reconciliation period would not be recoverable from
ratepayers. This $70 million was recorded in December 1994 as a one-time,
pre-tax charge to reconcilable fuel revenues and will be refunded to
ratepayers in the event that the Proposed Settlement is approved by the
Utility Commission.
For additional information regarding Docket Nos. 12065 and 13126, see Note 3
to the financial statements included in the Combined Form 10-Q, which note
is incorporated herein by reference.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years, the
Utility Commission has granted HL&P rate increases to reflect in electric
rates HL&P's substantial investment in new plant construction, including the
South Texas Project. Although Utility Commission action on those
applications has been completed, judicial review of a number of the Utility
Commission orders is pending. In the event the courts ultimately reverse
actions of the Utility Commission in any of these proceedings, such matters
would be remanded to the Utility Commission for action in light of the
courts' orders. Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and HL&P
generally are not in a position at this time to predict the outcome of the
matters on appeal or the ultimate effect that adverse action by the courts
could have on the Company and HL&P.
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(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the Utility
Commission granted HL&P a $227 million increase in base revenues,
allowed a 12.92 percent return on common equity, authorized a qualified
phase-in for Unit No. 1 of the South Texas Project (including
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approximately 72 percent of HL&P's investment in Unit No. 1 of the South
Texas Project in rate base) and authorized HL&P to use deferred
accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented by
HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with deductions
taken for expenses disallowed from cost of service. The court held that
the Utility Commission had failed to require that such tax savings be
passed on to ratepayers. Both HL&P and other parties sought review by
the Texas Supreme Court, which granted discretionary review as to the
issue of certain Malakoff plant expenditures treated as "Plant Held for
Future Use", and brought the entire case before it for consideration,
including the tax issue raised by HL&P. The case has been scheduled for
oral argument in September 1995 by the Texas Supreme Court.
Although no assurance can be given in this matter, the Company believes
that if the principles and rationale of the GTE-SW decision discussed in
Note 4(a) above were applied, the Utility Commission's treatment of the
tax issue in Docket No. 8425 should be upheld.
EXHIBIT 99(d)
ITEM 3. LEGAL PROCEEDINGS.
For a description of certain legal and regulatory proceedings affecting
the Company and its subsidiaries (including (i) HL&P's rate cases, (ii) certain
environmental matters and (iii) litigation related to the South Texas Project),
see "Business - Regulatory Matters - Environmental Quality" in Item 1 of this
Report, "LIQUIDITY AND CAPITAL RESOURCES - HL&P - Environmental Expenditures" in
Item 7 of this Report and Notes 1(f) and 2 through 5 to the Financial Statements
in Item 8 of this Report, which sections and notes are incorporated herein by
reference.
HL&P is a defendant in litigation arising out of the environmental
remediation of a site in Corpus Christi, Texas. The site in question was
operated as a metals reclaiming operation for a number of years, and, though
HL&P neither operated nor had any ownership interest in the site, some
transformers and other equipment that HL&P sold as surplus allegedly were
delivered to that site, where the site operators subsequently disposed of the
materials in ways that caused environmental damage. In one case, DUMES, ET AL.
V. HL&P, ET AL., pending in the U.S. District Court for the Southern District of
Texas, Corpus Christi Division, a group of approximately 70 landowners near the
site are seeking damages primarily for lead contamination to their property.
They have pled damages of approximately $1 million each and also seek punitive
damages totaling $51 million. The Plaintiffs seek to impose responsibility on
HL&P and the other utility that undertook to clean up the property, neither of
which contributed more than an insignificant amount of lead to the site, on the
theory that lead was deposited on their properties during the site remediation
itself. In addition, Gulf States Utilities Company (Gulf States) filed suit
(GULF STATES UTILITIES CO. V. HOUSTON LIGHTING & POWER CO., ET AL.) in the
United States District Court for the Southern District of Texas, Houston
Division, against HL&P and two other utilities concerning a site in Houston,
Texas, which allegedly has been contaminated by polychlorinated biphenyls and
which Gulf States has undertaken to remediate pursuant to an EPA order. HL&P
does not believe, based on its records, that it contributed material to that
site and in October 1994, Gulf States dismissed its claims against HL&P. HL&P
remains in the case on cross-claims asserted by two co-defendants. The ultimate
outcome of these pending cases cannot be predicted at this time. Based on
information currently available, the Company and HL&P believe that none of these
cases will result in a material adverse effect on the Company's or HL&P's
financial condition or results of operations.
HL&P and the other owners of the South Texas Project filed suit in 1990
against Westinghouse Electric Corporation (Westinghouse) in the 23rd District
Court for Matagorda County, Texas (Cause No. 90-S-0684-C), alleging breach of
warranty and misrepresentation in connection with the steam generators supplied
by Westinghouse for the South Texas Project. In recent years, other utilities
have encountered stress corrosion cracking in steam generator tubes in
Westinghouse units similar to those supplied for the South Texas Project.
Failure of such tubes can result in a reduction of plant efficiency, and, in
some cases, utilities have replaced their steam generators. During an inspection
concluded in the fall of 1993, evidence was found of stress corrosion cracking
consistent with that encountered with Westinghouse steam generators at other
facilities, and a small number of tubes were found to require plugging. To date,
stress corrosion cracking has not had a significant impact on operation of
either unit; however, the owners of the South Texas Project have approved
remedial operating
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plans and have undertaken expenditures to minimize and delay further corrosion.
The litigation, which is in discovery, seeks appropriate damages and other
relief from Westinghouse and is currently scheduled for trial in July 1995. No
prediction can be made as to the ultimate outcome of this litigation.
In April 1994, two former employees of HL&P filed a class action and
shareholder derivative suit on behalf of all shareholders of the Company. This
lawsuit (PACE AND FUENTEZ V. HOUSTON INDUSTRIES INCORPORATED) alleges various
acts of mismanagement against certain officers and directors of the Company and
HL&P and, seeks unspecified actual and punitive damages for the benefit of
shareholders of the Company. The Company and HL&P believe that the suit is
without merit. The lawsuit is pending in the 122nd Judicial District of
Galveston County, Texas.
In June 1994, a former employee of HL&P filed a lawsuit (PACE,
INDIVIDUALLY AND AS A REPRESENTATIVE OF ALL OTHERS SIMILARLY SITUATED V. HOUSTON
LIGHTING & POWER COMPANY) in the 56th Judicial District Court of Galveston
County, Texas alleging that HL&P has been overcharging ratepayers and owes a
refund of more than $500 million. The claim was based on the argument that the
Utility Commission failed to allocate to ratepayers alleged tax benefits
accruing to the Company and HL&P because HL&P's federal income taxes are paid as
part of a consolidated group. The court has granted HL&P's motion for summary
judgment, which has now become final.
In July 1990, the Company paid approximately $104.5 million to the
Internal Revenue Service (IRS) in connection with an IRS audit of the Company's
1983 and 1984 federal income tax returns. In November 1991, the Company filed a
refund suit in the U.S. Court of Federal Claims seeking the return of $52.1
million of tax, $36.3 million of accrued interest, plus interest on both of
those amounts accruing after July 1990. The major contested issue in the refund
case involved the IRS's allegation that certain amounts related to the
over-recovery of fuel costs should have been included as taxable income in 1983
and 1984 even though HL&P had an obligation to refund the over-recoveries to its
ratepayers. In October 1994, the Court granted the Company's Motion for Partial
Summary Judgment on the fuel cost over-recovery issue. On February 21, 1995, the
Court entered partial judgment in favor of the Company for this issue. The U.S.
Government (Government) must file its notice of appeal on or before April 24,
1995. If the Government does not appeal or if the Government appeals but does
not prevail, the Company would be entitled to a refund of overpaid tax, interest
paid on the overpaid tax in July 1990 and interest on both of those amounts from
July 1990. Although, the Company would not be entitled to a refund until all
appeals are decided in its favor, the amount owed to the Company will continue
to accrue interest. If the Government appeals and prevails, the Company's
ultimate financial exposure should be immaterial because of offsetting tax
deductions to which the Company is entitled in the year the over-recovery was
refunded to ratepayers (and which the IRS has conceded).
EXHIBIT 99(e)
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company and its
subsidiaries, including HL&P, reference is made to the information set
forth in Item 3 of the Company's and HL&P's Annual Report on Form 10-K
for the year ended December 31, 1994 (1994 Combined Form 10-K) and
Notes 2, 3 and 4 to the Company's Consolidated and HL&P's Financial
Statements in the Combined Form 8-K, which information, as qualified
and updated by the description of developments in regulatory and
litigation matters contained in Notes 2, 3 and 4 of the Notes to the
Company's Consolidated and HL&P's Financial Statements included in
Part I of this Report, is incorporated herein by reference.
In April 1995, the government filed a notice of appeal with respect
to the judgment entered in favor of the Company in its refund suit
pending in the U.S. Court of Federal Claims. For additional information
regarding the Company's tax case, see Item 3 to the 1994 Combined
Form 10-K.
EXHIBIT 99(f)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company and its
subsidiaries, including HL&P, reference is made to the information set
forth in Item 3 of the 1994 Combined Form 10-K, Item 1 of Part II of the
Combined Form 10-Q, Notes 2, 3 and 4 to the Company's Consolidated and
HL&P's Financial Statements in the Combined Form 8-K and Notes 2(b) and
3 to the Company's Consolidated and HL&P's Financial Statements in the
Combined Form 10-Q, which information, as qualified and updated by the
description of developments in regulatory and litigation matters
contained in Notes 2, 3 and 4 of the Notes to the Financial Statements
included in Part I of this Report, is incorporated herein by reference.
GULF STATES UTILITIES CO. V. HOUSTON LIGHTING & POWER CO., ET AL.,
formerly pending in the United States District Court for the Southern
District of Texas, Houston Division, was dismissed upon joint
stipulation of all the parties in June 1995. Under the terms of the
Agreement of Compromise and Settlement, HL&P bears its own fees, costs
and expenses, but is not required to pay any other amounts.
Exhibit 99(g)
RECOVERY OF FUEL COSTS. For information relating to the cost of fuel
over the last three years, see "Operating Statistics of HL&P" below and
"Results of Operations - HL&P - Fuel and Purchased Power Expense" in Item 7 of
this Report. Utility Commission rules provide for the recovery of certain fuel
and purchased power costs through an energy component of electric rates (fixed
fuel factor). The fixed fuel factor is established during either a utility's
general rate proceeding or an interim fuel proceeding and is to be generally
effective for a minimum of six months, unless a substantial change in a
utility's cost of fuel occurs. In that event, a utility may be authorized to
revise the fixed fuel factor in its rates appropriately. In any event, a fuel
reconciliation is required every three years.
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In October 1991, the Utility Commission approved HL&P's fixed
fuel factor as contemplated in the settlement agreement reached in February
1991 by HL&P and most other parties to Docket No. 9850. See Note 10(c) to the
Company's Consolidated and HL&P's Financial Statements in Item 8 of this
Report. In November 1993, the Utility Commission authorized HL&P to implement
a higher fuel factor under Docket No. 12370. The Company can request a
revision to its fuel factor in April and October each year.
Reconciliation of fuel costs after March 1990 is required in 1994, and
under Utility Commission rules, HL&P has anticipated that a filing would be
required in May 1994. However, the Utility Commission staff has requested that
such filing be delayed to the fourth quarter of 1994. If that request is
granted by the Utility Commission, HL&P anticipates that fuel costs through
some time in 1994 will be submitted for reconciliation at that time. No
hearing would be anticipated in that reconciliation proceeding before 1995, and
the schedule for reconciliation of those costs could be affected by the
institution of a rate proceeding by the Utility Commission and/or a prudence
inquiry concerning the outage at the South Texas Project. For a discussion of
that outage and the possibility that a rate proceeding may be instituted, see
Notes 9(f), 10(f) and 10(g), respectively, to the Company's Consolidated and
HL&P's Financial Statements in Item 8 of this Report, which notes are
incorporated herein by reference.
REGULATORY MATTERS
ENERGY ACT. In October 1992, the Energy Act became law. For a
description of the Energy Act, see "Competition" above and Note 8(a) to the
Company's Consolidated and HL&P's Financial Statements in Item 8 of this
Report.
RATES AND SERVICES. Pursuant to the PURA, the Utility Commission has
original jurisdiction over electric rates and services in unincorporated areas
of the State of Texas and in the incorporated municipalities that have
relinquished original jurisdiction. Original jurisdiction over electric rates
and services in the remaining incorporated municipalities served by HL&P is
exercised by such municipalities, including Houston, but the Utility Commission
has appellate jurisdiction over electric rates and services within those
incorporated municipalities.
In 1993, the Texas Legislature considered changes to PURA as part of a
required review under the Sunset Act. None of the proposed changes to the
Utility Commission or Texas utility regulation were enacted. However, the
legislature passed legislation continuing the current PURA until September 1,
1995. The legislature also established a joint interim committee to study
certain regulatory issues prior to the next legislative session which begins in
January 1995. These issues include, among other items, tax issues relating to
public utilities, the organization and authority of the Utility Commission and
IRP. Recommendations from this study period will be considered during the next
legislative session.
UTILITY COMMISSION PROCEEDINGS. For information concerning the
Utility Commission's orders with respect to HL&P's applications for general
rate increases with the Utility Commission (Docket No. 8425 for the 1988 rate
case and Docket No. 9850 for the 1990 rate case) and the municipalities within
HL&P's service area and the appeals of such orders, see Notes 10(b) and 10(c)
to the Company's Consolidated and HL&P's
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Financial Statements in Item 8 of this Report, which notes are incorporated
herein by reference. HL&P's 1986 general rate case (Docket Nos. 6765 and
6766) and 1984 rate case (Docket No. 5779) have been affirmed and are no longer
subject to appellate review. For a discussion of the possibility that a rate
proceeding may be instituted, see Notes 10(f) and 10(g) to the Company's
Consolidated and HL&P's Financial Statements in Item 8 of this Report, which
notes are incorporated herein by reference.
PRUDENCE REVIEW OF CONSTRUCTION OF THE SOUTH TEXAS PROJECT. For
information concerning the Utility Commission's orders with respect to a
prudence review of the planning, management and construction of the South Texas
Project (Docket No. 6668) and the appeals of such orders, see Note 10(d) to the
Company's Consolidated and HL&P's Financial Statements in Item 8 of this
Report, which note is incorporated herein by reference.
DEFERRED ACCOUNTING DOCKETS. For information concerning the Utility
Commission's orders allowing deferred accounting treatment for certain costs
associated with the South Texas Project (Docket Nos. 8230, 9010 and 8425), the
appeals of such orders and related proceedings, see Notes 10(b), 10(e) and 11
to the Company's Consolidated and HL&P's Financial Statements in Item 8 of this
Report, which notes are incorporated herein by reference.
ENVIRONMENTAL QUALITY. General. HL&P is subject to regulation with
respect to air and water quality, solid waste management and other
environmental matters by various federal, state and local authorities.
Environmental regulations continue to be affected by legislation,
administrative actions and judicial review and interpretation. As a result,
the precise effect of potential regulations upon existing and proposed
facilities and operations cannot presently be determined. However,
developments in these and other areas of regulation have required HL&P to make
substantial expenditures to modify, supplement or replace equipment and
facilities and may, in the future, delay or impede construction and operation
of new facilities or require expenditures to modify existing facilities. For
information regarding environmental expenditures, see "Capital Program" above.
Air. The TNRCC has jurisdiction and enforcement power to determine
the permissible level of air contaminants emitted in the State of Texas. The
standards established by the Texas Clean Air Act and the rules of the TNRCC are
subject to modification by standards promulgated by the EPA. Compliance with
such standards has resulted, and is expected to continue to result, in
substantial expenditures by HL&P. In addition, expanded permit and fee systems
and enforcement penalties may discourage industrial growth within HL&P's
service area.
In November 1990, significant amendments to the Clean Air Act became
law. The law is designed to control emissions of air pollutants which
contribute to acid rain, to reduce urban air pollution and to reduce emissions
of toxic air pollutants. Parts of the Clean Air Act are directed at reducing
emissions of sulfur dioxide from electric utility generating units. This
reduction program includes an "allowance" system which sets forth formulas and
criteria to establish a cap on sulfur dioxide emissions from utility generating
units. HL&P has been allocated allowances sufficient to permit continued
operation of its existing facilities and some expansion of its solid-fuel
generating facilities without substantial additional expense relating to
modification of its facilities.
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HL&P has already made substantial investments in pollution control
facilities, and all of its generating facilities currently comply in all
material respects with sulfur dioxide emission standards established by the
Clean Air Act. As a result of this previous investment, HL&P does not
anticipate that significant expenditures for sulfur dioxide removal equipment
will be required. Provisions of the Clean Air Act dealing with urban air
pollution require establishing new emission limitations for nitrogen oxides
from existing sources. Although initial limitations were finalized in 1993,
further reductions may be required in the future. The cost of modifications
necessary to reduce nitrogen oxide emissions from existing sources has been
estimated at $29 million in 1994 and $10.5 million in 1995. The Clean Air Act
also calls for additional stack gas continuous emissions monitoring equipment
to be installed on various HL&P generating facilities. Capital expenditures of
$12 million in 1994 and $2 million in 1995 are anticipated for installation of
this new monitoring equipment. See "Capital Program" above.
The Clean Air Act established a new permitting program to be
administered in Texas by the TNRCC. The precise requirements of the program
cannot be determined until the permit program is approved by the EPA. However,
based on regulations promulgated by the TNRCC, HL&P anticipates that additional
expenditures may be required for administering the permitting process. The
legislation could also substantially increase the cost of constructing new
generating units.
Water. The TNRCC has jurisdiction over water discharges in the State
of Texas and is empowered to set water quality standards and issue permits
regulating water quality. The TNRCC jurisdiction is currently shared with the
EPA, which also issues water discharge permits and reviews the Texas water
quality standards program.
HL&P has obtained permits from both the TNRCC and the EPA for all
facilities currently in operation which require such permits. Applications for
renewal of permits for existing facilities have been submitted as required.
The reissued permits reflect changes in federal and state regulations which may
increase the cost of maintaining compliance. Although compliance with the new
regulations has resulted and will continue to result in additional costs to
HL&P, the costs are not expected to have a material impact on HL&P's financial
condition or results of operations.
For a description of certain Administrative Orders issued by the EPA
to HL&P under the Clean Water Act and for a description of certain other
environmental litigation, see Item 3 of this Report.
