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 June 30, 1994.
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 (I.R.S. Employer
or organization) 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 (I.R.S. Employer
or organization) 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 July 31, 1994, Houston Industries Incorporated had
131,296,631 shares of common stock outstanding. As of July 31,
1994, all 1,000 authorized and outstanding shares of Houston
Lighting & Power Company's Class A voting common stock, without
par value, were held by Houston Industries Incorporated and all
100 authorized and outstanding shares of Houston Lighting & Power
Company's Class B non-voting common stock were held by Houston
Industries (Delaware) Incorporated.
HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1994
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 Six Months Ended
June 30, 1994 and 1993 3
Consolidated Balance Sheets
June 30, 1994 and December 31, 1993 5
Statements of Consolidated Cash Flows
Six Months Ended June 30, 1994 and 1993 7
Statements of Consolidated Retained Earnings
Three Months and Six Months Ended
June 30, 1994 and 1993 9
Notes to Consolidated Financial Statements 16
Houston Lighting & Power Company
Statements of Income
Three Months and Six Months Ended
June 30, 1994 and 1993 10
Balance Sheets
June 30, 1994 and December 31, 1993 11
Statements of Cash Flows
Six Months Ended June 30, 1994 and 1993 13
Statements of Retained Earnings
Three Months and Six Months Ended
June 30, 1994 and 1993 15
Notes to Financial Statements 16
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 4. Submission of Matters to a Vote
of Security-Holders 35
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 38
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
1994 1993 1994 1993
REVENUES:
Electric...................................... $1,004,906 $1,005,149 $1,826,487 $1,810,834
Cable television.............................. 61,754 62,604 122,274 122,878
---------- ---------- ---------- ----------
Total........................... 1,066,660 1,067,753 1,948,761 1,933,712
---------- ---------- ---------- ----------
EXPENSES:
Electric:
Fuel.......................................... 235,514 262,603 452,702 461,166
Purchased power............................... 103,906 129,224 202,455 258,923
Operation and maintenance..................... 204,089 212,866 397,940 408,102
Taxes other than income taxes................. 62,959 62,468 126,071 124,332
Cable television operating expenses........... 38,923 36,950 78,150 73,791
Depreciation and amortization................. 120,472 115,956 239,973 231,731
---------- ---------- ---------- ----------
Total........................... 765,863 820,067 1,497,291 1,558,045
---------- ---------- ---------- ----------
OPERATING INCOME............................... 300,797 247,686 451,470 375,667
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Allowance for other funds used
during construction........................ 93 1,080 1,409 1,788
Interest income............................... 8,125 8,598 16,543 16,738
Equity in income of cable television
partnerships............................... 7,790 7,987 15,700 15,009
Other - net................................... (4,058) (5,890) (12,387) (3,958)
---------- ---------- ---------- ----------
Total........................... 11,950 11,775 21,265 29,577
---------- ---------- ---------- ----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt.................... 86,449 96,547 173,462 193,623
Other interest................................ 5,931 4,505 11,657 8,294
Allowance for borrowed funds used
during construction........................ (129) (1,170) (1,817) (1,914)
Preferred dividends of subsidiary............. 8,403 8,789 16,676 17,934
---------- ---------- ---------- ----------
Total........................... 100,654 108,671 199,978 217,937
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS....................... 212,093 150,790 272,757 187,307
INCOME TAXES................................... 78,265 50,581 100,554 60,043
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS...................................... 133,828 100,209 172,203 127,264
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POSTEMPLOYMENT BENEFITS (NET OF
INCOME TAXES OF $4,415)....................... (8,200)
---------- ---------- --------- ----------
NET INCOME..................................... $ 133,828 $ 100,209 $ 164,003 $ 127,264
========== ========== ========== ==========
(Continued)
-3-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(Continued)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1994 1993 1994 1993
EARNINGS PER COMMON SHARE:
EARNINGS PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS................................... $ 1.02 $ .77 $ 1.31 $ .98
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS................................... (.06)
--------- --------- --------- ---------
EARNINGS PER COMMON SHARE..................... $ 1.02 $ .77 $ 1.25 $ .98
========= ========= ========= =========
DIVIDENDS DECLARED PER COMMON
SHARE...................................... $ .75 $ .75 $ 1.50 $ 1.50
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000).......................... 130,709 129,849 130,708 129,725
See Notes to Consolidated Financial Statements.
-4-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
June 30, December 31,
1994 1993
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Plant in service .......................... $11,637,250 $11,480,244
Construction work in progress ............. 246,852 242,661
Nuclear fuel .............................. 211,874 211,785
Plant held for future use ................. 197,491 196,330
Electric plant acquisition adjustments ....... 3,166 3,166
Cable television property .................... 393,229 372,178
Other property ............................... 59,998 47,494
----------- -----------
Total ................................. 12,749,860 12,553,858
Less accumulated depreciation and amortization 3,522,695 3,355,616
----------- -----------
Property, plant and equipment - net ... 9,227,165 9,198,242
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents .................... 8,098 14,884
Special deposits ............................. 13 11,834
Accounts receivable:
Customers - net ........................... 6,854 4,985
Others .................................... 26,429 11,153
Accrued unbilled revenues .................... 17,170 29,322
Fuel stock, at lifo cost ..................... 60,922 58,585
Materials and supplies, at average cost ...... 165,259 166,477
Prepayments .................................. 18,939 20,432
----------- -----------
Total current assets ................ 303,684 317,672
----------- -----------
OTHER ASSETS:
Cable television franchises and intangible
assets - net .............................. 961,233 984,032
Deferred plant costs ......................... 651,808 664,699
Deferred debits .............................. 357,838 371,773
Unamortized debt expense and premium on
reacquired debt ........................... 166,229 169,465
Equity investment in cable television
partnerships .............................. 142,745 122,531
Equity investment in foreign electric utility 35,529 36,984
Regulatory asset - net ....................... 241,194 246,763
Recoverable project costs .................... 108,085 118,016
----------- -----------
Total other assets .................. 2,664,661 2,714,263
----------- -----------
Total ............................ $12,195,510 $12,230,177
=========== ===========
See Notes to Consolidated Financial Statements.
-5-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
June 30, December 31,
1994 1993
CAPITALIZATION:
Common Stock Equity:
Common stock, no par value ......................... $ 2,418,455 $ 2,415,256
Note receivable from ESOP .......................... (327,916) (332,489)
Retained earnings .................................. 1,164,822 1,191,230
-------------- --------------
Total common stock equity ..................... 3,255,361 3,273,997
-------------- --------------
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 ....... 351,345 351,354
Subject to mandatory redemption ........... 121,910 167,236
-------------- --------------
Total cumulative preferred stock .... 473,255 518,590
-------------- --------------
Long-Term Debt:
Debentures ......................................... 548,636 548,544
Long-term debt of subsidiaries:
Electric:
First mortgage bonds ....................... 3,020,122 3,019,843
Pollution control revenue bonds ............ 155,232 155,218
Other ...................................... 12,875 15,010
Cable television:
Senior bank debt .......................... 364,000 364,000
Senior and subordinated notes ............. 124,783 140,580
-------------- --------------
Total long-term debt .................. 4,225,648 4,243,195
-------------- --------------
Total capitalization .............. 7,954,264 8,035,782
-------------- --------------
CURRENT LIABILITIES:
Notes payable ......................................... 649,800 591,385
Accounts payable ...................................... 205,673 239,814
Taxes accrued ......................................... 125,870 187,503
Interest accrued ...................................... 81,247 84,178
Dividends accrued ..................................... 104,607 105,207
Accrued liabilities to municipalities ................. 22,311 22,589
Customer deposits ..................................... 65,717 65,604
Current portion of long-term debt and
preferred stock .................................... 67,312 55,109
Other ................................................. 65,541 62,688
-------------- --------------
Total current liabilities .................... 1,388,078 1,414,077
-------------- --------------
DEFERRED CREDITS:
Accumulated deferred income taxes ..................... 2,009,608 1,987,336
Unamortized investment tax credit ..................... 424,705 434,597
Other ................................................. 418,855 358,385
-------------- --------------
Total deferred credits ....................... 2,853,168 2,780,318
-------------- --------------
COMMITMENTS AND CONTINGENCIES
Total ........................................ $ 12,195,510 $ 12,230,177
============== ==============
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)
Six Months Ended
June 30,
---------------------
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 164,003 $ 127,264
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................... 239,973 231,731
Amortization of nuclear fuel ..................................... 5,421 2,101
Deferred income taxes ............................................ 26,687 29,546
Investment tax credits ........................................... (9,892) (10,143)
Allowance for other funds used during
construction ................................................... (1,409) (1,788)
Fuel cost (refund) and over/(under) recovery
- net .......................................................... 27,408 (45,799)
Equity in income of cable television
partnerships ................................................... (15,700) (15,009)
Cumulative effect of change in accounting
for postemployment benefits .................................... 8,200
Changes in other assets and liabilities:
Accounts receivable and accrued unbilled
revenues ..................................................... (4,993) 302,123
Inventory ...................................................... (1,119) 3,057
Other current assets ........................................... 13,314 (6,509)
Accounts payable ............................................... (34,141) (6,293)
Interest and taxes accrued ..................................... (58,564) (60,106)
Other current liabilities ...................................... 2,050 (19,512)
Other - net .................................................... 62,851 51,241
---------- ----------
Net cash provided by operating activities ........................ 424,089 581,904
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital expenditures
(including allowance for borrowed funds
used during construction) ........................................ (191,637) (132,429)
Cable television additions .......................................... (32,692) (23,280)
Other construction expenditures ..................................... (12,253)
Other - net ......................................................... (20,532) (5,686)
---------- ----------
Net cash used in investing activities ............................ (257,114) (161,395)
---------- ----------
-7-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(Continued)
Six Months Ended
June 30,
---------------------
1994 1993
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock .......................................... $ 21,001
Decrease in note receivable from ESOP ............................... $ 4,573
Proceeds from first mortgage bonds .................................. 545,243
Proceeds from senior bank debt ...................................... 20,000
Extinguishment of long-term debt .................................... (477,083)
Payment of matured bonds ............................................ (19,500) (136,000)
Payment of senior bank debt ......................................... (182,349)
Payment of senior and subordinated notes ............................ (10,384) (6,372)
Payment of common stock dividends ................................... (196,064) (194,555)
Increase (decrease) in notes payable - net .......................... 58,415 (27,999)
Redemption of preferred stock ....................................... (20,000) (40,000)
Other - net ......................................................... 9,199 (733)
---------- ----------
Net cash used in financing activities ............................ (173,761) (478,847)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................. (6,786) (58,338)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 14,884 69,317
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 8,098 $ 10,979
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ............................ $ 187,333 $ 210,534
Income taxes ..................................................... 65,090 33,814
See Notes to Consolidated Financial Statements.
-8-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1994 1993 1994 1993
Balance at Beginning of Period .............................. $ 1,125,167 $ 1,186,012 $ 1,191,230 $ 1,254,584
Net Income for the Period ................................... 133,828 100,209 164,003 127,264
----------- ----------- ----------- -----------
Total .............................................. 1,258,995 1,286,221 1,355,233 1,381,848
Common Stock Dividends ...................................... (98,032) (97,365) (196,102) (194,555)
Tax Benefit of ESOP Dividends ............................... 3,859 2,449 5,691 4,012
Redemption of HL&P Preferred Stock .......................... (402) (402)
----------- ----------- ----------- -----------
Balance at End of Period .................................... $ 1,164,822 $ 1,190,903 $ 1,164,822 $ 1,190,903
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
-9-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1994 1993 1994 1993
OPERATING REVENUES ................ $ 1,004,906 $ 1,005,149 $ 1,826,487 $ 1,810,834
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Fuel ............................ 235,514 262,603 452,702 461,166
Purchased power ................. 103,906 129,224 202,455 258,923
Operation ....................... 141,835 143,898 274,802 284,505
Maintenance ..................... 62,254 68,968 123,138 123,597
Depreciation and amortization ... 99,675 96,217 198,604 192,432
Income taxes .................... 81,921 52,705 108,994 63,653
Other taxes ..................... 62,959 62,468 126,071 124,332
------------ ------------ ------------ ------------
Total ................... 788,064 816,083 1,486,766 1,508,608
------------ ------------ ------------ ------------
OPERATING INCOME .................. 216,842 189,066 339,721 302,226
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Allowance for other funds used
during construction ........... 93 1,080 1,409 1,788
Other - net ..................... (2,773) (1,543) (5,759) (1,176)
------------ ------------ ------------ ------------
Total ................... (2,680) (463) 4,350) 612
------------ ------------ ------------ ------------
INCOME BEFORE INTEREST CHARGES .... 214,162 188,603 335,371 302,838
------------ ------------ ------------ ------------
INTEREST CHARGES:
Interest on long-term debt ...... 61,557 70,853 123,399 140,458
Other interest .................. 1,853 4,366 4,749 9,021
Allowance for borrowed funds used
during construction ............ (129) (1,170) (1,817) (1,914)
------------ ------------ ------------ ------------
Total .................... 63,281 74,049 126,331 147,565
------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS ......... 150,881 114,554 209,040 155,273
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS (NET OF INCOME TAXES OF
$4,415) ......................... (8,200)
------------ ------------ ------------ ------------
NET INCOME ........................ 150,881 114,554 200,840 155,273
DIVIDENDS ON PREFERRED STOCK ...... 8,403 8,789 16,676 17,934
------------ ------------ ------------ ------------
INCOME AFTER PREFERRED DIVIDENDS .. $ 142,478 $ 105,765 $ 184,164 $ 137,339
============ ============ ============ ============
See Notes to Financial Statements.
-10-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
June 30, December 31,
1994 1993
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant ................................ $11,637,250 $11,480,244
Construction work in progress ................. 246,852 242,661
Plant held for future use ..................... 197,491 196,330
Nuclear fuel .................................. 211,874 211,785
Electric plant acquisition adjustments ........ 3,166 3,166
----------- -----------
Total ................................. 12,296,633 12,134,186
Less accumulated depreciation and
amortization ............................... 3,349,081 3,194,127
----------- -----------
Property, plant and equipment - net .............. 8,947,552 8,940,059
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ..................... 428 12,413
Special deposits .............................. 13 11,834
Accounts receivable:
Affiliated companies ....................... 988 1,792
Others ..................................... 13,765 2,540
Accrued unbilled revenues ..................... 17,170 29,322
Inventory:
Fuel stock, at lifo cost ................... 60,922 58,585
Materials and supplies, at average cost .... 157,456 160,371
Prepayments ................................... 15,271 9,234
----------- -----------
Total current assets ..................... 266,013 286,091
----------- -----------
OTHER ASSETS:
Deferred plant costs .......................... 651,808 664,699
Deferred debits ............................... 310,956 333,620
Unamortized debt expense and premium on
reacquired debt ............................ 162,291 164,368
Regulatory asset - net ........................ 241,194 246,763
Recoverable project costs ..................... 108,085 118,016
----------- -----------
Total other assets ....................... 1,474,334 1,527,466
----------- -----------
Total ............................................ $10,687,899 $10,753,616
=========== ===========
See Notes to Financial Statements.
-11-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
June 30, December 31,
1994 1993
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 .......................... 2,048,593 2,028,924
----------- -----------
Total common stock equity .............. 3,724,520 3,704,851
----------- -----------
Cumulative Preferred Stock:
Not subject to mandatory redemption ........ 351,345 351,354
Subject to mandatory redemption ............ 121,910 167,236
----------- -----------
Total cumulative preferred stock ....... 473,255 518,590
----------- -----------
Long-Term Debt:
First mortgage bonds ....................... 3,020,122 3,019,843
Pollution control revenue bonds ............ 155,232 155,218
Other ...................................... 12,875 15,010
----------- -----------
Total long-term debt .................. 3,188,229 3,190,071
----------- -----------
Total capitalization .............. 7,386,004 7,413,512
----------- -----------
CURRENT LIABILITIES:
Notes payable ................................. 113,500 171,100
Accounts payable .............................. 157,401 190,583
Accounts payable to affiliated companies ...... 19,862 8,449
Taxes accrued ................................. 145,766 187,517
Interest and dividends accrued ................ 61,739 65,238
Accrued liabilities to municipalities ......... 22,311 22,589
Customer deposits ............................. 65,717 65,604
Current portion of long-term debt and
preferred stock ............................ 51,514 44,725
Other ......................................... 66,035 63,607
----------- -----------
Total current liabilities .............. 703,845 819,412
----------- -----------
DEFERRED CREDITS:
Accumulated deferred federal income taxes ..... 1,831,149 1,798,976
Unamortized investment tax credit ............. 421,301 430,996
Other ......................................... 345,600 290,720
----------- -----------
Total deferred credits ............. 2,598,050 2,520,692
----------- -----------
COMMITMENTS AND CONTINGENCIES
Total .............................. $10,687,899 $ 10,753,616
=========== ============
See Notes to Financial Statements.
-12-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
Six Months Ended
June 30,
-----------------------
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................... $ 200,840 $ 155,273
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................ 198,604 192,432
Amortization of nuclear fuel ................. 5,421 2,101
Deferred income taxes ........................ 36,588 26,352
Investment tax credits ....................... (9,695) (9,946)
Allowance for other funds used during
construction .............................. (1,409) (1,788)
Fuel cost (refund) and over/(under) recovery
- net ..................................... 27,408 (45,799)
Cumulative effect of change in accounting for
postemployment benefits ................... 8,200
Changes in other assets and liabilities:
Accounts receivable - net ................. 1,731 170,111
Material and supplies ..................... 2,915 1,091
Fuel stock ................................ (2,337) 3,550
Accounts payable .......................... (21,769) 801
Interest and taxes accrued ................ (45,250) (46,248)
Other current liabilities ................. 3,547 (209)
Other - net ............................... 58,217 40,399
---------- ----------
Net cash provided by operating activities ....... 463,011 488,120
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction) .................... (191,637) (132,429)
Other - net ..................................... (6,355) (5,661)
---------- ----------
Net cash used in investing activities ........ (197,992) (138,090)
---------- ----------
(Continued)
-13-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(CONTINUED)
Six Months Ended
June 30,
-----------------------
1994 1993
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from first mortgage bonds ................ $ 545,243
Payment of matured bonds .......................... $ (19,500) (136,000)
Payment of dividends .............................. (181,885) (202,817)
Decrease in notes payable ......................... (57,600) (4,590)
Decrease in notes payable to affiliated
company ........................................ (19,000)
Redemption of preferred stock ..................... (20,000) (40,000)
Extinguishment of long-term debt .................. (477,083)
Other - net ....................................... 1,981 (3,036)
--------- ---------
Net cash used in financing activities .......... (277,004) (337,283)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ....................................... (11,985) 12,747
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..... 12,413 4,254
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $ 428 $ 17,001
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) .......... $ 131,634 $ 159,622
Income taxes ................................... 57,913 31,002
See Notes to Financial Statements.
-14-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1994 1993 1994 1993
Balance at Beginning of
Period ................. $ 1,990,614 $ 1,851,136 $ 2,028,924 $ 1,922,558
Net Income for the Period .. 150,881 114,554 200,840 155,273
Redemption of Preferred
Stock .................. (402) (402)
------------ ------------ ------------ ------------
Total .................. 2,141,495 1,965,288 2,229,764 2,077,429
------------ ------------ ------------ ------------
Deductions - Cash Dividends:
Preferred .............. 8,403 8,789 16,676 17,934
Common ................. 84,499 79,995 164,495 182,991
------------ ------------ ------------ ------------
Total .............. 92,902 88,784 181,171 200,925
------------ ------------ ------------ ------------
Balance at End of Period ... $ 2,048,593 $ 1,876,504 $ 2,048,593 $ 1,876,504
============ ============ ============ ============
See Notes to Financial Statements.
-15-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) REGULATORY PROCEEDINGS AND LITIGATION REFERENCE
The information presented in the following Notes in this Form
10-Q should be read in conjunction with the Houston Industries
Incorporated (Company) Annual Report on Form 10-K for the year
ended December 31, 1993 (File No. 1-7629), filed in combined
form with the Houston Lighting & Power Company (HL&P) Annual
Report on Form 10-K for the year ended December 31, 1993 (File
No. 1-3187) (collectively, the 1993 Combined Form 10-K),
including the Notes to the Company's Consolidated and HL&P's
Financial Statements included in Item 8 thereof. Notes 9, 10 and
11 to the Company's Consolidated and HL&P's Financial Statements
in the 1993 Combined Form 10-K, as updated by the description of
developments in the regulatory and litigation matters contained
in Notes 8, 9 and 10 of the Notes to the Company's Consolidated
and HL&P's Financial Statements included in this Report, are
incorporated herein by reference as they relate to the Company
and HL&P, respectively.
(2) COMMON STOCK
COMPANY. At June 30, 1994, and December 31, 1993, the Company
had authorized 400,000,000 shares of common stock, of which
130,708,985 and 130,658,755 shares, respectively, were
outstanding. For a discussion of additional shares issued by the
Company in July 1994, see Note 12 of the Notes to the Company's
Consolidated and HL&P's Financial Statements in this Report.
HL&P. 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 (Houston Industries Delaware), a
wholly-owned subsidiary of the Company.
(3) HL&P PREFERRED STOCK
At June 30, 1994, and December 31, 1993, HL&P had 10,000,000
shares of preferred stock authorized, of which 5,232,397 and
5,432,397 shares, respectively, were outstanding.
In June 1994, HL&P redeemed, at $100 per share, 200,000 shares
of its $8.50 cumulative preferred stock in satisfaction of
mandatory sinking fund requirements.
(4) EARNINGS PER COMMON SHARE
COMPANY. Earnings per common share for the Company is computed
by dividing net income by the weighted average number of shares
outstanding during the respective period.
-16-
HL&P. Earnings per share data for HL&P is not computed since all
of its common stock is held by the Company and Houston
Industries Delaware.
(5) LONG-TERM DEBT
COMPANY. In March 1994, KBL Cable, Inc. made a scheduled
repayment of $10.4 million principal amount of its senior notes
and senior subordinated notes.
HL&P. In January 1994, HL&P repaid at maturity $19.5 million
principal amount of Series A collateralized medium-term notes.
(6) POSTEMPLOYMENT BENEFITS FOR THE COMPANY AND HL&P
The Company and HL&P adopted Statement of Financial Accounting
Standards (SFAS) No. 112, "Employer's Accounting for
Postemployment Benefits", effective January 1, 1994. SFAS No.
112 requires the recognition of a liability for benefits, not
previously accounted for on the accrual basis, provided to
former or inactive employees, their beneficiaries and covered
dependents, after employment but before retirement. In the
Company's and HL&P's case, this liability is principally health
care and life insurance benefits for participants in the
long-term disability plan. As required by SFAS No. 112, the
Company and HL&P expensed the transition obligation (liability
from prior years) upon adoption, and recorded a one-time,
after-tax charge to income of $8.2 million in the first quarter
of 1994. Ongoing 1994 charges to income are expected to be
immaterial.
(7) ENVIRONMENTAL AND CABLE REGULATIONS
(A) ENVIRONMENTAL REGULATIONS. For information regarding the impact
of environmental regulations on the Company and its
subsidiaries, see the fifth paragraph of Note 8(a) to the
Company's Consolidated and HL&P's Financial Statements included
in the 1993 Combined Form 10-K, which paragraph is incorporated
herein by reference.
(B) IMPACT OF THE CABLE TELEVISION CONSUMER PROTECTION AND
COMPETITION ACT OF 1992 ON KBLCOM INCORPORATED (KBLCOM). In
March 1994, the Federal Communications Commission (FCC) issued
its revised benchmark rules (Rate Rule II) as well as its
interim cost-of-service rule (Interim COS Rule). Each of these
rules became effective on May 15, 1994. Rate Rule II revises the
"benchmark formulas" established by the FCC in May 1993. Under
Rate Rule II (which will be applied prospectively), cable
operators must reduce their existing rates to the higher of (i)
the rates calculated using the revised benchmark formulas
(Revised Benchmarks) or (ii) a level 17% below such cable
operators' rates as of September 30, 1992, adjusted for
inflation. Cable operators which cannot or do not wish to comply
with the Revised Benchmarks may choose to justify their existing
rates under the Interim COS Rule. The Interim COS Rule
establishes a cost-of-service rate system similar to that used
in the telephone industry. KBLCOM expects that it will incur
increased administrative burdens under these new rules, and that
the Revised Benchmarks will impose some additional reductions in
KBLCOM's rates for regulated services. The extent of the
anticipated decline in revenues cannot be determined at this
time, but will have an adverse impact on KBLCOM's financial
position and results of operations.
-17-
(8) JOINTLY-OWNED NUCLEAR PLANT
(A) HL&P INVESTMENT. HL&P is project manager and one of four co-owners
in the South Texas Project Electric Generating Station (South
Texas Project), which consists of two 1,250 megawatt nuclear
generating units. Each co-owner funds its own share of capital
and operating costs associated with the plant, with HL&P's
interest in the project being 30.8%. HL&P's share of the
operation and maintenance expenses is included in electric
operation and maintenance expenses on the Company's Statements
of Consolidated Income and in the corresponding operating
expense amounts on HL&P's Statements of Income. As of June 30,
1994, HL&P's investments (net of accumulated depreciation and
amortization) in the South Texas Project and in nuclear fuel,
including Allowance for Funds Used During Construction, were
$2.1 billion and $114.1 million, respectively.
(B) CITY OF AUSTIN LITIGATION. In February 1994, the City of Austin
(Austin), one of the other owners of the South Texas Project,
filed suit against HL&P. That suit remains pending in the
152nd District Court for Harris County, Texas. Austin alleges
that the outages at the South Texas Project 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.
As it did in litigation filed against HL&P in 1983, Austin
asserts that HL&P breached obligations HL&P owed under the
Participation Agreement to Austin, and Austin seeks a
declaration that HL&P had a duty to exercise reasonable care in
the operation and maintenance of the South Texas Project. In
that earlier litigation (which was won by HL&P at trial,
affirmed on appeal and became final in 1993), however, the
courts concluded that the Participation Agreement did not impose
on HL&P a duty to exercise reasonable skill and care as project
manager. In April 1994, HL&P filed a motion for partial summary
judgment on the grounds that Austin's negligence claims are
barred by RES JUDICATA and collateral estoppel. Following a
hearing in June 1994, HL&P's motion for summary judgment was
denied. Trial has been set for October 1995.
Austin also asserts in the pending suit that certain terms of a
settlement reached in 1992 among HL&P and Central and South West
Corporation (CSW) and its subsidiary, Central Power and Light
Company (CPL), another co-owner of the South Texas Project, are
invalid and void. The Participation Agreement permits
arbitration of certain disputes among the owners, and the
challenged settlement terms provide that in any future
arbitration, HL&P and CPL would each appoint an arbitrator
acceptable to the other. Austin asserts that, as a result of
this agreement, the arbitration provisions of the Participation
Agreement are void and Austin should not be required to
participate in or be bound by arbitration proceedings. HL&P,
however, considers that Austin's claims on this issue have
largely been rendered moot in this case as a result of HL&P's
election not to demand arbitration of Austin's current claims
as permitted by the Participation Agreement, but to proceed
to trial in the Harris County district court.
-18-
In May 1994, the City of San Antonio (San Antonio) intervened
in the litigation filed by Austin against HL&P and asserted
claims similar to those asserted by Austin, though San
Antonio has not identified the amount of damages it seeks
from HL&P. In its petition, San Antonio has also adopted
arguments similar to those of Austin regarding the effect of
HL&P's settlement with CPL on the arbitration provisions of
the Participation Agreement. HL&P opposes San Antonio's
intervention on the grounds that San Antonio has already
elected to arbitrate its claims against HL&P regarding HL&P's
management of the South Texas Project in the arbitration
proceeding currently pending among HL&P, San Antonio, Austin
and CPL, and to that end, HL&P has asserted its own demand
for arbitration of San Antonio's 1993-94 outage claims
pursuant to the terms of the Participation Agreement (see
Note 8(c) of the Notes to the Company's Consolidated and
HL&P's Financial Statements in this Report). The Harris
County district court has scheduled a hearing on HL&P's
opposition to San Antonio's intervention for September 1994.
HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims, and they intend to defend
vigorously against them. However, there can be no assurance as
to the ultimate outcome of these matters.
For more detailed information regarding the outage of the South
Texas Project, the previous litigation filed by Austin and the
settlement with CSW and CPL referred to above, see Notes 9(b),
9(c) and 9(f) of the Notes to the Company's Consolidated and
HL&P's Financial Statements included in the 1993 Combined Form
10-K. Also, see Note 8(f) of the Notes to the Company's
Consolidated and HL&P's Financial Statements in this Report.
(C) ARBITRATION WITH CO-OWNERS. For a discussion of the arbitration
requested by San Antonio for its claim under the Participation
Agreement, see Note 8(b) of the Notes to the Company's
Consolidated and HL&P's Financial Statements in this Report and
Note 9(c) of the Notes to the Company's Consolidated and HL&P's
Financial Statements included in the 1993 Combined Form 10-K.
The four arbitrators appointed by the owners to consider San
Antonio's claims against HL&P in this arbitration have met and
are currently considering the appointment of a fifth arbitrator
which they are to select under the terms of the arbitration
provisions in the Participation Agreement.
(D) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability
insurance coverages as required by law and periodically review
available limits and coverage for additional protection. The
owners of the South Texas Project currently maintain $500
million in primary property damage insurance from American
Nuclear Insurers (ANI). Additionally, the owners of the South
Texas Project maintain the maximum amounts of excess property
insurance available through the insurance industry, $2.25
billion. This excess property insurance coverage consists
of $850 million of excess insurance from ANI and $1.4 billion of
excess property insurance coverage through participation in the
Nuclear Electric Insurance Limited (NEIL) II program. Under NEIL
II, HL&P and the other owners of the South Texas Project are
subject to a maximum assessment, in the aggregate, of
approximately $15.9 million in any one policy year. The
application of the proceeds of such property insurance is
subject to the priorities established by the United States
-19-
Nuclear Regulatory Commission (NRC) regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act, the maximum liability to the
public for owners of nuclear power plants, such as the South
Texas Project, was decreased from $9.3 billion to $9.2 billion
effective June 3, 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 is $75.5 million per reactor subject to indexing for
inflation, a possible 5% surcharge (but no more than $10 million
per reactor per incident in any one year) and a 3% 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 could have a material adverse 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 Public Utility Commission of Texas (Utility
Commission) in Docket No. 9850, HL&P is currently funding
decommissioning costs with an independent trustee at an annual
amount of $6 million. This funding level was estimated to
provide approximately $146 million in 1989 dollars at the time
of scheduled decommissioning. In May 1994, an outside consultant
estimated HL&P's portion of decommissioning costs to be
approximately $318 million in 1994 dollars with a corresponding
funding level of $16 million per year. The consultant's calculation
of decommissioning costs for financial planning purposes used
the DECON methodology (prompt removal/dismantling), one of three
alternatives acceptable to the NRC, and assumed deactivation of
Unit No. 1 and Unit No. 2 upon expiration of their 40 year
operating licenses. HL&P is currently in a rate proceeding, see
Note 9(e) of the Notes to the Company's Consolidated and HL&P's
Financial Statements in this Report. Until the issuance of an
order in the pending rate proceeding, the exact funding level in
excess of the minimum NRC requirements cannot be determined.
While the current funding levels exceed minimum NRC
requirements, no assurance can be given that (i) the amount held
in the trust will be adequate to cover the actual
decommissioning costs of the South Texas Project or (ii) the
assumptions used in estimating decommissioning costs will
ultimately prove to be correct.
(F) 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. At that time HL&P concluded, and the NRC confirmed,
that the units should not resume operation until HL&P had
determined the root cause of the failure, had briefed the
NRC, and had taken corrective action.
-20-
The South Texas Project is currently listed on the NRC's "watch
list" of plants with "weaknesses that warrant increased NRC
attention." The decision to place the South Texas Project on the
"watch list" followed the June 1993 issuance of a report by a
Diagnostic Evaluation Team (DET) which conducted a review of the
South Texas Project and identified a number of areas requiring
improvement at the South Texas Project. Plants in this category
are authorized to operate but are subject to close monitoring by
the NRC. The NRC reviews the status of plants on the list
semi-annually with the last review conducted in June 1994 and
the next review planned in January 1995.
Other proceedings concerning the South Texas Project also
remain pending. As previously reported, certain former
employees and an employee of a contractor have asserted
claims that their employment was terminated or disrupted in
retaliation for their having made safety related complaints
to the NRC. In 1993, it was reported that the NRC had
referred these claims to the Department of Justice. HL&P
understands that these matters are no longer under
consideration by the Department of Justice. However, civil
proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against
HL&P, and the NRC could take enforcement action against HL&P
and/or individual employees with respect to these
matters. Also, a subcommittee of the U.S. House of
Representatives (Subcommittee) has notified HL&P that it is
conducting an inquiry related to the South Texas Project, and
HL&P has begun to provide documents and other assistance to
that Subcommittee's Staff in connection with that inquiry.
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 "whistleblower" complaints and to issues related
to the NRC's 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) has begun 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.
For additional information regarding the foregoing matters,
including the DET's report on weaknesses at the South Texas
Project, increases in fuel and non-fuel expenditures relating to
the outage, the possible impact of the outage on the results of
HL&P's pending rate proceeding under Section 42 of the Texas
Public Utility Regulatory Act of 1975, as amended (PURA),
involving the Company's rates, and various civil and
administrative proceedings relating to the South Texas Project,
see Notes 9(f) and 10(g) of the Notes to the Company's
Consolidated and HL&P's Financial Statements included in the
1993 Combined Form 10-K. Also, see Notes 9(e) and 9(f) of the
Notes to the Company's Consolidated and HL&P's Financial
Statements included in this Report.
(G) LOW-LEVEL RADIOACTIVE WASTE. In response to the federal Low-Level
Radioactive Waste Policy Act of 1980 which assigns
responsibility for low-level waste disposal to the states, Texas
has created the Texas Low-Level Radioactive Waste Disposal
Authority (Waste Disposal Authority) to build and operate a
low-level waste disposal facility. HL&P's portion of the State
of Texas assessment for the development work on this facility
was approximately $0.7 million in 1994 and will be approximately
$1.3 million for 1995. Nuclear facilities in Texas formerly had
access to the low-level waste disposal facility at Barnwell,
South Carolina which was closed in June 1994 to generators
-21-
of radioactive waste located in states which are not members
of the Southeast compact.
HL&P has constructed a temporary low-level radioactive waste
storage facility at the South Texas Project which will be
utilized for interim storage of low-level radioactive waste
prior to the opening of the Texas Low-Level Radioactive Waste
Site. The Waste Disposal Authority currently estimates that the
Texas site could begin receiving waste in mid-1997.
(9) UTILITY COMMISSION PROCEEDINGS
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 is pending on the final orders of the Utility
Commission in (a) through (d) described below.
(A) DOCKET NO. 8425. For information concerning HL&P's application for
a rate increase in Docket No. 8425 (1988 rate case) and the
status of appeals relating thereto, see Note 10(b) of the Notes
to the Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K. For information on the
decision of the Supreme Court of Texas regarding deferred
accounting with respect to Docket Nos. 8230 and 9010, see Note
9(d) of the Notes to the Company's Consolidated and HL&P's
Financial Statements in this Report.
(B) DOCKET NO. 9850. For a discussion of HL&P's 1991 rate case (Docket
No. 9850), the settlement agreement approved by the Utility
Commission, and the status of appeals relating thereto, see Note
10(c) of the Notes to the Company's Consolidated and HL&P's
Financial Statements included in the 1993 Combined Form 10-K.
In August 1992, a district court in Travis County affirmed the
Utility Commission's final order in HL&P's 1991 rate case
(Docket No. 9850). That decision was appealed by certain parties
to the Austin Court of Appeals, raising issues concerning the
Utility Commission's approval
-22-
of a non-unanimous settlement in that docket, the Utility
Commission's calculation of federal income tax expense and
the allowance of deferred accounting reflected in the
settlement. In August 1993, the Austin Court of Appeals
affirmed the ruling by the Travis County District Court on
the procedural ground that the appellant had not timely filed
a statement of facts.
On review of that decision in June 1994, the Supreme Court of
Texas reversed the decision of the Austin Court of Appeals
insofar as it refused to consider all assertions of error by the
appellant. The Supreme Court held that, even in the absence of a
timely filed statement of facts, the Court of Appeals could take
judicial notice of the Utility Commission's published order and
consider errors of law that may be evident from the face of the
order, and do not require reference to the administrative
record. Accordingly, it remanded the case for limited
reconsideration by the Court of Appeals. For a discussion of
certain other judicial decisions which may affect the Utility
Commission's calculation of federal income tax expense in Docket
No. 9850, see Note 10(b) of the Notes to the Company's
Consolidated and HL&P's Financial Statements included in the
1993 Combined Form 10-K.
(C) DOCKET NO. 6668. For a discussion of Docket No. 6668, the Utility
Commission's inquiry into the prudence of the planning,
management and construction of the South Texas Project, see Note
10(d) of the Notes to the Company's Consolidated and HL&P's
Financial Statements included in the 1993 Combined Form 10-K.
Separate appeals are pending from Utility Commission orders in
Docket Nos. 8425 and 9850 in which the findings of the order in
Docket No. 6668 are reflected in rates. See also Notes 9(a) and
9(b) above.
(D) DOCKET NOS. 8230 AND 9010. For a description of the Utility
Commission's authorization of deferred accounting for the South
Texas Project (Docket Nos. 8230 and 9010) and appeals thereof,
see Note 10(e) of the Notes to the Company's Consolidated and
HL&P's Financial Statements included in the 1993 Combined Form
10-K.
In June 1994, the Supreme Court of Texas decided the appeal
of Docket Nos. 8230 and 9010, as well as all other pending
deferred accounting cases, 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 operating and maintenance expenses, the
Supreme Court remanded Docket Nos. 8230 and 9010 to the
Austin Court of Appeals to consider the points of error
challenging the grant of deferred accounting for carrying
costs which it had not reached in its earlier consideration
of the case. The 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.
A motion for rehearing of the Supreme Court of Texas's decision
has been filed. The decision will not be final until this motion
is decided.
-23-
(E) DOCKET NO. 12065. In February 1994, an administrative law judge
(ALJ) of the Utility Commission ruled that a proceeding should
be conducted pursuant to Section 42 of PURA in order to inquire
into HL&P's existing rates. That order subsequently was affirmed
by the Utility Commission, and in July 1994, HL&P filed data in
support of its existing rates, as required by the ALJ. In that
material, HL&P asserts that its existing rates continue to be
just and reasonable and should not be reduced by the Utility
Commission. HL&P further asserts that it would be able to
demonstrate an entitlement of an increase in rates if it were to
file for a rate increase. No such increase is currently being
sought. In addition, HL&P will file a request in connection with
Docket No. 12065 for reconciliation of fuel related expenses
incurred during the period from April 1, 1990 through July 31,
1994, a period which includes the 1993-94 outages at the South
Texas Project units. Also in connection with Docket No. 12065,
the Utility Commission has determined to conduct an inquiry
(Docket No. 13126) into the prudence of HL&P's operation of
the South Texas Project, the results of which will be
considered in determining whether additional fuel expense
incurred during the 1993-94 outage at the South Texas Project
should be deemed by the Utility Commission to be unreasonable
and whether there has been mismanagement of the South Texas
Project by HL&P which should be taken into account in
considering the appropriate rate of return in the Section 42
proceeding. In July 1994, the Utility Commission approved the
hiring of a consultant to conduct a review of HL&P's prudence
in the management of the South Texas Project in order to
assist the Utility Commission Staff in preparing testimony
for the prudence inquiry. Hearings regarding the matters to
be considered in connection with Docket No. 12065 are
expected to begin in late November 1994. No final decision by
the Utility Commission on these matters is expected before
the summer of 1995. Although HL&P and the Company believe
that the Section 42 inquiry into HL&P's rates is unwarranted
and that the South Texas Project has not been imprudently
managed, there can be no assurance as to the outcome of this
proceeding, and HL&P's rates could be reduced following a
hearing. HL&P believes that any reduction in base rates as a
result of a Section 42 inquiry would take effect
prospectively.
For additional information regarding Docket No. 12065, see Note
10(f) of the Notes to the Company's Consolidated and HL&P's
Financial Statements included in the 1993 Combined Form 10-K.
(F) FUEL RECONCILIATION. At June 30, 1994, HL&P had recovered through
the fuel factor included in its rates approximately $89
million (including interest) less than the amounts expended
for fuel, a significant portion of which under recovery
occurred in 1993 during the outage of the South Texas
Project. Although over or under recoveries do not affect
earnings until reconciled in a proceeding before the Utility
Commission, any amounts disallowed as unreasonably incurred
would not be recoverable from customers and charged against
earnings. As discussed above, in August 1994, a fuel
reconciliation will be filed in Docket No. 12065. For
additional information regarding HL&P's recovery of fuel
costs incurred in electric generation (including possible
assertions in Docket No. 12065 that a portion of such costs
should be disallowed as unreasonable), see Note 10(g) of the
Notes to the Company's Consolidated and HL&P's Financial
Statements included in the 1993 Combined Form 10-K. Also, see
Note 9(e) of the Notes to the Company's Consolidated and
HL&P's Financial Statements included in this Report.
-24-
(10) DEFERRED PLANT COSTS
The Utility Commission authorized deferred accounting with respect
to the South Texas Project (Docket Nos. 8230 and 9010 for Unit
No. 1 and Docket No. 8425 for Unit No. 2).
In May 1991, HL&P implemented under bond, in Docket No. 9850, a
$313 million base rate increase. At that time, HL&P ceased all
cost deferrals related to the South Texas Project and began the
recovery of such amounts. These deferrals are being amortized on
a straight-line basis as allowed by the final order in Docket
No. 9850. The amortization of these deferrals totaled $6.4
million and $12.9 million for the three months and six months
ended June 30, 1994, respectively, and is recorded on the
Company's Statements of Consolidated Income and HL&P's
Statements of Income in depreciation and amortization expense.
The following table shows the original balance of the deferrals
and the unamortized balance at June 30, 1994.
Balance at
Original June 30,
Balance 1994
--------- -----------
(Thousands of Dollars)
Deferred Accounting: (a)
Deferred Expenses ................ $250,151 $230,139
Deferred Carrying Costs
on Plant Investment ......... 399,972 367,975
-------- --------
Total ............................ 650,123 598,114
Qualified Phase-In Plan: (b) ..... 82,254 53,694
-------- --------
Total Deferred Plant Costs ....... $732,377 $651,808
======== ========
------------
(a) Amortized over the estimated depreciable life of the South
Texas Project.
(b) Amortized over nine years beginning in May 1991.
As of June 30, 1994, HL&P has recorded deferred income taxes of
$198.2 million with respect to deferred accounting and $13.4
million with respect to the deferrals associated with the
qualified phase-in plan.
The accounting for deferred plant costs is described in greater
detail in Note 9(d) of the Notes to the Company's Consolidated
and HL&P's Financial Statements in this Report and Note 11 of
the Notes to the Company's Consolidated and HL&P's Financial
Statements included in the 1993 Combined Form 10-K.
(11) MALAKOFF ELECTRIC GENERATING STATION
As previously disclosed, HL&P ceased all development work on
the Malakoff Electric Generating Station (Malakoff) in 1987.
HL&P is no longer considering construction of the power
generating units due to the availability of other cost
effective options. Previously, the Utility Commission has
addressed portions of HL&P's investment in Malakoff and has
accorded various rate treatments for those costs,
-25-
including amortization of portions of those costs. For a
further discussion of the accounting treatment of costs
related to Malakoff and the Utility Commission's previous
treatment of those costs, see Note 12 of the Notes to the
Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which note is
incorporated herein by reference.
In its recent filing in Docket No. 12065 described in Note
9(e) of the Notes to the Company's Consolidated and HL&P's
Financial Statements in this Report, HL&P provided for
amortization of its entire remaining investment in Malakoff,
including $78.2 million attributable to the portion of the
engineering design costs for which amortization had not
previously been authorized and $147.6 million attributable to
related lignite reserves which had not previously been
addressed by the Utility Commission. If appropriate rate
treatment of these amounts is not ultimately received, HL&P
could be required to write off any unrecoverable portions of
its Malakoff investment.
(12) SUBSEQUENT EVENTS
COMPANY. In July 1994, KBLCOM acquired the stock of three cable
companies serving approximately 48,000 customers in the
Minneapolis area in exchange for 587,646 shares of common stock
of the Company. The total purchase price of approximately $80
million included the assumption of approximately $60 million in
liabilities.
HL&P. 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 on its equity investment in
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 has recorded
the transaction as a $66.1 million reduction to reconcilable
fuel expense in July 1994.
(13) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative of
results expected for the year due to the seasonal nature of
HL&P's business. In the opinion of management, the interim
information reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a full presentation of the
results for the interim periods. Certain amounts from the
previous year have been reclassified to conform to the 1994
presentation of consolidated financial statements. Such
reclassifications do not affect earnings.
-26-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPANY. Selected financial data for Houston Industries Incorporated
(Company) is set forth below:
Three Months Ended
June 30,
-----------------------
Percent
1994 1993 Change
(Thousands of Dollars)
Revenues ................ $1,066,660 $1,067,753 --
Operating Expenses ...... 765,863 820,067 (7)
Operating Income ........ 300,797 247,686 21
Other Income ............ 11,950 11,775 1
Interest and Other
Charges ............... 100,654 108,671 (7)
Income Taxes ............ 78,265 50,581 55
Net Income .............. 133,828 100,209 34
Six Months Ended
June 30,
---------------------
Percent
1994 1993 Change
(Thousands of Dollars)
Revenues ................ $1,948,761 $1,933,712 1
Operating Expenses ...... 1,497,291 1,558,045 (4)
Operating Income ........ 451,470 375,667 20
Other Income ............ 21,265 29,577 (28)
Interest and Other
Charges ............... 199,978 217,937 (8)
Income Taxes ............ 100,554 60,043 67
Net Income .............. 164,003 127,264 29
The Company had consolidated earnings per share of $1.02 for the
second quarter of 1994, compared to consolidated earnings per share of $.77
for the second quarter of 1993. Consolidated earnings per share for the six
months ended June 30, 1994 was $1.25, compared to $.98 per share for the
same period in 1993.
-27-
Electric Utility Operations:
HL&P. GENERAL. Selected financial data for Houston Lighting & Power
Company (HL&P) is set forth below:
Three Months Ended
June 30,
----------------------
Percent
1994 1993 Change
(Thousands of Dollars)
Revenues ................ $1,004,906 $1,005,149 --
Operating Expenses ...... 788,064 816,083 (3)
Operating Income ........ 216,842 189,066 15
Interest Charges ........ 63,281 74,049 (15)
Income After Preferred
Dividends ............. 142,478 105,765 35
Six Months Ended
June 30,
-----------------------
Percent
1994 1993 Change
(Thousands of Dollars)
Revenues ................ $1,826,487 $1,810,834 1
Operating Expenses ...... 1,486,766 1,508,608 (1)
Operating Income ........ 339,721 302,226 12
Interest Charges ........ 126,331 147,565 (14)
Income After Preferred
Dividends ............ 184,164 137,339 34
The increase in HL&P's earnings for the second quarter and first
six months of 1994 resulted primarily from increased energy sales due
primarily to improved economic activities in the service area and unusually
mild weather in 1993, and reduced interest expense resulting from
refinancing activities.
OPERATING REVENUES AND SALES. Electric operating revenues were
relatively unchanged for the second quarter, while they increased $15.7
million for the first six months of 1994, compared to the same periods in
1993. The increase in the first six months of 1994 was primarily due to
increased residential and commercial kilowatt-hour (KWH) sales. Residential
KWH sales for the second quarter and first six months of 1994 increased 11%
and 8%, respectively, compared to the same periods in 1993, while
commercial KWH sales increased 8% and 6%, respectively, for the same
periods. Base revenues for the second quarter and first six months of 1994
increased $51.3 million and $80.2 million, respectively, compared to the
same periods in 1993. These increases were due mainly to the unusually mild
weather experienced in the first six months of 1993, and a 1.7% increase in
the number of customers for the second quarter and first six months of 1994
compared to 1993.
FUEL AND PURCHASED POWER EXPENSES. Fuel expenses decreased $27.1
million and $8.5 million for the second quarter and first six months of
1994, respectively, compared to the same periods of the previous year.
These decreases were primarily due to decreases in the unit cost of gas and
the resumption of the use of nuclear fuel coinciding with the start up of
Unit Nos. 1 and 2 of the South Texas Project Electric Generating Station
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(South Texas Project). For additional information regarding the South Texas
Project, see Notes 8(f), 9(e) and 9(f) of the Notes to the Company's
Consolidated and HL&P's Financial Statements in Item 1 of this Report.
Purchased power expense decreased $25.3 million for the second quarter and
$56.5 million for the first six months of 1994 due to the expiration of a
purchase power contract. The average cost of fuel for the second quarter
and first six months of 1994 was $1.63 per million British Thermal Units
(MMBtu) and $1.71 per MMBtu, respectively, compared to $1.93 per MMBtu and
$1.86 per MMBtu for the same periods in 1993. The combined costs of fuel
used by HL&P and the fuel portion of purchased power was 1.76 cents per KWH
for the second quarter and 1.83 cents per KWH for the first six months of
1994. These costs decreased from 2.06 cents per KWH and 2.00 cents per KWH
for the comparable periods in 1993.
OPERATION AND MAINTENANCE, DEPRECIATION AND AMORTIZATION, AND
INTEREST EXPENSES. Electric operation and maintenance expense for the
second quarter and first six months of 1994 decreased $8.8 million and
$10.2 million, respectively, compared to the same periods in 1993.
Depreciation and amortization expense for the second quarter and first six
months of 1994 increased $3.5 million and $6.2 million, respectively,
compared to the same periods in 1993, primarily due to an increase in
depreciable property and the amortization, beginning in January 1994, of
Demand Side Management expenditures. Interest expense for the second
quarter and first six months of 1994 decreased $11.8 million and $21.3
million, respectively, compared to the same periods in 1993, primarily due
to refinancing activities.
RATE PROCEEDINGS. In February 1994, an administrative law judge
(ALJ) of the Public Utility Commission of Texas (Utility Commission) ruled
that a proceeding should be conducted pursuant to Section 42 of the Texas
Public Utility Regulatory Act of 1975, as amended (PURA), in order to
inquire into HL&P's existing rates. That order subsequently was affirmed by
the Utility Commission, and in July 1994, HL&P filed data in support of its
existing rates, as required by the ALJ. In that material, HL&P asserts that
its existing rates continue to be just and reasonable and should not be
reduced by the Utility Commission. HL&P further asserts that it would be
able to demonstrate an entitlement of an increase in rates if it were to
file for a rate increase. No such increase is currently being sought. In
addition, HL&P will file a request in connection with Docket No. 12065 for
reconciliation of fuel related expenses incurred during the period from
April 1, 1990 through July 31, 1994, a period which includes the 1993-94
outages at the South Texas Project units (see Note 9(f) of the Notes to the
Company's Consolidated and HL&P's Financial Statements in Item I of this
Report). Also in connection with Docket No. 12065, the Utility Commission
has determined to conduct an inquiry into the prudence of HL&P's operation
of the South Texas Project, the results of which will be considered in
determining whether additional fuel expense incurred during the 1993-94
outage at the South Texas Project should be deemed by the Utility
Commission to be unreasonable and whether there has been mismanagement of
the South Texas Project by HL&P which should be taken into account in
considering the appropriate rate of return in the Section 42 proceeding. In
July 1994, the Utility Commission approved the hiring of a consultant to
conduct a review of HL&P's prudence in the management of the South Texas
Project in order to assist the Utility Commission Staff in preparing
testimony for the prudence inquiry. Hearings regarding the matters to be
considered in connection with Docket No. 12065 are expected to begin in
late November 1994. No final decision by the Utility Commission on these
matters is expected before the summer of 1995. Although HL&P and the
Company believe that the Section 42 inquiry into HL&P's rates is
unwarranted and that the South Texas Project has not been imprudently
managed, there can be no assurance as to the outcome of this proceeding,
-29-
and HL&P's rates could be reduced following a hearing. HL&P believes that
any reduction in base rates as a result of a Section 42 inquiry would take
effect prospectively.
UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) DIAGNOSTIC
EVALUATION OF THE SOUTH TEXAS PROJECT. In June 1993, the NRC announced that
the South Texas Project had been placed on its "watch list" of plants with
"weaknesses that warrant increased NRC attention." For a discussion of the
NRC diagnostic evaluation of the South Texas Project and related matters,
see Note 8(f) of the Notes to the Company's Consolidated and HL&P's
Financial Statements in Item 1 of this Report and Note 9(f) of the Notes to
the Company's Consolidated and HL&P's Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1993
(File No. 1-7629), filed in combined form with the HL&P Annual Report on
Form 10-K for the year ended December 31, 1993 (File No. 1-3187)
(collectively, the 1993 Combined Form 10-K).
Cable Television Operations:
KBLCOM. KBLCOM Incorporated (KBLCOM), the Company's cable
television subsidiary, experienced a loss, before long-term financing cost
with parent, of $2.9 million in the second quarter of 1994 compared to a
loss of $.1 million for the same period in 1993. For the six months ended
June 30, 1994, KBLCOM experienced a loss of $6.1 million compared to $4.2
million for the same period in the prior year.
KBLCOM's results of operations for the second quarter and first six
months of 1994 declined due to lower revenues resulting from lower rates
for basic service mandated by the Cable Television Consumer Protection and
Competition Act of 1992 (1992 Cable Act). KBLCOM's results of operations
also declined due to higher operating expenses and higher depreciation and
amortization costs.
REVENUES AND EXPENSES. Revenues for the second quarter and first
six months of 1994 decreased 1.4% and .5%, respectively, compared to the
same periods in 1993. Operating expenses for the second quarter and first
six months of 1994 increased 5.3% and 5.9%, respectively, compared to the
same periods in 1993. Operating margins (revenue less operating expenses
exclusive of depreciation and amortization) decreased from 41% to 37% for
the second quarter of 1993 and 1994, respectively, and from 40% to 36% for
the six months ended June 30, 1993 and 1994, respectively. Depreciation and
amortization expense for the quarter and six months ended June 30, 1994
increased $1.1 million or 5.5% and $2.1 million or 5.4%, respectively,
compared to the same periods in 1993. KBLCOM's equity interest in the
pre-tax earnings of its jointly-owned cable television partnership, Paragon
Communications, for the second quarter of 1994 was $7.7 million, a decrease
of $.5 million or 6.4%, while earnings for the six months ended June 30,
1994 were $15.6 million, an increase of $.4 million or 2.8% when compared
to the same periods of the previous year.
Basic service revenues for the second quarter and six months ended
June 30, 1994 decreased $3 million or 7% and $4.9 million or 5.8%,
respectively, compared to the same periods of the previous year due to the
regulation (commencing in the third quarter of 1993) of basic service rates
under the 1992 Cable Act. This decrease was partially offset by the
addition of approximately 33,000 customers from the second quarter of
1993. At June 30, 1994 and 1993, KBLCOM operated systems serving
approximately 621,000 and 588,000 basic subscribers, respectively.
-30-
Premium service revenues for the quarter and six months ended June
30, 1994 increased $.6 million or 6.3% and $1 million or 5%, respectively,
compared to the same periods in the previous year due primarily to
increased sales of premium products.
Pay-per-view revenues for the quarter and six months ended June 30,
1994 decreased $.3 million or 10% and $.3 million or 4%, respectively,
compared to the same periods of the previous year.
Ancillary revenues including advertising and installation fees for
the quarter and six months ended June 30, 1994 increased $1.8 million or
25% and $3.6 million or 26%, respectively, compared to the same periods of
the previous year.
1992 CABLE ACT. In October 1992, the 1992 Cable Act became law. The
1992 Cable Act significantly revised various provisions of the Cable
Communications Policy Act of 1984. For a further discussion regarding the
1992 Cable Act, see "Business-Business of KBLCOM Regulation" in Item 1 of
the 1993 Combined Form 10-K and Item 5 of Part II of the Combined Form 10-Q
filed for the quarter ended March 31, 1994.
In February 1994, the Federal Communications Commission (FCC)
announced further changes in the rate regulations and announced its interim
cost-of-service standards. In March 1994, the FCC issued its revised
benchmark rules (Rate Rule II) as well as its interim cost-of-service rule
(Interim COS Rule). Each of these rules became effective on May 15, 1994.
Rate Rule II revises the "benchmark formulas" established by the FCC in May
1993. Under Rate Rule II (which will be applied prospectively), cable
operators must reduce their existing rates to the higher of (i) the rates
calculated using the revised benchmark formulas (Revised Benchmarks) or
(ii) a level 17% below such cable operators' rates as of September 30,
1992, adjusted for inflation. The FCC believes that the application of the
Revised Benchmarks will result in a reduction of cable system rates to
approximately 17% below September 1992 rate levels. Cable operators which
cannot or do not wish to comply with the Revised Benchmarks may choose to
justify their existing rates under the Interim COS Rule. The Interim COS
Rule establishes a cost-of-service rate system similar to that used in the
telephone industry.
Rate Rule II and the Interim COS Rule are lengthy and complex.
KBLCOM expects that it will incur increased administrative burdens under
these new rules, as well as additional reductions in KBLCOM's rates for
regulated services. The extent of the anticipated decline in revenues
cannot be determined at this time, but will have an adverse impact on
KBLCOM's financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company:
GENERAL. The Company's cash requirements stem primarily from
operating expenses, capital expenditures, payment of common stock
dividends, payment of preferred stock dividends and interest and principal
payments on debt. Net cash provided by operating activities totaled $424.1
million for the six months ended June 30, 1994.
Net cash used in investing activities for the six months ended June
30, 1994, totaled $257.1 million, primarily due to electric capital
expenditures of $191.6 million, cable television additions of $32.7 million
and other construction expenditures of $12.3 million.
-31-
Financing activities for the six months of 1994 resulted in a net
cash outflow of $173.8 million. The Company's primary financing activities
reflect the incurrence of additional short-term borrowings offset by the
redemption of preferred stock, the payment of dividends and the repayment
of matured long-term debt. For further information with respect to these
matters, reference is made to Notes 3 and 5 of the Notes to the Company's
Consolidated and HL&P's 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. Proceeds from the sale of these 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.
The Company's outstanding commercial paper at June 30, 1994 was
approximately $536.3 million, which is supported by a $600 million bank
credit facility.
RATIOS OF EARNINGS TO FIXED CHARGES. The Company's ratios of
earnings to fixed charges for the six and twelve months ended June 30, 1994
were 2.28 and 2.69, respectively. The Company believes that the ratio for
the six-month period is not necessarily indicative of the ratio for a
twelve-month period due to the seasonal nature of HL&P's business.
Electric Utility:
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 six months of 1994 totaled $463.0 million.
In January 1994, HL&P repaid at maturity $19.5 million principal
amount of Series A collateralized medium-term notes.
In June 1994, HL&P redeemed, at $100 per share, 200,000 shares of
its $8.50 cumulative preferred stock in satisfaction of mandatory sinking
fund requirements.
In July 1994, HL&P contributed as equity its rights to receive
certain railroad settlement payments to HL&P Receivables, Inc., a
wholly-owned subsidiary of HL&P. For a further discussion, see Note 12 of
the Notes to the Company's Consolidated and HL&P's Financial Statements in
Item 1 of this Report.
Net cash used in HL&P's investing activities for the first six
months of 1994 totaled $198.0 million. HL&P's construction and nuclear fuel
expenditures (excluding Allowance for Funds Used During Construction) for
the first six months of 1994 totaled $189.8 million out of the $478 million
annual budget. HL&P expects to finance substantially all of its 1994
capital expenditures through funds generated internally from operations.
-32-
HL&P's financing activities for the first six months of 1994
resulted in a net cash outflow of approximately $277.0 million. Included in
these activities were the payment of dividends, repayment of short-term
borrowings, the redemption of preferred stock, and the repayment of matured
long-term debt. For further information with respect to these matters,
reference is made to Notes 3 and 5 of the Notes to the Company's
Consolidated and HL&P's 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 the sales 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.
HL&P's outstanding commercial paper at June 30, 1994 was
approximately $113.5 million, which is supported by a $400 million bank
credit facility.
RATIOS OF EARNINGS TO FIXED CHARGES. HL&P's ratios of earnings to
fixed charges for the six and twelve months ended June 30, 1994, were 3.37
and 3.94, respectively. HL&P's ratios of earnings to fixed charges and
preferred dividends for the six and twelve months ended June 30, 1994, were
2.83 and 3.33, respectively. HL&P believes that the ratios for the
six-month period are not necessarily indicative of the ratios for a
twelve-month period due to the seasonal nature of HL&P's business.
Cable Television:
KBLCOM. GENERAL. KBLCOM's cash requirements stem primarily from
operating expenses, capital expenditures, and interest and principal
payments on debt. KBLCOM's net cash provided by operating activities was
$24.1 million for the six months ended June 30, 1994.
Net cash used in KBLCOM's investing activities for the six months
ended June 30, 1994 totaled $36.7 million, primarily due to cable
television additions of $32.7 million. These amounts were financed
principally through internally generated funds and intercompany borrowings.
KBLCOM's financing activities for the six months ended June 30,
1994 resulted in a net cash inflow of $12.6 million. Included in these
activities were the reduction of third party debt, and an increase in
borrowings from the Company.
The Company has engaged an investment banking firm to assist in
finding a strategic partner or investor for KBLCOM in the
telecommunications industry.
In July 1994, KBLCOM acquired the stock of three cable companies
serving approximately 48,000 customers in the Minneapolis area in exchange
for 587,646 shares of common stock of the Company. The total purchase price
of approximately $80 million included the assumption of approximately $60
million in liabilities.
-33-
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY. In March 1994, KBL
Cable, Inc. (KBL Cable) reduced its outstanding indebtedness by $10.4
million through scheduled principal payments. Additional borrowings under
KBL Cable's bank facilities are subject to certain covenants which relate
primarily to the maintenance of certain financial ratios, principally debt
to cash flow and interest coverages. KBL Cable presently is in compliance
with such covenants. KBLCOM's cash requirements for the remainder of 1994
are expected to be met primarily through intercompany borrowings.
-34-
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 1 of Part II of the
Combined Form 10-Q for the quarter ended March 31, 1994, and
Item 3 of the 1993 Combined Form 10-K and Notes 9, 10 and 11
to the Company's Consolidated and HL&P's Financial Statements
in Item 8 of the 1993 Combined Form 10-K, as updated by the
description of developments in regulatory and litigation
matters contained in Notes 8, 9 and 10 of the Notes to the
Company's Consolidated and HL&P's Financial Statements
included in Part I of this Form 10- Q, all of which are
incorporated herein by reference.
In April 1994, the state district judge of the 268th
Judicial District Court, Fort Bend County, Texas, dismissed
for lack of subject matter jurisdiction a suit (PACE AND SCOTT
v. HL&P) in which it was alleged that HL&P was charging
illegal rates. The claim was based on the argument that the
Utility Commission had failed to allocate to ratepayers the
alleged tax benefits accruing to the Company and HL&P by
virtue of the fact that HL&P's federal income taxes are paid
as part of a consolidated group. The time within which an
appeal of the District Court's dismissal could be perfected
has now expired. However, one of the two plaintiffs filed a
second lawsuit (PACE, INDIVIDUALLY AND AS A REPRESENTATIVE FOR
ALL OTHERS SIMILARLY SITUATED v. HL&P) alleging substantially
the same causes of action in the 56th Judicial District Court
of Galveston County, Texas in June 1994. Management believes
that the suit is without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
THE COMPANY
At the annual meeting of shareholders of the Company on
May 4, 1994, the matters voted upon and the number of votes
cast for, against or withheld, as well as the number of
abstentions and broker non-votes as to each such matter
(including a separate tabulation with respect to each nominee
for office) were as follows:
Item 1. To elect five directors to hold office in accordance
with the Amended and Restated Bylaws of the Company.
CLASS I DIRECTORS - TERM EXPIRING 1997:
AGAINST OR BROKER
FOR WITHHELD NON-VOTE
Robert J. Cruikshank 112,719,184 1,733,472 0
Linnet F. Deily 112,732,302 1,720,354 0
Alexander F. Schilt 112,637,735 1,814,921 0
Jack T. Trotter 110,305,129 4,147,527 0
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CLASS II DIRECTOR - TERM EXPIRING 1995:
AGAINST OR BROKER
FOR WITHHELD NON-VOTE
Bertram Wolfe 110,794,934 3,657,722 0
Item 2. To ratify the appointment of Deloitte & Touche as
independent auditors for the Company for 1994.
BROKER
FOR AGAINST ABSTAIN NON-VOTE
112,492,116 1,223,252 737,288 0
HL&P
The annual shareholder meeting of HL&P was held on May 4,
1994. Houston Industries Incorporated, the owner and holder
of all of the outstanding Class A voting common stock of HL&P,
by the duly authorized vote of its Chairman and Chief
Executive Officer Don D. Jordan, elected the following Board
of Directors for the ensuing year or until their successors
shall have qualified:
Milton Carroll, John T. Cater, Robert J. Cruikshank, Linnet F.
Deily, Joseph M. Hendrie, Howard W. Horne, Don D. Jordan,
Alexander F. Schilt, Kenneth L. Schnitzer, Sr., Don D. Sykora,
Jack T. Trotter and Bertram Wolfe.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
HOUSTON INDUSTRIES INCORPORATED:
Exhibit 10(a) - Agreement dated June 6, 1994 between the Company and
Don D. Jordan.
Exhibit 10(b) - Agreement dated June 6, 1994 between the Company
and Don D. Sykora.
Exhibit 11 - Computation of Earnings per Common Share and Common
Equivalent Share.
Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges.
Exhibit 99(a) - Notes 8(a), 9, 10, 11 and 12 of the Notes to the
Consolidated Financial Statements included on pages
83 through 97 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1993
(File No. 1-7629).
Exhibit 99(b) - Part I, Item 3 - Legal Proceedings included on
pages 37 and 38 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1993
(File No. 1- 7629).
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Exhibit 99(c) - Part II, Item 1 - Legal Proceedings included on
pages 31 and 32 of the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1994
(File No. 1-7629).
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 99(a) - Notes 8(a), 9, 10, 11 and 12 of the Notes to the
Financial Statements included on page 104 of HL&P's
Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-3187) (incorporated
by reference to Exhibit 99(a) to the Quarterly
Report on Form 10-Q of the Company for the quarter
ended June 30, 1994 (File No. 1-7629).
Exhibit 99(b) - Part I, Item 3 - Legal Proceedings included on
pages 37 and 38 of HL&P's Annual Report on Form
10-K for the year ended December 31, 1993 (File No.
1- 3187) (incorporated by reference to Exhibit
99(b) to the Quarterly Report on Form 10-Q of the
Company for the quarter ended June 30, 1994 (File
No. 1-7629).
Exhibit 99(c) - Part II, Item 1 - Legal Proceedings included on
pages 31 and 32 of HL&P's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994 (File No.
1- 3187) (incorporated by reference to Exhibit
99(c) to the Quarterly Report on Form 10-Q of the
Company for the quarter ended June 30, 1994 (File
No. 1-7629).
(b) Reports on Form 8-K.
None.
-37-
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: August 12, 1994
-38-
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: August 12, 1994
-39-
EXHIBIT 10(a)
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement"
herein) by and between HOUSTON INDUSTRIES INCORPORATED, a Texas
corporation (said corporation, together with its successors and assigns
permitted under this Agreement, hereinafter referred to as the
"Company"), and DON D. JORDAN (the "Executive"), dated this 6th day of
June, 1994.
W I T N E S S E T H:
WHEREAS, on May 12, 1994, the Company and Executive entered
into an Employment Agreement (the "Prior Agreement") under which
Executive would receive certain employment rights and benefits upon a
"Change of Control" (as defined therein); and
WHEREAS, the parties to said Prior Agreement desire to
completely amend and restate said Prior Agreement so that the Company
shall have the option to benefit from the continued services of
Executive beyond his attainment of age 65 and Executive has consented
to make himself available to be so employed; and
WHEREAS, Section 15(A) of the Prior Agreement authorizes the
amendment of said Agreement with the mutual consent of the parties and
the parties desire to so amend and restate the Prior Agreement;
NOW, THEREFORE, in consideration and mutual covenants and
agreements herein contained, the parties hereto agree that the Prior
Agreement shall be amended and restated in its entirety to read as
follows (the Prior Agreement as so amended and restated being
hereinafter called "this Agreement"):
PART A
CHANGE OF CONTROL PERIOD
The Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its
shareholders to assure that the Company will have the continued
dedication of the Executive, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined below) of the Company.
The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties
and risks created by a pending or threatened Change of Control and to
encourage the Executive's full attention and dedication to the Company
in the event of any threatened or pending Change of Control, and to
provide the Executive with compensation and benefits arrangements upon
a Change of Control which ensure that the compensation and benefits
expectations of the Executive will be satisfied and which are
competitive with those of other corporations. Therefore, in order to
accomplish these objectives, the Board has caused the Company to enter
into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. CERTAIN DEFINITIONS:
A. "AFFILIATED COMPANIES" shall mean and include any
company controlled by, controlling or under common control with the
Company within the meaning of Section 414(o) of the Code.
B. "ANNUAL BASE SALARY" shall mean the salary of the
Executive provided for in Section 4(B)(i) below, as adjusted and in
effect from time to time.
C. "BENEFICIARY" shall mean the person or persons named in
writing and filed with the Company to receive any compensation or
benefit payable hereunder following Executive's death, or in the event
no such person is named or survives the Executive, his estate. In the
event of the Executive's death or a judicial determination of his
incompetence, reference in this Agreement to the Executive shall be
deemed, where appropriate, to refer to his Beneficiary, estate or other
legal representative.
D. "BOARD" shall mean the Board of Directors of the
Company.
E. "CAUSE" shall mean those specific reasons for
Executive's termination of employment as specified in Section 5(B)
hereof.
F. "CHANGE OF CONTROL" shall have the meaning ascribed to
it in Section 2 hereof.
G. "CHANGE OF CONTROL PERIOD" shall mean the period
commencing on the date hereof and ending on the first day of the month
next following the Executive's retirement on or after his Normal
Retirement Date under the Company's tax-qualified retirement plan or
any successor retirement plan (the "Retirement Plan").
H. "CODE" shall mean the Internal Revenue Code of 1986, as
now in effect and as hereafter amended.
I. "DISABILITY" shall mean the absence of the Executive
from Executive's duties with the Company on a full-time basis for 180
consecutive business days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to
Executive or Executive's legal representative. Such agreement as to
acceptability by the Executive not to be withheld unreasonably.
J. "EFFECTIVE DATE" shall mean the first date during the
Change of Control Period (as defined in Section 1(G)) on which a Change
of Control occurs. Anything in this Agreement to the contrary
notwithstanding, if a Change of Control occurs and if the Executive's
employment with the Company is terminated or the Executive ceases to be
an officer of the Company prior to the date on which the Change of
Control occurs, and if it is reasonably demonstrated by the Executive
that such termination of employment or cessation of status as a officer
(i) was at the request of a third party who has taken steps reasonably
-2-
calculated to effect the Change of Control or (ii) otherwise arose in
connection with or anticipation of the Change of Control, then for all
purposes of this Agreement, the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment or
cessation of status as an officer.
K. "EMPLOYMENT PERIOD" shall mean the period commencing on
the Effective Date and ending on the date described in Section 3.
L. "SPOUSE" shall mean the person who is legally married to
the Executive.
2. CHANGE OF CONTROL: For the purpose of this Agreement, a
"Change of Control" shall be deemed to have occurred if:
(a) any "person," including a "group" as determined in
accordance with Section 13(d)(3) of the Securities Exchange Act of
1934 (the "Exchange Act"), is or becomes the beneficial owner,
directly or indirectly, of securities of the Company representing
30% or more of the combined voting power of the Company's then
outstanding securities;
(b) as a result of, or in connection with, any tender offer or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions
(a "Transaction"), the persons who were directors of the Company before
the Transaction shall cease to constitute a majority of the Board of
Directors of the Company or any successor to the Company;
(c) the Company is merged or consolidated with another
corporation and as a result of such merger or consolidation less than
70% of the outstanding voting securities of the surviving or resulting
corporation shall then be owned in the aggregate by the former
stockholders of the Company, other than (x) affiliates within the
meaning of the Exchange Act, or (y) any party to such merger or
consolidation;
(d) a tender offer or exchange offer is made and consummated for
the ownership of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding voting
securities; or
(e) the Company transfers substantially all of its assets to
another corporation which is not a wholly owned subsidiary of the
Company;
provided, however, that unless the Board of Directors of the
Company determines otherwise prior to the date of any event
described in the foregoing clauses (a) - (e) above ("Event"),
a "Change of Control" shall not have occurred if any Event
results, directly or indirectly, in the beneficial ownership
by the employees, former employees or members of the Board of
Directors of the Company of:
(x) substantially all of the assets of
the Company; or
-3-
(y) securities of the Company
representing 30% or more of the combined voting
power of the outstanding securities of the Company
or any successor to the Company.
3. EMPLOYMENT PERIOD: The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in
the employ of the Company, in accordance with the terms and provisions
of this Agreement, for the period commencing on the Effective Date and
ending on the earlier to occur of (i) the fifth anniversary of such
Effective Date or (ii) the first day of the month coinciding with or
next following the Executive's attainment of age 67.
4. TERMS OF EMPLOYMENT:
A. POSITION AND DUTIES:
(i) During the Employment Period and until the
date of his termination of employment hereunder, the
Executive shall be employed as the Chairman and Chief
Executive Officer of the Company and be responsible for the
general management of the affairs of the Company; provided,
however, that the Executive may upon agreement of the parties
relinquish the office of Chief Executive Officer of the
Company. Executive shall, however, at all times remain
employed as Chairman of the Board. It is the intention of
the parties that during the Employment Period the Executive
shall continue to be elected to and serve on the Board as its
Chairman. The Executive, in carrying out his duties under
this Agreement, shall report only to the Board. During the
Employment Period, (a) the Executive's position (including
status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least
commensurate in all material respects with the most
significant of those held, exercised and assigned at any time
during the 90-day period immediately preceding the Effective
Date, except as otherwise provided immediately above and
(b) the Executive's services shall be performed at the
location where the Executive was employed immediately
preceding the Effective Date or any office which is the
headquarters of the Company and is less than 250 miles from
such location. It is hereby agreed and understood that
Executive may be required by the Company to move his business
office (within the 250-mile limit set forth above) but not
his principle place of residence. In the event that the
Company requires Executive to move his main office outside of
Harris County, the Company shall provide, at no expense to
Executive, an apartment or townhome in the new location which
is commensurate with Executive's standard of living.
(ii) During the Employment Period, and excluding
any periods of vacation and sick leave to which the Executive
is entitled, the Executive agrees to devote reasonable
attention and time during normal business hours to the
business and affairs of the Company and, to the extent
necessary to discharge the responsibilities assigned to the
Executive hereunder, to use the Executive's reasonable best
efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not
be a violation of this
-4-
Agreement for the Executive to (a) serve on corporate, civic
or charitable boards or committees, (b) deliver lectures,
fulfill speaking engagements or teach at educational
institutions and (c) manage personal investments, so long as
such activities do not significantly interfere with the
performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement.
It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive
prior to the Effective Date, the continued conduct of such
activities (or the conduct of activities similar in nature
and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the
Executive's responsibilities to the Company.
B. COMPENSATION:
(i) ANNUAL BASE SALARY: During the Employment
Period, the Executive shall receive an Annual Base Salary at
a monthly rate at least equal to the highest monthly base
salary paid to the Executive by the Company during the
12-month period immediately preceding the month in which the
Effective Date occurs. Thereafter, the Annual Base Salary
shall increase by not less than 5% each year (unless a
smaller percentage is agreed upon between the parties) with
the increases being effective on the same date that similar
salary changes are effective for other members of the senior
group of executives of the Company. During the Employment
Period and subject to the provisions of the preceding
sentence, the Annual Base Salary shall be reviewed at least
annually and shall be increased at any time and from time to
time as shall be substantially consistent with increases in
base salary generally awarded in the ordinary course of
business to other peer executives of the Company and its
Affiliated Companies. Any increase in Annual Base Salary
shall not serve to limit or reduce any other obligation to
the Executive under this Agreement. Annual Base Salary shall
not be reduced after any such increase and the term Annual
Base Salary as utilized in this Agreement shall refer to
Annual Base Salary as so increased.
(ii) ANNUAL BONUS: In addition to Annual Base
Salary, the Executive shall be awarded, for each fiscal year
ending during the Employment Period, an annual bonus
(the "Annual Bonus") in cash and/or common stock of the
Company as determined in accordance with the existing bonus
plans of the Company, the Executive Incentive Compensation
Plan ("EICP") and the Long-Term Incentive Compensation Plan
("LICP"), or any successor plan or plans, if any successor of
the Company has a superior bonus plan or plans. Each such
Annual Bonus shall be in an amount not less than the greater
of (1) 125% of Annual Base Salary or (2) the bonus payable to
the Executive for the applicable year under the EICP and LICP
or said successor superior plan assuming that any performance
objectives thereunder had been met at the "target" level;
and, such Annual Bonus shall be paid at the same time or
times as similar bonuses are paid to other peer executives of
the Company, unless the Executive shall elect to defer the
receipt of such Annual Bonus. For all
-5-
purposes of this Agreement, "Annual Bonus" shall be deemed to
include but not necessarily limited to the aggregate of
(a) cash paid during a given year under the EICP for
short-term annual awards thereunder and (b) the dollar value
of shares of the Company's common stock paid out during a
given year under the LICP based on the achievement of certain
performance goals, plus dividend equivalent accruals during
the performance period.
(iii) INCENTIVE, SAVINGS AND RETIREMENT
PLANS: During the Employment Period, the Executive shall be
entitled to participate in all incentive, savings and
retirement plans, practices, policies and programs applicable
generally to other peer executives of the Company and its
Affiliated Companies, but in no event shall such plans,
practices, policies and programs provide the Executive with
incentive opportunities (measured with respect to both
regular and special incentive opportunities, to the extent,
if any, that such distinction is applicable), savings
opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its Affiliated
Companies for the Executive under such plans, practices,
policies and programs as in effect at any time during the
90-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at
any time after the Effective Date to other peer executives of
the Company and its Affiliated Companies.
(iv) WELFARE BENEFIT PLANS: During the Employment
Period, the Executive and/or the Executive's family, as the
case may be, shall be eligible for participation in and shall
receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company and its
Affiliated Companies (including, without limitation, medical,
prescription, dental, disability, executive salary
continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent
applicable generally to other peer executives of the Company
and its Affiliated Companies, but in no event shall such
plans, practices, policies and programs provide the Executive
with benefits which are less favorable, in the aggregate,
than the most favorable of such plans, practices, policies
and programs in effect for the Executive at any time during
the 90-day period immediately preceding the Effective Date
or, if more favorable to the Executive, those provided
generally at any time after the Effective Date to other peer
executives of the Company and its Affiliated Companies.
(v) EXPENSES: During the Employment Period, the
Executive shall be entitled to receive prompt reimbursement
for all reasonable expenses incurred by the Executive in
accordance with the most favorable policies, practices and
procedures of the Company and its Affiliated Companies in
effect for the Executive at any time during the 90-day period
immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any
time thereafter with respect to other peer executives of the
Company and its Affiliated Companies.
-6-
(vi) FRINGE BENEFITS: During the Employment
Period, the Executive shall be entitled to fringe benefits in
accordance with the most favorable plans, practices, programs
and policies of the Company and its Affiliated Companies in
effect for the Executive at any time during the 90-day period
immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any
time thereafter with respect to other peer executives of the
Company and its Affiliated Companies.
(vii) OFFICE AND SUPPORT STAFF: During the
Employment Period, the Executive shall be entitled to an
office or offices of a size and with furnishings and other
appointments, and to exclusive personal secretarial and other
assistance, at least equal to the most favorable of the
foregoing provided to the Executive by the Company and its
Affiliated Companies at any time during the 90-day period
immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any time
thereafter with respect to other peer executives of the
Company and its Affiliated Companies.
(viii) VACATION: During the Employment Period,
the Executive shall be entitled to paid vacation in
accordance with the most favorable plans, policies, programs
and practices of the Company and its Affiliated Companies as
in effect for the Executive at any time during the 90-day
period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any
time thereafter with respect to other peer executives of the
Company and its Affiliated Companies.
(ix) OTHER PERQUISITES: During the Employment
Period, the Executive shall continue to be provided with such
perquisites as were provided to the Executive on the
Effective Date of this Agreement. Such perquisites shall be
reviewed annually by the Personnel Committee of the Board.
In addition, the Executive shall be entitled to reimbursement
for expenses incurred with respect to the preparation of his
personal income tax returns and for financial counseling in
an amount not to exceed $10,000 per calendar year.
5. TERMINATION OF EMPLOYMENT:
A. DEATH OR DISABILITY: The Executive's employment shall
terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the
Disability of the Executive has occurred during the Employment Period,
it may give to the Executive written notice in accordance with
Section 15(B) of this Agreement of its intention to terminate the
Executive's employment. In such event, the Executive's employment with
the Company shall terminate effective on the 30th day after receipt of
such notice by the Executive (the "Disability Effective Date"),
provided that, within the 30 days after such receipt, the Executive
shall not have returned to full-time performance of the Executive's
duties.
B. CAUSE: The Company may terminate the Executive's
employment during the Employment Period for Cause. For purposes of
this Agreement, "Cause" shall mean
-7-
(i) repeated violations by the Executive of the Executive's obligations
under Section 4(A) of this Agreement (other than as a result of
incapacity due to physical or mental illness) which are demonstrably
willful and deliberate on the Executive's part, which are committed in
bad faith or without reasonable belief that such violations are in the
best interests of the Company and which are not remedied in a
reasonable period of time after receipt of written notice from the
Company specifying such violations or (ii) the conviction of the
Executive of a felony involving moral turpitude.
C. GOOD REASON: The Executive's employment may be
terminated during the Employment Period by the Executive for Good
Reason. For purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities as
contemplated by Section 4(A) of this Agreement, or any other
action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding
for this purpose an isolated, insubstantial and inadvertent
action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any
of the provisions of Section 4(B) of this Agreement, other
than an isolated, insubstantial and inadvertent failure not
occurring in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to
be based at any office or location other than that described
in Section 4(A)(i) hereof or the Company's failure to provide
the residence required by Section 4(A)(i);
(iv) any purported termination by the Company of
the Executive's employment otherwise than as expressly
permitted by this Agreement; or
(v) any failure by the Company to comply with and
satisfy Section 11(C) of this Agreement, provided that such
successor has received at least ten days' prior written
notice from the Company or the Executive of the requirements
of Section 11(C) of this Agreement.
For purposes of this Section 5(C), any good faith determination of
"Good Reason" made by the Executive shall be conclusive.
D. NOTICE OF TERMINATION: Any termination by the Company
for Cause, or by the Executive for Good Reason, shall be communicated
by Notice of Termination to the other party hereto given in accordance
with Section 15(B) of this Agreement. For purposes of this Agreement,
a "Notice of Termination" means a written notice which (i) indicates
the
-8-
specific termination provision in this Agreement relied upon, (ii) to
the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if
the Date of Termination (as defined below) is other than the date of
receipt of such notice, specifies the termination date (which date
shall be not more than 15 days after the giving of such notice). The
failure by the Executive or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of the Executive or the
Company hereunder or preclude the Executive or the Company from
asserting such fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
E. DATE OF TERMINATION: "Date of Termination" means (i) if
the Executive's employment is terminated by the Company for Cause, or
by the Executive for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the date
on which the Company notifies the Executive of such termination and
(iii) if the Executive's employment is terminated by reason of death or
Disability, the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may be.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION:
A. GOOD REASON, OTHER THAN FOR CAUSE, DEATH OR
DISABILITY: If, during the Employment Period, the Company shall
terminate the Executive's employment other than for Cause or Disability
or the Executive shall terminate employment for Good Reason, then:
(i) the Company shall pay to the Executive in a
lump sum in cash (or common stock of the Company with respect
to certain payments under LICP), within 30 days after the
Date of Termination, the aggregate of (1) the Executive's
Annual Base Salary and Annual Bonus remaining owing to the
Executive for the Employment Period as if there had been no
termination determined without any reduction for the present
value of such lump-sum payment and (2) any accrued vacation
pay, in each case to the extent not theretofore paid (the sum
of the amounts described in clauses (1) and (2) above shall
be hereinafter referred to as the "Accrued Obligations");
(ii) the benefits accrued up to the Date of
Termination under the Retirement Plan and the Benefit
Restoration Plan of the Company or any successor plan thereto
("SERP" herein) shall commence immediately thereunder in such
form as elected by the Executive in accordance with the terms
of said Plans and, notwithstanding any provision of the SERP
to the contrary, the Company and the Board hereby agree to
cause the SERP to be administered so that no benefit payable
under the SERP may be commuted and paid in a lump sum by the
Company;
(iii) the Company shall pay a separate monthly
supplemental retirement benefit equal to the difference
between (1) the benefit payable under
-9-
the Retirement Plan and the SERP or any other successor
supplemental and/or excess retirement plan of the Company and
its Affiliated Companies providing benefits for the Executive
which the Executive would receive if the Executive's
employment continued at the compensation level provided for
in Sections 4(B)(i) and 4(B)(ii) of this Agreement for the
remainder of the Employment Period, assuming for this purpose
that all accrued benefits are fully vested and that benefit
accrual formulas and actuarial assumptions are no less
advantageous to the Executive than those in effect during the
90-day period immediately preceding the Effective Date, and
(2) the Executive's actual benefit (paid or payable), if any,
under the Retirement Plan and the SERP (the amount of such
benefit calculated under this Section 6(A)(iii) which shall
commence at the same time and be payable in the same form as
the amounts described in Section 6(A)(ii) shall be
hereinafter referred to as the "Supplemental Retirement
Benefit");
(iv) for the remainder of the Employment Period, or
such longer period as any plan, program, practice or policy
may provide, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to
those which would have been provided to them in accordance
with the plans, programs, practices and policies described in
Section 4(B)(iv) of this Agreement if the Executive's
employment had not been terminated in accordance with the
most favorable plans, practices, programs or policies of the
Company and its Affiliated Companies as in effect and
applicable generally to other peer executives and their
families during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other
peer executives of the Company and its Affiliated Companies
and their families; provided, however, that if the Executive
becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another
employer provided plan, the medical and other welfare
benefits described herein shall be secondary to those
provided under such other plan during such applicable period
of eligibility (such continuation of such benefits for the
applicable period herein set forth shall be hereinafter
referred to as "Welfare Benefit Continuation"). For purposes
of determining eligibility of the Executive for retiree
benefits pursuant to such plans, practices, programs and
policies, the Executive shall be considered to have remained
employed until the end of the Employment Period and to have
retired on the last day of such period;
(v) to the extent not theretofore paid or
provided, the Company shall timely pay or provide to the
Executive and/or the Executive's family any other amounts or
benefits required to be paid or provided or which the
Executive and/or the Executive's family is eligible to
receive pursuant to this Agreement and under any plan,
program, policy or practice or contract or agreement of the
Company and its Affiliated Companies as in effect and
applicable generally to other peer executives and their
families during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in
effect generally thereafter with respect to other peer
executives
-10-
of the Company and its Affiliated Companies and their
families (such other amounts and benefits shall be
hereinafter referred to as the "Other Benefits"); provided,
however, that the Company and the Board hereby agree to cause
the Deferred Compensation Plan to be administered so that any
and all amounts of salary and/or bonus theretofore deferred
by Executive and held under the Deferred Compensation Plan of
the Company with instructions from Executive to pay in 15
annual installments shall be paid in said 15 installments
commencing at the end of the Employment Period and shall not
be commuted and paid in a lump sum, notwithstanding any
provision of the Deferred Compensation Plan to the contrary;
and
(vi) the Company shall pay to Executive in a lump sum in
cash, within 30 days after the Date of Termination, the
amount it would have contributed as an employer contribution
to the tax-qualified Savings Plan of the Company for the
remainder of the Employment Period had Executive contributed
at the maximum rate during said period and had the terms of
said Savings Plan as in effect on the Effective Date remained
unchanged during said remainder of the Employment Period.
B. DEATH: If the Executive's employment is terminated by
reason of the Executive's death during the Employment Period, this
Agreement shall terminate without further obligations to the
Executive's Beneficiary or other legal representatives under this
Agreement, other than for (i) payment of Accrued Obligations (which
shall be paid to the Executive's Beneficiary in a lump sum in cash (or
common stock of the Company with respect to certain payments under
LICP) within 30 days of the Date of Termination) and the timely payment
or provision of the Welfare Benefit Continuation and Other Benefits and
(ii) payment to the Executive's Beneficiary in a lump sum in cash
within 30 days of the Date of Termination of an amount equal to the
actuarial equivalent (utilizing for this purpose the assumptions
utilized with respect to the Retirement Plan on the Effective Date) of
the Supplemental Retirement Benefit.
C. DISABILITY: If the Executive's employment is terminated
by reason of the Executive's Disability during the Employment Period,
this Agreement shall terminate without further obligations to the
Executive under this Agreement, other than for (i) payment of Accrued
Obligations (which shall be paid to the Executive in a lump sum in cash
(or common stock of the Company with respect to certain payments under
LICP) within 30 days of the Date of Termination) and the timely payment
or provision of the Welfare Benefit Continuation and Other Benefits and
(ii) payment to the Executive in a lump sum in cash within 30 days of
the Date of Termination of an amount equal to the actuarial equivalent
(utilizing for this purpose the assumptions utilized with respect to
the Retirement Plan on the Effective Date) of the Supplemental
Retirement Benefit.
D. CAUSE; OTHER THAN FOR GOOD REASON: If the Executive's
employment shall be terminated for Cause during the Employment Period
or if the Executive terminates employment during the Employment Period,
excluding a termination for Good Reason or by reason of death or
Disability, this Agreement shall terminate without further obligations
to the Executive other than the obligation to pay to Executive the
Annual Base Salary through the
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Date of Termination plus the amount of any compensation previously
deferred by the Executive, in each case to the extent theretofore
unpaid, and the timely provision of Other Benefits. In such case, any
unpaid but due Annual Base Salary shall be paid to the Executive in a
lump sum in cash within 30 days of the Date of Termination.
E. GROUP LIFE INSURANCE: Upon a termination of employment
during or at the end of the Employment Period for any reason other than
death or for Cause, the Executive may elect to retain the group life
insurance coverage provided to Executive and other employees of the
Company under the Group Life Insurance Plan of the Company, and, if the
election is made, Executive shall pay, or reimburse the Company for the
cost of, the premiums for such insurance paid by the Company at the
same rate charged active employees of the Company for similar coverage
utilizing the same method or procedure for calculating the premium as
in effect and applicable for Executive as of the date of execution
hereof. Such right to maintain group coverage shall be in the minimum
amount of three times Annual Base Salary and shall continue for the
life of Executive. It is hereby understood and agreed that there shall
be no increase in said premium because of any reallocation due to age
or risk that may occur after the date of execution hereof.
F. RETIREMENT: If Executive terminates his employment with
the Company by reason of retirement with the consent of the Company
during the Employment Period, he shall be entitled to receive under
this Agreement, in addition to all other benefits otherwise due from
the Company upon retirement, the prompt payment of all benefits due
under Section 6(A) had the Executive terminated employment for Good
Reason. Furthermore, Executive shall be entitled until the end of the
Employment Period to the prompt reimbursement of all expenses incurred
for civic or industry activities undertaken on behalf of the Company
which are of a similar nature and scope to those expenses reimbursable
by the Company to Executive on the Effective Date. In this connection,
Executive shall also be afforded reasonable use of any Company
aircraft.
G. OFFICE: Upon a termination of employment during the
Employment Period for any reason other than death or for Cause, the
Company shall provide Executive with suitable executive office space
and secretarial help at an acceptable location outside the premises of
any Company location. Such office and secretary shall be provided
Executive until such time as mutually agreed by the parties to be no
longer necessary.
H. SALARY CONTINUATION PLAN: Upon a termination of
employment during the Employment Period for any reason, the Company
hereby agrees that Executive shall be fully vested in the benefit
provided under the Salary Continuation Plan, as in effect on the
Effective Date, and that the benefit payable thereunder shall be based
on his Annual Base Salary as provided in Section 4(B)(i).
7. NON-EXCLUSIVITY OF RIGHTS: Except as provided in Section 6
of this Agreement, nothing in this Agreement shall prevent or limit the
Executive's continuing or further participation in any plan, program,
policy or practice provided by the Company or any of its Affiliated
Companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its
Affiliated Companies. Amounts which are vested benefits or which
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the Executive is otherwise entitled to receive under any plan,
policy, practice or program of or any contract or agreement with the
Company or any of its Affiliated Companies at or subsequent to the Date
of Termination shall be payable in accordance with such plan, policy,
practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. FULL SETTLEMENT; RESOLUTION OF DISPUTES:
A. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Company
may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Executive
under any of the provisions of this Agreement and, except as provided
in Section 6(A)(iv) of this Agreement, such amounts shall not be
reduced whether or not the Executive obtains other employment. The
Company agrees to pay promptly as incurred, to the full extent
permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any contest (regardless of the outcome
thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement
or any guarantee of performance thereof (including as a result of any
contest by the Executive about the amount of any payment pursuant to
this Agreement), plus in each case interest on any delayed payment at
the applicable Federal rate provided for in Section 7872(f)(2)(A) of
the Code. In addition and to the extent not already provided by the
terms of any insurance policy owned by the Company, the Company hereby
agrees to pay promptly as incurred, to the full extent permitted by
law, all legal fees and expenses which the Executive may reasonably
incur as a result of any litigation or other legal action filed against
the Executive or his estate arising out of, or in any way connected
with or resulting from, actions taken or omitted to be taken by
Executive during his employment with the Company.
B. If there shall be any dispute between the Company and
the Executive (i) in the event of any termination of the Executive's
employment by the Company, whether such termination was for Cause, or
(ii) in the event of any termination of employment by the Executive,
whether Good Reason existed, then, unless and until there is a final,
nonappealable judgment by a court of competent jurisdiction declaring
that such termination was for Cause or that the determination by the
Executive of the existence of Good Reason was not made in good faith,
the Company shall pay all amounts, and provide all benefits, to the
Executive and/or the Executive's family or other beneficiaries, as the
case may be, that the Company would be required to pay or provide
pursuant to Section 6(A) hereof as though such termination were by the
Company without Cause or by the Executive with Good Reason; provided,
however, that the Company shall not be required to pay any disputed
amounts pursuant to this paragraph except upon receipt of an
undertaking by or on behalf of the Executive to repay all such amounts
to which the Executive is ultimately adjudged by such court not to be
entitled.
9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY:
A. Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment
or distribution by the Company to or for benefit of the
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Executive (whether paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise, but determined
without regard to any additional payments required under this
Section 9) (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall
be entitled to receive an additional payment (a "Gross-Up Payment") in
an amount such that after payment (whether through withholding at the
source or otherwise) by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including,
without limitation, any income taxes (and any interest and penalties
imposed with respect thereto), employment taxes and Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
B. Subject to the provisions of Section 9(C), all
determinations required to be made under this Section 9, including
whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by Deloitte & Touche (the "Accounting
Firm") which shall provide detailed supporting calculations both to the
Company and the Executive within 15 business days of the receipt of
notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the individual,
entity or group effecting the Change of Control, the Executive shall
appoint another nationally recognized accounting firm to make the
determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses
of the Accounting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this Section 9, shall be
paid by the Company to the Executive within five days of the receipt of
the Accounting Firm's determination. If the Accounting Firm determines
that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion that failure to report the Excise Tax
on the Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding upon the Company
and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by
the Accounting Firm hereunder, it is possible that Gross-Up Payments
which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies
pursuant to Section 9(C) and the Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
C. The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than
ten business days after the Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. The Executive shall
not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or
such shorter period ending on the
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date that any payment of taxes with respect to such claim is due). If
the Company notifies the Executive in writing prior to the expiration
of such period that it desires to contest such claim, the Executive
shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim;
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in writing
from time to time, including, without limitation, accepting
legal representation with respect to such claim by an
attorney reasonably selected by the Company;
(iii) cooperate with the Company in good faith
in order effectively to contest such claim; and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax,
employment tax or income tax (including interest and penalties with
respect thereto) imposed as a result of such representation and payment
of costs and expenses. Without limitation on the foregoing provisions
of this Section 9(C), the Company shall control all proceedings taken
in connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may,
at its sole option, either direct the Executive to pay the tax claimed
and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall determine;
provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount
of such payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax, employment tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or
with respect to any imputed income with respect to such advance; and
further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with
respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled
to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
D. If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(C), the Executive becomes
entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the
requirements of Section 9(C)) promptly pay to the Company the amount of
such refund
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(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 9(C), a
determination is made that the Executive shall not be entitled to any
refund with respect to such claim and the Company does not notify the
Executive in writing of its intent to contest such denial of refund
prior to the expiration of 30 days after such termination, then such
advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the
amount of Gross-Up Payment required to be paid.
10. CONFIDENTIAL INFORMATION: The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or
any of its Affiliated Companies, and their respective businesses, which
shall have been obtained by the Executive during the Executive's
employment by the Company or any of its Affiliated Companies and which
shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of
the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it. In no event
shall an asserted violation of the provisions of this Section 10
constitute a basis for deferring or withholding any amounts otherwise
payable to the Executive under this Agreement.
11. SUCCESSORS:
A. This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives.
B. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
C. The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to
assume expressly and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it
if no such succession had taken place. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise.
12. SOURCE OF PAYMENTS: All payments provided in this Agreement
shall, unless the plan or program pursuant to which they are made
provide otherwise, be paid in cash from the general funds of the
Company, and no special or separate funds shall be established and no
other segregation of assets shall be made to assure payment. Executive
shall have no right, title or interest whatever in or to any
investments which the Company may make to aid the Company in meeting
its obligations hereunder. Nothing contained in this Agreement, and no
action taken pursuant to this provision, shall create or be construed
to create a trust of any
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kind, or a fiduciary relationship, between the Company and
Executive or any other person. To the extent that any person acquires
a right to receive payments from the Company hereunder, such right
shall be no greater than the right of an unsecured creditor of the
Company.
13. EFFECT OF PRIOR AGREEMENTS: This Agreement contains the
entire understanding between the parties hereto and supersedes any
prior employment agreement between the Company or any predecessor of
the Company and Executive, except that this Agreement shall not affect
or operate to reduce any benefit or compensation inuring to Executive
of a kind elsewhere provided and not expressly provided or modified in
this Agreement. Specifically, but not by way of limitation, this
Agreement supersedes and replaces that certain Employment Agreement
between the parties, dated May 12, 1994.
14. CONSOLIDATION, MERGER OR SALE OF ASSETS: Nothing in this
Agreement shall preclude the Company from consolidating or merging into
or with, or transferring all or substantially all of its assets to,
another corporation which assumes this Agreement and all obligations
and undertakings of the Company hereunder; provided that no such action
shall diminish Executive's rights hereunder, including, without
limitation, rights under paragraph 5(C). Upon such a consolidation,
merger or transfer of assets in assumption, the term "Company" as used
herein shall mean such other corporation.
15. MISCELLANEOUS:
A. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without reference to
principles of conflict of laws. The captions of this Agreement are not
part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written
agreement executed by the parties hereto or their respective successors
and legal representatives.
B. All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the other party or by
registered or certified-mail, return receipt requested, postage
prepaid, addressed as follows:
IF TO THE EXECUTIVE: Don D. Jordan
5 Stayton Circle
Houston, Texas 77024
IF TO THE COMPANY: Houston Industries Incorporated
Five Post Oak Park
P.O. Box 4567
Houston, Texas 77210
ATTENTION: Mr. Hugh Rice Kelly
Vice President, General
Counsel and Secretary
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or to such other address as either party shall have furnished to the
other in writing in accordance herewith. Notice and communications
shall be effective when actually received by the addressee.
C. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement.
D. The Company may withhold from any amounts payable under
this Agreement such Federal, state or local taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
E. The Executive's or the Company's failure to insist upon
strict compliance with any provision hereof or any other provision of
this Agreement or the failure to assert any right the Executive or the
Company may have hereunder, including, without limitation, the right of
the Executive to terminate employment for Good Reason pursuant to
Section 5(C)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of
this Agreement.
F. The headings of paragraphs herein are included solely
for convenience and reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
G. Contemporaneously with execution of this Agreement,
Executive shall be furnished a certified copy of a resolution of the
Board of Directors authorizing the execution and delivery of this
Agreement.
PART B
EXTENDED EMPLOYMENT TERM
The Board has determined that it is in the best interests of
the Company and its shareholders to assure that the Company will have
the continued benefit of the Executive's services for a transition
period following the Executive's attainment of age 65 in the event that
the Executive remains employed by the Company on the date he attains
age 65. Therefore, in order to accomplish this objective and in
consideration of Executive's agreement to remain employed beyond normal
retirement age, the Board has caused the Company to enter into this
Part B of this Agreement. This Part B shall be effective immediately
upon the execution of this Agreement and shall be null and void
immediately upon (a) a Change in Control (as defined in Part A above),
whereupon the provisions of Part A shall govern, or (b) the day that
the Executive attains age 65 if he is not employed by the Company on
such day.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. EMPLOYMENT PRIOR TO AGE 65: The parties hereby agree that
the Executive's employment with the Company is terminable at will by
either party until the date that the Executive attains age 65.
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2. CERTAIN DEFINITIONS: Capitalized terms in this Part B shall
have the meanings herein ascribed to them or, if not defined in this
Part B, the meanings ascribed to them in Part A of this Agreement
("Part A").
3. PROVISIONS INCORPORATED BY REFERENCE: Sections 7, 8 and 10
through 15 of Part A are hereby incorporated by reference into this
Part B.
4. EMPLOYMENT PERIOD: In the event that the Executive is
employed by the Company on the date that he attains age 65, the Company
hereby agrees to continue the Executive in its employ, and the
Executive hereby agrees to remain in the employ of the Company, in
accordance with the terms and provisions of this Part B, for the period
commencing on the date immediately following the date the Executive
attains age 65 and ending on the first day of the month coinciding with
or next following the Executive's attainment of age 67 (the "Extended
Employment Term").
5. TERMS OF EMPLOYMENT:
A. POSITION AND DUTIES: During the Extended Employment
Term and until the date of his termination of employment hereunder, the
Executive shall be employed as the Chairman of the Company or in such
other executive capacities, consistent with the Executive's years of
experience with the Company, as the Board may determine in its
discretion from time to time. Unless otherwise requested by the Board,
Executive shall resign and relinquish his office as Chief Executive
Officer of the Company effective as of his attainment of age 65.
B. COMPENSATION:
(i) ANNUAL BASE SALARY: During the Extended
Employment Term, the Executive shall receive an annual base
salary (the "Annual Base Salary") at a monthly rate set by
the Board in its discretion, which salary shall be in an
amount commensurate with the Executive's position, duties and
years of experience with the Company.
(ii) BENEFIT AND BONUS PLANS: During the Extended
Employment Term, (a) the Executive shall be entitled to
participate in all incentive, savings and retirement plans,
practices, policies and programs applicable generally to
other peer executives of the Company and its Affiliated
Companies and (b) the Executive and/or the Executive's
family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare
benefit plans, practices, policies and programs provided by
the Company and its Affiliated Companies (including, without
limitation, medical, prescription, dental, disability,
executive salary continuance, employee life, group life,
accidental death and travel accident insurance plans and
programs) to the extent applicable generally to other peer
executives of the Company and its Affiliated Companies (the
benefits described in clauses (a) and (b) collectively
referred to herein as the "Other Benefits").
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(iii) SUPPLEMENTAL RETIREMENT
BENEFIT: Executive may be entitled to a Supplemental
Retirement Benefit under this Agreement; provided that
Executive shall not be entitled to such a benefit if
Executive's employment terminates for Cause or voluntarily
during the Extended Employment Term. For purposes of
determining the amount of any Supplemental Retirement Benefit
hereunder, Executive's benefit under the SERP (including both
the Retirement Plan Restoration Benefit and the Supplemental
Retirement Benefit) shall be calculated as provided in the
SERP except that for purposes of such calculation Executive's
"Average Monthly Compensation" (as defined in the Retirement
Plan and referenced in the SERP) shall be deemed to be the
result obtained by dividing the sum of (a) and (b) by 12,
where (a) is Executive's salary received from the Company for
the 12 months ended May 31, 1997 and where (b) is the EICP
bonus that would have been paid to the Executive with respect
to the year in which Executive reached age 64 had the
performance objectives thereunder been achieved at a target
level for such year. If the benefit so calculated is greater
than the benefit payable to the Executive under the terms of
the SERP, the Company shall pay to the Executive the amount
of the difference (a "Supplemental Retirement Benefit"). The
Supplemental Retirement Benefit shall be paid at the same
time and in the same manner as the Executive's benefit under
the SERP.
(iv) SUPPLEMENTAL BENEFIT UPON DEATH OR
DISABILITY: If the Executive's employment is terminated by
reason of the Executive's death or Disability during the
Extended Employment Term or if the Executive dies following
completion of the Extended Employment Term, any death or
disability benefit that is payable to the Executive or his
Beneficiary under the Company's Executive Benefits Plan and
that is calculated with reference to the Executive's salary
at termination of employment shall be calculated hereunder
based on the Executive's salary in effect immediately prior
to attainment of age 65. If a death or disability benefit is
greater when calculated under this Section B than the benefit
payable pursuant to the Executive Benefits Plan
(the "Underlying Benefit"), the Company shall pay to the
Executive or his Beneficiary the amount of the difference
(a "Supplemental Benefit"). Any Supplemental Benefit shall
be paid at the same time and in the same manner as the
Underlying Benefit.
(v) GROUP LIFE INSURANCE: Upon a termination of
employment (a) during the Extended Employment Term for any
reason other than voluntarily, by death or for Cause or
(b) at the end of the Extended Employment Term, the Executive
may elect to retain the group life insurance coverage
provided to Executive and other employees of the Company
under the Group Life Insurance Plan of the Company, and, if
the election is made, Executive shall pay, or reimburse the
Company for the cost of, the premiums for such insurance paid
by the Company at the same rate charged active employees of
the Company for similar coverage utilizing the same method or
procedure for calculating the premium as in effect and
applicable for Executive on the date hereof. Such right to
maintain group coverage shall be in an amount not to exceed
three times Annual Base Salary of Executive in effect prior
to Executive reaching age 65
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and shall continue for the life of Executive. It is hereby
understood and agreed that there shall be no increase in said
premium because of any reallocation due to age or risk that
may occur after the date of execution hereof.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION:
A. VOLUNTARILY, FOR CAUSE OR BY DEATH OR DISABILITY: If
the Executive's employment shall be terminated for Cause during the
Extended Employment Term or if the Executive voluntarily terminates
employment during the Extended Employment Term, including a termination
by reason of death or Disability, this Agreement shall terminate
without further obligations to the Executive other than the obligation
to pay to Executive the Annual Base Salary through the Date of
Termination plus the amount of any compensation previously deferred by
the Executive, in each case to the extent theretofore unpaid, and the
timely provision of Other Benefits; provided that in the case of a
death or Disability, the Company shall also pay or provide any benefit
for which Executive or his Beneficiary is eligible pursuant to Section
5(B)(iii)-(v) hereof. Any unpaid but due Annual Base Salary shall be
paid to the Executive in a lump sum in cash within 30 days of the Date
of Termination.
B. TERMINATION OTHER THAN VOLUNTARILY, FOR CAUSE OR BY
DEATH OR DISABILITY: If, during the Extended Employment Term, the
Company shall terminate the Executive's employment other than for Cause
or Disability, then:
(i) the Company shall pay to the Executive in a
lump sum in cash (or common stock of the Company with respect
to certain payments under LICP), within 30 days after the
Date of Termination, the aggregate of (1) the Executive's
Annual Base Salary and any annual bonus remaining owing to
the Executive for the Extended Employment Term as if there
had been no termination determined without any reduction for
the present value of such lump-sum payment and (2) any
accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in
clauses (1) and (2) above shall be hereinafter referred to as
the "Accrued Obligations");
(ii) for the remainder of the Extended Employment
Term, or such longer period as any plan, program, practice or
policy may provide, the Company shall continue benefits to
the Executive and/or the Executive's family at least equal to
those which would have been provided to them in accordance
with the plans, programs, practices and policies described in
Section 5(B)(ii)(b) of this Part B if the Executive's
employment had not been terminated; and
(iii) to the extent not theretofore paid or
provided, the Company shall timely pay or provide to the
Executive and/or the Executive's family any other amounts or
benefits required to be paid or provided or which the
Executive and/or the Executive's family is eligible to
receive pursuant to this
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Agreement and under any plan, program, policy or practice or
contract or agreement of the Company and its Affiliated Companies
as in effect and applicable generally to other peer executives and
their families.
7. DEFERRED COMPENSATION PLAN AND SERP PAYMENTS:
Notwithstanding any provision herein or any provision of the Deferred
Compensation Plan of the Company to the contrary, the Company and the
Board hereby agree to cause the Deferred Compensation Plan to be
administered so that any and all amounts of salary and/or bonus
theretofore deferred by Executive and held under the Deferred
Compensation Plan with instructions from Executive to pay in 15 annual
installments shall be paid in said 15 installments, shall remain in
said Plan earning interest at the rate prescribed therein until
installment distributions commence, shall commence as provided under
the terms of the Deferred Compensation Plan but shall not be commuted
and paid in a lump sum. Notwithstanding any provision of this
Agreement or any provision of the SERP to the contrary, the Company and
the Board hereby agree to cause the SERP to be administered so that no
benefit payable to or on behalf of Executive under the SERP may be
commuted and paid in a lump sum.
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization from its Board of
Directors, the Company has caused these presents to be executed in its
name and on its behalf, all as of the day and year first above written.
HOUSTON INDUSTRIES INCORPORATED
By /s/ JOHN T. CATER
John T. Cater, Chairman of Personnel
Committee of the Board of Directors
EXECUTIVE
DON D. JORDAN
Don D. Jordan
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EXHIBIT 10(b)
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement"
herein) by and between HOUSTON INDUSTRIES INCORPORATED, a Texas
corporation (said corporation, together with its successors and assigns
permitted under this Agreement, hereinafter referred to as the
"Company"), and DON D. SYKORA (the "Executive"), dated this 6th day of
June, 1994.
W I T N E S S E T H:
WHEREAS, on May 12, 1994, the Company and Executive entered
into an Employment Agreement (the "Prior Agreement") under which
Executive would receive certain employment rights and benefits upon a
"Change of Control" (as defined therein); and
WHEREAS, the parties to said Prior Agreement desire to
completely amend and restate said Prior Agreement so that the Company
shall have the option to benefit from the continued services of Executive
beyond his attainment of age 65 and Executive has consented to make
himself available to be so employed; and
WHEREAS, Section 15(A) of the Prior Agreement authorizes the
amendment of said Agreement with the mutual consent of the parties and
the parties desire to so amend and restate the Prior Agreement;
NOW, THEREFORE, in consideration and mutual covenants and
agreements herein contained, the parties hereto agree that the Prior
Agreement shall be amended and restated in its entirety to read as
follows (the Prior Agreement as so amended and restated being hereinafter
called "this Agreement"):
PART A
CHANGE OF CONTROL PERIOD
The Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its
shareholders to assure that the Company will have the continued
dedication of the Executive, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined below) of the Company. The
Board believes it is imperative to diminish the inevitable distraction of
the Executive by virtue of the personal uncertainties and risks created
by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company in the event of
any threatened or pending Change of Control, and to provide the Executive
with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the
Executive will be satisfied and which are competitive with those of other
corporations. Therefore, in order to accomplish these objectives, the
Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. CERTAIN DEFINITIONS:
A. "AFFILIATED COMPANIES" shall mean and include any company
controlled by, controlling or under common control with the Company
within the meaning of Section 414(o) of the Code.
B. "ANNUAL BASE SALARY" shall mean the salary of the
Executive provided for in Section 4(B)(i) below, as adjusted and in
effect from time to time.
C. "BENEFICIARY" shall mean the person or persons named in
writing and filed with the Company to receive any compensation or benefit
payable hereunder following Executive's death, or in the event no such
person is named or survives the Executive, his estate. In the event of
the Executive's death or a judicial determination of his incompetence,
reference in this Agreement to the Executive shall be deemed, where
appropriate, to refer to his Beneficiary, estate or other legal
representative.
D. "BOARD" shall mean the Board of Directors of the Company.
E. "CAUSE" shall mean those specific reasons for Executive's
termination of employment as specified in Section 5(B) hereof.
F. "CHANGE OF CONTROL" shall have the meaning ascribed to it
in Section 2 hereof.
G. "CHANGE OF CONTROL PERIOD" shall mean the period
commencing on the date hereof and ending on the first day of the month
next following the Executive's retirement on or after his Normal
Retirement Date under the Company's tax-qualified retirement plan or any
successor retirement plan (the "Retirement Plan").
H. "CODE" shall mean the Internal Revenue Code of 1986, as
now in effect and as hereafter amended.
I. "DISABILITY" shall mean the absence of the Executive from
Executive's duties with the Company on a full-time basis for 180
consecutive business days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to
Executive or Executive's legal representative. Such agreement as to
acceptability by the Executive not to be withheld unreasonably.
J. "EFFECTIVE DATE" shall mean the first date during the
Change of Control Period (as defined in Section 1(G)) on which a Change
of Control occurs. Anything in this Agreement to the contrary
notwithstanding, if a Change of Control occurs and if the Executive's
employment with the Company is terminated or the Executive ceases to be
an officer of the Company prior to the date on which the Change of
Control occurs, and if it is reasonably demonstrated by the Executive
that such termination of employment or cessation of status as a officer
(i) was at the request of a third party who has taken steps reasonably
calculated to effect the Change of Control or (ii) otherwise arose in
connection with or
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anticipation of the Change of Control, then for all purposes of this
Agreement, the "Effective Date" shall mean the date immediately prior to
the date of such termination of employment or cessation of status as an
officer.
K. "EMPLOYMENT PERIOD" shall mean the period commencing on
the Effective Date and ending on the date described in Section 3.
L. "SPOUSE" shall mean the person who is legally married to
the Executive.
2. CHANGE OF CONTROL: For the purpose of this Agreement, a
"Change of Control" shall be deemed to have occurred if:
(a) any "person," including a "group" as determined in accordance
with Section 13(d)(3) of the Securities Exchange Act of 1934
(the "Exchange Act"), is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding securities;
(b) as a result of, or in connection with, any tender offer or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions
(a "Transaction"), the persons who were directors of the Company before
the Transaction shall cease to constitute a majority of the Board of
Directors of the Company or any successor to the Company;
(c) the Company is merged or consolidated with another corporation
and as a result of such merger or consolidation less than 70% of the
outstanding voting securities of the surviving or resulting corporation
shall then be owned in the aggregate by the former stockholders of the
Company, other than (x) affiliates within the meaning of the Exchange
Act, or (y) any party to such merger or consolidation;
(d) a tender offer or exchange offer is made and consummated for
the ownership of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding voting
securities; or
(e) the Company transfers substantially all of its assets to
another corporation which is not a wholly owned subsidiary of the
Company;
provided, however, that unless the Board of Directors of the
Company determines otherwise prior to the date of any event
described in the foregoing clauses (a) - (e) above ("Event"), a
"Change of Control" shall not have occurred if any Event
results, directly or indirectly, in the beneficial ownership by
the employees, former employees or members of the Board of
Directors of the Company of:
(x) substantially all of the assets of the
Company; or
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(y) securities of the Company representing
30% or more of the combined voting power of the
outstanding securities of the Company or any
successor to the Company.
3. EMPLOYMENT PERIOD: The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the
employ of the Company, in accordance with the terms and provisions of
this Agreement, for the period commencing on the Effective Date and
ending on the earlier to occur of (i) the third anniversary of such
Effective Date or (ii) the first day of the month coinciding with or next
following the Executive's attainment of age 67.
4. TERMS OF EMPLOYMENT:
A. POSITION AND DUTIES:
(i) During the Employment Period and until the date
of his termination of employment hereunder, the Executive shall
be employed as the President of the Company and be responsible
for the general management of the affairs of the Company. It
is the intention of the parties that during the Employment
Period the Executive shall continue to be elected to and serve
on the Board for approximately one year and that he will not
seek reelection in 1995. The Executive, in carrying out his
duties under this Agreement, shall report only to the Chairman
of the Board. During the Employment Period, (a) the
Executive's position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities
shall be at least commensurate in all material respects with
the most significant of those held, exercised and assigned at
any time during the 90-day period immediately preceding the
Effective Date, except as otherwise provided immediately above
and (b) the Executive's services shall be performed at the
location where the Executive was employed immediately preceding
the Effective Date or any office which is the headquarters of
the Company and is less than 250 miles from such location. It
is hereby agreed and understood that Executive may be required
by the Company to move his business office (within the 250-mile
limit set forth above) but not his principle place of
residence. In the event that the Company requires Executive to
move his main office outside of Harris County, the Company
shall provide, at no expense to Executive, an apartment or
townhome in the new location which is commensurate with
Executive's standard of living.
(ii) During the Employment Period, and excluding any
periods of vacation and sick leave to which the Executive is
entitled, the Executive agrees to devote reasonable attention
and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive
hereunder, to use the Executive's reasonable best efforts to
perform faithfully and efficiently such responsibilities.
During the Employment Period it shall not be a violation of
this Agreement for the Executive to (a) serve on corporate,
civic or charitable boards or committees, (b) deliver lectures,
fulfill speaking engagements or teach at educational
institutions and (c) manage personal investments, so long as
such activities do not significantly interfere with the
performance of the Executive's
-4-
responsibilities as an employee of the Company in accordance
with this Agreement. It is expressly understood and agreed
that to the extent that any such activities have been conducted
by the Executive prior to the Effective Date, the continued
conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the
Effective Date shall not thereafter be deemed to interfere with
the performance of the Executive's responsibilities to the
Company.
B. COMPENSATION:
(i) ANNUAL BASE SALARY: During the Employment
Period, the Executive shall receive an Annual Base Salary at a
monthly rate at least equal to the highest monthly base salary
paid to the Executive by the Company during the 12-month period
immediately preceding the month in which the Effective Date
occurs. Thereafter, the Annual Base Salary shall increase by
not less than 5% each year (unless a smaller percentage is
agreed upon between the parties) with the increases being
effective on the same date that similar salary changes are
effective for other members of the senior group of executives
of the Company. During the Employment Period and subject to
the provisions of the preceding sentence, the Annual Base
Salary shall be reviewed at least annually and shall be
increased at any time and from time to time as shall be
substantially consistent with increases in base salary
generally awarded in the ordinary course of business to other
peer executives of the Company and its Affiliated Companies.
Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this
Agreement. Annual Base Salary shall not be reduced after any
such increase and the term Annual Base Salary as utilized in
this Agreement shall refer to Annual Base Salary as so
increased.
(ii) ANNUAL BONUS: In addition to Annual Base
Salary, the Executive shall be awarded, for each fiscal year
ending during the Employment Period, an annual bonus
(the "Annual Bonus") in cash and/or common stock of the Company
as determined in accordance with the existing bonus plans of
the Company, the Executive Incentive Compensation Plan ("EICP")
and the Long-Term Incentive Compensation Plan ("LICP"), or any
successor plan or plans, if any successor of the Company has a
superior bonus plan or plans. Each such Annual Bonus shall be
in an amount not less than the greater of (1) 125% of Annual
Base Salary or (2) the bonus payable to the Executive for the
applicable year under the EICP and LICP or said successor
superior plan assuming that any performance objectives
thereunder had been met at the "target" level; and, such Annual
Bonus shall be paid at the same time or times as similar
bonuses are paid to other peer executives of the Company,
unless the Executive shall elect to defer the receipt of such
Annual Bonus. For all purposes of this Agreement, "Annual
Bonus" shall be deemed to include but not necessarily limited
to the aggregate of (a) cash paid during a given year under the
EICP for short-term annual awards thereunder and (b) the dollar
value of shares of the Company's common stock paid out during a
given year under the LICP based on the achievement of certain
performance goals, plus dividend equivalent accruals during the
performance period.
-5-
(iii) INCENTIVE, SAVINGS AND RETIREMENT
PLANS: During the Employment Period, the Executive shall be
entitled to participate in all incentive, savings and
retirement plans, practices, policies and programs applicable
generally to other peer executives of the Company and its
Affiliated Companies, but in no event shall such plans,
practices, policies and programs provide the Executive with
incentive opportunities (measured with respect to both regular
and special incentive opportunities, to the extent, if any,
that such distinction is applicable), savings opportunities and
retirement benefit opportunities, in each case, less favorable,
in the aggregate, than the most favorable of those provided by
the Company and its Affiliated Companies for the Executive
under such plans, practices, policies and programs as in effect
at any time during the 90-day period immediately preceding the
Effective Date or if more favorable to the Executive, those
provided generally at any time after the Effective Date to
other peer executives of the Company and its Affiliated
Companies.
(iv) WELFARE BENEFIT PLANS: During the Employment
Period, the Executive and/or the Executive's family, as the
case may be, shall be eligible for participation in and shall
receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company and its
Affiliated Companies (including, without limitation, medical,
prescription, dental, disability, executive salary continuance,
employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable
generally to other peer executives of the Company and its
Affiliated Companies, but in no event shall such plans,
practices, policies and programs provide the Executive with
benefits which are less favorable, in the aggregate, than the
most favorable of such plans, practices, policies and programs
in effect for the Executive at any time during the 90-day
period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any
time after the Effective Date to other peer executives of the
Company and its Affiliated Companies.
(v) EXPENSES: During the Employment Period, the
Executive shall be entitled to receive prompt reimbursement for
all reasonable expenses incurred by the Executive in accordance
with the most favorable policies, practices and procedures of
the Company and its Affiliated Companies in effect for the
Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its
Affiliated Companies.
(vi) FRINGE BENEFITS: During the Employment Period, the
Executive shall be entitled to fringe benefits in accordance with
the most favorable plans, practices, programs and policies of the
Company and its Affiliated Companies in effect for the Executive at
any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer
executives of the Company and its Affiliated Companies.
-6-
(vii) OFFICE AND SUPPORT STAFF: During the
Employment Period, the Executive shall be entitled to an office
or offices of a size and with furnishings and other
appointments, and to exclusive personal secretarial and other
assistance, at least equal to the most favorable of the
foregoing provided to the Executive by the Company and its
Affiliated Companies at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable
to the Executive, as provided generally at any time thereafter
with respect to other peer executives of the Company and its
Affiliated Companies.
(viii) VACATION: During the Employment Period,
the Executive shall be entitled to paid vacation in accordance
with the most favorable plans, policies, programs and practices
of the Company and its Affiliated Companies as in effect for
the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its
Affiliated Companies.
(ix) OTHER PERQUISITES: During the Employment
Period, the Executive shall continue to be provided with such
perquisites as were provided to the Executive on the Effective
Date of this Agreement. Such perquisites shall be reviewed
annually by the Personnel Committee of the Board. In addition,
the Executive shall be entitled to reimbursement for expenses
incurred with respect to the preparation of his personal income
tax returns and for financial counseling in an amount not to
exceed $10,000 per calendar year.
5. TERMINATION OF EMPLOYMENT:
A. DEATH OR DISABILITY: The Executive's employment shall
terminate automatically upon the Executive's death during the Employment
Period. If the Company determines in good faith that the Disability of
the Executive has occurred during the Employment Period, it may give to
the Executive written notice in accordance with Section 15(B) of this
Agreement of its intention to terminate the Executive's employment. In
such event, the Executive's employment with the Company shall terminate
effective on the 30th day after receipt of such notice by the Executive
(the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties.
B. CAUSE: The Company may terminate the Executive's
employment during the Employment Period for Cause. For purposes of this
Agreement, "Cause" shall mean (i) repeated violations by the Executive of
the Executive's obligations under Section 4(A) of this Agreement (other
than as a result of incapacity due to physical or mental illness) which
are demonstrably willful and deliberate on the Executive's part, which
are committed in bad faith or without reasonable belief that such
violations are in the best interests of the Company and which are not
remedied in a reasonable period of time after receipt of written notice
from the Company specifying such violations or (ii) the conviction of the
Executive of a felony involving moral turpitude.
-7-
C. GOOD REASON: The Executive's employment may be terminated
during the Employment Period by the Executive for Good Reason. For
purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties or responsibilities as contemplated by
Section 4(A) of this Agreement, or any other action by the
Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any of
the provisions of Section 4(B) of this Agreement, other than an
isolated, insubstantial and inadvertent failure not occurring
in bad faith and which is remedied by the Company promptly
after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be
based at any office or location other than that described in
Section 4(A)(i) hereof or the Company's failure to provide the
residence required by Section 4(A)(i);
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by
this Agreement; or
(v) any failure by the Company to comply with and
satisfy Section 11(C) of this Agreement, provided that such
successor has received at least ten days' prior written notice
from the Company or the Executive of the requirements of
Section 11(C) of this Agreement.
For purposes of this Section 5(C), any good faith determination of "Good
Reason" made by the Executive shall be conclusive.
D. NOTICE OF TERMINATION: Any termination by the Company for
Cause, or by the Executive for Good Reason, shall be communicated by
Notice of Termination to the other party hereto given in accordance with
Section 15(B) of this Agreement. For purposes of this Agreement, a
"Notice of Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt
of such notice, specifies the termination date (which date shall be not
more than 15 days after the giving of such notice). The failure by the
Executive or the Company to set forth in the Notice of Termination any
fact or circumstance which contributes to a showing of Good Reason or
Cause shall not waive any right of the Executive or the Company hereunder
or preclude the Executive or the Company
-8-
from asserting such fact or circumstance in enforcing the Executive's or
the Company's rights hereunder.
E. DATE OF TERMINATION: "Date of Termination" means (i) if
the Executive's employment is terminated by the Company for Cause, or by
the Executive for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the date
on which the Company notifies the Executive of such termination and
(iii) if the Executive's employment is terminated by reason of death or
Disability, the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may be.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION:
A. GOOD REASON, OTHER THAN FOR CAUSE, DEATH OR
DISABILITY: If, during the Employment Period, the Company shall
terminate the Executive's employment other than for Cause or Disability
or the Executive shall terminate employment for Good Reason, then:
(i) the Company shall pay to the Executive in a lump
sum in cash (or common stock of the Company with respect to
certain payments under LICP), within 30 days after the Date of
Termination, the aggregate of (1) the Executive's Annual Base
Salary and Annual Bonus remaining owing to the Executive for
the Employment Period as if there had been no termination
determined without any reduction for the present value of such
lump-sum payment and (2) any accrued vacation pay, in each case
to the extent not theretofore paid (the sum of the amounts
described in clauses (1) and (2) above shall be hereinafter
referred to as the "Accrued Obligations");
(ii) the benefits accrued up to the Date of
Termination under the Retirement Plan and the Benefit
Restoration Plan of the Company or any successor plan thereto
("SERP" herein) shall commence immediately thereunder in such
form as elected by the Executive in accordance with the terms
of said Plans and, notwithstanding any provision of the SERP to
the contrary, the Company and the Board hereby agree to cause
the SERP to be administered so that no benefit payable under
the SERP may be commuted and paid in a lump sum by the Company;
(iii) the Company shall pay a separate monthly
supplemental retirement benefit equal to the difference between
(1) the benefit payable under the Retirement Plan and the SERP
or any other successor supplemental and/or excess retirement
plan of the Company and its Affiliated Companies providing
benefits for the Executive which the Executive would receive if
the Executive's employment continued at the compensation level
provided for in Sections 4(B)(i) and 4(B)(ii) of this Agreement
for the remainder of the Employment Period, assuming for this
purpose that all accrued benefits are fully vested and that
benefit accrual formulas and actuarial assumptions are no less
advantageous to the Executive than those in effect during the
90-day period immediately
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preceding the Effective Date, and (2) the Executive's actual
benefit (paid or payable), if any, under the Retirement Plan
and the SERP (the amount of such benefit calculated under this
Section 6(A)(iii) which shall commence at the same time and be
payable in the same form as the amounts described in
Section 6(A)(ii) shall be hereinafter referred to as
the "Supplemental Retirement Benefit");
(iv) for the remainder of the Employment Period, or
such longer period as any plan, program, practice or policy may
provide, the Company shall continue benefits to the Executive
and/or the Executive's family at least equal to those which
would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 4(B)(iv)
of this Agreement if the Executive's employment had not been
terminated in accordance with the most favorable plans,
practices, programs or policies of the Company and its
Affiliated Companies as in effect and applicable generally to
other peer executives and their families during the 90-day
period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company
and its Affiliated Companies and their families; provided,
however, that if the Executive becomes reemployed with another
employer and is eligible to receive medical or other welfare
benefits under another employer provided plan, the medical and
other welfare benefits described herein shall be secondary to
those provided under such other plan during such applicable
period of eligibility (such continuation of such benefits for
the applicable period herein set forth shall be hereinafter
referred to as "Welfare Benefit Continuation"). For purposes
of determining eligibility of the Executive for retiree
benefits pursuant to such plans, practices, programs and
policies, the Executive shall be considered to have remained
employed until the end of the Employment Period and to have
retired on the last day of such period;
(v) to the extent not theretofore paid or provided,
the Company shall timely pay or provide to the Executive and/or
the Executive's family any other amounts or benefits required
to be paid or provided or which the Executive and/or the
Executive's family is eligible to receive pursuant to this
Agreement and under any plan, program, policy or practice or
contract or agreement of the Company and its Affiliated
Companies as in effect and applicable generally to other peer
executives and their families during the 90-day period
immediately preceding the Effective Date or, if more favorable
to the Executive, as in effect generally thereafter with
respect to other peer executives of the Company and its
Affiliated Companies and their families (such other amounts and
benefits shall be hereinafter referred to as the "Other
Benefits"); provided, however, that the Company and the Board
hereby agree to cause the Deferred Compensation Plan to be
administered so that any and all amounts of salary and/or bonus
theretofore deferred by Executive and held under the Deferred
Compensation Plan of the Company with instructions from
Executive to pay in 15 annual installments shall be paid in
said 15 installments commencing at the end of the Employment
Period and shall not be commuted
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and paid in a lump sum, notwithstanding any provision of the
Deferred Compensation Plan to the contrary; and
(vi) the Company shall pay to Executive in a lump sum in
cash, within 30 days after the Date of Termination, the amount
it would have contributed as an employer contribution to the
tax-qualified Savings Plan of the Company for the remainder of
the Employment Period had Executive contributed at the maximum
rate during said period and had the terms of said Savings Plan
as in effect on the Effective Date remained unchanged during
said remainder of the Employment Period.
B. DEATH: If the Executive's employment is terminated by
reason of the Executive's death during the Employment Period, this
Agreement shall terminate without further obligations to the Executive's
Beneficiary or other legal representatives under this Agreement, other
than for (i) payment of Accrued Obligations (which shall be paid to the
Executive's Beneficiary in a lump sum in cash (or common stock of the
Company with respect to certain payments under LICP) within 30 days of
the Date of Termination) and the timely payment or provision of the
Welfare Benefit Continuation and Other Benefits and (ii) payment to the
Executive's Beneficiary in a lump sum in cash within 30 days of the Date
of Termination of an amount equal to the actuarial equivalent (utilizing
for this purpose the assumptions utilized with respect to the Retirement
Plan on the Effective Date) of the Supplemental Retirement Benefit.
C. DISABILITY: If the Executive's employment is terminated
by reason of the Executive's Disability during the Employment Period,
this Agreement shall terminate without further obligations to the
Executive under this Agreement, other than for (i) payment of Accrued
Obligations (which shall be paid to the Executive in a lump sum in cash
(or common stock of the Company with respect to certain payments under
LICP) within 30 days of the Date of Termination) and the timely payment
or provision of the Welfare Benefit Continuation and Other Benefits and
(ii) payment to the Executive in a lump sum in cash within 30 days of the
Date of Termination of an amount equal to the actuarial equivalent
(utilizing for this purpose the assumptions utilized with respect to the
Retirement Plan on the Effective Date) of the Supplemental Retirement
Benefit.
D. CAUSE; OTHER THAN FOR GOOD REASON: If the Executive's
employment shall be terminated for Cause during the Employment Period or
if the Executive terminates employment during the Employment Period,
excluding a termination for Good Reason or by reason of death or
Disability, this Agreement shall terminate without further obligations to
the Executive other than the obligation to pay to Executive the Annual
Base Salary through the Date of Termination plus the amount of any
compensation previously deferred by the Executive, in each case to the
extent theretofore unpaid, and the timely provision of Other Benefits.
In such case, any unpaid but due Annual Base Salary shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of
Termination.
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E. GROUP LIFE INSURANCE: Upon a termination of employment
during or at the end of the Employment Period for any reason other than
death or for Cause, the Executive may elect to retain the group life
insurance coverage provided to Executive and other employees of the
Company under the Group Life Insurance Plan of the Company, and, if the
election is made, Executive shall pay, or reimburse the Company for the
cost of, the premiums for such insurance paid by the Company at the same
rate charged active employees of the Company for similar coverage
utilizing the same method or procedure for calculating the premium as in
effect and applicable for Executive as of the date of execution hereof.
Such right to maintain group coverage shall be in the minimum amount of
three times Annual Base Salary and shall continue for the life of
Executive. It is hereby understood and agreed that there shall be no
increase in said premium because of any reallocation due to age or risk
that may occur after the date of execution hereof.
F. RETIREMENT: If Executive terminates his employment with
the Company by reason of retirement with the consent of the Company
during the Employment Period, he shall be entitled to receive under this
Agreement, in addition to all other benefits otherwise due from the
Company upon retirement, the prompt payment of all benefits due under
Section 6(A) had the Executive terminated employment for Good Reason.
Furthermore, Executive shall be entitled until the end of the Employment
Period to the prompt reimbursement of all expenses incurred for civic or
industry activities undertaken on behalf of the Company which are of a
similar nature and scope to those expenses reimbursable by the Company to
Executive on the Effective Date. In this connection, Executive shall
also be afforded reasonable use of any Company aircraft.
G. OFFICE: Upon a termination of employment during the
Employment Period for any reason other than death or for Cause, the
Company shall provide Executive with suitable executive office space and
secretarial help at an acceptable location outside the premises of any
Company location. Such office and secretary shall be provided Executive
until such time as mutually agreed by the parties to be no longer
necessary.
H. SALARY CONTINUATION PLAN: Upon a termination of
employment during the Employment Period for any reason, the Company
hereby agrees that Executive shall be fully vested in the benefit
provided under the Salary Continuation Plan, as in effect on the
Effective Date, and that the benefit payable thereunder shall be based on
his Annual Base Salary as provided in Section 4(B)(i).
7. NON-EXCLUSIVITY OF RIGHTS: Except as provided in Section 6 of
this Agreement, nothing in this Agreement shall prevent or limit the
Executive's continuing or further participation in any plan, program,
policy or practice provided by the Company or any of its Affiliated
Companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its Affiliated
Companies. Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan, policy, practice or program
of or any contract or agreement with the Company or any of its Affiliated
Companies at or subsequent to the Date of Termination shall be payable in
accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
-12-
8. FULL SETTLEMENT; RESOLUTION OF DISPUTES:
A. The Company's obligation to make the payments provided for
in this Agreement and otherwise to perform its obligations hereunder
shall not be affected by any set-off, counterclaim, recoupment, defense
or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to
seek other employment or take any other action by way of mitigation of
the amounts payable to the Executive under any of the provisions of this
Agreement and, except as provided in Section 6(A)(iv) of this Agreement,
such amounts shall not be reduced whether or not the Executive obtains
other employment. The Company agrees to pay promptly as incurred, to the
full extent permitted by law, all legal fees and expenses which the
Executive may reasonably incur as a result of any contest (regardless of
the outcome thereof) by the Company, the Executive or others of the
validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant
to this Agreement), plus in each case interest on any delayed payment at
the applicable Federal rate provided for in Section 7872(f)(2)(A) of the
Code. In addition and to the extent not already provided by the terms of
any insurance policy owned by the Company, the Company hereby agrees to
pay promptly as incurred, to the full extent permitted by law, all legal
fees and expenses which the Executive may reasonably incur as a result of
any litigation or other legal action filed against the Executive or his
estate arising out of, or in any way connected with or resulting from,
actions taken or omitted to be taken by Executive during his employment
with the Company.
B. If there shall be any dispute between the Company and the
Executive (i) in the event of any termination of the Executive's
employment by the Company, whether such termination was for Cause, or
(ii) in the event of any termination of employment by the Executive,
whether Good Reason existed, then, unless and until there is a final,
nonappealable judgment by a court of competent jurisdiction declaring
that such termination was for Cause or that the determination by the
Executive of the existence of Good Reason was not made in good faith, the
Company shall pay all amounts, and provide all benefits, to the Executive
and/or the Executive's family or other beneficiaries, as the case may be,
that the Company would be required to pay or provide pursuant to
Section 6(A) hereof as though such termination were by the Company
without Cause or by the Executive with Good Reason; provided, however,
that the Company shall not be required to pay any disputed amounts
pursuant to this paragraph except upon receipt of an undertaking by or on
behalf of the Executive to repay all such amounts to which the Executive
is ultimately adjudged by such court not to be entitled.
9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY:
A. Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the terms of
this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred by the Executive with respect to such
excise tax (such excise tax, together with any such interest and
penalties, are
-13-
hereinafter collectively referred to as the "Excise Tax"), then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment (whether through
withholding at the source or otherwise) by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto), employment taxes and Excise Tax
imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
B. Subject to the provisions of Section 9(C), all
determinations required to be made under this Section 9, including
whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by Deloitte & Touche (the "Accounting Firm")
which shall provide detailed supporting calculations both to the Company
and the Executive within 15 business days of the receipt of notice from
the Executive that there has been a Payment, or such earlier time as is
requested by the Company. In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm
shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 9, shall be paid by the Company to
the Executive within five days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the Executive with a written
opinion that failure to report the Excise Tax on the Executive's
applicable federal income tax return would not result in the imposition
of a negligence or similar penalty. Any determination by the Accounting
Firm shall be binding upon the Company and the Executive. As a result of
the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the
Company should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 9(C) and the Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the Company
to or for the benefit of the Executive.
C. The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require
the payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten business days
after the Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid. The Executive shall not pay such
claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending
on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration
of such period that it desires to contest such claim, the Executive
shall:
-14-
(i) give the Company any information reasonably
requested by the Company relating to such claim;
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in writing
from time to time, including, without limitation, accepting
legal representation with respect to such claim by an attorney
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in
order effectively to contest such claim; and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax, employment tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this
Section 9(C), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo
any and all administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may, at its sole
option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine; provided, however,
that if the Company directs the Executive to pay such claim and sue for a
refund, the Company shall advance the amount of such payment to the
Executive, on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax,
employment tax or income tax (including interest or penalties with
respect thereto) imposed with respect to such advance or with respect to
any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
D. If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(C), the Executive becomes
entitled to receive any refund with respect to such claim, the Executive
shall (subject to the Company's complying with the requirements of
Section 9(C)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(C), a determination is made
that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of
its intent to contest
-15-
such denial of refund prior to the expiration of 30 days after such
termination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.
10. CONFIDENTIAL INFORMATION: The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or
any of its Affiliated Companies, and their respective businesses, which
shall have been obtained by the Executive during the Executive's
employment by the Company or any of its Affiliated Companies and which
shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of
the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone
other than the Company and those designated by it. In no event shall an
asserted violation of the provisions of this Section 10 constitute a
basis for deferring or withholding any amounts otherwise payable to the
Executive under this Agreement.
11. SUCCESSORS:
A. This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives.
B. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
C. The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no
such succession had taken place. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform
this Agreement by operation of law, or otherwise.
12. SOURCE OF PAYMENTS: All payments provided in this Agreement
shall, unless the plan or program pursuant to which they are made provide
otherwise, be paid in cash from the general funds of the Company, and no
special or separate funds shall be established and no other segregation
of assets shall be made to assure payment. Executive shall have no
right, title or interest whatever in or to any investments which the
Company may make to aid the Company in meeting its obligations hereunder.
Nothing contained in this Agreement, and no action taken pursuant to this
provision, shall create or be construed to create a trust of any kind, or
a fiduciary relationship, between the Company and Executive or any other
person. To the extent that any person acquires a right to receive
payments from the Company hereunder, such right shall be no greater than
the right of an unsecured creditor of the Company.
-16-
13. EFFECT OF PRIOR AGREEMENTS: This Agreement contains the entire
understanding between the parties hereto and supersedes any prior
employment agreement between the Company or any predecessor of the
Company and Executive, except that this Agreement shall not affect or
operate to reduce any benefit or compensation inuring to Executive of a
kind elsewhere provided and not expressly provided or modified in this
Agreement. Specifically, but not by way of limitation, this Agreement
supersedes and replaces that certain Employment Agreement between the
parties, dated May 12, 1994.
14. CONSOLIDATION, MERGER OR SALE OF ASSETS: Nothing in this
Agreement shall preclude the Company from consolidating or merging into
or with, or transferring all or substantially all of its assets to,
another corporation which assumes this Agreement and all obligations and
undertakings of the Company hereunder; provided that no such action shall
diminish Executive's rights hereunder, including, without limitation,
rights under paragraph 5(C). Upon such a consolidation, merger or
transfer of assets in assumption, the term "Company" as used herein shall
mean such other corporation.
15. MISCELLANEOUS:
A. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without reference to
principles of conflict of laws. The captions of this Agreement are not
part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written
agreement executed by the parties hereto or their respective successors
and legal representatives.
B. All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified-mail, return receipt requested, postage prepaid,
addressed as follows:
IF TO THE EXECUTIVE: Don D. Sykora
5300 Mercer
#8 Auburn Place
Houston, Texas 77005
IF TO THE COMPANY: Houston Industries Incorporated
Five Post Oak Park
P.O. Box 4567
Houston, Texas 77210
ATTENTION: Mr. Hugh Rice Kelly
Vice President, General
Counsel and Secretary
or to such other address as either party shall have furnished to the
other in writing in accordance herewith. Notice and communications shall
be effective when actually received by the addressee.
-17-
C. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement.
D. The Company may withhold from any amounts payable under
this Agreement such Federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
E. The Executive's or the Company's failure to insist upon
strict compliance with any provision hereof or any other provision of
this Agreement or the failure to assert any right the Executive or the
Company may have hereunder, including, without limitation, the right of
the Executive to terminate employment for Good Reason pursuant to
Section 5(C)(i)-(v) of this Agreement, shall not be deemed to be a waiver
of such provision or right or any other provision or right of this
Agreement.
F. The headings of paragraphs herein are included solely for
convenience and reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
G. Contemporaneously with execution of this Agreement,
Executive shall be furnished a certified copy of a resolution of the
Board of Directors authorizing the execution and delivery of this
Agreement.
PART B
EXTENDED EMPLOYMENT TERM
The Board has determined that it is in the best interests of
the Company and its shareholders to assure that the Company will have the
continued benefit of the Executive's services for a transition period
following the Executive's attainment of age 65 in the event that the
Executive remains employed by the Company on the date he attains age 65.
Therefore, in order to accomplish this objective and in consideration of
Executive's agreement to remain employed beyond normal retirement age,
the Board has caused the Company to enter into this Part B of this
Agreement. This Part B shall be effective immediately upon the execution
of this Agreement and shall be null and void immediately upon (a) a
Change in Control (as defined in Part A above), whereupon the provisions
of Part A shall govern, or (b) the day that the Executive attains age 65
if he is not employed by the Company on such day.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. EMPLOYMENT PRIOR TO AGE 65: The parties hereby agree that the
Executive's employment with the Company is terminable at will by either
party until the date that the Executive attains age 65.
2. CERTAIN DEFINITIONS: Capitalized terms in this Part B shall
have the meanings herein ascribed to them or, if not defined in this
Part B, the meanings ascribed to them in Part A of this Agreement
("Part A").
-18-
3. PROVISIONS INCORPORATED BY REFERENCE: Sections 7, 8 and 10
through 15 of Part A are hereby incorporated by reference into this
Part B.
4. EMPLOYMENT PERIOD: In the event that the Executive is employed
by the Company on the date that he attains age 65, the Company hereby
agrees to continue the Executive in its employ, and the Executive hereby
agrees to remain in the employ of the Company, in accordance with the
terms and provisions of this Part B, for the period commencing on the
date immediately following the date the Executive attains age 65 and
ending on the first day of the month coinciding with or next following
the Executive's attainment of age 67 (the "Extended Employment Term").
5. TERMS OF EMPLOYMENT:
A. POSITION AND DUTIES: During the Extended Employment
Term and until the date of his termination of employment hereunder, the
Executive shall be employed as the President of the Company or in such
other executive capacities, consistent with the Executive's years of
experience with the Company, as the Board may determine in its discretion
from time to time. Unless otherwise requested by the Board, Executive
shall resign and relinquish his office as President of the Company
effective as of his attainment of age 65.
B. COMPENSATION:
(i) ANNUAL BASE SALARY: During the Extended
Employment Term, the Executive shall receive an annual base
salary (the "Annual Base Salary") at a monthly rate set by the
Board in its discretion, which salary shall be in an amount
commensurate with the Executive's position, duties and years of
experience with the Company.
(ii) BENEFIT AND BONUS PLANS: During the Extended
Employment Term, (a) the Executive shall be entitled to
participate in all incentive, savings and retirement plans,
practices, policies and programs applicable generally to other
peer executives of the Company and its Affiliated Companies and
(b) the Executive and/or the Executive's family, as the case
may be, shall be eligible for participation in and shall
receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company and its
Affiliated Companies (including, without limitation, medical,
prescription, dental, disability, executive salary continuance,
employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable
generally to other peer executives of the Company and its
Affiliated Companies (the benefits described in clauses (a) and
(b) collectively referred to herein as the "Other Benefits").
(iii) SUPPLEMENTAL RETIREMENT BENEFIT: Executive
may be entitled to a Supplemental Retirement Benefit under this
Agreement; provided that Executive shall not be entitled to
such a benefit if Executive's employment terminates for Cause
or voluntarily during the Extended Employment Term. For
purposes of determining the amount of any Supplemental
Retirement Benefit
-19-
hereunder, Executive's benefit under the SERP (including both
the Retirement Plan Restoration Benefit and the Supplemental
Retirement Benefit) shall be calculated as provided in the SERP
except that for purposes of such calculation Executive's
"Average Monthly Compensation" (as defined in the Retirement
Plan and referenced in the SERP) shall be deemed to be the
result obtained by dividing the sum of (a) and (b) by 12, where
(a) is Executive's salary received from the Company for the 12
months ended August 31, 1995 and where (b) is the EICP bonus
that would have been paid to the Executive with respect to the
year in which Executive reached age 64 had the performance
objectives thereunder been achieved at a target level for such
year. If the benefit so calculated is greater than the benefit
payable to the Executive under the terms of the SERP, the
Company shall pay to the Executive the amount of the difference
(a "Supplemental Retirement Benefit"). The Supplemental
Retirement Benefit shall be paid at the same time and in the
same manner as the Executive's benefit under the SERP.
(iv) SUPPLEMENTAL BENEFIT UPON DEATH OR
DISABILITY: If the Executive's employment is terminated by
reason of the Executive's death or Disability during the
Extended Employment Term or if the Executive dies following
completion of the Extended Employment Term, any death or
disability benefit that is payable to the Executive or his
Beneficiary under the Company's Executive Benefits Plan and
that is calculated with reference to the Executive's salary at
termination of employment shall be calculated hereunder based
on the Executive's salary in effect immediately prior to
attainment of age 65. If a death or disability benefit is
greater when calculated under this Section B than the benefit
payable pursuant to the Executive Benefits Plan
(the "Underlying Benefit"), the Company shall pay to the
Executive or his Beneficiary the amount of the difference
(a "Supplemental Benefit"). Any Supplemental Benefit shall be
paid at the same time and in the same manner as the Underlying
Benefit.
(v) GROUP LIFE INSURANCE: Upon a termination of
employment (a) during the Extended Employment Term for any
reason other than voluntarily, by death or for Cause or (b) at
the end of the Extended Employment Term, the Executive may
elect to retain the group life insurance coverage provided to
Executive and other employees of the Company under the Group
Life Insurance Plan of the Company, and, if the election is
made, Executive shall pay, or reimburse the Company for the
cost of, the premiums for such insurance paid by the Company at
the same rate charged active employees of the Company for
similar coverage utilizing the same method or procedure for
calculating the premium as in effect and applicable for
Executive on the date hereof. Such right to maintain group
coverage shall be in an amount not to exceed three times Annual
Base Salary of Executive in effect prior to Executive reaching
age 65 and shall continue for the life of Executive. It is
hereby understood and agreed that there shall be no increase in
said premium because of any reallocation due to age or risk
that may occur after the date of execution hereof.
-20-
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION:
A. VOLUNTARILY, FOR CAUSE OR BY DEATH OR DISABILITY: If the
Executive's employment shall be terminated for Cause during the Extended
Employment Term or if the Executive voluntarily terminates employment
during the Extended Employment Term, including a termination by reason of
death or Disability, this Agreement shall terminate without further
obligations to the Executive other than the obligation to pay to
Executive the Annual Base Salary through the Date of Termination plus the
amount of any compensation previously deferred by the Executive, in each
case to the extent theretofore unpaid, and the timely provision of Other
Benefits; provided that in the case of a death or Disability, the
Company shall also pay or provide any benefit for which Executive or his
Beneficiary is eligible pursuant to Section 5(B)(iii)-(v) hereof. Any
unpaid but due Annual Base Salary shall be paid to the Executive in a
lump sum in cash within 30 days of the Date of Termination.
B. TERMINATION OTHER THAN VOLUNTARILY, FOR CAUSE OR BY DEATH
OR DISABILITY: If, during the Extended Employment Term, the Company
shall terminate the Executive's employment other than for Cause or
Disability, then:
(i) the Company shall pay to the Executive in a lump
sum in cash (or common stock of the Company with respect to
certain payments under LICP), within 30 days after the Date of
Termination, the aggregate of (1) the Executive's Annual Base
Salary and any annual bonus remaining owing to the Executive
for the Extended Employment Term as if there had been no
termination determined without any reduction for the present
value of such lump-sum payment and (2) any accrued vacation
pay, in each case to the extent not theretofore paid (the sum
of the amounts described in clauses (1) and (2) above shall be
hereinafter referred to as the "Accrued Obligations");
(ii) for the remainder of the Extended Employment
Term, or such longer period as any plan, program, practice or
policy may provide, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those
which would have been provided to them in accordance with the
plans, programs, practices and policies described in
Section 5(B)(ii)(b) of this Part B if the Executive's
employment had not been terminated; and
(iii) to the extent not theretofore paid or
provided, the Company shall timely pay or provide to the
Executive and/or the Executive's family any other amounts or
benefits required to be paid or provided or which the Executive
and/or the Executive's family is eligible to receive pursuant
to this Agreement and under any plan, program, policy or
practice or contract or agreement of the Company and its
Affiliated Companies as in effect and applicable generally to
other peer executives and their families.
7. DEFERRED COMPENSATION PLAN AND SERP PAYMENTS:
Notwithstanding any provision herein or any provision of the Deferred
Compensation Plan of the Company to the contrary, the Company and the
Board hereby agree to cause the Deferred Compensation Plan to be
administered so that any and all amounts of salary and/or bonus
theretofore deferred by
-21-
Executive and held under the Deferred Compensation Plan with instructions
from Executive to pay in 15 annual installments shall be paid in said 15
installments, shall remain in said Plan earning interest at the rate
prescribed therein until installment distributions commence, shall
commence as provided under the terms of the Deferred Compensation Plan
but shall not be commuted and paid in a lump sum. Notwithstanding any
provision of this Agreement or any provision of the SERP to the contrary,
the Company and the Board hereby agree to cause the SERP to be
administered so that no benefit payable to or on behalf of Executive
under the SERP may be commuted and paid in a lump sum.
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization from its Board of
Directors, the Company has caused these presents to be executed in its
name and on its behalf, all as of the day and year first above written.
HOUSTON INDUSTRIES INCORPORATED
By JOHN T. CATER
John T. Cater, Chairman of Personnel
Committee of the Board of Directors
EXECUTIVE
DON D. SYKORA
Don D. Sykora
-22-
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 Six Months Ended
June 30, June 30,
-------------------------------- ----------------------------
1994 1993 1994 1993
Primary Earnings Per Share:
(1) Weighted average shares of
common stock outstanding................. 130,708,985 129,849,302 130,707,875 129,725,481
(2) Effect of issuance of shares
from assumed exercise of
stock options
(treasury stock method).................. (66,344) (619) (42,705) 2,543
------------ ------------ ------------ ------------
(3) Weighted average shares........................ 130,642,641 129,848,683 130,665,170 129,728,024
============ ============ ============ ============
(4) Net income..................................... $ 133,828 $ 100,209 $ 164,003 $ 127,264
(5) Primary earnings per share
(line 4/line 3).......................... $ 1.02 $ .77 $ 1.26 $ .98
Fully Diluted Earnings Per Share:
(6) Weighted average shares per
computation on line 3 above.............. 130,642,641 129,848,683 130,665,170 129,728,024
(7) Shares applicable to options
included on line 2 above................. 66,344 619 42,705 (2,543)
(8) Dilutive effect of stock
options based on the average
price for the period or period-
end price, whichever is higher,
of $33.63 and $44.67 for the
second quarter of 1994 and 1993,
respectively, and $37.06 and
$45.77 for the first six months
of 1994 and 1993, respectively.
(treasury stock method).................. (66,344) (619) (42,705) 2,543
------------ ------------ ------------ ------------
(9) Weighted average shares........................ 130,642,641 129,848,683 130,665,170 129,728,024
============ ============ ============ ============
(10) Net income..................................... $ 133,828 $ 100,209 $ 164,003 $ 127,264
(11) Fully diluted earnings per
share (line 10/line 9)................... $ 1.02 $ .77 $ 1.26 $ .98
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 quarters and six months ended June 30, 1994 and
1993 are submitted in accordance with Regulation S-K item 601(b) (11)
although they are contrary to paragraphs 30 and 40 of APB No. 15 because
they produce anti-dilutive results.
EXHIBIT 12
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
Six Twelve
Months Ended Months Ended
June 30, 1994 June 30, 1994
Fixed Charges as Defined:
(1) Interest on Long-Term Debt.................. $ 173,462 $ 359,927
(2) Other Interest.............................. 11,657 15,728
(3) Preferred Dividends Factor
of Subsidiary........................ 26,348 52,810
(4) Interest Component of Rentals
Charged to Operating Expense......... 1,909 4,151
------------- -----------
(5) Total Fixed Charges......................... $ 213,376 $ 432,616
============= ===========
Earnings as Defined:
(6) Income Before Cumulative Effect
of Change in Accounting for
Postemployment Benefits.............. $ 172,203 $ 460,974
(7) Income Taxes .............................. 100,554 271,641
(8) Fixed Charges (line 5)...................... 213,376 432,616
------------- -----------
(9) Earnings Before Income Taxes
and Fixed Charges.................... $ 486,133 $ 1,165,231
============= ===========
Preferred Dividends Factor of
Subsidiary:
(10) Preferred Stock Dividends of
Subsidiary........................... $ 16,676 $ 33,214
(11) Ratio of Pre-Tax Income to
Net Income (line 6 plus
line 7 divided by line 6)............ 1.58 1.59
------------- -----------
(12) Preferred Dividends Factor of
Subsidiary (line 10 times
line 11)............................. $ 26,348 $ 52,810
============= ===========
Ratio of Earnings to Fixed Charges
(line 9 divided by line 5)..................... 2.28 2.69
EXHIBIT 99(a)
(8) COMMITMENTS AND CONTINGENCIES
(a) HL&P. HL&P has various commitments for capital expenditures,
fuel, purchased power, cooling water and operating leases.
Commitments in connection with HL&P's capital program are
generally revocable by HL&P subject to reimbursement to
manufacturers for expenditures incurred or other cancellation
penalties. HL&P's other commitments have various quantity
requirements and durations. However, if these requirements could
not be met, various alternatives are available to mitigate the
cost associated with the contracts' commitments.
HL&P's capital program (exclusive of AFUDC) is presently
estimated to cost $478 million in 1994, $381 million in 1995 and
$418 million in 1996. These amounts do not include expenditures
on projects for which HL&P expects to be reimbursed by customers
or other parties.
HL&P has entered into several long-term coal, lignite and natural
gas contracts which have various quantity requirements and
durations. Minimum obligations for coal and transportation
agreements are approximately $167 million in 1994, and $165
million in 1995 and 1996. In addition, the minimum obligations
under the lignite mining and lease agreements will be
approximately $14 million annually during the 1994-1996 period.
HL&P has entered into several gas purchase agreements containing
contract terms in excess of one year which provide for specified
purchase and delivery obligations. Minimum obligations for
natural gas purchase and natural gas storage contracts are
approximately $57.4 million in 1994, $58.9 million in 1995 and
$60.5 million in 1996. Collectively, the gas supply contracts
included in these figures could amount to 11% of HL&P's annual
natural gas requirements. The Utility Commission's rules provide
for recovery of the coal, lignite and natural gas costs described
above through the energy component of HL&P's electric rates.
Nuclear fuel costs are also included in the energy component of
HL&P's electric rates based on the cost of nuclear fuel consumed
in the reactor.
HL&P has commitments to purchase firm capacity from cogenerators
of approximately $145 million in 1994, $32 million in 1995 and
$22 million in 1996. The Utility Commission's rules allow
recovery of these costs through HL&P's base rates for electric
service and additionally authorize HL&P to charge or credit
customers for any variation in actual purchased power cost from
the cost utilized to determine its base rates. In the event that
the Utility Commission, at some future date, does not allow
recovery through rates of any amount of purchased power payments,
the three principal firm capacity contracts contain provisions
allowing HL&P to suspend or reduce payments and seek repayment
for amounts disallowed.
In November 1990, the Clean Air Act was extensively amended by
Congress. HL&P has already made an investment in pollution
control facilities, and all of its generating facilities
currently comply in all material respects with sulfur dioxide
emission standards established by the legislation. Provisions of
the Clean Air Act dealing with urban air pollution required
establishing new emission limitations for nitrogen oxides from
existing sources. 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. In addition,
continuous emission monitoring regulations are anticipated to
require expenditures of $12 million in 1994 and $2 million in
1995. Capital expenditures are expected to total $71 million for
the years 1994 through 1996.
The Energy Policy Act of 1992, which became law in October 1992,
includes a provision that assesses a fee upon domestic utilities
having purchased enrichment services from the Department of
Energy before October 22, 1992. This fee is to cover a portion
of the cost to decontaminate and decommission the enrichment
facilities. It is currently estimated that the assessment to the
South Texas Project Electric Generating Station (South Texas
Project) will be approximately $4 million in 1994 and
approximately $2 million each year thereafter (subject to
escalation for inflation), of which HL&P's share is 30.8%. This
assessment will continue until the earlier of 15 years or when
$2.25 billion (adjusted for inflation) has been collected from
domestic utilities. Based on HL&P's actual payment of $579,810
in 1993, it recorded an estimated liability of $8.7 million.
HL&P's service area is heavily dependent on oil, gas, refined
products, petrochemicals and related business. Significant
adverse events affecting these industries would negatively impact
the revenues of the Company and HL&P.
(9) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is project manager and one of four co-
owners in the South Texas Project, which consists of two 1,250
megawatt nuclear generating units. Unit Nos. 1 and 2 of the
South Texas Project achieved commercial operation in August 1988
and June 1989, respectively. Each co-owner funds its own share
of capital and operating costs associated with the plant, with
HL&P's interest in the project being 30.8%. HL&P's share of the
operation and maintenance expenses is included in electric
operation and maintenance expenses on the Company's Statements of
Consolidated Income and in the corresponding operating expense
amounts on HL&P's Statements of Income.
As of December 31, 1993, 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 $119
million, respectively.
(b) CITY OF AUSTIN LITIGATION. In 1983, the City of Austin (Austin),
one of the four co-owners of the South Texas Project, filed a
lawsuit against the Company and HL&P alleging that it was
fraudulently induced to participate in the South Texas Project
and that HL&P failed to perform properly its duties as project
manager. After a jury trial in 1989, judgment was entered in
favor of HL&P, and that judgment was affirmed on appeal. In May
1993, following the expiration of Austin's rights to appeal to
the United States Supreme Court, the judgment in favor of the
Company and HL&P became final.
On February 22, 1994, Austin filed a new suit against HL&P. In
that suit, filed in the 164th District Court for Harris County,
Texas, Austin alleges that the outages at the South Texas Project
since February 1993 are 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 asserts that such failures
have caused Austin damages of at least $125 million, which are
continuing, 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. Austin states that
it will file a "more detailed" petition at a later date. For a
discussion of the 1993 outage, see Note 9(f).
As it did in the litigation filed against HL&P in 1983, Austin
asserts that HL&P breached obligations HL&P owed under the
Participation Agreement to Austin, and Austin seeks a declaration
that HL&P had as duty to exercise reasonable care in the
operation and maintenance of the South Texas Project. In that
earlier litigation, however, the courts concluded that the
Participation Agreement did not impose on HL&P a duty to exercise
reasonable skill and care as Project Manager.
Austin also asserts in its new suit that certain terms of a
settlement reached in 1992 among HL&P and Central and South West
Corporation (CSW) and its subsidiary, Central Power and Light
Company (CPL), are invalid and void. The Participation Agreement
permits arbitration of certain disputes among the owners, and the
challenged settlement terms provide that in any future
arbitration, HL&P and CPL would each appoint an arbitrator
acceptable to the other. Austin asserts that, as a result of
this agreement, the arbitration provisions of the Participation
Agreement are void and Austin should not be required to
participate in or be bound by arbitration proceedings;
alternatively, Austin asserts that HL&P's rights with respect to
CPL's appointment of an arbitrator should be shared with all the
owners or canceled, and Austin seeks injunctive relief against
arbitration of its dispute with HL&P. For a further discussion
of the settlement among HL&P, CSW and CPL, see Note 9(c) below.
HL&P and the Company do not believe there is merit to Austin's
claims, and they intend to defend vigorously against them.
However, there can be no assurance as to the ultimate outcome of
this matter.
(c) ARBITRATION WITH CO-OWNERS. During the course of the litigation
filed by Austin in 1983, the City of San Antonio (San Antonio)
and CPL, the other two co-owners in the South Texas Project,
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.
This matter was severed from the Austin litigation and is pending
before the 101st District Court in Dallas County, Texas.
The 101st District Court ruled that the demand for arbitration is
valid and enforceable under the Participation Agreement, and that
ruling has been upheld by appellate courts. Arbitrators were
appointed by HL&P and each of the other co-owners in connection
with the District Court's ruling. The Participation Agreement
provides that the four appointed arbitrators will select a fifth
arbitrator, but that action has not yet occurred.
In 1992, the Company and HL&P entered into a settlement with CPL
and CSW, with respect to various matters including the
arbitration and related legal proceedings. Pursuant to the
settlement, CPL withdrew its demand for arbitration under the
Participation Agreement, and the Company, HL&P, CSW and CPL
dismissed litigation associated with the dispute. The settlement
also resolved other disputes between the parties concerning
various transmission agreements and related billing disputes. In
addition, the parties also agreed to support, and to seek consent
of the other owners of the South Texas Project to, certain
amendments to the Participation Agreement, including changes in
the management structure of the South Texas Project through which
HL&P would be replaced as project manager by an independent
entity.
Although settlement with CPL does not directly affect San
Antonio's pending demand for arbitration, HL&P and CPL have
reached certain other understandings which contemplate that: (i)
CPL's arbitrator previously appointed for that proceeding would
be replaced by CPL; (ii) arbitrators approved by CPL and HL&P
for any future arbitrations will be mutually acceptable to HL&P
and CPL; and (iii) HL&P and CPL will resolve any future disputes
between them concerning the South Texas Project without resorting
to the arbitration provision of the Participation Agreement. The
settlement with CPL did not have a material adverse effect on the
Company's or HL&P's financial position and results of operations.
In February 1994, San Antonio indicated a desire to move forward
with its demand for arbitration and suggested that San Antonio
considers all allegations of mismanagement against HL&P to be
appropriate subjects for arbitration in that proceeding, not just
allegations related to the planning and construction of the South
Texas Project. It is unclear what additional allegations San
Antonio may make, but it is possible that San Antonio will assert
that HL&P has liability for all or some portion of the additional
costs incurred by San Antonio due to the 1993 outage of the South
Texas Project. For a discussion of that outage see Note 9(f).
HL&P and the Company continue to regard San Antonio's claims to
be without merit. From time to time, HL&P and other parties to
these proceedings have held discussions with a view toward
settling their differences on these matters.
While HL&P and the Company cannot give definite assurance
regarding the ultimate resolution of the San Antonio litigation
and arbitration, they presently do not believe such resolutions
will have a material adverse impact on HL&P's or the Company's
financial position and results of operations.
(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability
insurance coverages as required by law and periodically review
available limits and coverage for additional protection. The
owners of the South Texas Project currently maintain $500 million
in primary property damage insurance from American Nuclear
Insurers (ANI). Effective November 15, 1993, the maximum amounts
of excess property insurance available through the insurance
industry increased from $2.125 billion to $2.2 billion. This
$2.2 billion of excess property insurance coverage includes $800
million of excess insurance from ANI and $1.4 billion of excess
property insurance coverage through participation in the Nuclear
Electric Insurance Limited (NEIL) II program. The owners of the
South Texas Project have approved the purchase of the additional
available excess property insurance coverage. Additionally,
effective January 1, 1994, ANI will be increasing their excess
property insurance limits to $850 million, and the owners of the
South Texas Project have also approved the purchase of the
additional limits at the March 1, 1994 renewal for ANI excess
property insurance. Under NEIL II, HL&P and the other owners of
the South Texas Project are subject to a maximum assessment, in
the aggregate, of approximately $15.9 million in any one policy
year. The application of the proceeds of such property insurance
is subject to the priorities established by the United States
Nuclear Regulatory Commission (NRC) regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act, the maximum liability to the
public for owners of nuclear power plants, such as the South
Texas Project, was increased from $7.9 billion to $9.3 billion
effective February 18, 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. Effective August 20, 1993, the assessment of
deferred premiums provided by the plan for each nuclear incident
has increased from $63 million to up to $75.5 million per reactor
subject to indexing for inflation, a possible 5% surcharge (but
no more than $10 million per reactor per incident in any one
year) and a 3% 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.
As of December 31, 1993, the trustee held approximately $18.7
million for decommissioning, for which the asset and liability
are reflected on the Company's Consolidated and HL&P's Balance
Sheets in deferred debits and deferred credits, respectively.
HL&P's funding level is estimated to provide approximately $146
million in 1989 dollars, an amount which currently exceeds the
NRC minimum. However, the South Texas Project co-owners have
engaged an outside consultant to review the estimated
decommissioning costs of the South Texas Project which review
should be completed by the end of 1994. While changes to present
funding levels, if any, cannot be estimated at this time, a
substantial increase in funding may be necessary. No assurance
can be given that the amounts held in trust will be adequate to
cover the decommissioning costs.
(f) 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 authorized by the NRC to
return to service. Currently, Unit No. 1 is out of service for
repairs to a small steam generator leak encountered following the
unit's shutdown to repair a feedwater control valve. Those
repairs are scheduled for completion by mid-March 1994, and no
formal NRC approval is required to resume operation of Unit No.
1. Unit No. 2 is currently scheduled to resume operation after
completion of regulatory reviews, in the spring of 1994. HL&P
removed the units from service in February 1993 when a problem
was encountered with certain pumps. At that time HL&P concluded
that the units should not resume operation until HL&P had
determined the root cause of the failure and had briefed the NRC
and corrective action had been taken. The NRC formalized that
commitment in a Confirmatory Action Letter, which confirmed that
HL&P would not resume operations until it had briefed the NRC on
its findings and actions. Subsequently, that Confirmatory Action
Letter was supplemented by the NRC to require HL&P, prior to
resuming operations, to address additional matters which were
identified during the course of analyzing the issues associated
with the original pump failure and during various subsequent NRC
inspections and reviews.
In June 1993, the NRC announced that the South Texas Project had
been placed on the NRC's "watch list" of plants with "weaknesses
that warrant increased NRC attention." Plants in this category
are authorized to operate but are subject to close monitoring by
the NRC. The NRC reviews the status of plants on this list semi-
annually, but HL&P does not anticipate that the South Texas
Project would be removed from that list until there has been a
period of operation for both units, and the NRC concludes that
the concerns which led the NRC to place the South Texas Project
on that list have been satisfactorily addressed.
The NRC's decision to place the South Texas Project on its "watch
list" followed the June 1993 issuance of a report by its
Diagnostic Evaluation Team (DET) which conducted a review of the
South Texas Project in the spring of 1993 and identified a number
of areas requiring improvement at the South Texas Project.
Conducted infrequently, NRC diagnostic evaluations do not
evaluate compliance with NRC regulations but are broad-based
evaluations of overall plant operations and are intended to
review the strengths and weaknesses of the licensee's performance
and to identify the root cause of performance problems.
The DET report found, among other things, weaknesses in
maintenance and testing, deficiencies in training and in the
material condition of some equipment, strained staffing levels in
operations and several weaknesses in engineering support. The
report cited the need to reduce backlogs of engineering and
maintenance work and to simplify work processes which, the DET
found, placed excessive burdens on operating and other plant
personnel. The report also identified the need to strengthen
management communications, oversight and teamwork as well as the
capability to identify and correct the root causes of problems.
The DET also expressed concern with regard to the adequacy of
resources committed to resolving issues at the South Texas
Project but noted that many issues had already been identified
and were being addressed by HL&P.
In response to the DET report, HL&P presented its plan to address
the issues raised in that report and began its action program to
address those concerns. While those programs were being
implemented, HL&P also initiated additional activities and
modifications that were not previously scheduled during 1993 but
which are designed to eliminate the need for some future outages
and to enhance operations at the South Texas Project. The NRC
conducted additional inspections and reviews of HL&P's plans and
agreed in February 1994 that HL&P's progress in addressing the
NRC's concerns had satisfied the issues raised in the
Confirmatory Action Letter with respect to Unit No. 1. The NRC
concurred in HL&P's determination that Unit No. 1 could resume
operation. Work is now underway to address the NRC's concerns
with respect to Unit No. 2, which HL&P anticipates will not
require as extensive an effort as was required by the NRC for
Unit No. 1. However, difficulties encountered in completing
actions required on Unit No. 2 and any additional issues which
may be raised in the conduct of those activities or in the
operation of Unit No. 1 could adversely affect the anticipated
schedule for resuming operation of Unit No. 2. During the
outage, HL&P has not had, and does not anticipate having,
difficulty in meeting its energy needs.
During the outage, both fuel and non-fuel expenditures have been
higher for HL&P than levels originally projected for the year.
HL&P's non-fuel expenditures for the South Texas Project during
1993 were approximately $115 million greater than originally
budgeted levels (of which HL&P's share was $35 million) for work
undertaken in connection with the DET and for other initiatives
taken during the year. It is expected that, subsequent to 1993,
operation and maintenance costs will continue to be higher than
previous levels in order to support additional initiatives
developed in 1993. Fuel costs also were necessarily higher due
to the use of higher cost alternative fuels. However, these
increased expenditures are expected to be offset to some extent
by savings from future outages that can now be avoided as a
result of activities accelerated into 1993 and from overall
improvement in operations resulting from implementing the
programs developed during the outage. For a discussion of
regulatory treatment related to the outage, see Notes 10(f) and
10(g).
During 1993, the NRC imposed a total of $500,000 in civil
penalties (of which HL&P's share was $154,000) in connection with
violations of NRC requirements.
In March 1993, a Houston newspaper reported that the NRC had
referred to the Department of Justice allegations that the
employment of three former employees and an employee of a
contractor to HL&P had been terminated or disrupted in
retaliation for their having made safety-related complaints to
the NRC. Such retaliation, if proved, would be contrary to
requirements of the Atomic Energy Act and regulations promulgated
by the NRC. The NRC has confirmed to HL&P that these matters
have been referred to the Department of Justice for consideration
of further action and has notified HL&P that the NRC is
considering enforcement action against HL&P and one or more HL&P
employees in connection with one of those cases. HL&P has been
advised by counsel that most referrals by the NRC to the
Department of Justice do not result in prosecutions. The Company
and HL&P strongly believe that the facts underlying these events
would not support action by the Department of Justice against
HL&P or any of its personnel; accordingly, HL&P intends to defend
vigorously against such charges. HL&P also intends to defend
vigorously against civil proceedings filed in the state court in
Matagorda County, Texas, by the complaining employees and against
administrative proceedings before the Department of Labor and the
NRC, which, independently of the Department of Justice, could
impose administrative sanctions if they find violations of the
Atomic Energy Act or the NRC regulations. These administrative
sanctions may include civil penalties in the case of the NRC and,
in the case of the Department of Labor, ordering reinstatement
and back pay and/or imposing civil penalties. Although the
Company and HL&P do not believe these allegations have merit or
will have a material adverse effect on the Company or HL&P,
neither the Company nor HL&P can predict at this time their
outcome.
(10) UTILITY COMMISSION PROCEEDINGS
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) DOCKET NOS. 6765, 6766 AND 5779. In February 1993, the Austin
Court of Appeals granted a motion by the Office of Public Utility
Counsel (OPC) to voluntarily dismiss its appeal of the Utility
Commission's order in HL&P's 1984 rate case (Docket No. 5779).
In December 1993, the Supreme Court of Texas granted a similar
motion by OPC to dismiss its appeal of the Utility Commission's
order in HL&P's 1986 rate case (Docket Nos. 6765 and 6766). As a
result, appellate review of the Utility Commission's orders in
those dockets has been concluded, and the orders have been
affirmed.
(b) DOCKET NO. 8425. In October 1992, a District Court in Travis
County, Texas affirmed the Utility Commission's order in HL&P's
1988 rate case (Docket No. 8425). An appeal to the Austin Court
of Appeals is pending. In its final order in that docket, the
Utility Commission granted HL&P a $227 million increase in base
revenues, allowed a 12.92% return on common equity, authorized a
qualified phase-in plan for Unit No. 1 of the South Texas Project
(including approximately 72% 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 the appeal of the Utility Commission's order, certain parties
have challenged the Utility Commission's decision regarding
deferred accounting, treatment of federal income tax expense and
certain other matters. A recent decision of the Austin Court of
Appeals, in an appeal involving another utility (and to which
HL&P was not a party), adopted some of the arguments being
advanced by parties challenging the Utility Commission's order in
Docket No. 8425. In that case, PUBLIC UTILITY COMMISSION OF
TEXAS VS. GTE-SW, the Austin Court of Appeals ruled 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.
In its final order in Docket No. 8425, the Utility Commission did
not reduce HL&P's tax expense by any of the tax savings resulting
from the Company's filing of a consolidated tax return. Although
the GTE decision was not legally dispositive of the tax issues
presented in the appeal of Docket No. 8425, it is possible that
the Austin Court of Appeals could utilize the reasoning in GTE in
addressing similar issues in the appeal of Docket No. 8425.
However, in February 1993 the Austin Court of Appeals,
considering an appeal involving another telephone utility, upheld
Utility Commission findings that the tax expense for the utility
included the utility's fair share of the tax savings resulting
from a consolidated tax return, even though the utility's fair
share of the tax savings was determined to be zero. HL&P
believes that the Utility Commission findings in Docket No. 8425
and in Docket No. 9850 (see Note 10(c)) should be upheld on the
same principle (i.e., that the Utility Commission determined that
the fair share of tax savings to be allocated to ratepayers is
determined to be zero). However, no assurance can be made as to
the ultimate outcome of this matter.
The Utility Commission's order in Docket No. 8425 may be affected
also by the ultimate resolution of appeals concerning the Utility
Commission's treatment of deferred accounting. For a discussion
of appeals of the Utility Commission's orders on deferred
accounting, see Notes 10(e) and 11.
(c) DOCKET NO. 9850. In August 1992, a district court in Travis
County affirmed the Utility Commission's final order in HL&P's
1991 rate case (Docket No. 9850). That decision was appealed by
certain parties to the Austin Court of Appeals, raising issues
concerning the Utility Commission's approval of a non-unanimous
settlement in that docket, the Utility Commission's calculation
of federal income tax expense and the allowance of deferred
accounting reflected in the settlement. In August 1993, the
Austin Court of Appeals affirmed on procedural grounds the ruling
by the Travis County District Court, and applications for writ of
error were filed with the Supreme Court of Texas by one of the
other parties to the proceeding. The Supreme Court has not yet
ruled on these applications. In Docket No. 9850, the Utility
Commission approved a settlement agreement reached with most
parties. That settlement agreement provided 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% return on common
equity for HL&P, and HL&P agreed not to request additional
increases in base rates that would be implemented prior to May 1,
1993. Rates contemplated by that settlement agreement were
implemented in May 1991 and remain in effect.
The Utility Commission's order in Docket No. 9850 found that HL&P
would have been entitled to more rate relief than the $313
million agreed to in the settlement, but certain recent actions
of the Austin Court of Appeals could, if ultimately upheld and
applied to the appeal of Docket No. 9850, require a remand of
that settlement to the Utility Commission. HL&P believes that
the amount which the Utility Commission found HL&P was entitled
to would exceed any disallowance that would have been required
under the Austin Court of Appeals' ruling regarding deferred
accounting (see Notes 10(e) and 11) or any adverse effect on the
calculation of tax expense if the court's ruling in the GTE
decision were applied to that settlement (see Note 10(b) above).
However, the amount of rate relief to which the Utility
Commission found HL&P to be entitled in excess of the $313
million agreed to in the settlement may not be sufficient if the
reasoning in both the GTE decision and the ruling on deferred
accounting were to be applied to the settlement agreement in
Docket No. 9850. Although HL&P believes that it should be
entitled to 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 ratemaking purposes.
(d) DOCKET NO. 6668. In June 1990, the Utility Commission issued the
final order in Docket No. 6668, the Utility Commission's inquiry
into the prudence of the planning, management and construction of
the South Texas Project. The Utility Commission's findings and
order in Docket No. 6668 were incorporated in Docket No. 8425,
HL&P's 1988 general rate case. Pursuant to the findings in
Docket No. 6668, the Utility Commission found imprudent $375.5
million out of HL&P's $2.8 billion investment in the two units of
the South Texas Project.
The Utility Commission's findings did not reflect $207 million in
benefits received in a settlement of litigation with the former
architect-engineer of the South Texas Project or the effects of
federal income taxes, investment tax credits or certain
deferrals. In addition, accounting standards require that the
equity portion of AFUDC accrued for regulatory purposes under
deferred accounting orders be utilized to determine the cost
disallowance for financial reporting purposes. After taking all
of these items into account, HL&P recorded an after-tax charge of
$15 million in 1990 and continued to reduce such loss with the
equity portion of deferrals in 1991 related to Unit No. 2 of the
South Texas Project. The findings in Docket No. 6668 represent
the Utility Commission's final determination regarding the
prudence of expenditures associated with the planning and
construction of the South Texas Project. Unless the order is
modified or reversed on appeal, HL&P will be precluded from
recovering in rate proceedings the amount found imprudent by the
Utility Commission.
Appeals by HL&P and other parties of the Utility Commission's
order in Docket No. 6668 were dismissed by a District Court in
Travis County in May 1991. However, in December 1992 the Austin
Court of Appeals reversed the District Court's dismissals on
procedural grounds. HL&P and other parties have filed
applications for writ of error with the Supreme Court of Texas
concerning the order by the Austin Court of Appeals, but unless
the order is modified on further review, HL&P anticipates that
the appeals of the parties will be reinstated and that the merits
of the issues raised in those appeals of Docket No. 6668 will be
considered by the District Court, with the possibility of
subsequent judicial review once the District Court has acted on
those appeals. In addition, separate appeals are pending from
Utility Commission orders in Docket Nos. 8425 and 9850, in which
the findings of the order in Docket No. 6668 are reflected in
rates. See Notes 10(b) and 10(c).
(e) DOCKET NOS. 8230 AND 9010. Deferred accounting treatment for
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 11. In September 1992, the Austin Court of
Appeals, in considering the appeal of the Utility Commission's
final order in Docket Nos. 8230 and 9010, upheld the Utility
Commission's action in granting deferred accounting treatment for
operation and maintenance expenses, but rejected such treatment
for the carrying costs associated with the investment in Unit No.
1 of the South Texas Project. That ruling followed the Austin
Court of Appeals decision rendered in August 1992, on a motion
for rehearing, involving another utility which had been granted
similar deferred accounting treatment for another nuclear plant.
In its August decision, the court ruled that Texas law did not
permit the Utility Commission to allow the utility to place the
carrying costs associated with the investment in the utility's
rate base, though the court observed that the Utility Commission
could allow amortization of such costs.
The Supreme Court of Texas has granted applications for writ of
error with respect to the Austin Court of Appeals decision
regarding Docket Nos. 8230 and 9010. The Supreme Court of Texas
has also granted applications for writ of error on three other
decisions by the Austin Court of Appeals regarding deferred
accounting treatment granted to other utilities by the Utility
Commission. The Supreme Court heard oral arguments on these
appeals on September 13, 1993. The court has not yet ruled.
(f) DOCKET NO. 12065. HL&P is not currently seeking authority to
change its base rates for electric service, but the Utility
Commission has authority to initiate a rate proceeding pursuant
to Section 42 of the Public Utility Regulatory Policy Act (PURA)
to determine whether existing rates are unjust or unreasonable.
In 1993, the Utility Commission referred to an administrative law
judge (ALJ) the complaint of a former employee of HL&P seeking to
initiate such a proceeding.
On February 23, 1994, the ALJ concluded that a Section 42
proceeding should be conducted and that HL&P should file full
information, testimony and schedules justifying its rates. The
ALJ acknowledged that the decision was a close one, and is
subject to review by the Utility Commission. However, he
concluded that information concerning HL&P's financial results as
of December 1992 indicated that HL&P's adjusted revenues could be
approximately $62 million (or 2.33% of its adjusted base
revenues) more than might be authorized in a current rate
proceeding. The ALJ's conclusion was based on various accounting
considerations, including use of a different treatment of federal
income tax expense than the method utilized in HL&P's last rate
case. The ALJ also found that there could be a link between the
1993 outage at the South Texas Project, the NRC's actions with
respect to the South Texas Project and possible mismanagement by
HL&P, which in turn could result in a reduction of HL&P's
authorized rate of return as a penalty for imprudent management.
HL&P and the Company believe that the examiner's analysis is
incorrect, that the South Texas Project has not been imprudently
managed, and that ordering a Section 42 proceeding at this time
is unwarranted and unnecessarily expensive and burdensome. HL&P
has appealed the ALJ's decision to the Utility Commission.
If HL&P ultimately is required to respond to a Section 42
inquiry, it will assert that it remains entitled to rates at
least at the levels currently authorized. However, there can be
no assurance as to the outcome of a Section 42 proceeding if it
is ultimately authorized, and HL&P's rates could be reduced
following a hearing. HL&P believes that any reduction in base
rates as a result of a Section 42 inquiry would take effect
prospectively.
HL&P is also a defendant in a lawsuit filed in a Fort Bend
County, Texas, district court by the same former HL&P employee
who originally initiated the Utility Commission complaint
concerning HL&P's rates. In that suit, Pace and Scott v. HL&P,
the former employee contends that HL&P is currently charging
illegal rates since the rates authorized by the Utility
Commission do not allocate to ratepayers tax benefits accruing to
the Company and to HL&P by virtue of the fact that HL&P's federal
income taxes are paid as part of a consolidated group. HL&P is
seeking dismissal of that suit because in Texas exclusive
jurisdiction to set electric utility rates is vested in
municipalities and in the Utility Commission, and the courts have
no jurisdiction to set such rates or to set aside authorized
rates except through judicial appeals of Utility Commission
orders in the manner prescribed in applicable law. Although
substantial damages have been claimed by the plaintiffs in that
litigation, HL&P and the Company consider this litigation to be
wholly without merit, and do not presently believe that it will
have a material adverse effect on the Company's or HL&P's results
of operations, though no assurances can be given as to its
ultimate outcome at this time.
(g) FUEL RECONCILIATION. 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 revenues, with a
corresponding entry to under- or over-recovered fuel, as
appropriate. Amounts collected pursuant to the fixed fuel factor
must be reconciled periodically by the Utility Commission against
actual, reasonable costs as determined by the Utility Commission.
Any fuel costs which the Utility Commission determines are
unreasonable in a fuel reconciliation proceeding would not be
recoverable from customers, and a charge against earnings would
result. Under Utility Commission rules, HL&P is required to file
an application to reconcile those costs in 1994. Such a filing
would also be required in conjunction with any rate proceeding
that may be filed, such as the Section 42 proceeding described in
Note 10(f).
Unless filed earlier in conjunction with a rate proceeding, HL&P
currently anticipates filing its fuel reconciliation application
in the fourth quarter of 1994 in accordance with a schedule
proposed by the Utility Commission staff. If that schedule is
approved by the Utility Commission, HL&P anticipates that fuel
costs through some time in 1994 will be submitted for
reconciliation. No hearing would be anticipated in that
reconciliation proceeding before 1995.
The schedule for a fuel reconciliation proceeding could be
affected by the institution of a prudence inquiry concerning the
outage at the South Texas Project. The Utility Commission staff
has indicated a desire to conduct an inquiry into the prudence of
HL&P's management prior to and during the outage, but it is
currently unknown what action the Utility Commission will take on
that request or what the nature and scope of any such proceeding
would be. Such an inquiry could also be conducted in connection
with a rate proceeding under Section 42 of PURA if one is
instituted by the Utility Commission.
Through the end of 1993, HL&P had recovered through the fuel
factor approximately $115 million (including interest) less than
the amounts expended for fuel, a significant portion of which
under recovery occurred in 1993 during the outage at the South
Texas Project. In any review of costs incurred during the period
of the 1993 outage at the South Texas Project, it is anticipated
that other parties will contend that a portion of fuel costs
incurred should be attributed to imprudence on the part of HL&P
and thus should be disallowed as unreasonable, with recovery from
ratepayers denied. Those amounts could be substantial. HL&P
intends to defend vigorously against any allegation that its
actions have been imprudent or that any portion of its costs
incurred should be judged to be unreasonable, but no prediction
can be made as to the ultimate outcome of such a proceeding.
(11) DEFERRED PLANT COSTS
Deferred plant costs were authorized for the South Texas Project
by the Utility Commission in two contexts. In the first context,
or "deferred accounting," the Utility Commission orders permitted
HL&P, for regulatory purposes, to continue to accrue carrying
costs in the form of AFUDC (at a 10% rate) on its investment in
the two units of the South Texas Project until costs of such
units were reflected in rates (which was July 1990 for
approximately 72% of Unit No. 1, and May 1991 for the remainder
of Unit No. 1 and 100% of Unit No. 2) and to defer and capitalize
depreciation, operation and maintenance, insurance and tax
expenses associated with such units during the deferral period.
Accounting standards do not permit the accrual of the equity
portion of AFUDC for financial reporting purposes under these
circumstances. However, in accordance with accounting standards,
such amounts were utilized to determine the amount of plant cost
disallowance for financial reporting purposes.
The deferred expenses and the debt portion of the carrying costs
associated with the South Texas Project are included on the
Company's Statements of Consolidated Income in deferred expenses
and deferred carrying costs, respectively.
Beginning with the June 1990 order in Docket No. 8425, deferrals
were permitted in a second context, a "qualified phase-in plan"
for Unit No. 1 of the South Texas Project. Accounting standards
require allowable costs deferred for future recovery under a
qualified phase-in plan to be capitalized as a deferred charge if
certain criteria are met. The qualified phase-in plan as
approved by the Utility Commission meets these criteria.
During the period June 1990 through May 15, 1991, HL&P deferred
depreciation and property taxes related to the 28% of its
investment in Unit No. 1 of the South Texas Project not reflected
in the Docket No. 8425 rates and recorded a deferred return on
that investment as part of the qualified phase-in plan. Deferred
return represents the financing costs (equity and debt)
associated with the qualified phase-in plan. The deferred
expenses and deferred return related to the qualified phase-in
plan are included on the Company's Statements of Consolidated
Income and HL&P's Statements of Income in deferred expenses and
deferred return under phase-in plan, respectively. Under the
phase-in plan, these accumulated deferrals will be recoverable
within ten years of the June 1990 order.
On May 16, 1991, HL&P implemented under bond, in Docket No. 9850,
a $313 million base rate increase consistent with the terms of
the settlement. Accordingly, HL&P ceased all cost deferrals
related to the South Texas Project and began the recovery of such
amounts. These deferrals are being amortized on a straight-line
basis as allowed by the final order in Docket No. 9850. The
amortization of these deferrals totaled $25.8 million for both
1993 and 1992 and $16.1 million in 1991, and is included on the
Company's Statements of Consolidated Income and HL&P's Statements
of Income in depreciation and amortization expense. See also
Notes 10(b), 10(c) and 10(e).
The following table shows the original balance of the deferrals
and the unamortized balance at December 31, 1993.
Balance at
Original December 31,
Balance 1993
(Thousands of Dollars)
Deferred Accounting: (a)
Deferred Expenses $ 250,151 $ 233,341
Deferred Carrying Costs on
Plant Investment 399,972 373,094
Total 650,123 606,435
Qualified Phase-In Plan: (b) 82,254 58,264
Total Deferred Plant Cost $ 732,377 $ 664,699
(a) Amortized over the estimated depreciable life of the South
Texas Project.
(b) Amortized over nine years beginning in May 1991.
As of December 31, 1993, HL&P has recorded deferred income
taxes of $200.9 million with respect to deferred accounting
and $14.5 million with respect to the deferrals associated
with the qualified phase-in plan.
(12) MALAKOFF ELECTRIC GENERATING STATION
The scheduled in-service dates for the Malakoff Electric
Generating Station (Malakoff) units were postponed during the
1980's as expectations of continued strong load growth were
tempered. These units have been indefinitely deferred due to
the availability of other cost effective resource options. In
1987, all developmental work was stopped and AFUDC accruals
ceased.
Due to the indefinite postponement of the in-service date for
Malakoff, the engineering design work is no longer considered
viable. The costs associated with this engineering design
work are currently included in rate base and are earning a
return per the Utility Commission's final order in Docket No.
8425. Pursuant to HL&P's determination that such costs will
have no future value, $84.1 million was reclassified from
plant held for future use to recoverable project costs as of
December 31, 1992. An additional $7.0 million was
reclassified to recoverable project costs in 1993.
Amortization of these amounts began in 1993. Amortization
amounts will correspond to the amounts being earned as a
result of the inclusion of such costs in rate base. The
Utility Commission's action in allowing treatment of those
costs as plant held for future use has been challenged in the
pending appeal of the Utility Commission's final order in
Docket No. 8425. Also, recovery of such Malakoff costs may be
addressed if rate proceedings are initiated such as that
proposed under Section 42 of PURA. See Notes 10(b) and 10(f)
for a discussion of these respective proceedings.
In June 1990, HL&P purchased from its then fuel supply
affiliate, Utility Fuels, all of Utility Fuels' interest in
the lignite reserves and lignite handling facilities for
Malakoff. The purchase price was $138.2 million, which
represented the net book value of Utility Fuels' investment in
such reserves and facilities. As part of the June 1990 rate
order (Docket No. 8425), the Utility Commission ordered that
issues related to the prudence of the amounts invested in the
lignite reserves be considered in HL&P's next general rate
case which was filed in November 1990 (Docket No. 9850).
However, under the October 1991 Utility Commission order in
Docket No. 9850, this determination was postponed to a
subsequent docket.
HL&P's remaining investment in Malakoff through December 31,
1993 of $167 million, consisting primarily of lignite reserves
and land, is included on the Company's Consolidated and HL&P's
Balance Sheets in plant held for future use. For the 1994-
1996 period, HL&P anticipates $14 million of expenditures
relating to lignite reserves, primarily to keep lignite leases
and other related agreements in effect.
EXHIBIT 99(b)
ITEM 3. LEGAL PROCEEDINGS.
For a description of certain legal and regulatory proceedings
affecting the Company and its subsidiaries, see Notes 9 through 12 to
the Company's Consolidated and HL&P's Financial Statements in Item 8
of this Report, which notes are incorporated herein by reference.
In August 1993, HL&P entered into a Consent Agreement with the
EPA that resolved three Administrative Orders issued by the EPA in
1991 and 1992 regarding alleged violations of certain provisions of
the Clean Water Act at Limestone during the period 1989 through 1992.
Pursuant to the Consent Agreement, HL&P, while neither admitting nor
denying the allegations contained in the complaint, agreed to pay the
EPA $87,500. On August 29, 1991, the EPA issued an Administrative
Order related to alleged noncompliance at W. A. Parish. HL&P has
taken action to address the issues cited by the EPA and believes them
to be substantially resolved at this time.
From time to time, HL&P sells equipment and material it no longer
requires for its business. In the past, some purchasers may have
improperly handled the material, principally through improper disposal
of oils containing PCBs used in older transformers. Claims have been
asserted against HL&P for clean-up of environmental contamination as
well as for personal injury and property damages resulting from the
purchasers' alleged improper activities. Although HL&P has disputed
its responsibility for the actions of such purchasers, HL&P has, in
some cases, participated in or contributed to the remediation of those
sites. Such undertakings in the past have not required material
expenditures by HL&P. In 1990, HL&P, together with other companies,
participated in the clean-up of one such site. Three suits have been
brought against HL&P and a number of other parties for personal injury
and property damages in connection with that site and its cleanup. In
two of the cases, Dumes, et al. vs. Houston Lighting & Power Company,
et al., pending in the United States District Court for the Southern
District of Texas, Corpus Christi Division, and Trevino, et al. vs.
Houston Lighting & Power Company, et al., pending before the 117th
District Court of Nueces County, Texas, landowners near the site are
seeking damages primarily for lead contamination to their property. A
third lawsuit, Holland vs. Central Power and Light Company, et al.,
involving an allegation of exposure to PCBs disposed of at the site,
was dismissed pursuant to a settlement agreement entered into by the
parties in July 1993. The terms of the settlement were not material.
In all these cases, HL&P has disputed its responsibility for the
actions of the disposal site operator and whether injuries or damages
occurred. In addition, Gulf States has filed suit in the United
States District Court for the Southern District of Texas, Houston
Division, against HL&P and two other utilities concerning another site
in Houston, Texas, which allegedly has been contaminated by PCBs and
which Gulf States has undertaken to remediate pursuant to an EPA
order. Gulf States seeks contribution from HL&P and the other
utilities for Gulf States' remediation costs. HL&P does not currently
believe that it has any responsibility for that site, and HL&P has not
been determined by the EPA to be a responsible party for that site.
Discovery is underway in all these pending cases and, although their
ultimate outcomes cannot be predicted at this time, HL&P and the
Company believe, based on information currently available, 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.
For information with respect to the EPA's identification of HL&P
as a "potentially responsible party" for remediation of a CERCLA site
adjacent to one of HL&P's transmission lines in Harris County, see
"Liquidity and Capital Resources - HL&P - Environmental Expenditures"
in Item 7 of this Report, which information is incorporated herein by
reference.
HL&P and the other owners of the South Texas Project have filed
suit against Westinghouse in the 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 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
the fall of 1994. No prediction can be made as to the ultimate
outcome of that litigation.
EXHIBIT 99(c)
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 1993
Combined Form 10-K and Notes 9, 10 and 11 to the Company's
Consolidated and HL&P's Financial Statements in Item 8 of
the 1993 Combined Form 10-K, which information, as qualified
and updated by the description of developments in regulatory
and litigation matters contained in Notes 10, 11 and 12 of
the Notes to the Company's Consolidated and HL&P's Financial
Statements included in Part I of this Form 10-Q, is
incorporated herein by reference.
In April 1994, two former employees of HL&P filed a
lawsuit against the Company, HL&P and certain executive
officers and directors of the Company and HL&P. In this
lawsuit (PACE AND FUENTEZ V. THE COMPANY, HL&P, ET AL.), the
former employees alleged that certain officers and directors
of the Company and HL&P had engaged in various acts of
mismanagement. The lawsuit, which purports to have been
filed as a class action and shareholder derivative suit on
behalf of all shareholders of the Company, is pending in the
212th Judicial District Court of Galveston County, Texas.
Management believes that the suit is without merit.
In April 1994, the state district judge of the 268th
Judicial District Court, Fort Bend County, Texas, dismissed
for lack of subject matter jurisdiction a suit (PACE AND
SCOTT V. HL&P) filed by two former employees of HL&P, who
alleged that HL&P was charging illegal rates. The claim was
based on the argument that the Utility Commission had failed
to allocate to ratepayers the alleged tax benefits accruing
to the Company and HL&P by virtue of the fact that HL&P's
federal income taxes are paid as part of a consolidated
group.
In March 1994, the United States District Court for the
Southern District of Texas granted summary judgment in favor
of the Company and HL&P and dismissed a lawsuit filed by
former HL&P employees who claimed that their employment had
been terminated in violation of the WORKER ADJUSTMENT AND
RETRAINING NOTIFICATION ACT (WARN). In a separate order,
another judge of the United States District Court for the
Southern District of Texas granted summary judgment in favor
of the Company and HL&P on the validity of releases executed
by most of the employees who had been terminated in the 1992
reduction which gave rise to the claims under the WARN Act. The
question of the validity of those releases in the WARN Act case
and in other pending cases involving that staff reduction was
consolidated for decision. Notices of appeal to the United States
Court of Appeals for the Fifth Circuit have been filed from both
decisions. Other legal proceedings, which the Company and HL&P
believe to be immaterial and without merit, have been filed by
former employees of HL&P seeking damages alleged to have been
caused by that staff reduction. Although there can be no assurance
that additional proceedings asserting labor related claims will not
be filed, the Company and HL&P believe that the resolution
of these claims will not have a material adverse effect on
the Company's or HL&P's results of operations.
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)
Six Twelve
Months Ended Months Ended
June 30, 1994 June 30, 1994
Fixed Charges as Defined:
(1) Interest on Long-Term Debt............................................ $ 123,399 $ 258,991
(2) Other Interest........................................................ 4,749 8,045
(3) Amortization of (Premium)
Discount.............................................................. 4,241 8,149
(4) Interest Component of Rentals
Charged to Operating Expense.......................................... 1,909 4,151
---------- ----------
(5) Total Fixed Charges................................................... $ 134,298 $ 279,336
========== ==========
Earnings as Defined:
(6) Net Income............................................................ $ 200,840 $ 529,791
(7) Cumulative Effect of Change in
Accounting for Postemployment
Benefits.............................................................. 8,200 8,200
---------- ----------
(8) Income Before Cumulative Effect of
Change in Accounting for
Postemployment Benefits............................................... 209,040 537,991
---------- ----------
Federal Income Taxes:
(9) Current............................................................... 76,761 138,469
(10) Deferred (Net)........................................................ 27,407 139,032
(11) Cumulative Effect of Change in
Accounting for Postemployment
Benefits.............................................................. 4,415 4,415
---------- ----------
(12) Total Federal Income Taxes
Before Cumulative Effect of
Change in Accounting for
Postemployment Benefits............................................... 108,583 281,916
---------- ----------
(13) Fixed Charges (line 5)................................................ 134,298 279,336
---------- ----------
(14) Earnings Before Income Taxes and
Fixed Charges (line 8 plus
line 12 plus line 13)................................................. $ 451,921 $1,099,243
========== ==========
Ratio of Earnings to Fixed Charges
(line 14 divided by line 5)........................................... 3.37 3.94
Preferred Dividends Requirements:
(15) Preferred Dividends .................................................. $ 16,676 $ 33,214
(16) Less Tax Deduction for Preferred
Dividends............................................................. 27 54
---------- ----------
(17) Total ................................................................ 16,649 33,160
(18) Ratio of Pre-Tax Income to Net
Income (line 8 plus line 12
divided by line 8).................................................... 1.52 1.52
---------- ----------
(19) Line 17 times line 18................................................. 25,306 50,403
(20) Add Tax Deduction for Preferred
Dividends (line 16)................................................... 27 54
---------- ----------
(21) Preferred Dividends Factor............................................ $ 25,333 $ 50,457
========== ==========
(22) Fixed Charges (line 5)................................................ $ 134,298 $ 279,336
(23) Preferred Dividends Factor
(line 21)............................................................. 25,333 50,457
---------- ----------
(24) Total ................................................................ $ 159,631 $ 329,793
========== ==========
Ratio of Earnings to Fixed Charges and
Preferred Dividends
(line 14 divided by line 24)............................................... 2.83 3.33
