UT
0000202131
HOUSTON INDUSTRIES INCORPORATED
1000
3-MOS
DEC-31-1995
MAR-31-1995
PER-BOOK
8,934,675
149,157
311,245
1,399,973
731,018
11,526,068
2,155,171
0
1,242,925
3,398,096
121,910
351,345
3,615,424
0
0
634,155
110,143
45,700
8,004
3,614
3,237,677
11,526,068
746,166
10,427
622,865
622,865
123,301
(7,630)
115,671
72,410
123,441
8,985
114,456
92,752
61,497
41,297
0.93
0.93
Total annual interest charges on all bonds for year-to-date 3/31/95.
EXHIBIT 99(a)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(f) DEFERRED PLANT COSTS. The Utility Commission authorized deferred
accounting treatment for certain costs related to the South Texas
Project Electric Generating Station (South Texas Project) in two
contexts. The first was "deferred accounting" where HL&P was permitted
to continue to accrue carrying costs in the form of AFUDC and defer
and capitalize depreciation and other operating costs on its
investment in the South Texas Project until such costs were reflected
in rates. The second was the "qualified phase-in plan" where HL&P was
permitted to capitalize as deferred charges allowable costs, including
return, deferred for future recovery
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under the approved plan. The accumulated deferrals for "deferred
accounting" and "qualified phase-in plan" are being recovered over the
estimated depreciable life of the South Texas Project and within the
ten year phase-in period, respectively. The amortization of these
deferrals totaled $25.8 million for each of the years 1994, 1993, and
1992 and is included on the Company's Statements of Consolidated
Income and HL&P's Statements of Income in depreciation and
amortization expense. Under the terms of the settlement agreement
regarding the issues raised in Docket Nos. 12065 and 13126 (Proposed
Settlement), see Note 3, the South Texas Project deferrals will
continue to be amortized using the schedules discussed above.
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(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four
co-owners) of the South Texas Project, which consists of two 1,250
megawatt nuclear generating units. HL&P has a 30.8 percent interest in
the project and bears a corresponding share of capital and operating
costs associated with the project. As of December 31, 1994, HL&P's
investments (net of accumulated depreciation and amortization) in the
South Texas Project and in nuclear fuel, including AFUDC, were $2.1
billion and $99 million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. Both generating units at the South Texas Project were out
of service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994.
HL&P removed the units from service in February 1993 when a problem
was encountered with certain of the units' auxiliary feedwater pumps.
In February 1995, the NRC removed the South Texas Project from its
"watch list" of plants with weaknesses that warranted increased NRC
attention. The NRC placed the South Texas Project on the "watch list"
in June 1993, following the issuance of a report by an NRC Diagnostic
Evaluation Team (DET) which conducted a review of the South Texas
Project operations.
Certain current and former employees of HL&P or contractors of HL&P
have asserted claims that their employment was terminated or disrupted
in retaliation for their having made safety-related complaints to the
NRC. Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P,
and the NRC has jurisdiction to take enforcement action against HL&P
and/or individual employees with respect to these matters. Based on
its own internal investigation, in October 1994 the NRC issued a
notice of violation and proposed a $100,000 civil penalty against HL&P
in one such case in which HL&P had terminated the site access of a
former contractor employee. In that action, the NRC also requested
information relating to possible further enforcement action in this
matter against two HL&P managers involved in such termination. HL&P
strongly disagrees with the NRC's conclusions, and has requested the
NRC to give further consideration of its notice. In February 1995, the
NRC conducted an enforcement conference with respect to that matter,
but no result has been received.
HL&P has provided documents and other assistance to a subcommittee of
the U. S. House of Representatives (Subcommittee) that is conducting
an inquiry related to the South Texas Project. Although the precise
focus and timing of the inquiry has not been identified by the
Subcommittee, it is anticipated that the Subcommittee will inquire
into matters related to HL&P's handling of employee concerns and to
issues related to the NRC's 1993 DET review of the South Texas
Project. In connection with that inquiry, HL&P has been advised that
the U. S. General Accounting Office (GAO) is conducting a review of
the NRC's inspection process as it relates to the South Texas Project
and other plants, and HL&P is cooperating with the GAO in its
investigation and with the NRC in a similar review it has initiated.
While no prediction can
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be made at this time as to the ultimate outcome of these matters, the
Company and HL&P do not believe that they will have a material adverse
effect on the Company's or HL&P's financial condition or results of
operations.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February
1994, the City of Austin (Austin), one of the four co-owners of the
South Texas Project, filed suit (Austin II Litigation) against HL&P.
That suit is pending in the 152nd District Court for Harris County,
Texas, which has set a trial date for October 1995. Austin alleges
that the outages at the South Texas Project from early 1993 to early
1994 were due to HL&P's failure to perform obligations it owed to
Austin under the Participation Agreement among the four co-owners of
the South Texas Project (Participation Agreement). Austin also asserts
that HL&P breached certain undertakings voluntarily assumed by HL&P
under the terms and conditions of the Operating Licenses and Technical
Specifications relating to the South Texas Project. Austin claims that
such failures have caused Austin damages of at least $125 million due
to the incurrence of increased operating and maintenance costs, the
cost of replacement power and lost profits on wholesale transactions
that did not occur. In May 1994, the City of San Antonio (San
Antonio), another co-owner of the South Texas Project, intervened in
the litigation filed by Austin against HL&P and asserted claims
similar to those asserted by Austin. San Antonio has not identified
the amount of damages it intends to seek from HL&P. HL&P is contesting
San Antonio's intervention and has called for arbitration of San
Antonio's claim under the arbitration provisions of the Participation
Agreement. The trial court has denied HL&P's requests, but review of
these decisions is currently pending before the 1st Court of Appeals
in Houston.
In a previous lawsuit (Austin I Litigation) filed in 1983 against the
Company and HL&P, Austin alleged that it had been fraudulently induced
to participate in the South Texas Project and that HL&P had failed to
perform properly its duties as project manager. In May 1993, the
courts entered a judgement in favor of the Company and HL&P,
concluding, among other things, that the Participation Agreement did
not impose on HL&P a duty to exercise reasonable skill and care as
project manager. During the course of the Austin I Litigation, San
Antonio and Central Power and Light Company (CPL), a subsidiary of
Central and South West Corporation, two of the co-owners in the South
Texas Project, also asserted claims for unspecified damages against
HL&P as project manager of the South Texas Project, alleging HL&P
breached its duties and obligations. San Antonio and CPL requested
arbitration of their claims under the Participation Agreement. In
1992, the Company and HL&P entered into a settlement agreement with
CPL (CPL Settlement) providing for CPL's withdrawal of its demand for
arbitration. San Antonio's claims for arbitration remain pending.
Under the Participation Agreement, San Antonio's arbitration claims
will be heard by a panel of five arbitrators consisting of four
arbitrators named by each co-owner and a fifth arbitrator selected by
the four appointed arbitrators.
Although the CPL Settlement did not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL reached certain
understandings in such agreement which contemplated that: (i) CPL's
previously appointed arbitrator would be replaced by CPL; (ii)
arbitrators approved by CPL or HL&P in any future arbitrations would
be mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL would
resolve any future disputes between them concerning the South Texas
Project without resorting to the arbitration provision of the
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Participation Agreement. Austin and San Antonio have asserted in the
pending Austin II Litigation that such understandings have rendered
the arbitration provisions of the Participation Agreement void and
that neither Austin nor San Antonio should be required to participate
in or be bound by such proceedings.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability insurance
coverage as required by law and periodically review available limits
and coverage for additional protection. The owners of the South Texas
Project currently maintain the maximum amount of property damage
insurance currently available through the insurance industry,
consisting of $500 million in primary property damage insurance and
excess property insurance in the amount of $2.25 billion. Under the
excess property insurance which became effective on March 1, 1995 and
under portions of the excess property insurance coverage in effect
prior to March 1, 1995, HL&P and the other owners of the South Texas
Project are subject to assessments, the maximum aggregate assessment
under current policies being $26.9 million during any one policy year.
The application of the proceeds of such property insurance is subject
to the priorities established by the NRC regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.0 billion to $8.92 billion effective in
November 1994. Owners are required under the Act to insure their
liability for nuclear incidents and protective evacuations by
maintaining the maximum amount of financial protection available from
private sources and by maintaining secondary financial protection
through an industry retrospective rating plan. The assessment of
deferred premiums provided by the plan for each nuclear incident is up
to $75.5 million per reactor subject to indexing for inflation, a
possible 5 percent surcharge (but no more than $10 million per reactor
per incident in any one year) and a 3 percent state premium tax. HL&P
and the other owners of the South Texas Project currently maintain the
required nuclear liability insurance and participate in the industry
retrospective rating plan.
There can be no assurance that all potential losses or liabilities
will be insurable, or that the amount of insurance will be sufficient
to cover them. Any substantial losses not covered by insurance would
have a material effect on HL&P's and the Company's financial
condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South
Texas Project are required by the NRC to meet minimum decommissioning
funding requirements to pay the costs of decommissioning the South
Texas Project. Pursuant to the terms of the order of the Utility
Commission in Docket No. 9850, HL&P is currently funding
decommissioning costs for the South Texas Project with an independent
trustee at an annual amount of $6 million, which is recorded in
depreciation and amortization expense. HL&P's funding level is
estimated to provide approximately $146 million, in 1989 dollars, an
amount which exceeds the current NRC minimum.
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The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective January 1, 1994. At December
31, 1994, the securities held in the Company's nuclear decommissioning
trust totaling $25.1 million (reflected on the Company's Consolidated
and HL&P's Balance Sheets in deferred debits and deferred credits) are
classified as available for sale. Such securities are reported on the
balance sheets at fair value, which at December 31, 1994 approximates
cost, and any unrealized gains or losses will be reported as a
separate component of common stock equity. Earnings, net of taxes and
administrative costs, are reinvested in the funds.
In May 1994, an outside consultant estimated HL&P's portion of
decommissioning costs to be approximately $318 million, in 1994
dollars. The consultant's calculation of decommissioning costs for
financial planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the
NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration
of their 40 year operating licenses. Under the terms of the Proposed
Settlement, HL&P would increase funding of decommissioning costs to an
annual amount of approximately $14.8 million consistent with such
study. While the current and projected funding levels presently exceed
minimum NRC requirements, no assurance can be given that the amounts
held in trust will be adequate to cover the actual decommissioning
costs of the South Texas Project or the assumptions used in estimating
decommissioning costs will ultimately prove to be correct.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Utility Commission initiated a proceeding
(Docket No. 12065) to determine whether HL&P's existing rates are just
and reasonable. Subsequently, the scope of the docket was expanded to
include reconciliation of HL&P's fuel costs from April 1, 1990 to July
31, 1994. The Utility Commission also initiated a separate proceeding
(Docket No. 13126) to review issues regarding the prudence of
operation of the South Texas Project from the date of commercial
operation through the present. That review would encompass the outage
at the South Texas Project during 1993 through 1994.
Hearings began in Docket No. 12065 in January 1995, and the Utility
Commission has retained a consultant to review the South Texas Project
for the purpose of providing testimony in Docket No. 13126 regarding
the prudence of HL&P's management of operation of the South Texas
Project. In February 1995, all major parties to these proceedings
signed the Proposed Settlement resolving the issues with respect to
HL&P, including the prudence issues related to operation of the South
Texas Project. Approval of the Proposed Settlement by the Utility
Commission will be required. To that end, the parties have established
procedural dates for a hearing on issues raised by the parties who are
opposed to the Proposed Settlement. A decision by the Utility
Commission on the Proposed Settlement is not anticipated before early
summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and rates would be frozen for three years, subject to certain
conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment of $218 million in the cancelled Malakoff plant
over a period not to exceed
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seven years. HL&P also would increase its decommissioning expense for
the South Texas Project by $9 million per year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This
$70 million was recorded as a one-time, pre-tax charge to reconcilable
fuel revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately
17 percent below that currently in effect and would refund to
customers the balance in its fuel over-recovery account, estimated to
be approximately $180 million after giving effect to the amounts not
recoverable from ratepayers.
HL&P recovers fuel costs incurred in electric generation through a
fixed fuel factor that is set by the Utility Commission. The
difference between fuel revenues billed pursuant to such factor and
fuel expense incurred is recorded as an addition to or a reduction of
revenue, with a corresponding entry to under- or over-recovered fuel,
as appropriate. Amounts collected pursuant to the fixed fuel factor
must be reconciled periodically against actual, reasonable costs as
determined by the Utility Commission. Currently, HL&P has an
over-recovery fuel account balance that will be refunded pursuant to
the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the
Utility Commission, including issues related to the South Texas
Project, Docket No. 12065 will be remanded to an Administrative Law
Judge (ALJ) to resume detailed hearings in this docket. Prior to
reaching agreement on the terms of the Proposed Settlement, HL&P
argued that its existing rates were just and reasonable and should not
be reduced. Other parties argued that rate decreases in annual amounts
ranging from $26 million to $173 million were required and that
additional decreases might be justified following an examination of
the prudence of the management of the South Texas Project and the
costs incurred in connection with the outages at the South Texas
Project. Testimony filed by the Utility Commission staff included a
recommendation to remove from rate base $515 million of HL&P's
investment in the South Texas Project to reflect the staff's view that
such investment was not fully "used and useful" in providing service,
a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did
not result from imprudent management. HL&P also filed testimony
analyzing the extent to which regulatory issues extended the outages.
In that testimony an outside consultant retained by HL&P concluded
that the duration of the outages was controlled by both the resolution
of NRC regulatory issues as well as necessary equipment repairs
unrelated to NRC regulatory issues and that the incremental effect of
NRC regulatory issues on the duration of the outages was only 39 days
per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range
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of assumptions would result in replacement fuel costs of less than $10
million for the 39 day periods identified by HL&P's consultant and
less than $100 million for the entire length of the outages. Any fuel
costs determined to have been unreasonably incurred would not be
recoverable from customers and would be charged against the Company's
earnings.
Although the Company and HL&P believe that the Proposed Settlement is
in the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility
Commission ultimately will approve the terms of the Proposed
Settlement or (ii) in the event the Proposed Settlement is not
approved and proceedings against HL&P resumed, that the outcome of
such proceedings would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years,
the Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant
construction, including the South Texas Project. Although Utility
Commission action on those applications has been completed, judicial
review of a number of the Utility Commission orders is pending. In
Texas, Utility Commission orders may be appealed to a District Court
in Travis County, and from that Court's decision an appeal may be
taken to the Court of Appeals for the 3rd District at Austin (Austin
Court of Appeals). Discretionary review by the Supreme Court of Texas
may be sought from decisions of the Austin Court of Appeals. The
pending appeals from the Utility Commission orders are in various
stages. In the event the courts ultimately reverse actions of the
Utility Commission in any of these proceedings, such matters would be
remanded to the Utility Commission for action in light of the courts'
orders. Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and HL&P
generally are not in a position at this time to predict the outcome of
the matters on appeal or the ultimate effect that adverse action by
the courts could have on the Company and HL&P. On remand, the Utility
Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the
Utility Commission approved a non-unanimous settlement agreement
providing for a $313 million increase in HL&P's base rates,
termination of deferrals granted with respect to Unit No. 2 of the
South Texas Project and of the qualified phase-in plan deferrals
granted with respect to Unit No. 1 of the South Texas Project, and
recovery of deferred plant costs. The settlement authorized a 12.55
percent return on common equity for HL&P. Rates contemplated by the
settlement agreement were implemented in May 1991 and remain in effect
(subject to the outcome of the current rate proceeding described in
Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on
review by a District Court, and the Austin Court of Appeals affirmed
that decision on procedural grounds due to the failure of the
appellant to file the record with the court in a timely manner. On
review, the Texas
-46-
Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility
Commission's order, which include issues regarding deferred
accounting, the treatment of federal income tax expense and certain
other matters. As to federal tax issues, a recent decision of the
Austin Court of Appeals, in an appeal involving GTE-SW (and to which
HL&P was not a party), held that when a utility pays federal income
taxes as part of a consolidated group, the utility's ratepayers are
entitled to a fair share of the tax savings actually realized, which
can include savings resulting from unregulated activities. The Texas
Supreme Court has agreed to hear an appeal of that decision, but on
points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any
disallowance that might be required if the court's ruling in the GTE
decision were applied in Docket No. 9850 would be offset by that
greater amount. However, that amount may not be sufficient if the
Austin Court of Appeals also concludes that the Utility Commission's
inclusion of deferred accounting costs in the settlement was improper.
For a discussion of the Texas Supreme Court's decision on deferred
accounting treatment, see Note 4(c). Although HL&P believes that it
could demonstrate entitlement to rate relief equal to that agreed to
in the stipulation in Docket No. 9850, HL&P cannot rule out the
possibility that a remand and reopening of that settlement would be
required if decisions unfavorable to HL&P are rendered on both the
deferred accounting treatment and the calculation of tax expense for
rate making purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the
Utility Commission granted HL&P a $227 million increase in base
revenues, allowed a 12.92 percent return on common equity, authorized
a qualified phase-in plan for Unit No. 1 of the South Texas Project
(including approximately 72 percent of HL&P's investment in Unit No. 1
of the South Texas Project in rate base) and authorized HL&P to use
deferred accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented
by HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with
deductions taken for expenses disallowed in cost of service. The court
held that the Utility Commission had failed to require that such tax
savings be passed on to ratepayers, and ordered that the case be
remanded to the Utility Commission with instructions to adjust HL&P's
cost of service accordingly. Discretionary review is being sought from
the Texas Supreme Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing
its appeal in Docket No. 6668. A separate party to this appeal,
however, has not agreed to dismiss its appeal.
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(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized
by the Utility Commission in Docket No. 8230 and was extended in
Docket No. 9010. Similar deferred accounting treatment with respect to
Unit No. 2 of the South Texas Project was authorized in Docket No.
8425. For a discussion of the deferred accounting treatment granted,
see Note 1(f).
In June 1994, the Texas Supreme Court decided the appeal of Docket
Nos. 8230 and 9010, as well as all other pending deferred accounting
cases involving other utilities, upholding deferred accounting
treatment for both carrying costs and operation and maintenance
expenses as within the Utility Commission's statutory authority and
reversed the Austin Court of Appeals decision to the extent that the
Austin Court of Appeals had rejected deferred accounting treatment for
carrying charges. Because the lower appellate court had upheld
deferred accounting only as to operation and maintenance expenses, the
Texas Supreme Court remanded Docket Nos. 8230 and 9010 to the Austin
Court of Appeals to consider the points of error challenging the
granting of deferred accounting for carrying costs which it had not
reached in its earlier consideration of the case. The Texas Supreme
Court opinion did state, however, that when deferred costs are
considered for addition to the utility's rate base in an ensuing rate
case, the Utility Commission must then determine to what extent
inclusion of the deferred costs is necessary to preserve the utility's
financial integrity. Under the terms of the Proposed Settlement, South
Texas Project deferrals will continue to be amortized under the
schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant
to the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In
June 1990, the Utility Commission ruled in a separate docket (Docket
No. 6668) that had been created to review the prudence of HL&P's
planning and construction of the South Texas Project that $375.5
million out of HL&P's $2.8 billion investment in the two units of the
South Texas Project had been imprudently incurred. That ruling was
incorporated into HL&P's 1988 and 1991 rate cases and resulted in
HL&P's recording an after-tax charge of $15 million in 1990. Several
parties appealed the Utility Commission's decision, but a District
Court dismissed these appeals on procedural grounds. The Austin Court
of Appeals reversed and directed consideration of the appeals, and the
Texas Supreme Court denied discretionary review in 1994. At this time,
no action has been taken by the appellants to proceed with the
appeals. Unless the order in Docket No. 6668 is modified or reversed
on appeal, the amount found imprudent by the Utility Commission will
be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
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(5)MALAKOFF
The scheduled in-service dates for the Malakoff units were postponed
during the 1980's as expectations of continued strong load growth were
tempered. In 1987, all developmental work was stopped and AFUDC
accruals ceased. These units have been cancelled due to the
availability of other cost effective resource options.
In Docket No. 8425, the Utility Commission allowed recovery of certain
costs associated with the cancelled Malakoff units by amortizing those
costs over ten years for rate making purposes. Such recoverable costs
were not included in rate base and, as a result, no return on
investment is being earned during the recovery period. The remaining
balance at December 31, 1994 is $34 million with a recovery period of
66 months.
Also as a result of the final order in Docket No. 8425, the costs
associated with the engineering design work for the Malakoff units
were included in rate base and are earning a return. Subsequently, in
December 1992, HL&P determined that such costs would have no future
value and reclassified $84.1 million from plant held for future use to
recoverable project costs. In 1993, an additional $7 million was
reclassified to recoverable project costs. Amortization of these
amounts began in 1993. The balance at December 31, 1994 was $65
million with a remaining recovery period of 60 months. The
amortization amount is approximately equal to the amount currently
earning a cash return in rates. The Utility Commission's decision to
allow treatment of these costs as plant held for future use has been
challenged in the pending appeal of the Docket No. 8425 final order.
See Note 4(b) for a discussion of this proceeding.
In June 1990, HL&P purchased from its then fuel supply affiliate,
Utility Fuels, Inc. (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 lignite reserves as of
December 31, 1994 of $153 million is included on the Company's
Consolidated and HL&P's Balance Sheets in plant held for future use.
HL&P anticipates that an additional $8 million of expenditures
relating to lignite reserves will be incurred in 1995 and 1996.
In Docket No. 12065, HL&P filed testimony in support of the
amortization of substantially all of its remaining investment in
Malakoff, including the portion of the engineering design costs for
which amortization had not previously been authorized and the amount
attributable to related lignite reserves which had not previously been
addressed by the Utility Commission. Under the Proposed Settlement of
Docket No. 12065, HL&P would amortize its investment in Malakoff over
a period not to exceed seven years such that the entire investment
will be written off no later than December 31, 2002. See Note 3. In
the event that the Utility Commission does not
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approve the Proposed Settlement, and 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.
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(20) SUBSEQUENT EVENTS
(a) KBLCOM. On January 26, 1995, Time Warner and the Company reached an
agreement in which Time Warner would acquire KBLCOM in a tax-deferred,
stock-for-stock merger with a subsidiary of Time Warner for a sales
price of approximately $2.2 billion, subject to closing adjustments.
Time Warner will issue one million shares of Time Warner common stock
and 11 million shares of a newly-issued series of its convertible
preferred stock, which will have a liquidation value of $100 per
share, to the Company. The preferred stock will be convertible into
approximately 22.9 million shares of Time Warner common stock and,
until the earlier of conversion or the fourth anniversary of its
issuance, pays an annual dividend of $3.75 per share. After four
years, Time Warner will have the right to exchange the Time Warner
preferred stock for Time Warner common stock at the stated conversion
rate. In addition, at the closing Time Warner will purchase for cash
certain intercompany debt of KBLCOM from the Company for approximately
$600 million subject to adjustment for changes in or levels of
specified indebtedness and liabilities, working capital, capital
expenditures and related items. Closing of this transaction, which is
subject to, among other things, (i) the parties obtaining necessary
consents of certain franchise authorities and other governmental
entities, (ii) the absence of any change that might have a material
adverse effect on KBLCOM or Time Warner, (iii) the absence of any
material litigation and (iv) the expiration or termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvement Act
of 1976, as amended, is expected to take place in the second half of
1995.
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Operating results from discontinued operations for years ended
December 31, 1994, 1993 and 1992 were as follows:
Year Ended December 31,
-----------------------------------
1994 1993 1992
--------- --------- ---------
(Thousands of Dollars)
Revenues ................................ $ 255,772 $ 244,067 $ 235,258
Operating expenses (a) .................. 156,084 148,325 140,242
--------- --------- ---------
Gross operating margin (a) .............. 99,688 95,742 95,016
Depreciation, amortization,
interest and other .................... 128,023 117,982 137,227
Income taxes (benefit) .................. (11,811) 2,255 (12,667)
--------- --------- ---------
Loss from discontinued operations ....... $ (16,524) $ (24,495) $ (29,544)
========= ========= =========
(a)Exclusive of depreciation and amortization.
Loss from discontinued operations of KBLCOM excludes the effects of
corporate overhead charges and includes interest expense relating to
the amount of intercompany debt that Time Warner is purchasing from
the Company.
Net assets of discontinued operations were as follows:
December 31, 1994 December 31, 1993
----------------- -----------------
(Thousands of Dollars)
Assets:
Cable television property, net of
accumulated depreciation of
$161,402 and $151,671 for
1994 and 1993, respectively ........ $ 276,624 $ 220,507
Equity in cable television
partnerships ........................ 160,363 122,531
Intangible assets ..................... 1,029,440 984,032
Other assets .......................... 43,625 35,526
----------- -----------
Total assets ....................... 1,510,052 1,362,596
Less:
Cable television debt ................. (488,783) (504,580)
Accumulated deferred income taxes ..... (308,627) (297,624)
Other liabilities ..................... (43,510) (19,169)
----------- -----------
Net assets ......................... $ 669,132 $ 541,223
=========== ===========
At December 31, 1994 pursuant to the acquisition of cable systems,
KBLCOM has unutilized Separate Return Limitation Year (SRLY) net
operating loss tax benefits of approximately $22.1 million and
unutilized SRLY investment tax credits of approximately $14.0 million
which expire in the years 1995 through 2008, and 1995 through 2003,
respectively. In addition, KBLCOM has unutilized restricted state loss
tax benefits of $20.0 million, which expire in the years 1995 through
2009, and unutilized minimum tax credits of $1.8 million. The Company
does not anticipate full utilization of these losses and tax credits
and, therefore, has established a valuation allowance. Utilization of
preacquisition carryforwards in the future would not affect income of
the Company and KBLCOM, but would be applied to reduce the carrying
value of
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cable television franchises and intangible assets. These tax benefits
and credits will inure to the benefit of Time Warner upon closing of
the pending sale.
Based on a Time Warner common stock price of $35.50 and assuming the
closing occurs on September 30, 1995, the Company estimates that it
will recognize an after-tax gain of approximately $650 million. The
Company anticipates that it will record a portion of this gain
(estimated to be approximately $100 million) in the first quarter of
1995 in recognition of the deferred tax asset arising from the
Company's excess tax basis in KBLCOM stock. The remainder of the gain
will be recognized at closing.
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EXHIBIT 99(b)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four co-owners)
of the South Texas Project, which consists of two 1,250 megawatt nuclear
generating units. HL&P has a 30.8 percent interest in the project and
bears a corresponding share of capital and operating
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costs associated with the project. As of December 31, 1994, HL&P's
investments (net of accumulated depreciation and amortization) in the
South Texas Project and in nuclear fuel, including AFUDC, were $2.1
billion and $99 million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. Both generating units at the South Texas Project were out of
service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994.
HL&P removed the units from service in February 1993 when a problem was
encountered with certain of the units' auxiliary feedwater pumps.
In February 1995, the NRC removed the South Texas Project from its
"watch list" of plants with weaknesses that warranted increased NRC
attention. The NRC placed the South Texas Project on the "watch list" in
June 1993, following the issuance of a report by an NRC Diagnostic
Evaluation Team (DET) which conducted a review of the South Texas
Project operations.
Certain current and former employees of HL&P or contractors of HL&P have
asserted claims that their employment was terminated or disrupted in
retaliation for their having made safety-related complaints to the NRC.
Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P, and
the NRC has jurisdiction to take enforcement action against HL&P and/or
individual employees with respect to these matters. Based on its own
internal investigation, in October 1994 the NRC issued a notice of
violation and proposed a $100,000 civil penalty against HL&P in one such
case in which HL&P had terminated the site access of a former contractor
employee. In that action, the NRC also requested information relating to
possible further enforcement action in this matter against two HL&P
managers involved in such termination. HL&P strongly disagrees with the
NRC's conclusions, and has requested the NRC to give further
consideration of its notice. In February 1995, the NRC conducted an
enforcement conference with respect to that matter, but no result has
been received.
HL&P has provided documents and other assistance to a subcommittee of
the U. S. House of Representatives (Subcommittee) that is conducting an
inquiry related to the South Texas Project. Although the precise focus
and timing of the inquiry has not been identified by the Subcommittee,
it is anticipated that the Subcommittee will inquire into matters
related to HL&P's handling of employee concerns and to issues related to
the NRC's 1993 DET review of the South Texas Project. In connection with
that inquiry, HL&P has been advised that the U. S. General Accounting
Office (GAO) is conducting a review of the NRC's inspection process as
it relates to the South Texas Project and other plants, and HL&P is
cooperating with the GAO in its investigation and with the NRC in a
similar review it has initiated. While no prediction can be made at this
time as to the ultimate outcome of these matters, the Company and HL&P
do not believe that they will have a material adverse effect on the
Company's or HL&P's financial condition or results of operations.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February 1994,
the City of Austin (Austin), one of the four co-owners of the South
Texas Project, filed suit (Austin II Litigation) against HL&P. That suit
is pending in the 152nd District Court for Harris County, Texas, which
has set a trial date for October 1995. Austin alleges that the outages
at the South Texas
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Project from early 1993 to early 1994 were due to HL&P's failure to
perform obligations it owed to Austin under the Participation Agreement
among the four co-owners of the South Texas Project (Participation
Agreement). Austin also asserts that HL&P breached certain undertakings
voluntarily assumed by HL&P under the terms and conditions of the
Operating Licenses and Technical Specifications relating to the South
Texas Project. Austin claims that such failures have caused Austin
damages of at least $125 million due to the incurrence of increased
operating and maintenance costs, the cost of replacement power and lost
profits on wholesale transactions that did not occur. In May 1994, the
City of San Antonio (San Antonio), another co-owner of the South Texas
Project, intervened in the litigation filed by Austin against HL&P and
asserted claims similar to those asserted by Austin. San Antonio has not
identified the amount of damages it intends to seek from HL&P. HL&P is
contesting San Antonio's intervention and has called for arbitration of
San Antonio's claim under the arbitration provisions of the
Participation Agreement. The trial court has denied HL&P's requests, but
review of these decisions is currently pending before the 1st Court of
Appeals in Houston.
In a previous lawsuit (Austin I Litigation) filed in 1983 against the
Company and HL&P, Austin alleged that it had been fraudulently induced
to participate in the South Texas Project and that HL&P had failed to
perform properly its duties as project manager. In May 1993, the courts
entered a judgement in favor of the Company and HL&P, concluding, among
other things, that the Participation Agreement did not impose on HL&P a
duty to exercise reasonable skill and care as project manager. During
the course of the Austin I Litigation, San Antonio and Central Power and
Light Company (CPL), a subsidiary of Central and South West Corporation,
two of the co-owners in the South Texas Project, also asserted claims
for unspecified damages against HL&P as project manager of the South
Texas Project, alleging HL&P breached its duties and obligations. San
Antonio and CPL requested arbitration of their claims under the
Participation Agreement. In 1992, the Company and HL&P entered into a
settlement agreement with CPL (CPL Settlement) providing for CPL's
withdrawal of its demand for arbitration. San Antonio's claims for
arbitration remain pending. Under the Participation Agreement, San
Antonio's arbitration claims will be heard by a panel of five
arbitrators consisting of four arbitrators named by each co-owner and a
fifth arbitrator selected by the four appointed arbitrators.
Although the CPL Settlement did not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL reached certain
understandings in such agreement which contemplated that: (i) CPL's
previously appointed arbitrator would be replaced by CPL; (ii)
arbitrators approved by CPL or HL&P in any future arbitrations would be
mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL would
resolve any future disputes between them concerning the South Texas
Project without resorting to the arbitration provision of the
Participation Agreement. Austin and San Antonio have asserted in the
pending Austin II Litigation that such understandings have rendered the
arbitration provisions of the Participation Agreement void and that
neither Austin nor San Antonio should be required to participate in or
be bound by such proceedings.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
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(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas Project
maintain nuclear property and nuclear liability insurance coverage as
required by law and periodically review available limits and coverage
for additional protection. The owners of the South Texas Project
currently maintain the maximum amount of property damage insurance
currently available through the insurance industry, consisting of $500
million in primary property damage insurance and excess property
insurance in the amount of $2.25 billion. Under the excess property
insurance which became effective on March 1, 1995 and under portions of
the excess property insurance coverage in effect prior to March 1, 1995,
HL&P and the other owners of the South Texas Project are subject to
assessments, the maximum aggregate assessment under current policies
being $26.9 million during any one policy year. The application of the
proceeds of such property insurance is subject to the priorities
established by the NRC regulations relating to the safety of licensed
reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.0 billion to $8.92 billion effective in
November 1994. Owners are required under the Act to insure their
liability for nuclear incidents and protective evacuations by
maintaining the maximum amount of financial protection available from
private sources and by maintaining secondary financial protection
through an industry retrospective rating plan. The assessment of
deferred premiums provided by the plan for each nuclear incident is up
to $75.5 million per reactor subject to indexing for inflation, a
possible 5 percent surcharge (but no more than $10 million per reactor
per incident in any one year) and a 3 percent state premium tax. HL&P
and the other owners of the South Texas Project currently maintain the
required nuclear liability insurance and participate in the industry
retrospective rating plan.
There can be no assurance that all potential losses or liabilities will
be insurable, or that the amount of insurance will be sufficient to
cover them. Any substantial losses not covered by insurance would have a
material effect on HL&P's and the Company's financial condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South Texas
Project are required by the NRC to meet minimum decommissioning funding
requirements to pay the costs of decommissioning the South Texas
Project. Pursuant to the terms of the order of the Utility Commission in
Docket No. 9850, HL&P is currently funding decommissioning costs for the
South Texas Project with an independent trustee at an annual amount of
$6 million, which is recorded in depreciation and amortization expense.
HL&P's funding level is estimated to provide approximately $146 million,
in 1989 dollars, an amount which exceeds the current NRC minimum.
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective January 1, 1994. At December 31,
1994, the securities held in the Company's nuclear decommissioning trust
totaling $25.1 million (reflected on the Company's Consolidated and
HL&P's Balance Sheets in deferred debits and deferred credits) are
classified as available for sale. Such securities are reported on the
balance sheets at fair value, which at December 31, 1994 approximates
cost, and any unrealized gains or losses will be reported as a separate
component of common stock equity. Earnings, net of taxes and
administrative costs, are reinvested in the funds.
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In May 1994, an outside consultant estimated HL&P's portion of
decommissioning costs to be approximately $318 million, in 1994 dollars.
The consultant's calculation of decommissioning costs for financial
planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the
NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration
of their 40 year operating licenses. Under the terms of the Proposed
Settlement, HL&P would increase funding of decommissioning costs to an
annual amount of approximately $14.8 million consistent with such study.
While the current and projected funding levels presently exceed minimum
NRC requirements, no assurance can be given that the amounts held in
trust will be adequate to cover the actual decommissioning costs of the
South Texas Project or the assumptions used in estimating
decommissioning costs will ultimately prove to be correct.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Utility Commission initiated a proceeding (Docket
No. 12065) to determine whether HL&P's existing rates are just and
reasonable. Subsequently, the scope of the docket was expanded to
include reconciliation of HL&P's fuel costs from April 1, 1990 to July
31, 1994. The Utility Commission also initiated a separate proceeding
(Docket No. 13126) to review issues regarding the prudence of operation
of the South Texas Project from the date of commercial operation through
the present. That review would encompass the outage at the South Texas
Project during 1993 through 1994.
Hearings began in Docket No. 12065 in January 1995, and the Utility
Commission has retained a consultant to review the South Texas Project
for the purpose of providing testimony in Docket No. 13126 regarding the
prudence of HL&P's management of operation of the South Texas Project.
In February 1995, all major parties to these proceedings signed the
Proposed Settlement resolving the issues with respect to HL&P, including
the prudence issues related to operation of the South Texas Project.
Approval of the Proposed Settlement by the Utility Commission will be
required. To that end, the parties have established procedural dates for
a hearing on issues raised by the parties who are opposed to the
Proposed Settlement. A decision by the Utility Commission on the
Proposed Settlement is not anticipated before early summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and rates would be frozen for three years, subject to certain
conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment of $218 million in the cancelled Malakoff plant
over a period not to exceed seven years. HL&P also would increase its
decommissioning expense for the South Texas Project by $9 million per
year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This $70
million was recorded as a one-time, pre-tax charge to reconcilable fuel
revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately 17
percent below that currently in effect and would
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refund to customers the balance in its fuel over-recovery account,
estimated to be approximately $180 million after giving effect to the
amounts not recoverable from ratepayers.
HL&P recovers fuel costs incurred in electric generation through a fixed
fuel factor that is set by the Utility Commission. The difference
between fuel revenues billed pursuant to such factor and fuel expense
incurred is recorded as an addition to or a reduction of revenue, with a
corresponding entry to under- or over-recovered fuel, as appropriate.
Amounts collected pursuant to the fixed fuel factor must be reconciled
periodically against actual, reasonable costs as determined by the
Utility Commission. Currently, HL&P has an over-recovery fuel account
balance that will be refunded pursuant to the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the Utility
Commission, including issues related to the South Texas Project, Docket
No. 12065 will be remanded to an Administrative Law Judge (ALJ) to
resume detailed hearings in this docket. Prior to reaching agreement on
the terms of the Proposed Settlement, HL&P argued that its existing
rates were just and reasonable and should not be reduced. Other parties
argued that rate decreases in annual amounts ranging from $26 million to
$173 million were required and that additional decreases might be
justified following an examination of the prudence of the management of
the South Texas Project and the costs incurred in connection with the
outages at the South Texas Project. Testimony filed by the Utility
Commission staff included a recommendation to remove from rate base $515
million of HL&P's investment in the South Texas Project to reflect the
staff's view that such investment was not fully "used and useful" in
providing service, a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did not
result from imprudent management. HL&P also filed testimony analyzing
the extent to which regulatory issues extended the outages. In that
testimony an outside consultant retained by HL&P concluded that the
duration of the outages was controlled by both the resolution of NRC
regulatory issues as well as necessary equipment repairs unrelated to
NRC regulatory issues and that the incremental effect of NRC regulatory
issues on the duration of the outages was only 39 days per unit.
Estimates as to the cost of replacement power may vary significantly
based on a number of factors, including the capacity factor at which the
South Texas Project might be assumed to have operated had it not been
out of service due to the outages. However, HL&P believes that applying
a reasonable range of assumptions would result in replacement fuel costs
of less than $10 million for the 39 day periods identified by HL&P's
consultant and less than $100 million for the entire length of the
outages. Any fuel costs determined to have been unreasonably incurred
would not be recoverable from customers and would be charged against the
Company's earnings.
Although the Company and HL&P believe that the Proposed Settlement is in
the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility Commission
ultimately will approve the terms of the Proposed Settlement or
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(ii) in the event the Proposed Settlement is not approved and
proceedings against HL&P resumed, that the outcome of such proceedings
would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years, the
Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant construction,
including the South Texas Project. Although Utility Commission action on
those applications has been completed, judicial review of a number of
the Utility Commission orders is pending. In Texas, Utility Commission
orders may be appealed to a District Court in Travis County, and from
that Court's decision an appeal may be taken to the Court of Appeals for
the 3rd District at Austin (Austin Court of Appeals). Discretionary
review by the Supreme Court of Texas may be sought from decisions of the
Austin Court of Appeals. The pending appeals from the Utility Commission
orders are in various stages. In the event the courts ultimately reverse
actions of the Utility Commission in any of these proceedings, such
matters would be remanded to the Utility Commission for action in light
of the courts' orders. Because of the number of variables which can
affect the ultimate resolution of such matters on remand, the Company
and HL&P generally are not in a position at this time to predict the
outcome of the matters on appeal or the ultimate effect that adverse
action by the courts could have on the Company and HL&P. On remand, the
Utility Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the Utility
Commission approved a non-unanimous settlement agreement providing for a
$313 million increase in HL&P's base rates, termination of deferrals
granted with respect to Unit No. 2 of the South Texas Project and of the
qualified phase-in plan deferrals granted with respect to Unit No. 1 of
the South Texas Project, and recovery of deferred plant costs. The
settlement authorized a 12.55 percent return on common equity for HL&P.
Rates contemplated by the settlement agreement were implemented in May
1991 and remain in effect (subject to the outcome of the current rate
proceeding described in Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on review
by a District Court, and the Austin Court of Appeals affirmed that
decision on procedural grounds due to the failure of the appellant to
file the record with the court in a timely manner. On review, the Texas
Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility Commission's
order, which include issues regarding deferred accounting, the treatment
of federal income tax expense and certain other matters. As to federal
tax issues, a recent decision of the Austin Court of Appeals, in an
appeal involving GTE-SW (and to which HL&P was not a party), held that
when a utility pays federal income taxes as part of a consolidated
group, the utility's ratepayers are entitled to a fair share of the tax
savings actually realized, which can include savings resulting from
unregulated activities. The
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Texas Supreme Court has agreed to hear an appeal of that decision, but
on points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any disallowance
that might be required if the court's ruling in the GTE decision were
applied in Docket No. 9850 would be offset by that greater amount.
However, that amount may not be sufficient if the Austin Court of
Appeals also concludes that the Utility Commission's inclusion of
deferred accounting costs in the settlement was improper. For a
discussion of the Texas Supreme Court's decision on deferred accounting
treatment, see Note 4(c). Although HL&P believes that it could
demonstrate entitlement to rate relief equal to that agreed to in the
stipulation in Docket No. 9850, HL&P cannot rule out the possibility
that a remand and reopening of that settlement would be required if
decisions unfavorable to HL&P are rendered on both the deferred
accounting treatment and the calculation of tax expense for rate making
purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the Utility
Commission granted HL&P a $227 million increase in base revenues,
allowed a 12.92 percent return on common equity, authorized a qualified
phase-in plan for Unit No. 1 of the South Texas Project (including
approximately 72 percent of HL&P's investment in Unit No. 1 of the South
Texas Project in rate base) and authorized HL&P to use deferred
accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented by
HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with deductions
taken for expenses disallowed in cost of service. The court held that
the Utility Commission had failed to require that such tax savings be
passed on to ratepayers, and ordered that the case be remanded to the
Utility Commission with instructions to adjust HL&P's cost of service
accordingly. Discretionary review is being sought from the Texas Supreme
Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing its
appeal in Docket No. 6668. A separate party to this appeal, however, has
not agreed to dismiss its appeal.
(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized by
the Utility Commission in Docket No. 8230 and was extended in Docket No.
9010. Similar deferred accounting treatment with respect to Unit No. 2
of the South Texas Project was authorized in Docket No. 8425. For a
discussion of the deferred accounting treatment granted, see Note 1(f).
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In June 1994, the Texas Supreme Court decided the appeal of Docket Nos.
8230 and 9010, as well as all other pending deferred accounting cases
involving other utilities, upholding deferred accounting treatment for
both carrying costs and operation and maintenance expenses as within the
Utility Commission's statutory authority and reversed the Austin Court
of Appeals decision to the extent that the Austin Court of Appeals had
rejected deferred accounting treatment for carrying charges. Because the
lower appellate court had upheld deferred accounting only as to
operation and maintenance expenses, the Texas Supreme Court remanded
Docket Nos. 8230 and 9010 to the Austin Court of Appeals to consider the
points of error challenging the granting of deferred accounting for
carrying costs which it had not reached in its earlier consideration of
the case. The Texas Supreme Court opinion did state, however, that when
deferred costs are considered for addition to the utility's rate base in
an ensuing rate case, the Utility Commission must then determine to what
extent inclusion of the deferred costs is necessary to preserve the
utility's financial integrity. Under the terms of the Proposed
Settlement, South Texas Project deferrals will continue to be amortized
under the schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant to
the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In June
1990, the Utility Commission ruled in a separate docket (Docket No.
6668) that had been created to review the prudence of HL&P's planning
and construction of the South Texas Project that $375.5 million out of
HL&P's $2.8 billion investment in the two units of the South Texas
Project had been imprudently incurred. That ruling was incorporated into
HL&P's 1988 and 1991 rate cases and resulted in HL&P's recording an
after-tax charge of $15 million in 1990. Several parties appealed the
Utility Commission's decision, but a District Court dismissed these
appeals on procedural grounds. The Austin Court of Appeals reversed and
directed consideration of the appeals, and the Texas Supreme Court
denied discretionary review in 1994. At this time, no action has been
taken by the appellants to proceed with the appeals. Unless the order in
Docket No. 6668 is modified or reversed on appeal, the amount found
imprudent by the Utility Commission will be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
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EXHIBIT 99(c)
HOUSTON INDUSTRIES INCORPORATED
SAVINGS PLAN
(As Amended and Restated Effective July 1, 1995)
HOUSTON INDUSTRIES INCORPORATED
SAVINGS PLAN
(As Amended and Restated Effective July 1, 1995)
I N D E X PAGE
ARTICLE I DEFINITIONS................................................... 3
Section:
1.1 Accounts...................................................... 3
1.2 Affiliate..................................................... 3
1.3 After-Tax Contributions....................................... 3
1.4 After-Tax Contribution Account................................ 3
1.5 Anniversary Date.............................................. 3
1.6 Beneficiary................................................... 3
1.7 Code.......................................................... 3
1.8 Committee..................................................... 3
1.9 Company....................................................... 3
1.10 Company Stock................................................. 4
1.11 Compensation.................................................. 4
1.12 Contribution.................................................. 4
1.13 Defined Benefit Plan.......................................... 4
1.14 Effective Date................................................ 4
1.15 Employee...................................................... 4
1.16 Employer...................................................... 5
1.17 Employer Contributions........................................ 5
1.18 Employer Matching Account..................................... 5
1.19 Employer Matching Contributions............................... 5
1.20 ERISA......................................................... 5
1.21 ESOP Account.................................................. 5
1.22 ESOP Contributions............................................ 5
1.23 ESOP Fund..................................................... 5
1.24 Exempt Loan................................................... 5
1.25 Fiduciaries................................................... 5
1.26 Financed Stock................................................ 5
1.27 HII Participant............................................... 6
1.28 Investment Fund............................................... 6
1.29 Investment Manager............................................ 6
1.30 KBLCOM Participant............................................ 6
1.31 Participant................................................... 6
1.32 Plan.......................................................... 6
(i)
1.33 Plan Year..................................................... 6
1.34 Pre-Tax Contributions......................................... 6
1.35 Pre-Tax Contribution Account.................................. 6
1.36 Prior Plan.................................................... 6
1.37 Prior Plan Participant........................................ 7
1.38 Retirement.................................................... 7
1.39 Retirement Date............................................... 7
1.40 Service....................................................... 7
1.41 Stock Suspense Account........................................ 7
1.42 Trust Agreement............................................... 7
1.43 Trust Fund.................................................... 7
1.44 Trustee....................................................... 7
1.45 Valuation Date................................................ 7
1.46 Vesting Computation Period.................................... 7
1.47 Vesting Service............................................... 7
ARTICLE II ADMINISTRATION OF THE PLAN.................................... 9
Section:
2.1 Appointment of Committee...................................... 9
2.2 Records of Committee.......................................... 9
2.3 Committee Action.............................................. 9
2.4 Committee Disqualification.................................... 9
2.5 Committee Compensation and Expenses........................... 9
2.6 Committee Liability........................................... 9
2.7 Committee Determinations...................................... 10
2.8 Information from Employer..................................... 11
2.9 Uniform Administration........................................ 11
2.10 Reporting Responsibilities.................................... 12
2.11 Disclosure Responsibilities................................... 12
2.12 Annual Statements............................................. 12
2.13 Allocation of Responsibility Among Fiduciaries for Plan and
Trust Administration....................................... 12
2.14 Annual Audit.................................................. 13
2.15 Presenting Claims for Benefits................................ 13
2.16 Claims Review Procedure....................................... 14
2.17 Disputed Benefits............................................. 14
ARTICLE III PARTICIPATION IN THE PLAN..................................... 15
Section:
3.1 Eligibility of Employees...................................... 15
3.2 Employee Information.......................................... 15
3.3 Notification of Eligible Employees............................ 15
3.4 Application by Participants................................... 15
(ii)
3.5 Authorized Absences........................................... 15
3.6 Vesting Service............................................... 16
3.7 Hour of Service............................................... 16
3.8 Break In Service.............................................. 18
3.9 Participation and Vesting Upon Re-Employment.................. 18
3.10 Transfers..................................................... 18
ARTICLE IV CONTRIBUTIONS TO THE PLAN..................................... 20
Section:
4.1 Employer Contributions........................................ 20
4.2 Pre-Tax Contributions......................................... 20
4.3 After-Tax Contributions....................................... 21
4.4 Actual Deferral Percentage.................................... 22
4.5 Actual Deferral Percentage Limits............................. 22
4.6 Reduction of Pre-Tax Contribution Rates by Leveling Method.... 24
4.7 Increase in Pre-Tax Contribution Rates........................ 25
4.8 Excess Pre-Tax Contributions.................................. 25
4.9 Aggregation of Family Members in Determining the Actual
Deferral Ratio............................................. 26
4.10 Contribution Percentage and ESOP Percentage................... 26
4.11 Contribution Percentage and ESOP Percentage Limits............ 28
4.12 Treatment of Excess Aggregate Contributions or
ESOP Contributions......................................... 29
4.13 Aggregation of Family Members in Determining the Actual
Contribution Ratio......................................... 29
4.14 Multiple Use of Alternative Limitation........................ 30
4.15 ESOP Contributions, Employer Matching Contributions
and Pre-Tax Contributions to be Tax Deductible............. 30
4.16 Maximum Allocations........................................... 30
4.17 Refunds to Employer........................................... 31
4.18 Rollover Contributions........................................ 31
ARTICLE V PARTICIPANTS' ACCOUNTS........................................ 33
Section:
5.1 Trust Accounts................................................ 33
5.2 Valuation of Trust Fund....................................... 33
5.3 Allocation to Accounts........................................ 34
5.4 Treatment of Company Stock Purchased with an Exempt Loan...... 36
5.5 Maximum Annual Additions...................................... 37
5.6 Certain Conditions Applicable to Company Stock................ 45
(iii)
ARTICLE VI PARTICIPANTS' BENEFITS........................................ 48
Section:
6.1 Termination of Service........................................ 48
6.2 Disability of Participants.................................... 48
6.3 Death of Participants......................................... 48
6.4 Retirement of Participants on or After Retirement Date........ 49
6.5 In-Service Distributions...................................... 49
6.6 Payments of Benefits.......................................... 50
6.7 Payment of Distribution Directly to Eligible Retirement Plan.. 51
6.8 Participation Rights Determined as of Valuation Date
Coinciding with or Preceding Termination of Employment..... 52
6.9 Treatment of Non-Vested Account Balances Upon Termination of
Service.................................................... 53
6.10 Required Minimum Distributions................................ 54
6.11 Unclaimed Benefits............................................ 54
ARTICLE VII WITHDRAWALS AND LOANS......................................... 55
Section:
7.1 Withdrawal of After-Tax Excess Contributions.................. 55
7.2 Withdrawal of After-Tax Basic Contributions................... 55
7.3 Conditions of Withdrawals..................................... 55
7.4 Loans......................................................... 55
ARTICLE VIII INVESTMENT DIRECTIONS......................................... 58
Section:
8.1 Investment of Trust Fund...................................... 58
8.2 Diversification Election...................................... 60
8.3 Voting of Company Stock; Exercise of Other Rights............. 60
ARTICLE IX TRUST AGREEMENT AND TRUST FUND................................ 62
Section:
9.1 Trust Agreement............................................... 62
9.2 Benefits Paid Solely from Trust Fund.......................... 62
9.3 Committee Directions to Trustee............................... 62
9.4 Trustee's Reliance on Committee Instructions.................. 62
9.5 Authority of Trustee in Absence of Instructions from
the Committee ............................................. 62
9.6 Compliance with Exchange Act Rule 10(b)(18)................... 63
(iv)
ARTICLE X ADOPTION OF PLAN BY OTHER CORPORATIONS,
AMENDMENT AND TERMINATION OF THE PLAN,
AND DISCONTINUANCE OF CONTRIBUTIONS TO THE
TRUST FUND................................................. 64
Section:
10.1 Adoption by Employers......................................... 64
10.2 Continuous Service............................................ 64
10.3 Amendment of the Plan......................................... 65
10.4 Termination of the Plan....................................... 65
10.5 Distribution of Trust Fund on Termination..................... 65
10.6 Effect of Discontinuance of Contributions..................... 66
10.7 Merger of Plan with Another Plan.............................. 66
ARTICLE XI TOP-HEAVY PLAN REQUIREMENTS................................... 67
Section:
11.1 General Rule.................................................. 67
11.2 Vesting Provisions............................................ 67
11.3 Minimum Contribution Provisions............................... 67
11.4 Limitation on Compensation.................................... 68
11.5 Limitation on Contributions................................... 68
11.6 Coordination with Other Plans................................. 69
11.7 Distributions to Certain Key Employees........................ 69
11.8 Determination of Top-Heavy Status............................. 69
ARTICLE XII MISCELLANEOUS PROVISIONS...................................... 74
Section:
12.1 Terms of Employment........................................... 74
12.2 Controlling Law............................................... 74
12.3 Invalidity of Particular Provisions........................... 74
12.4 Non-Alienability of Rights of Participants.................... 74
12.5 Payments in Satisfaction of Claims of Participants............ 75
12.6 Payments Due Minors and Incompetents.......................... 75
12.7 Acceptance of Terms and Conditions of Plan by Participants.... 75
12.8 Impossibility of Diversion of Trust Fund...................... 75
(v)
HOUSTON INDUSTRIES INCORPORATED
SAVINGS PLAN
(As Amended and Restated Effective July 1, 1995)
RECITALS
Houston Industries Incorporated (the "Company"), a Texas
corporation with its principal place of business in Houston, Harris County,
Texas, established a Savings Plan effective July 1, 1973 for the benefit of its
eligible Employees and retained the right to amend such Savings Plan under
Section 10.3 thereof. Effective as of January 1, 1989, said Savings Plan was
amended to comply with the provisions of the Tax Reform Act of 1986 and to make
certain other changes therein.
Effective October 5, 1990, the Savings Plan was amended and
restated to include an employee stock ownership plan which is a stock bonus plan
intended to qualify under Sections 401(a) and 4975(e)(7) of the Internal Revenue
Code of 1986, as amended (the "Code"), and as such is designed to invest
primarily in Company Stock (said Savings Plan, as amended and restated effective
October 5, 1990, and as thereafter amended and in effect on December 31, 1993,
being herein referred to as the "HII Plan").
In connection with the HII Plan, the Company adopted the
Houston Industries Incorporated Master Savings Trust (the "Master Savings
Trust"), as established effective July 1, 1989, with Texas Commerce Bank
National Association as trustee thereof, and also adopted the Savings Plan of
Houston Industries Incorporated ESOP Trust (the "ESOP Trust"), as established by
Trust Agreement with State Street Bank and Trust Company dated October 5, 1990.
KBLCOM Incorporated ("KBLCOM"), a Delaware corporation and
wholly owned subsidiary of the Company, established the KBLCOM Incorporated
Savings Plan, effective July 1, 1989 (the "KBLCOM Plan"), for the benefit of its
eligible employees. In connection with the establishment of the KBLCOM Plan,
KBLCOM adopted the Master Savings Trust to fund and administer funds contributed
under the KBLCOM Plan for the exclusive benefit of the participants thereunder.
Effective as of January 1, 1994, the Boards of Directors of
the Company and KBLCOM authorized and directed that the KBLCOM Plan be amended,
restated, consolidated with, merged into and continued in the form of and by the
adoption of the Houston Industries Incorporated Savings Plan, as amended and
restated effective January 1, 1994 (the "Prior Plan"), so as to provide for a
continuation of substantially identical benefits for the former participants of
each of the KBLCOM Plan and the HII Plan, respectively, and the merger of all
the assets held under the Master Savings Trust for the benefit of the
participants in the KBLCOM Plan with all the assets held under the Master
Savings Trust for the benefit of the participants in the HII Plan so that from
and after January 1, 1994, such Plans constituted a "single plan" within the
meaning and purview of Section 414(l) of the Code (with the HII Plan being the
surviving
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plan for all legal purposes, including reporting and disclosure under ERISA),
notwithstanding that KBLCOM Participants (as herein defined) are not eligible to
make After-Tax Contributions to the Plan.
The Northern Trust Company was appointed successor trustee to
Texas Commerce Bank National Association under the Master Savings Trust,
effective as of May 1, 1995. The Northern Trust Company also replaced State
Street Bank & Trust Company as successor trustee under the ESOP Trust, effective
as of May 1, 1995. Effective as of July 1, 1995, the Master Savings Trust and
the ESOP Trust each were amended, restated and continued in the form of a single
trust known as the Houston Industries Incorporated Savings Trust. The Savings
Trust is intended to form a part of the Plan.
Effective as of July 1, 1995, the Benefits Committee of the
Company (the "Committee") authorized and directed that the Prior Plan be
amended, restated, and continued in order to (i) reflect the consolidation of
the trust agreements and the successor trustee thereunder, (ii) provide for
daily valuations, (iii) provide for the addition of new investment funds, and
(iv) make certain other changes therein (hereinafter referred to as the "Plan").
The provisions of this Plan shall apply to a Participant who
continues his Service after the Effective Date. Except as otherwise expressly
set forth herein, the rights and benefits, if any, of a Prior Plan Participant
(as herein defined) who terminated his Service prior to the Effective Date shall
be determined under the provisions of the applicable Prior Plan (as herein
defined) in effect on the date his Service terminated.
NOW, THEREFORE, the Committee hereby amends, restates, and
continues the Prior Plan in the form of and by the adoption of the Plan as
herein set forth, effective as of July 1, 1995, to read as follows:
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ARTICLE I
DEFINITIONS
As used in the Plan, the following words and phrases shall
have the following meanings unless the context clearly requires a different
meaning:
1.1 ACCOUNTS: The accounts maintained for a Participant pursuant to
Section 5.1.
1.2 AFFILIATE: A corporation or other trade or business which, together
with an Employer, is "under common control" within the meaning of Section 414(b)
or (c), as modified by Section 415(h) of the Code; any organization (whether or
not incorporated) which is a member of an "affiliated service group" (within the
meaning of Section 414(m) of the Code) which includes the Employer; and any
other entity required to be aggregated with the Employer pursuant to regulations
under Section 414(o) of the Code. In addition, "Affiliate" means, for all
purposes of the Plan except for testing under Sections 4.4, 4.5, 4.10 and 4.11
and determining maximum Annual Additions under Section 5.5 of the Plan, Paragon
Communications, a partnership, as long as the Company or one of its wholly owned
subsidiaries owns at least 50% of the profits interest or 50% of the capital
interest of Paragon Communications.
1.3 AFTER-TAX CONTRIBUTIONS: Any amount contributed by a Participant to
the Trust Fund from his Compensation as "After-Tax Basic Contributions" and
"After-Tax Excess Contributions" pursuant to Section 4.3.
1.4 AFTER-TAX CONTRIBUTION ACCOUNT: The account or accounts maintained
for each Participant to reflect his After-Tax Basic Contributions and After-Tax
Excess Contributions, and adjustments relating thereto.
1.5 ANNIVERSARY DATE: January 1.
1.6 BENEFICIARY: Such natural person or persons, or the trustee of an
INTER VIVOS trust for the benefit of natural persons, entitled to receive a
Participant's death benefits under the Plan, as provided in Section 6.3 hereof.
1.7 CODE: The Internal Revenue Code of 1986, as amended.
1.8 COMMITTEE: The Benefits Committee as described in Article II and, in
regard to any provision of this Plan under which an agent has been appointed by
the Benefits Committee pursuant to Article II to administer such provision of
this Plan, such agent.
1.9 COMPANY: Houston Industries Incorporated, a Texas corporation, or a
successor to Houston Industries Incorporated in the ownership of substantially
all of its assets, and prior to January 14, 1977, Houston Lighting & Power
Company, a Texas corporation.
-3-
1.10 COMPANY STOCK: Common stock or convertible preference stock of the
Company which is readily tradeable on an established securities market.
1.11 COMPENSATION: The total cash compensation actually paid for
personal services to the respective Participant by the Employer during the
applicable payroll period plus any amounts contributed by an Employer pursuant
to a salary reduction agreement and which is not includable in gross income of
the Participant under Code Section 125. Compensation specifically includes
salaries, wages, commissions, overtime pay, benefits paid under the Houston
Industries Incorporated Executive Incentive Compensation Plan (including annual
and long-term awards), the KBLCOM Incorporated Executive Incentive Compensation
Plan and the Houston Industries Energy, Inc. Annual Incentive Compensation Plan,
and any other payments of compensation which would be subject to tax under Code
Section 3101(a), without the dollar limitations of Code Section 3121(a)(1).
Compensation specifically excludes (i) expense allowances; (ii) benefits
received under the Long Term Disability Plan of an Employer; (iii) contributions
of the Employer to or benefits under this Plan or any other welfare or deferred
compensation plan not expressly included above; (iv) any payments made in
connection with a Participant's termination of employment or severance pay; and
(v) Compensation taken into account under the Plan for any Participant during a
given Plan Year beginning on or after January 1, 1994 exceeding $150,000, or
such other dollar amount as may be prescribed by the Secretary of the Treasury
or his delegate. For purposes of applying the $150,000 limit on Compensation,
the family unit of an Employee who either is a 5% owner or is both a highly
compensated employee and one of the ten most highly compensated employees will
be treated as a single Employee with one Compensation, and the $150,000 limit
will be allocated among the members of the family unit in proportion to the
total Compensation of each member of the family unit. For this purpose, a family
unit consists of the Employee who is a 5% owner or one of the ten most highly
compensated employees, the Employee's spouse, and the Employee's lineal
descendants who have not attained age 19 before the close of the year. The
Compensation of the respective Participants as reflected by the books and
records of the Employer shall be conclusive.
1.12 CONTRIBUTION: Any amount contributed to the Trust Fund pursuant to
the provisions of this Plan by the Employer or by a Participant from his
Compensation, including ESOP Contributions, Employer Matching Contributions,
Pre-Tax Basic Contributions, Pre-Tax Excess Contributions, After-Tax Basic
Contributions, and After-Tax Excess Contributions.
1.13 DEFINED BENEFIT PLAN: The Houston Industries Incorporated
Retirement Plan, the KBLCOM Retirement Plan and/or any other defined benefit
plan (as defined in Section 415(k) of the Code) maintained by the Company or by
any Affiliate.
1.14 EFFECTIVE DATE: July 1, 1995.
1.15 EMPLOYEE: Any person employed by an Employer, and including (i) any
disabled individual on "Initial LTD Status" or inactive status under the Long
Term Disability Plan of an Employer and (ii) any "leased employee" (as defined
in Section 414 of the Code, subject to Section 414(n)(5)) performing services
for an Employer. In addition to the above, the term
-4-
"Employee" shall include any person receiving remuneration for personal services
(or would be receiving such remuneration except for an authorized leave of
absence) rendered as an employee of a foreign affiliate (as defined in Code
Section 3121(l)(6)) of an Employer to which an agreement extending coverage
under the Federal Social Security Act entered into by an Employer under Section
3121(l) of said Code applies, provided that such person is a citizen or resident
of the United States.
1.16 EMPLOYER: The Company, its successors, Houston Lighting & Power
Company, Houston Industries Energy, Inc., Houston Industries Products, Inc.,
KBLCOM Incorporated, and any other eligible organization that shall adopt this
Plan pursuant to the provisions of Article X, and the successors, if any, to
such organization.
1.17 EMPLOYER CONTRIBUTIONS: Collectively, the Employer Matching
Contributions and ESOP Contributions.
1.18 EMPLOYER MATCHING ACCOUNT: The account maintained to reflect the
Employer Matching Contributions to the Plan for each Participant or to the
applicable Prior Plan for each Prior Plan Participant, and any adjustments
thereto made pursuant to the provisions of the Plan.
1.19 EMPLOYER MATCHING CONTRIBUTIONS: Any amount, with the exception of
ESOP Contributions, contributed to the Trust Fund by the Employer pursuant to
Section 4.1.
1.20 ERISA: Public Law No. 93-406, the Employee Retirement Income
Security Act of 1974, as amended from time to time.
1.21 ESOP ACCOUNT: The account maintained for each Participant to
reflect the interest in the ESOP Fund allocated to each Participant.
1.22 ESOP CONTRIBUTIONS: The Employer Contributions to the Trust on
behalf of the ESOP Fund for the purpose of repayment of an Exempt Loan, as
described in Section 4.1.
1.23 ESOP FUND: The investment fund held by the Trustee which shall be
primarily invested and reinvested in shares of Company Stock.
1.24 EXEMPT LOAN: Any loan or other extension of credit made or
guaranteed by a disqualified person as defined in Code Section 4975(e)(2) that
is used to finance the purchase of Company Stock by the Trustee and that meets
the requirements of Section 5.6.
1.25 FIDUCIARIES: The Employer, the Committee, the Trustee, and any
other person designated as a Fiduciary with respect to the Plan or the Trust
Agreement, but only with respect to the specific responsibilities of each as
described in Section 2.13 hereof. Any person or group of persons may serve in
more than one fiduciary capacity with respect to the Plan.
1.26 FINANCED STOCK: Company Stock acquired with the proceeds of an
Exempt Loan; provided, however, that the number of shares of Financed Stock
shall be proportionately
-5-
adjusted to reflect any share split, share dividend or combination of
outstanding shares of the Company Stock that were acquired with the proceeds of
an Exempt Loan.
1.27 HII PARTICIPANT: A Participant who is participating in this Plan as
an employee of Houston Industries Incorporated or as an employee of any of its
subsidiaries or affiliates other than KBLCOM Incorporated and the subsidiaries
of KBLCOM Incorporated.
1.28 INVESTMENT FUND: One of the Investment Funds held under the Trust
Fund, as described in Section 8.1, of which the ESOP Fund is not a part.
1.29 INVESTMENT MANAGER: The Investment Manager, if any, appointed by
the Committee under the Trust, as such term is defined by Section 3(38) of
ERISA.
1.30 KBLCOM PARTICIPANT: A Participant who is participating in this Plan
as an employee of KBLCOM Incorporated or as an employee of any of KBLCOM
Incorporated's subsidiaries.
1.31 PARTICIPANT: A current or former eligible Employee who, pursuant to
the provisions of Article III hereof, has elected to participate in the Plan,
and who at any relevant time is either making, or has made, Pre-Tax Basic
Contributions and/or After-Tax Basic Contributions to the Plan, and for whom
contribution accounts continue to be held under the Plan. A former Employee
shall be deemed a Participant under the Plan as long as he has an Account in the
Trust Fund which has not been forfeited under Section 6.1 hereof and thus will
be entitled to exercise all the rights and privileges granted active Employees
who are Participants except as otherwise specifically provided in the case of
Participant loans under Section 7.4 hereof.
1.32 PLAN: The Savings Plan set forth herein, intended to constitute a
profit-sharing plan under Section 401(a)(27) of the Code and an employee stock
ownership plan under Section 4975(e)(7) of the Code, including all subsequent
amendments hereto.
1.33 PLAN YEAR: Each fiscal year commencing January 1 and ending
December 31 of each calendar year.
1.34 PRE-TAX CONTRIBUTIONS: Any amount deferred by a Participant from
his Compensation as "Pre-Tax Basic Contributions" and "Pre-Tax Excess
Contributions" pursuant to Section 4.2.
1.35 PRE-TAX CONTRIBUTION ACCOUNT: The account or accounts maintained
for each Participant to reflect his Pre-Tax Basic Contributions and Pre-Tax
Excess Contributions to the Plan, and any adjustments thereto made pursuant to
the provisions of the Plan.
1.36 PRIOR PLAN: The Houston Industries Incorporated Savings Plan, as
amended and restated effective January 1, 1994 and as thereafter amended and in
effect on June 30, 1995.
-6-
1.37 PRIOR PLAN PARTICIPANT: Any person who is in the employment of an
Employer or Affiliate on the Effective Date and was included in and covered by
the Prior Plan immediately prior thereto, or who is the alternate payee,
beneficiary, spouse or estate representative of such a person who died or was
receiving or entitled to receive benefits under the Prior Plan.
1.38 RETIREMENT: Termination of employment on or after the Retirement
Date of a Participant.
1.39 RETIREMENT DATE: With respect to HII Participants employed prior to
January 1, 1988 and with respect to KBLCOM Participants hired prior to July 1,
1989, the term "Retirement Date" shall mean the first day of the calendar month
coincident with or next following the 65th birthday of a Participant; and, with
respect to HII Participants hired on or after January 1, 1988 and with respect
to KBLCOM Participants hired on or after July 1, 1989, such term shall mean the
later of (i) the Participant's attainment of age 65 or (ii) the fifth
anniversary of the Participant's commencement of participation in the Plan.
1.40 SERVICE: Active employment as an Employee of an Employer and
periods of Authorized Absences of the kinds described in Section 3.5.
1.41 STOCK SUSPENSE ACCOUNT: The suspense account maintained by the
Trustee in accordance with Section 5.1 and to which will be credited all shares
of Financed Stock prior to the allocation of such shares to the ESOP Accounts in
accordance with Section 5.3.
1.42 TRUST AGREEMENT: The Houston Industries Incorporated Savings Trust,
as amended and restated effective July 1, 1995, as it may hereafter be amended
from time to time.
1.43 TRUST FUND: All contributions of Employers and Participants, and
the investments and reinvestments thereof, held by the Trustee under the Trust
Agreement, together with all income, profits or increments thereon.
1.44 TRUSTEE: The Northern Trust Company, an Illinois corporation.
1.45 VALUATION DATE: Any date on which the New York Stock Exchange is
open for trading and any date on which the value of the assets of the Trust Fund
is determined by the Trustee pursuant to Section 5.2. The last business day of
each calendar month shall be the "monthly Valuation Date," and the last business
day of December of each Plan Year shall be the "annual Valuation Date."
1.46 VESTING COMPUTATION PERIOD: The 12 consecutive month period
beginning January 1 and ending December 31.
1.47 VESTING SERVICE: The period of a Participant's employment
considered in the determination of his eligibility for benefits under Section
3.6 of the Plan.
-7-
Words used in this Plan and in the Trust Agreement in the
singular shall include the plural and in the plural the singular, and the gender
of words used shall be construed to include whichever may be appropriate under
any particular circumstances of the masculine, feminine or neuter genders.
-8-
ARTICLE II
ADMINISTRATION OF THE PLAN
2.1 APPOINTMENT OF COMMITTEE: The Board of Directors of the Company
shall appoint a Committee of not less than three persons, who may be Employees
of the Company, to perform the administrative duties set forth herein. The
Committee shall be the administrator of the Plan for the purposes of ERISA. Each
member of the Committee shall serve for such term as the Board of Directors of
the Company may designate or until his death, resignation or removal by the
Board. The Board of Directors of the Company shall promptly appoint successors
to fill any vacancies in the Committee.
2.2 RECORDS OF COMMITTEE: The Committee shall keep appropriate records
of its proceedings and the administration of the Plan. The Committee shall make
available to Participants and their Beneficiaries for examination, during
business hours, such records of the Plan as pertain to the examining person and
such documents relating to the Plan as are required by any applicable disclosure
acts.
2.3 COMMITTEE ACTION: The Committee may act through the concurrence of a
majority of its members expressed either at a meeting of the Committee, or in
writing without a meeting. Any member of the Committee, or the Secretary or
Assistant Secretary of the Committee (who need not be members of the Committee),
may execute on behalf of the Committee any certificate or other written
instrument evidencing or carrying out any action approved by the Committee. The
Committee may delegate any of its rights, powers and duties to any one or more
of its members or to an agent. The Chairman of the Committee shall be agent of
the Plan and the Committee for the service of legal process at the principal
office of the Company in Houston, Texas.
2.4 COMMITTEE DISQUALIFICATION: A member of the Committee who may be a
Participant shall not vote on any question relating specifically to himself.
2.5 COMMITTEE COMPENSATION AND EXPENSES: The members of the Committee
shall serve without bond (unless otherwise required by law) and without
compensation for their services as such. The Committee may select and authorize
the Trustee to suitably compensate such attorneys, agents and representatives as
it may deem necessary or advisable to the performance of its duties. Expenses of
the Committee that shall arise in connection with the administration of the Plan
shall be paid by the Company or, if not paid by the Company, by the Trustee out
of the Trust Fund.
2.6 COMMITTEE LIABILITY: Except to the extent that such liability is
created by ERISA, no member of the Committee shall be liable for any act or
omission of any other member of the Committee, nor for any act or omission on
his own part except for his gross negligence or willful misconduct, nor for the
exercise of any power or discretion in the performance of any duty assumed by
him hereunder. The Company shall indemnify and hold harmless each member of the
Committee from any and all claims, losses, damages, expenses (including counsel
fees
-9-
approved by the Committee) and liabilities (including any amounts paid in
settlement with the Committee's approval, but excluding any excise tax assessed
against any member or members of the Committee pursuant to the provisions of
Section 4975 of the Code) arising from any act or omission of such member in
connection with duties and responsibilities under the Plan, except where the
same is judicially determined to be due to the gross negligence or willful
misconduct of such member.
2.7 COMMITTEE DETERMINATIONS: The Committee shall enforce this Plan in
accordance with its terms and shall have all powers necessary for the
accomplishment of that purpose, including, but not by way of limitation, the
following powers:
(a) To employ such agents and assistants, such counsel (who
may be of counsel to the Company) and such clerical, accounting,
administrative, and investment services as the Committee may require in
carrying out the provisions of the Plan.
(b) To authorize one or more of their number, or any agent, to
make payment, or to execute or deliver any instrument, on behalf of the
Committee, except that all requisitions for funds from, and requests,
directions, notifications, certifications, and instructions to, the
Trustee (except as provided in (i) below) or to the Company shall be
signed either by a member of the Committee or by the Secretary or
Assistant Secretary of the Committee.
(c) To determine from the records of the Company the
considered Compensation, Service and other pertinent facts regarding
Employees and Participants for the purpose of the Plan.
(d) To construe and interpret the Plan, decide all questions
of eligibility and determine the amount, manner and time of payment of
any benefits hereunder.
(e) To prescribe forms and procedures to be followed by
Employees for participation in the Plan, by Participants or
Beneficiaries filing applications for benefits, by Participants
applying for withdrawals or loans, and for other occurrences in the
administration of the Plan.
(f) To prepare and distribute, in such manner as the Committee
determines to be appropriate, information explaining the Plan.
(g) To furnish the Company and the Participants, upon request,
such annual reports with respect to the administration of the Plan as
are reasonable and appropriate.
(h) To certify to the Trustee the amount and kind of benefits
payable to Participants and their Beneficiaries.
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(i) To authorize all disbursements by the Trustee from the
Trust Fund by a written authorization signed either by a member of the
Committee or by the Secretary or Assistant Secretary of the Committee;
provided, however, that disbursements for ordinary expenses incurred in
the administration of the Trust Fund and disbursements to Participants
need not be authorized by the Committee.
(j) In the event of any share split, share dividend or
combination of outstanding shares of Company Stock, to determine the
appropriate allocation of shares of Company Stock to the Stock Suspense
Account and the Accounts maintained for the Participants and to
determine the appropriate number of shares distributable to a
Participant under Section 6.6 hereof immediately following such share
split, share dividend or combination so as to effectuate the intent and
purpose of the Plan.
(k) To interpret and construe all terms, provisions,
conditions and limitations of this Plan and to reconcile any
inconsistency or supply any omitted detail that may appear in this Plan
in such manner and to such extent, consistent with the general terms of
this Plan, as the Committee shall deem necessary and proper to
effectuate the Plan for the greatest benefit of all parties interested
in the Plan.
(l) To make and enforce such rules and regulations for the
administration of the Plan as are not inconsistent with the terms set
forth herein.
(m) In addition to all other powers herein granted, and in
general consistent with provisions hereof, the Committee shall have all
other rights and powers reasonably necessary to supervise and control
the administration of this Plan.
2.8 INFORMATION FROM EMPLOYER: To enable the Committee to perform its
functions, the Employer shall supply full and timely information to the
Committee of all matters relating to the dates of employment of its Employees
for purposes of determining eligibility of Employees to participate hereunder,
the Compensation of all Participants, their Retirement, death or other cause for
termination of employment, and such other pertinent facts as the Committee may
require; and the Committee shall advise the Trustee of such of the foregoing
facts as may be pertinent to the Trustee's administration of the Trust Fund.
2.9 UNIFORM ADMINISTRATION: Whenever in the administration of the Plan
any action is required by the Employer or the Committee, including, but not by
way of limitation, action with respect to eligibility of Employees,
Contributions, and benefits, such action shall be uniform in nature as applied
to all persons similarly situated, and no action shall be taken which will
discriminate in favor of Participants who are officers or shareholders of the
Employer, highly compensated Employees, or persons whose principal duties
consist of supervising the work of others.
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2.10 REPORTING RESPONSIBILITIES: As administrator of the Plan under
ERISA, the Committee shall file or distribute all reports, returns and notices
required under ERISA or other applicable law.
2.11 DISCLOSURE RESPONSIBILITIES: The Committee shall make available to
each Participant and Beneficiary such records, documents and other data as may
be required under ERISA, and Participants or Beneficiaries shall have the right
to examine such records at reasonable times during business hours. Nothing
contained in this Plan shall give any Participant or Beneficiary the right to
examine any data or records reflecting the Compensation paid to, or relating to
any Account of, any other Participant or Beneficiary, except as may be required
under ERISA.
2.12 ANNUAL STATEMENTS: As soon as practicable after each annual
Valuation Date, the Committee shall prepare and deliver to each Participant a
written statement reflecting as of that annual Valuation Date:
(a) Such information applicable to contributions by and for
each such Participant and the increase or decrease thereof as a
consequence of valuation adjustments as may be pertinent in the
premises.
(b) The balance in his Account as of that annual Valuation
Date.
2.13 ALLOCATION OF RESPONSIBILITY AMONG FIDUCIARIES FOR PLAN AND TRUST
ADMINISTRATION: The Fiduciaries shall have only those specific powers, duties,
responsibilities and obligations as are specifically given them under this Plan
or the Trust Agreement. In general, the Employer shall have the sole
responsibility for making the Contributions provided for under Sections 4.1, 4.2
and 4.3. The Company shall have the sole authority to appoint and remove the
Trustee and members of the Committee. The Company may amend or terminate, in
whole or in part, this Plan or the Trust Agreement. The Committee shall have the
sole responsibility for the administration of the Plan and the sole authority to
appoint and remove any Investment Manager which may be provided for under the
Trust. The Trustee shall have the sole responsibility for the administration of
the Trust Fund and shall have exclusive authority and discretion to manage and
control the assets held under the Trust Fund, except to the extent that the
authority to manage, acquire and dispose of the assets of the Trust Fund is
delegated to an Investment Manager, all as specifically provided in the Trust
Agreement. Each Fiduciary warrants that any directions given, information
furnished, or action taken by it shall be in accordance with the provisions of
the Plan or the Trust Agreement, as the case may be, authorizing or providing
for such direction, information or action. Furthermore, each Fiduciary may rely
upon any such direction, information or action of another Fiduciary as being
proper under this Plan or the Trust Agreement and is not required under this
Plan or the Trust Agreement to inquire into the propriety of any such direction,
information or action. It is intended under this Plan and the Trust Agreement
that each Fiduciary shall be responsible for the proper exercise of its own
powers, duties, responsibilities and obligations under this Plan and the Trust
Agreement and shall not be responsible for any act or failure to act of another
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Fiduciary. No Fiduciary guarantees the Trust Fund in any manner against
investment loss or depreciation in asset value.
2.14 ANNUAL AUDIT: The Committee shall engage, on behalf of all
Participants, an independent Certified Public Accountant who shall conduct an
annual examination of any financial statements of the Plan and Trust Fund and of
other books and records of the Plan and Trust Fund as the Certified Public
Accountant may deem necessary to enable him to form and provide a written
opinion as to whether the financial statements and related schedules required to
be filed with the Internal Revenue Service, Securities and Exchange Commission,
or Department of Labor or furnished to each Participant are presented fairly and
in conformity with generally accepted accounting principles applied on a basis
consistent with that of the preceding Plan Year. If, however, the statements
required to be submitted as part of the reports to the Department of Labor are
prepared by a bank or similar institution or insurance carrier regulated and
supervised and subject to periodic examination by a state or federal agency and
if such statements are, in fact, made a part of the annual report to the
Department of Labor and no such audit is required by ERISA, then the audit
required by the foregoing provisions of this Section shall be optional with the
Committee.
2.15 PRESENTING CLAIMS FOR BENEFITS: Any Participant or any other person
claiming under any deceased Participant may submit written application to the
Committee for the payment of any benefit asserted to be due him under the Plan.
Such application shall set forth the nature of the claim and such other
information as the Committee may reasonably request. Promptly upon the receipt
of any application required by this Section, the Committee shall determine
whether or not the Participant or Beneficiary involved is entitled to a benefit
hereunder and, if so, the amount thereof and shall notify the applicant of its
findings.
The Committee shall notify the applicant of the benefits
determination within a reasonable time after receipt of the claim, such time not
to exceed 90 days unless special circumstances require an extension of time for
processing the application. If such an extension of time for processing is
required, written notice of the extension shall be furnished to the applicant
prior to the end of the initial 90-day period. In no event shall such extension
exceed a period of 90 days from the end of such initial period. The extension
notice shall indicate the special circumstances requiring an extension of time
and the date by which the Committee expects to render its final decision. Notice
of the Committee's decision to deny a claim in whole or in part shall be set
forth in a manner calculated to be understood by the applicant and shall contain
the following:
(a) the specific reason or reasons for the denial;
(b) specific reference to the pertinent Plan provisions on
which the denial is based;
(c) a description of any additional material or information
necessary for the applicant to perfect the claim and an explanation of
why such material or information is necessary; and
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(d) an explanation of the claims review procedures set forth
in Section 2.16 hereof.
If notice of denial is not furnished and if the claim is not granted within the
period of time set forth above, the claim shall be deemed denied for purposes of
proceeding to the review stage described in Section 2.16. Participants shall be
given timely written notice of the time limits set forth herein for
determination on claims, appeal of claim denial and decisions on appeal.
2.16 CLAIMS REVIEW PROCEDURE: If an application filed by a Participant
or Beneficiary under Section 2.15 above shall result in a denial by the
Committee of the benefit applied for, either in whole or in part, such applicant
shall have the right, to be exercised by written request filed with the
Committee within 60 days after receipt of notice of the denial of his
application or, if no such notice has been given, within 60 days after the
application is deemed denied under Section 2.15, for the review of his
application and of his entitlement to the benefit for which he applied. Such
request for review may contain such additional information and comments as the
applicant may wish to present. The Committee shall reconsider the application in
light of such additional information and comments as the applicant may have
presented and, if the applicant shall have so requested, may grant the applicant
a formal hearing before the Committee in its discretion. The Committee shall
also permit the applicant or his designated representative to review pertinent
documents in its possession, including copies of the Plan document and
information provided by the Employer relating to the applicant's entitlement to
such benefit. The Committee shall render a decision no later than the date of
the Committee meeting next following receipt of the request for review, except
that (i) a decision may be rendered no later than the second following Committee
meeting if the request is received within 30 days of the first meeting and (ii)
under special circumstances which require an extension of time for rendering a
decision (including but not limited to the need to hold a hearing), the decision
may be rendered not later than the date of the third Committee meeting following
the receipt of the request for review. If such an extension of time for review
is required because of special circumstances, written notice of the extension
shall be furnished to the applicant prior to the commencement of the extension.
Notice of such final determination of the Committee shall be furnished to the
applicant in writing, in a manner calculated to be understood by him, and shall
set forth the specific reasons for the decision and specific references to the
pertinent provisions of the Plan upon which the decision is based. If the
decision on review is not furnished within the time period set forth above, the
claim shall be deemed denied on review.
2.17 DISPUTED BENEFITS: If any dispute shall arise between a Participant
or other person claiming under a Participant and the Committee after review of a
claim for benefits, or in the event any dispute shall develop as to the person
to whom the payment of any benefit under the Plan shall be made, the Trustee may
withhold the payment of all or any part of the benefits payable hereunder to the
Participant or other person claiming under the Participant until such dispute
has been resolved by a court of competent jurisdiction or settled by the parties
involved.
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ARTICLE III
PARTICIPATION IN THE PLAN
3.1 ELIGIBILITY OF EMPLOYEES: An Employee eligible under the applicable
Prior Plan immediately preceding the Effective Date shall continue to be
eligible to participate in this Plan in accordance with the provisions of this
Plan. From and after the Effective Date, each Employee who is eligible and who
is not a Participant and who began Service with an Employer on or after April 1,
1995 shall be initially eligible to participate in the Plan as soon as
practicable following the later of (i) the Effective Date, or (ii) the date he
first began Service with such Employer. Each of (i) an Employee who is employed
as a building trades worker under a construction industry collective bargaining
agreement providing specifically for retirement benefit payments to be made
thereunder for such building trades worker and (ii) an Employee who is a "leased
employee" as defined in Section 414(n) of the Code shall be ineligible to
participate in this Plan.
3.2 EMPLOYEE INFORMATION: The Committee shall maintain records which
shall reflect as to each Employee his date of birth, all dates reflecting when
he entered into or left the employment of any Employer, and his years of Vesting
Service. The Employer shall make available to the Committee all such information
as may be required by the Committee for the purposes of maintaining such
information as to each Employee.
3.3 NOTIFICATION OF ELIGIBLE EMPLOYEES: Each eligible Employee shall be
notified that he is eligible to participate in the Plan upon commencement of his
Service.
3.4 APPLICATION BY PARTICIPANTS: Each Employee who shall become eligible
to participate in the Plan and who shall desire to become a Participant shall
complete an application in such form as may be prescribed by the Committee in
which the Participant shall elect to make and designate the amount of his
Contributions, as contemplated under Sections 4.2 and 4.3 hereof, and his choice
of investment options under Section 8.1 hereof.
3.5 AUTHORIZED ABSENCES: Authorized Absences shall have the following
meaning and consequences:
(a) The following shall be "Authorized Absences":
(i) Absence without pay of an Employee due to
membership in the Armed Forces of the United States (but if
such absence is not pursuant to orders issued by the Armed
Forces of the United States, only if with the consent of the
Employer).
(ii) Absence due to an authorized leave of absence
without pay granted by the Employer in a non-discriminatory
manner in order that all Employees under similar circumstances
shall be treated alike.
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(iii) An absence otherwise recognized as an
"Authorized Absence" shall not be so recognized (1) under (i)
above unless such Employee shall apply for reinstatement in
the employment of Employer within 90 days after discharge or
release to inactive duty, as the case may be, or (2) under
(ii) above unless within ten days after the expiration date
thereof such Employee shall apply for reinstatement in the
employment of the Employer.
(b) The years of Vesting Service of an Employee immediately
after his re-employment following an Authorized Absence shall be
determined as if he had continued employment throughout his Authorized
Absence. If, however, an Employee, following his re-employment after an
Authorized Absence, thereafter terminates his employment (other than as
a consequence of Retirement, death, disability, or subsequent
Authorized Absence) before completion of one year of Service or fails
to apply for re-employment as specified under Section 3.5(a)(iii), the
commencement date of his Authorized Absence will be treated as having
marked the termination of the employment of such Employee for all
purposes of the Plan (including specifically but without limitation his
years of Vesting Service); provided that for valuation purposes only,
the distributions from the Plan to which such an Employee may then be
entitled shall be determined by reference to the value of his Pre-Tax
Contribution Account, his After-Tax Contribution Account, his Employer
Matching Account and his ESOP Account as of the last immediately
preceding Valuation Date.
(c) Solely for the purpose of determining the eligibility of
an Employee to participate in the Plan immediately following the
resumption of his employment after expiration of his Authorized
Absence, the employment status of such Employee prior to his Authorized
Absence shall be considered as continuing throughout his Authorized
Absence.
3.6 VESTING SERVICE: An Employee shall be credited with one and only one
year of Vesting Service for each Vesting Computation Period before or after the
Effective Date during which such Employee completes at least 1,000 Hours of
Service for an Employer or an Affiliate. An Employee will not be credited with a
year of Vesting Service with respect to a Vesting Computation Period if the
Employee completes less than 1,000 Hours of Service for the Employer or an
Affiliate during such Vesting Computation Period.
3.7 HOUR OF SERVICE: An Employee shall be credited with an Hour of
Service as follows:
(a) An Hour of Service shall be credited to an Employee for
each hour for which an Employee is directly paid, or entitled to
payment, by the Employer or an Affiliate for the performance of duties
during the applicable computation period. Such hours shall be credited
to the Employee for the computation period or periods in which the
duties were performed.
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(b) An Hour of Service shall be credited to an Employee for
each hour for which back pay, irrespective of mitigation of damages,
has been either awarded or agreed to by the Employer or an Affiliate.
These hours shall be credited to the Employee for the computation
period or periods to which the award or agreement pertains rather than
the computation period in which the award, agreement, or payment is
made. Hours of Service shall not be credited to an Employee under both
paragraphs (a) and (b) of this Section.
(c) In addition to Hours of Service credited in paragraphs (a)
and (b) of this Section, an Hour of Service shall be credited to an
Employee for each hour for which such Employee is directly or
indirectly paid, or entitled to such payment by the Employer or an
Affiliate for reasons (such as vacation, sickness, or disability) other
than for the performance of duties during the applicable computation
period. For purposes of this paragraph (c), irrespective of whether
such hours have accrued in other computation periods, such hours shall
be counted in the computation period in which either payment is
actually made or amounts payable to the Employee become due. For
purposes of this paragraph (c), Hours of Service shall be determined by
dividing the payments received or due for reasons other than the
performance of duties by the lesser of (i) the Employee's most recent
hourly rates of compensation for the performance of duties or (ii) the
Employee's average hourly rate of compensation for the performance of
duties for the most recent computation period in which the Employee
completed more than 500 Hours of Service.
(d) The number of Hours of Service which are credited for
reasons other than the performance of duties for the Employer in
determining a Break In Service shall be determined in accordance with
Sections 2530.200b-2(b) and (c) of Title 29, Chapter XXV of the Code of
Federal Regulations.
Hours of Service will be credited for employment with other members of an
affiliated service group (under Section 414(m)), a controlled group of
corporations (under Section 414(b)), or a group of trades or businesses under
common control (under Section 414(c)) of which the adopting Employer is a
member.
Notwithstanding the foregoing, no Hours of Service will be
credited for a KBLCOM Participant's employment with an "employer" as defined in
the KBLCOM Incorporated Savings Plan prior to the later of (i) July 1, 1989 or
(ii) the date such "employer" became an Affiliate of KBLCOM.
Solely for purposes of determining whether a Break In Service,
as defined in Section 3.8, for participation and vesting purposes has occurred
in a computation period for any Plan Year beginning after December 31, 1984, an
individual who is absent from work for maternity or paternity reasons shall
receive credit for the Hours of Service which would otherwise have been credited
to such individual but for such absence, or in any case in which such hours
cannot be determined, eight Hours of Service per day of such absence. For
purposes
-17-
of this paragraph, an absence from work for maternity or paternity reasons means
an absence (i) by reason of the pregnancy of the individual, (ii) by reason of
the birth of a child of the individual, (iii) by reason of the placement of a
child with the individual in connection with the adoption of such child by such
individual, or (iv) for purposes of caring for such child for a period beginning
immediately following such birth or placement. The Hours of Service credited
under this paragraph shall be credited (1) in the computation period in which
the absence begins if the crediting is necessary to prevent a Break In Service
in that period or (2) in all other cases, in the following computation period.
3.8 BREAK IN SERVICE: A Vesting Computation Period during which a
Participant completes 500 Hours of Service or less for an Employer or an
Affiliate shall constitute a Break In Service. Upon incurring a Break In
Service, an Employee's or former Employee's rights and benefits under this Plan
shall be determined as provided in Section 3.9.
3.9 PARTICIPATION AND VESTING UPON RE-EMPLOYMENT: Participation in the
Plan shall cease at the close of the pay period during which the termination of
Service occurs. Termination of Service may result from Retirement, death or
voluntary or involuntary termination of employment with the Employer and its
Affiliates, if any, unauthorized absence, or by failure to return to active
employment with the Employer by the date on which an Authorized Absence expired.
Upon the re-employment prior to or after a Break In Service of any person who
had previously been employed by the Employer, the following rules shall apply in
determining his Participation in the Plan and his Vesting Service under Sections
3.1 and 3.6:
(a) PARTICIPATION: If the re-employed Employee was not a
Participant in the Plan during his prior period of Service, he shall be
eligible to commence participation in the Plan on the date of his
re-employment. If the re-employed Employee was a Participant in the
Plan during his prior period of Service, he shall recommence
participation in the Plan on the date of his re-employment, and any
forfeitures from his Employer Matching Account and ESOP Account shall
be reinstated to the extent provided in Section 6.9.
(b) VESTING: Any Vesting Service attributable to a re-employed
Employee's prior period of employment shall be reinstated as of the
date of his recommencement of participation in the Plan.
3.10 TRANSFERS:
(a) For the purposes of determining eligibility to participate
in the Plan and Service under this Article III, a Participant shall
receive Vesting Service and Hours of Service for employment with an
Affiliate after it became an Affiliate, provided that all such
employment is determined in accordance with the re-employment
provisions of Section 3.9.
If an individual is transferred to eligible
employment covered by this Plan from employment with an Employer or
Affiliate not covered by the
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Plan, he shall be eligible to participate in this Plan as of the date
of his transfer or as of a date that is as soon as practicable
thereafter, provided he would otherwise meet the requirements of
Section 3.1. In addition, if such transferred Participant had an
account in a qualified defined contribution plan maintained by such
Affiliate, such account shall be transferred to the Trust Fund under
this Plan if the transfer is permitted by the terms of said plan and if
the Committee determines that the transferred account will not fail to
satisfy Section 401(a) or 411(d)(6) of the Code. Any transferred
account shall be subject to the provisions of this Plan; provided,
however, that the vesting provisions of the transferor plan shall
continue to apply.
(b) If a Participant is transferred to employment with an
Employer or Affiliate which is not eligible employment covered by the
Plan, his participation in the Plan shall be suspended, provided,
however, that during the period of his employment in such ineligible
position:
(i) subject to the re-employment provisions of
Section 3.9, service for vesting purposes shall continue to
accrue;
(ii) he shall cease to have any right to make
Contributions pursuant to Sections 4.2 and 4.3;
(iii) his Employer Matching Account and ESOP Account
shall receive no Employer Matching Contribution or ESOP
Contribution allocations under Section 4.1;
(iv) he shall continue to participate in income
allocations of the earnings and/or losses of the Trust Fund
pursuant to Section 5.3;
(v) no distribution event shall be deemed to have
occurred under Section 6.1; and
(vi) the loan privileges under Article VII and the
provisions of Article VIII shall continue to apply.
In addition, the Committee may, at its discretion,
authorize the transfer of his Accounts under this Plan to the Trust
Fund funding the qualified defined contribution plan, if any, of the
Affiliate to which the Participant was transferred. In such event, the
provisions of the transferee plan shall govern.
-19-
ARTICLE IV
CONTRIBUTIONS TO THE PLAN
4.1 EMPLOYER CONTRIBUTIONS: For each Plan Year during which an Exempt
Loan is outstanding, the Employer shall make an ESOP Contribution to the Trust
in such amount and at such times as shall be determined by the Company.
The Employer shall also make an Employer Matching Contribution
(subject to adjustments for forfeitures and limitations on annual additions as
elsewhere specified in the Plan) in the amount, if any, necessary to result in a
total allocation under Article V to each Participant's Prior Plan and ESOP
Accounts of not less than (i) 70% of the total of his Pre-Tax Basic Contribution
and After-Tax Basic Contribution for the Plan Year in the case of HII
Participants and (ii) 70% of the total of his Pre-Tax Basic Contribution for the
Plan Year in the case of KBLCOM Participants. Further, the Employer shall make
an additional ESOP Contribution and/or Employer Matching Contribution, if
necessary, to make the allocation required under Section 5.3(d)(ii) with respect
to dividends used to repay an Exempt Loan.
To the extent specified in Section 5.3(d)(iii), any amounts
attributable to forfeitures will be applied to reduce, to the extent of such
forfeitures, the Employer Matching Contributions required to be made next
following the determination of any such forfeiture amounts.
In the event that a forfeiture arising under Section 6.1 is
reinstated under Section 6.9 because of the return to the employment of the
terminated Participant, or in the event that a forfeiture arising under Section
6.11 is reinstated in accordance with the provisions of Section 6.11 because of
an appropriate claim of forfeited unclaimed benefit by the Participant,
Beneficiary or other distributee, the Employer shall contribute, within a
reasonable time following such re-employment or claim, an amount equal to the
forfeiture to be reinstated.
4.2 PRE-TAX CONTRIBUTIONS: Each Participant who has elected to defer a
portion of his salary as a Pre-Tax Basic Contribution to the Plan pursuant to
Section 3.4 shall defer as his Pre-Tax Basic Contribution to the Trust Fund 1%,
2%, 3%, 4%, 5% or 6%, as he may designate, of his Compensation. In addition,
each HII Participant may also elect to defer any whole percent, up to a maximum
of 10%, of his Compensation, and each KBLCOM Participant may also elect to defer
any whole percent, up to a maximum of 4%, of his Compensation, as a Pre-Tax
Excess Contribution. Each Participant's Pre-Tax Basic Contribution and Pre-Tax
Excess Contribution, if any, shall be contributed to the Trust Fund by the
Employer as soon as practicable. A Participant's Pre-Tax Contributions under
this Plan and all other plans, contracts or arrangements of the Employer shall
not exceed a maximum contribution of $9,240 (as adjusted by the Secretary of the
Treasury) for each calendar year. In the event a Participant's Pre-Tax
Contributions exceed the applicable limit described in the preceding sentence,
or in the event the Participant submits a written claim under the Plan, at the
time and in the manner prescribed by the Committee, specifying an amount of
Pre-Tax Contributions that will exceed the applicable limit of Section 402(g) of
the Code when added to the amounts deferred by the
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Participant in other plans or arrangements, such excess (the "Excess
Deferrals"), plus any income and minus any loss allocable to such amount, shall
be returned to the Participant by the April 15 of the following year. Excess
Deferrals shall be treated as Annual Additions under Section 5.5 of the Plan.
Each Participant's Pre-Tax Contribution Account shall be fully vested and
non-forfeitable at all times.
When first electing to participate in the Plan, each
Participant shall give advance notification by electronic, telephonic, written
or other such manner as may be prescribed from time to time by the Committee, of
the amount he elects to defer as a Pre-Tax Basic Contribution and as a Pre-Tax
Excess Contribution. Each such election shall continue in effect during
subsequent Plan Years unless the Participant shall give timely notice of his
election to change or discontinue his Pre-Tax Basic Contribution or his Pre-Tax
Excess Contribution in accordance with procedures established from time to time
by the Committee.
A Participant may change the rate of his Pre-Tax Basic
Contribution and/or Pre-Tax Excess Contribution, with no restrictions on
frequency, by electronic, telephonic, written or other such manner as may be
prescribed from time to time by the Committee. A Participant may discontinue his
Pre-Tax Basic Contribution and/or Pre-Tax Excess Contribution, with no
restrictions on frequency, by electronic, telephonic, written or other such
manner as may be prescribed from time to time by the Committee. Any such change
or discontinuance in the rate of Pre-Tax Basic and/or Excess Contributions shall
be effective as soon as reasonably practicable following receipt of the change
or discontinuance of elections.
4.3 AFTER-TAX CONTRIBUTIONS: Each HII Participant who has elected to
make a Pre-Tax Basic Contribution of less than 6% of his Compensation may elect
to make an After-Tax Basic Contribution to the Plan pursuant to Section 3.4 of
1%, 2%, 3%, 4%, 5% or 6%, as he may designate, of his Compensation, provided
that the total of his Pre-Tax Basic Contribution, if any, and his After-Tax
Basic Contribution does not exceed 6% of his Compensation. In addition, each HII
Participant who has elected to make a Pre-Tax Excess Contribution of less than
10% of his Compensation may elect to contribute to the Plan any whole percent,
up to a maximum of 10%, of his Compensation, as an After-Tax Excess
Contribution; provided that the total of his Pre-Tax Excess Contribution, if
any, and his After-Tax Excess Contribution does not exceed 10% of his
Compensation. Each HII Participant's After-Tax Basic Contribution and After-Tax
Excess Contribution, if any, shall be withheld from each of his paychecks and
contributed to the Trust Fund by the Employer as soon as practicable. Each HII
Participant's After-Tax Contribution Account shall be fully vested and
non-forfeitable at all times.
When first electing to participate in the Plan, each HII
Participant shall give advance notification by electronic, telephonic, written
or other such manner as may be prescribed from time to time by the Committee, of
the amount he elects to contribute as an After-Tax Basic Contribution and as an
After-Tax Excess Contribution. Each such election shall continue in effect
during subsequent Plan Years unless the HII Participant shall give timely notice
of his election to change or discontinue his After-Tax Basic Contribution or his
After-Tax Excess Contribution in accordance with procedures established from
time to time by the Committee.
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An HII Participant may change the amount of his After-Tax
Basic Contribution and/or After-Tax Excess Contribution, with no restrictions on
frequency, by electronic, telephonic, written or other such manner as may be
prescribed from time to time by the Committee. A Participant may discontinue his
After-Tax Basic Contribution and/or After-Tax Excess Contribution, with no
restrictions on frequency, by electronic, telephonic, written or other such
manner as may be prescribed from time to time by the Committee. Any such change
or discontinuance in the amount of After-Tax Basic or Excess Contributions shall
be effective as soon as reasonably practicable following receipt of the change
or discontinuance of elections.
KBLCOM Participants are not eligible to make After-Tax Basic
Contributions or After-Tax Excess Contributions.
4.4 ACTUAL DEFERRAL PERCENTAGE: The Actual Deferral Percentage for a
specified group of Employees for a Plan Year shall be the average of the ratios
(calculated separately for each Employee in such group) of:
(a) the amount of Pre-Tax Contributions (i) allocated to each
such Employee's Account under the Plan as of a date during the Plan
Year, without contingency on future participation in the Plan or
performance of future services, (ii) actually paid to the Plan on
behalf of each such Employee for such Plan Year no later than the end
of the 12-month period immediately following such Plan Year and (iii)
that relate to Compensation that either would have been received by the
Employee in such Plan Year (but for the deferral election) or are
attributable to services performed by the Employee in the Plan Year and
would have been received by the Employee within 2 1/2 months after the
close of the Plan Year (but for the deferral election); over
(b) the Employee's Compensation (as defined in Treasury
Regulation Section 1.414(s)-1(c)) for such Plan Year. Notwithstanding
any provision in this Plan to the contrary, an Employer may, to the
extent permitted by the Code and applicable regulations, elect to
include as Compensation pre-tax or after-tax contributions made under
this Plan or any other plan of the Employer, and may elect to exclude
as Compensation any Compensation received by a Participant during the
Plan Year while such Participant was not eligible to be a Participant
in the Plan.
An eligible Employee for the purpose of computing the
Actual Deferral Percentage is defined in Treasury Regulation Section
1.401(k)-1(g)(4). The Actual Deferral Percentage of an eligible
Employee who makes no Pre-Tax Contributions is zero. The individual
ratios and Actual Deferral Percentages shall be calculated to the
nearest 1/100 of 1% of an Employee's Compensation.
4.5 ACTUAL DEFERRAL PERCENTAGE LIMITS: The Actual Deferral Percentage
for the eligible Highly Compensated Employees for any Plan Year shall not exceed
the greater of (a) or (b), as follows:
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(a) the Actual Deferral Percentage of Compensation for the
eligible non-Highly Compensated Employees times 1.25; or
(b) the lesser of (i) the Actual Deferral Percentage of
Compensation for the eligible non-Highly Compensated Employees times
2.0 or (ii) the Actual Deferral Percentage of Compensation for the
eligible non-Highly Compensated Employees plus two percentage points or
such lesser amount as the Secretary of the Treasury shall prescribe to
prevent the multiple use of this alternative limitation with respect to
any Highly Compensated Employee.
"Highly Compensated Employee" shall mean any Employee
and any employee of an Affiliate who is a highly compensated employee
under Section 414(q) of the Code, including any Employee and any
employee of an Affiliate who is a highly compensated employee under
Section 414(q) of the Code and who, during the current Plan Year or
prior Plan Year:
(i) was at any time a 5% owner; or
(ii) received Compensation (as defined in Section
5.5(d)(6)) in excess of $75,000 (or such other amount as
determined by the Secretary of the Treasury which reflects
cost-of-living increases in accordance with the provisions of
Code Section 414(q)(1)); or
(iii) received Compensation (as defined in Section
5.5(d)(6)) in excess of $50,000 (or such other amount as
determined by the Secretary of the Treasury which reflects
cost-of-living increases in accordance with the provisions of
Code Section 414(q)(1)) and was in the "top-paid group" (the
top 20% of payroll, excluding Employees described in Code
Section 414(q)(8) and applicable regulations) for the Plan
Year; or
(iv) was an officer receiving Compensation (as
defined in Section 5.5(d)(6)) exceeding 50% of the dollar
limit in Section 415(b)(1)(A) of the Code. The number of
officers shall be limited to 50 employees (or, if lesser, the
greater of three employees or 10% of the employees).
If for any year no officer of the Employer is described in
subparagraph (iv) above, the highest paid officer of the Employer for such year
shall be treated as described in such paragraph.
In determining an Employee's status as a Highly Compensated
Employee within the meaning of Section 414(q), the entities set forth in
Treasury Regulation Section 1.414(q)-1T Q&A-6(a)(1) through (4) must be taken
into account as a single employer.
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For purposes of determining whether an individual is a Highly
Compensated Employee for the current Plan Year, an Employee who meets the
definition of Highly Compensated Employee set forth in this Section by virtue of
subparagraph (ii), (iii) or (iv) for the current Plan Year (but not for the
prior Plan Year) shall not be treated as a Highly Compensated Employee unless
such individual is a member of the group consisting of the 100 individuals who
were paid the greatest Compensation (as defined in Section 5.5(d)(6)) during the
current Plan Year.
In determining the Actual Deferral Percentage of an Employee
who is a 5% owner or one of the ten most Highly Compensated Employees and who
has a Family Member who is an Employee, any remuneration paid to the Family
Member for services rendered to an Employer or an Affiliate and any
contributions made on behalf of or by such Family Member shall be attributed to
such Highly Compensated Employee. Family Members, with respect to Highly
Compensated Employees, shall be disregarded as separate Employees in determining
the Actual Deferral Percentage both for Employees who are non-Highly Compensated
Employees and for Employees who are Highly Compensated Employees. "Family
Member" means the spouse and the lineal ascendants and descendants (and spouses
of such ascendants and descendants) of any Employee or former Employee.
The Actual Deferral Percentage for any Highly Compensated
Employee who is eligible to have deferred contributions allocated to his account
under one or more plans described in Section 401(k) of the Code that are
maintained by an Employer or an Affiliate in addition to this Plan shall be
determined as if all such contributions were made to this Plan. For purposes of
determining whether the Actual Deferral Percentage limits of this Section are
satisfied, all Pre-Tax Contributions that are made under two or more plans that
are aggregated for purposes of Code Section 401(a)(4) or 410(b) (other than Code
Section 410(b)(2)(A)(ii)) are to be treated as made under a single plan, and if
two or more plans are permissively aggregated for purposes of Code Section
401(k), the aggregated plans must also satisfy Code Sections 401(a)(4) and
410(b) as though they were a single plan.
4.6 REDUCTION OF PRE-TAX CONTRIBUTION RATES BY LEVELING METHOD: If, on
the basis of the Pre-Tax Contribution rates elected by Participants for any Plan
Year, the Committee determines, in its sole discretion, that neither of the
tests contained in (a) or (b) of Section 4.5 will be satisfied, the Committee
may reduce the Pre-Tax Contribution rate of any Participant who is among the
eligible Highly Compensated Employees to the extent necessary to reduce the
overall Actual Deferral Percentage for eligible Highly Compensated Employees to
a level which will satisfy either (a) or (b) of Section 4.5. The reductions in
Pre-Tax Contribution rates shall be made in a manner so that the Actual Deferral
Percentage of the affected Participants who elected the highest Actual Deferral
Percentage shall be first lowered to the level of the affected Participants who
elected the next to the highest Actual Deferral Percentage. If further overall
reductions are required to achieve compliance with (a) or (b) of Section 4.5,
both of the above-described groups of Participants will be lowered to the level
of Participants with the next highest Actual Deferral Percentage, and so on,
until sufficient total reductions in Pre-Tax Contribution rates have occurred to
achieve compliance with (a) or (b) of Section 4.5. The
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Committee may, in its discretion, permit a Participant whose Pre-Tax
Contributions are reduced under this paragraph to contribute a like amount to
his After-Tax Contribution Account.
4.7 INCREASE IN PRE-TAX CONTRIBUTION RATES: If a Participant's Pre-Tax
Contribution is reduced below the level necessary to satisfy either (a) or (b)
of Section 4.5 for the Plan Year, such Participant may be eligible to increase
his Pre-Tax Contribution rate for the remainder of the Plan Year to a level not
in excess of that level which will satisfy the greater of (a) or (b) of Section
4.5. Such an increase in the Pre-Tax Contribution rate shall be made by
Participants on a uniform and non-discriminatory basis, pursuant to such rules
and procedures as the Committee may prescribe.
4.8 EXCESS PRE-TAX CONTRIBUTIONS: As soon as possible following the end
of the Plan Year, the Committee shall determine whether either of the tests
contained in Section 4.5 were satisfied as of the end of the Plan Year, and any
excess Pre-Tax Contributions, plus any income and minus any loss attributable
thereto, of those Participants who are among the Highly Compensated Employees
shall be distributed to such Participants. In addition, the Employer
Contribution made with respect to such excess Pre-Tax Contributions shall be
forfeited and applied to reduce future Employer Contributions otherwise required
under Section 4.1. In the event of excess Pre-Tax Contributions attributable to
a Highly Compensated Employee whose actual deferral ratio is determined under
the rules of family aggregation, the actual deferral ratio shall be reduced
using the leveling method set forth below, and the excess Pre-Tax Contributions
to be distributed thereby shall be allocated among the Family Members in
proportion to the Pre-Tax Contribution of each Family Member that is combined to
determine the actual deferral ratio. Such income shall include the allocable
gain or loss for the Plan Year only.
The amount of any excess Pre-Tax Contributions to be
distributed to a Participant shall be reduced by Excess Deferrals previously
distributed to him pursuant to Section 4.2 for the taxable year ending in the
same Plan Year. All excess Pre-Tax Contributions shall be returned to the
Participants no later than the last day of the following Plan Year. The excess
Pre-Tax Contributions, if any, of each Participant who is among the Highly
Compensated Employees shall be determined by computing the maximum Actual
Deferral Percentage which each such Participant may defer under (a) or (b) of
Section 4.5 and then reducing the Actual Deferral Percentage of some or all of
such Participants who elected an Actual Deferral Percentage in excess of such
maximum by an amount of sufficient size to reduce the overall Actual Deferral
Percentage for eligible Participants who are among the Highly Compensated
Employees to a level which satisfies either (a) or (b) of Section 4.5. The
excess Pre-Tax Contributions, if any, of each Participant shall be determined in
such a manner that the Actual Deferral Percentage of such Participants who
elected the highest Actual Deferral Percentage shall be first lowered to the
level of such Participants who elected the next to the highest Actual Deferral
Percentage. If further overall reductions are required to achieve compliance
with (a) or (b) of Section 4.5, both of the above-described groups of
Participants will be lowered to the level of Participants with the next highest
Actual Deferral Percentages, and so on, until sufficient total reductions have
occurred to achieve compliance with (a) or (b) of Section 4.5.
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The income or loss attributable to the Participant's excess
Pre-Tax Contributions for the Plan Year shall be determined by multiplying the
income or loss attributable to the Participant's Pre-Tax Contribution Account
balance for the Plan Year by a fraction, the numerator of which is the excess
Pre-Tax Contribution and the denominator of which is the Participant's total
Pre-Tax Contribution Account balance. Excess Pre-Tax Contributions shall be
treated as Annual Additions under Section 5.5 of the Plan.
4.9 AGGREGATION OF FAMILY MEMBERS IN DETERMINING THE ACTUAL
DEFERRAL RATIO:
A. CALCULATION OF ACTUAL DEFERRAL RATIOS: If an eligible Highly
Compensated Employee is subject to the family aggregation rules of Section
414(q)(6) of the Code because such Employee is either a 5% owner or one of the
ten most Highly Compensated Employees, the combined actual deferral ratio of
this family group (which is treated as one Highly Compensated Employee) shall be
determined by combining the Pre-Tax Contributions and the Compensation for all
the eligible Family Members.
Pre-Tax Contributions and Compensation of all Family Members
are disregarded for purposes of determining the actual deferral percentage for
the group of non-Highly Compensated Employees, except to the extent taken into
account in paragraph (A) above.
B. AGGREGATION OF FAMILY GROUPS: If an Employee is required to be
aggregated as a Family Member of more than one family group, all eligible
Employees who are Family Members of those groups that include the Employee are
aggregated as one family group in accordance with paragraph (A) above.
C. EXCESS PRE-TAX CONTRIBUTIONS OF FAMILY MEMBERS: In the event that it
becomes necessary to determine and correct the excess Pre-Tax Contributions of a
Highly Compensated Employee whose actual deferral ratio is determined under the
rules of Section 414(q)(6) of the Code and this Section 4.9, the actual deferral
ratio calculated in paragraph (A) above shall be reduced using the leveling
method set forth in Section 4.6 and Section 4.8, and the excess Pre-Tax
Contributions to be distributed thereby shall be allocated among the Family
Members in proportion to the Pre-Tax Contribution of each Family Member that is
combined to determine the actual deferral ratio.
4.10 CONTRIBUTION PERCENTAGE AND ESOP PERCENTAGE:
A. CONTRIBUTION PERCENTAGE: The Contribution Percentage for a specified
group of Employees for a Plan Year shall be the average of the ratios
(calculated separately for each Employee in such group) of:
(a) the total of the Employer Matching Contributions and the
After-Tax Contributions (the "Aggregate Contributions") paid under the
Plan on behalf of each such Employee for such Plan Year; to
(b) the Employee's Compensation (as defined in Section
4.4(b)).
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In computing the Contribution Percentage, the Employer may elect to
take into account After-Tax and Pre-Tax Contributions made under this
Plan or any other plan of the Employer to the extent that the following
requirements are satisfied:
(i) the amount of non-elective contributions,
including those qualified non-elective contributions treated
as Employer Matching Contributions for purposes of calculating
the Contribution Percentage, satisfies the requirements of
Section 401(a)(4) of the Code;
(ii) the amount of non-elective contributions,
excluding those qualified non-elective contributions treated
as Employer Matching Contributions for purposes of calculating
the Contribution Percentage and those qualified non-elective
contributions treated as elective contributions under Section
1.401(k)-1(b)(5) for purposes of calculating the Actual
Deferral Percentage, satisfies the requirements of Section
401(a)(4) of the Code;
(iii) the elective contributions, including those
treated as Employer Matching Contributions for purposes of
calculating the Contribution Percentage, satisfy the
requirements of Code Section 401(k)(3);
(iv) the qualified non-elective contributions are
allocated to the Employee under the Plan as of a date within
the Plan Year and the elective contributions satisfy Section
1.401(k)-1(b)(i) for the Plan Year; and, if applicable, the
Plan and the plans to which the qualified non-elective
contributions and elective contributions are made, are or
could be aggregated for purposes of Code Section 410(b).
A Participant's Contribution Percentage shall be determined after determining
the Participant's Excess Deferrals, if any, pursuant to Section 4.2, and after
determining the Participant's excess Pre-Tax Contributions pursuant to Section
4.8.
B. ESOP PERCENTAGE: The ESOP Percentage for a specified group of
Employees for a Plan Year shall be the average of the ratios (calculated
separately for each Employee in such group) of:
(a) The total of the ESOP Contributions paid under the Plan on
behalf of each such Employee for such Plan Year; to
(b) The Employee's Compensation (as defined in Section
4.4(b)).
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A Participant's ESOP Percentage shall be determined after determining the
Participant's Excess Deferrals, if any, pursuant to Section 4.2 and after
determining the Participant's excess Pre-Tax Contributions pursuant to Section
4.8.
An eligible Employee for purposes of computing the
Contribution Percentage is defined in Treasury Regulation Section
1.401(m)-1(f)(4). The Contribution Percentage will be zero for an eligible
Employee who received no allocation of Aggregate Contributions.
4.11 CONTRIBUTION PERCENTAGE AND ESOP PERCENTAGE LIMITS: Each of the
Contribution Percentage and ESOP Percentage (with respect to each, the
"Applicable Percentage") for the eligible Employees for any Plan Year who are
Highly Compensated Employees shall not exceed the greater of (a) or (b), as
follows:
(a) the Applicable Percentage for the eligible Employees who
are not Highly Compensated Employees times 1.25; or
(b) the lesser of (i) the Applicable Percentage for the
eligible Employees who are not Highly Compensated Employees times 2.0
or (ii) the Applicable Percentage for the eligible Employees who are
not Highly Compensated Employees plus two percentage points or such
lesser amount as the Secretary of the Treasury shall prescribe to
prevent the multiple use of this alternative limitation with respect to
any Highly Compensated Employee.
In determining the Applicable Percentage of an Employee who is
a 5% owner or one of the ten most Highly Compensated Employees and who has a
Family Member who is an Employee, any remuneration paid to the Family Member for
services rendered to an Employer or an Affiliate and any contributions made on
behalf of or by such Family Member shall be attributed to such Highly
Compensated Employee. Family Members, with respect to Highly Compensated
Employees, shall be disregarded as separate Employees in determining the
Applicable Percentage both for Employees who are non-Highly Compensated
Employees and for Employees who are Highly Compensated Employees.
The Contribution Percentage for any Highly Compensated
Employee for any Plan Year who is eligible to have matching employer
contributions made on his behalf or to make after-tax contributions under one or
more plans described in Section 401(a) of the Code that are maintained by an
Employer or an Affiliate in addition to this Plan shall be determined as if all
such contributions were made to this Plan.
In the event that this Plan must be combined with one or more
other plans in order to satisfy the requirements of Code Section 410(b), then
the Contribution Percentage shall be determined as if all such plans were a
single plan. If two or more plans are permissively aggregated for the purposes
of Code Section 410(b) (other than the average benefit percentage test), then
the Contribution Percentage shall be determined as if all such plans were a
single plan.
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4.12 TREATMENT OF EXCESS AGGREGATE CONTRIBUTIONS OR ESOP CONTRIBUTIONS:
If neither of the tests described above in Section 4.11 are satisfied with
respect to either Aggregate Contributions or ESOP Contributions, the excess
Aggregate Contributions or ESOP Contributions (as applicable), plus any income
and minus any loss attributable thereto, shall be forfeited or, if not
forfeitable, shall be distributed no later than the last day of the Plan Year
following the Plan Year in which such excess Aggregate Contributions or ESOP
Contributions (as applicable) were made. Such income shall include the allocable
gain or loss for the Plan Year only. The income or loss attributable to the
Participant's excess Aggregate Contributions or ESOP Contributions (as
applicable) for the Plan Year shall be determined by multiplying the income or
loss attributable to the Participant's Account for the Plan Year by a fraction,
the numerator of which is the excess Aggregate Contribution or ESOP
Contributions (as applicable), and the denominator of which is the Participant's
total Account balance. Excess Aggregate Contributions or ESOP Contributions
shall be treated as Annual Additions under Section 5.5 of the Plan.
The excess Aggregate Contributions or ESOP Contributions (as
applicable), if any, of each Participant who is among the Highly Compensated
Employees shall be determined by computing the maximum Contribution Percentage
under (a) or (b) of Section 4.11 and then reducing the Contribution Percentage
of some or all of such Participants whose Contribution Percentage exceeds the
maximum by an amount of sufficient size to reduce the overall Contribution
Percentage for eligible Participants who are among the Highly Compensated
Employees to a level which satisfies either (a) or (b) of Section 4.11. The
excess Aggregate Contributions or ESOP Contributions (as applicable), if any, of
each Participant shall be determined in such a manner that the Contribution
Percentage of such Participants who have the highest actual contribution ratio
under Section 4.10 shall be first lowered to the level of such Participants with
the next to the highest actual contribution ratio under Section 4.10. If further
overall reductions are required to achieve compliance with (a) or (b) of Section
4.11, both of the above-described groups of Participants will be lowered to the
level of Participants with the next highest actual contribution ratio under
Section 4.10, and so on, until sufficient total reductions have occurred to
achieve compliance with (a) or (b) of Section 4.11. For each Participant who is
a Highly Compensated Employee, the amount of excess Aggregate Contributions or
ESOP Contributions (as applicable) is equal to the total Employer Contributions
and After-Tax Contributions on behalf of the Participant (determined prior to
the application of this paragraph) minus the amount determined by multiplying
the Participant's actual contribution ratio (determined after application of
this paragraph) by his Compensation used in determining such ratio. The
individual ratios and Contribution Percentages shall be calculated to the
nearest 1/100 of 1% of the Employee's Compensation, as such term is used in
paragraph (b) of Section 4.11.
4.13 AGGREGATION OF FAMILY MEMBERS IN DETERMINING THE ACTUAL
CONTRIBUTION RATIO:
A. CALCULATION OF ACTUAL CONTRIBUTION RATIO: If an eligible Highly
Compensated Employee is subject to the family aggregation rules of Section
414(q)(6) of the Code because such Employee is either a 5% owner or one of the
ten most Highly Compensated Employees, the combined actual contribution ratio
for the family group (which is treated as one Highly
-29-
Compensated Employee) shall be determined by combining the Employer
Contributions not taken into account in applying the Actual Deferral Percentage
test, After-Tax Contributions and Compensation of all the eligible Family
Members.
The Employer Contributions, After-Tax Contributions and
Compensation of all Family Members are disregarded for purposes of determining
the Contribution Percentage for the group of Highly Compensated Employees and
the group of non-Highly Compensated Employees except to the extent taken into
account in paragraph (A) of this Section.
B. AGGREGATION OF FAMILY GROUPS: If an Employee is required to be
aggregated as a Family Member of more than one family group, all eligible
Employees or Family Members of those groups that include the Employee shall be
aggregated as one family group in accordance with paragraph (A) above.
C. EXCESS AGGREGATE CONTRIBUTIONS OF FAMILY MEMBERS: In the event that
it becomes necessary to determine and correct the excess Aggregate Contributions
of a Highly Compensated Employee whose actual contribution ratio is determined
under the rules of Code Section 414(q)(6) and this Section 4.13, the actual
contribution ratio shall be reduced as required under Section 4.12, and the
excess Aggregate Contributions to be forfeited or distributed thereby shall be
allocated among the Family Members in proportion to the Employer Contributions
and After-Tax Contributions of each Family Member that are combined to determine
the actual contribution ratio.
4.14 MULTIPLE USE OF ALTERNATIVE LIMITATION: The rules set forth in
Treasury Regulation Section 1.401(m)-2(b) for determination of multiple use of
the alternative methods of compliance with respect to Sections 4.5(b) and
4.11(b) are hereby incorporated into the Plan. If a multiple use of the
alternative limitation occurs with respect to two or more plans or arrangements
maintained by an Employer, it shall be treated as an excess Aggregate
Contribution and must be corrected by reducing the actual contribution ratio of
Highly Compensated Employees eligible both to make elective contributions to
receive matching contributions under the 401(k) arrangement or to make
contributions under the 401(m) plan. Such reduction shall be by the leveling
process set forth in Section 4.12.
4.15 ESOP CONTRIBUTIONS, EMPLOYER MATCHING CONTRIBUTIONS AND PRE-TAX
CONTRIBUTIONS TO BE TAX DEDUCTIBLE: ESOP Contributions, Employer Matching
Contributions and Pre-Tax Contributions shall not be made in excess of the
amount deductible under applicable Federal law now or hereafter in effect
limiting the allowable deduction for contributions to profit-sharing plans. The
ESOP Contributions, Employer Matching Contributions and Pre-Tax Contributions to
this Plan when taken together with all other contributions made by the Employer
to other qualified retirement plans shall not exceed the maximum amount
deductible under Section 404 of the Code.
4.16 MAXIMUM ALLOCATIONS: Notwithstanding the above, the total Annual
Additions made to the Account of any Participant shall not exceed the limits
prescribed in Section 5.5.
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4.17 REFUNDS TO EMPLOYER: Once Contributions are made to the Plan by the
Employer on behalf of the Participants, they are not refundable to the Employer
unless a Contribution:
(a) was made by mistake of fact; or
(b) was made conditioned upon the contribution being allowed
as a deduction and such deduction was disallowed.
Any Contribution made by the Employer during any Plan Year in excess of the
amount deductible or any Contribution attributable to a good faith mistake of
fact shall be refunded to the Employer. The amount which may be returned to the
Employer is the excess of the amount contributed over the amount that would have
been contributed had there not occurred a mistake of fact or the excess of the
amount contributed over the amount deductible, as applicable. A Contribution
made by reason of a mistake of fact may be refunded only within one year
following the date of payment. Any Contribution to be refunded because it was
not deductible under Section 404 of the Code may be refunded only within one
year following the date the deduction was disallowed. Earnings attributable to
any such excess Contribution may not be withdrawn, but losses attributable
thereto must reduce the amount to be returned. In no event may a refund be due
which would cause the Account balance of any Participant to be reduced to less
than the Participant's Account balance would have been had the mistaken amount,
or the amount determined to be non-deductible, not been contributed.
4.18 ROLLOVER CONTRIBUTIONS: Notwithstanding any other provision of the
Plan, the Trustee shall be authorized to accept an "eligible rollover
distribution" within the meaning of Code Section 402(c)(4) on behalf of or from
a person who is (or who will be entitled under Section 3.1 to become) a
Participant in this Plan, provided that the transfer of the assets to this Plan
is one described in Section 402(c)(4), 403(a)(4) or 408(d)(3)(A)(ii) of the
Code. Such a transferred distribution is referred to herein as a "rollover
contribution."
The acceptance of rollover contributions under this Section
4.18 shall be subject to the following conditions:
(a) No rollover contribution shall be in an amount less than
$500.
(b) Rollover contributions shall be in cash only.
(c) No rollover contribution may be transferred to the Plan
without the prior approval of the Committee. The Committee shall
develop such procedures and may require such information from an
Employee desiring to make such a transfer as it deems necessary or
desirable. The Committee may act in its sole discretion in determining
whether to accept the transfer, and shall act in a uniform,
non-discriminatory manner in this regard.
(d) Upon approval by the Committee, a rollover contribution
shall be paid to the Trustee to be held in the Trust Fund.
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(e) A separate account shall be established and maintained for
each Employee who has made a rollover contribution. A rollover account
shall share in the earnings and/or losses of the Trust Fund (and
component Investment Funds in which such account may be invested)
commencing on the Valuation Date coincident with or next following the
date on which the transferred amount is placed in the Trust Fund. The
Employee's interest in his rollover contribution account shall be fully
vested and non-forfeitable. If an Employee who is otherwise eligible to
participate in the Plan but who has not yet begun participation under
Section 3.1 of the Plan makes a rollover contribution to the Plan, his
rollover contribution account shall represent his sole interest in the
Plan until he becomes a Participant.
(f) A rollover account shall be subject to the same rules as a
Pre-Tax Contribution Account for purposes of the Plan, including, but
not by way of limitation, rules regarding investments, withdrawals,
distributions and loans under the Plan.
(g) No rollover contributions may be transferred from a plan
which is required to provide automatic survivor benefits under Section
401(a)(11) of the Code, or which is a transferee of a plan required to
provide such benefits.
(h) The Committee shall be entitled to rely on the
representation of the Employee that the rollover contribution is an
eligible rollover distribution. If, however, it is determined that a
transfer received from or on behalf of a Employee failed to qualify as
an eligible rollover distribution within the meaning of Code Section
402(c)(4), then the balance in the Employee's account attributable to
the ineligible transfer shall, as soon as is administratively
practicable, be:
(1) segregated from all other Plan assets;
(2) treated as a non-qualified trust established by
and for the benefit of the Participant; and
(3) distributed to the Employee.
Such an ineligible transfer shall be deemed never to have been a part
of the Plan or Trust.
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ARTICLE V
PARTICIPANTS' ACCOUNTS
5.1 TRUST ACCOUNTS: The Committee shall create and maintain adequate
records to reflect all transactions of the Trust Fund and to disclose the
interest in the Trust Fund of each Participant (whether on active or inactive
status), former Participant and Beneficiary.
(a) ACCOUNTS FOR PARTICIPANTS: Such accounts shall be
maintained for each Participant as may be appropriate from time to time
to reflect his interest in the ESOP Fund and each Investment Fund in
which he may be participating at any time as contemplated under Section
8.1. The interest in each Investment Fund attributable to the
Contributions made by or on behalf of each Participant shall be
reflected in a Pre-Tax Contribution Account and/or an After-Tax
Contribution Account for each Participant. The interest in the HI
Common Stock Fund of each Participant attributable to the Employer
Matching Contributions made to the Plan or the Prior Plan shall be
reflected in an Employer Matching Account for each Participant. The
interest in the ESOP Fund of each Participant shall be reflected in an
ESOP Account for each Participant as described in Section 5.3.
(b) STOCK SUSPENSE ACCOUNT: There shall also be established
and maintained under the Trust a suspense account to be known as the
Stock Suspense Account.
(c) RIGHTS IN TRUST FUND: The maintenance of individual
Accounts is only for accounting purposes, and a segregation of the
assets of the Trust Fund to each Account shall not be required.
Distribution and withdrawals made from an Account shall be charged to
the Account as of the date paid.
5.2 VALUATION OF TRUST FUND: A valuation of the Trust Fund shall be made
as of each annual Valuation Date and on any other date during the Plan Year that
the Committee deems a valuation to be advisable. Any such interim valuation
shall be exercised on a uniform and non-discriminatory basis. For the purposes
of each such valuation, the assets of each Investment Fund shall be valued at
their respective current market values, and the amount of any obligations for
which the Investment Fund may be liable, as shown on the books of the Trustee,
shall be deducted from the total value of the assets. For the purposes of
maintenance of books of account in respect of properties comprising the Trust
Fund, and of making any such valuation, the Trustee shall account for the
transactions of the Trust Fund on an accrual basis. The current market value
shall, for the purposes hereof, be determined as follows:
(a) Where the properties are securities which are listed on a
securities exchange, or which are actively traded over the counter, the
value shall be the net asset value, if appropriate, otherwise the last
recorded sales price. In the event transactions regarding such property
are recorded over more than one such
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exchange, the Trustee may select the exchange to be used for purposes
hereof. Recorded information regarding any such securities published in
THE WALL STREET JOURNAL or any other publication deemed appropriate may
be relied upon by the Trustee. If no transactions involving any such
securities have been recorded within ten days prior to the particular
Valuation Date, such securities shall be valued as provided in
paragraph (b) below.
(b) Where paragraph (a) hereof shall be inapplicable in the
valuation of any properties, the Trustee shall obtain from at least two
qualified persons an opinion as to the value of such properties as of
the close of business on the particular Valuation Date. The average of
such estimates shall be used.
5.3 ALLOCATION TO ACCOUNTS:
(a) PRE-TAX, AFTER-TAX AND EMPLOYER MATCHING CONTRIBUTIONS:
Pre-Tax Contributions and After-Tax Contributions received in the Trust
Fund since the preceding Valuation Date shall be credited to the
respective Pre-Tax Contribution Accounts and After-Tax Contribution
Accounts of the Participants and invested in the Investment Funds in
accordance with their instructions pursuant to Section 8.1. Employer
Matching Contributions received in the Trust Fund since the preceding
Valuation Date shall be allocated to the Participants' Employer
Matching Accounts in the ratio that the sum of each Participant's
Pre-Tax Basic Contribution and After-Tax Basic Contribution for the
period bears to the total Pre-Tax Basic Contributions and After-Tax
Basic Contributions of all Participants for the period.
(b) ESOP ACCOUNTS: The ESOP Account of each Participant shall
be credited with his allocable portion of (i) the Company Stock
investment in the ESOP Fund purchased and paid for by the Trust (other
than Financed Stock) or contributed in kind by the Employer, (ii)
forfeitures from the ESOP Fund, (iii) the Company Stock investment in
the ESOP Fund released from the Stock Suspense Account and (iv) any
cash held in the ESOP Fund. Such allocation shall be made in the ratio
that the sum of each Participant's Pre-Tax Basic Contribution and
After-Tax Basic Contribution for the period bears to the total Pre-Tax
Basic Contributions and After-Tax Basic Contributions of all
Participants for the period. Allocations made pursuant to this Section
5.3(b) shall be made as soon as practicable after the close of each
payroll period in an amount not to exceed (i) 70% of the total of each
HII Participant's Pre-Tax Basic Contributions and After-Tax Basic
Contributions and (ii) 70% of the total of each KBLCOM Participant's
Pre-Tax Basic Contributions. All amounts not otherwise allocated
hereunder during the Plan Year as provided above shall be allocated in
full on the annual Valuation Date.
(c) STOCK SUSPENSE ACCOUNT: The Stock Suspense Account shall
be credited as of each Valuation Date with the number of shares of
Financed Stock purchased by the Trustee since the preceding Valuation
Date. In addition, the
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Stock Suspense Account shall be credited with all ESOP Contributions
for the Plan Year which are to be used to repay Exempt Loans. The Stock
Suspense Account shall be debited with amounts used to repay Exempt
Loans and with the number of shares of Financed Stock that are to be
released from such Account in accordance with the provisions of Section
5.3(b).
(d) ALLOCATION PROCEDURES: The Accounts of Participants,
former Participants and Beneficiaries shall be adjusted in accordance
with the following:
(i) EARNINGS OF THE INVESTMENT FUND: The earnings (or
loss) of the Investment Fund since the preceding Valuation
Date (including the appreciation or depreciation in value of
the assets of the Investment Fund) shall be allocated to the
Accounts of Participants (other than a terminated
Participant's Accounts which have become current obligations
of the Investment Fund) in proportion to the balances in such
Accounts on the preceding Valuation Date, but after first
reducing each such Account balance by any distribution from
such Account since the preceding Valuation Date.
(ii) INCOME AND APPRECIATION IN VALUE OF STOCK
SUSPENSE ACCOUNT AND ESOP ACCOUNTS IN THE TRUST FUND: The
income of the ESOP Fund shall be allocated in proportion to
the balances, as of the preceding Valuation Date, in the Stock
Suspense Account and the ESOP Accounts, but after first
reducing each such Account balance by any distributions or
charges from such Accounts since the preceding Valuation Date.
Notwithstanding anything to the contrary in the Plan, if and
to the extent that dividends credited to Participants' ESOP
Accounts are used to amortize an Exempt Loan pursuant to
Section 5.6, an interest in the ESOP Fund with a fair market
value not less than the amount of such dividends must be
allocated to the Participants' ESOP Accounts (resulting from
the release of Financed Stock attributable to such use of
dividends to amortize the Exempt Loan) for the year of payment
of such dividends to the Plan, and the Company shall make such
additional Employer Matching Contributions as are necessary to
accomplish such result. Any dividends with respect to Financed
Stock that are used to amortize an Exempt Loan shall be used
first to repay current principal and then to repay current
interest with respect to such loan.
(iii) FORFEITURES: As of each Valuation Date, any
amounts in the Employer Matching Accounts which have become
forfeitures since the preceding Valuation Date shall first be
made available to reinstate previously forfeited Account
balances of former
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Participants, if any, in accordance with Section 6.9 and
previous Participants who have unclaimed benefits, if any, in
accordance with Section 6.11. The remaining forfeitures from
the Employer Matching Accounts and all forfeitures from the
ESOP Accounts, if any, shall be used to reduce Employer
Matching Contributions as specified under Section 4.1.
5.4 TREATMENT OF COMPANY STOCK PURCHASED WITH AN EXEMPT LOAN:
(a) FINANCED STOCK: Any Company Stock purchased by the Trust
on behalf of the ESOP Fund with the proceeds of an Exempt Loan shall be
credited initially to the Stock Suspense Account.
(b) ALLOCATION FROM STOCK SUSPENSE ACCOUNT TO ESOP ACCOUNTS:
As of each monthly Valuation Date, and as of any special Valuation Date
if directed by the Committee, there shall be released an interest in
the ESOP Fund equal to the excess, if any, of shares of Financed Stock
determined in (i) over (ii), where (i) and (ii) are as follows: (i) is
equal to the product of the number of shares of Financed Stock not
released prior to January 1 of the current Plan Year multiplied by the
ratio of (y) the amount of principal and interest paid under the Exempt
Loan during the current Plan Year to (z) the sum of the amount
determined in clause (y) plus the total of all principal and interest
to be paid in the future, assuming if the interest rate is variable
that the interest rate in the future will be the same as that currently
in effect, and (ii) is equal to the number of shares of Financed Stock
previously released in the current Plan Year. The Company Stock
investment in the ESOP Fund released pursuant to the preceding sentence
shall be allocated to the Participants' ESOP Accounts in accordance
with the provisions of Section 5.3(b).
(c) PAYMENTS ON EXEMPT LOANS: As of each Valuation Date,
installment payments, including principal and interest, made by the
Trustee since the last preceding Valuation Date under Exempt Loans will
be debited to the Stock Suspense Account and to Participants' ESOP
Accounts under the provisions of Section 5.3 hereof. Specified income
shall not include shares of Company Stock attributable to any share
split or share dividend on outstanding shares.
For purposes of determining payments on Exempt Loans,
payment of principal and interest shall be accounted for substantially
in accordance with the following: All income ("specified income")
allocable to the Stock Suspense Account that is attributable to
collateral for the Exempt Loan or to ESOP Contributions shall be used,
before any ESOP Contributions are so used, to pay principal amounts due
under such Exempt Loan; ESOP Contributions shall be first applied to
repay interest under such Exempt Loan with any excess ESOP Contribution
used to fund current principal requirements not otherwise funded by the
specified income; if the specified income exceeds the amount necessary
to pay
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principal due on Exempt Loans for the Plan Year, then such excess
amount shall be first used to pay interest currently due with respect
to the Exempt Loans and any remaining amount of income may, at the
direction of the Committee, be used to prepay principal due on Exempt
Loans in succeeding periods. In the event that there are insufficient
funds available to make payments of principal or interest on Exempt
Loans when due, the Committee may direct (i) the Trustee to obtain a
new Exempt Loan in an amount sufficient to make such payments or (ii)
the Trustee to sell any Financed Stock which has not yet been allocated
to ESOP Accounts provided such sale meets the requirements of the
following sentence. In directing any such sale of Financed Stock, the
Committee shall consider all of the facts and circumstances surrounding
the proposed transaction and the reasons therefor and shall act in the
best interest of Plan Participants in accordance with the applicable
Treasury Regulations and ERISA.
5.5 MAXIMUM ANNUAL ADDITIONS: Notwithstanding anything contained herein
to the contrary, the total Annual Additions made to the Account of a Participant
for any Plan Year commencing on or after the Effective Date shall be subject to
the following limitations:
(a) SINGLE DEFINED CONTRIBUTION PLAN
1. If an Employer does not maintain any other qualified plan,
the amount of Annual Additions which may be allocated under this Plan
on a Participant's behalf for a Limitation Year shall not exceed the
lesser of the Maximum Permissible Amount or any other limitation
contained in this Plan.
2. Prior to the determination of the Participant's actual
Compensation for a Limitation Year, the Maximum Permissible Amount may
be determined on the basis of the Participant's estimated annual
Compensation for such Limitation Year. Such estimated annual
Compensation shall be determined on a reasonable basis and shall be
uniformly determined for all Participants similarly situated. Any
Employer contributions (including allocation of forfeitures) based on
estimated annual Compensation shall be reduced by any Excess Amounts
carried over from prior years.
3. As soon as is administratively feasible after the end of
the Limitation Year, the Maximum Permissible Amount for such Limitation
Year shall be determined on the basis of the Participant's actual
Compensation for such Limitation Year.
4. If there is an Excess Amount with respect to a Participant
for the Limitation Year, such Excess Amount shall be disposed of as
follows:
A. There shall first be returned to the Participant
his After-Tax Excess Contributions as defined in Section 4.3,
if any, attributable to that Limitation Year, and then his
Pre-Tax Excess
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Contributions as defined in Section 4.2, if any, attributable
to that Limitation Year to the extent such returned
Contributions would reduce the Excess Amount. If any such
Excess Amount shall then remain, the Participant's After-Tax
Basic Contributions as defined in Section 4.3, if any,
attributable to that Limitation Year shall be returned to the
Participant, and the Employer Matching Contributions made with
respect to said After-Tax Basic Contributions shall be reduced
and allocated to a suspense account in the manner set forth in
Paragraph B below, both to the extent such returned and
reduced Contributions would reduce the Excess Amount. If any
such Excess Amount shall then remain, the Participant's
Pre-Tax Basic Contributions as defined in Section 4.2, if any,
attributable to that Limitation Year shall be returned to the
Participant, and the Employer Matching Contributions made with
respect to said Pre-Tax Basic Contributions shall be reduced
and allocated to a suspense account in the manner set forth in
Paragraph B below, both to the extent such returned and
reduced Contributions would reduce the Excess Amount. All such
amounts shall be adjusted for any income or loss allocated
thereon.
B. The amount of the reduction of the Employer
Matching Contributions for the Participant shall be
reallocated out of the ESOP Account of such Participant and
shall be held in a suspense account which shall be applied as
a part of (and to reduce to such extent what would otherwise
be) the Employer Matching Contributions for all Participants
required to be made to the Plan during the next subsequent
calendar quarter or quarters. No portion of such Excess Amount
may be distributed to Participants or former Participants. If
a suspense account is in existence at any time during the
Limitation Year pursuant to this Paragraph B, such suspense
account shall not participate in the allocation of investment
gains or losses of the Trust Fund.
(b) TWO OR MORE DEFINED CONTRIBUTION PLANS
1. If, in addition to this Plan, the Employer maintains any
other qualified defined contribution plan, the amount of Annual
Additions which may be allocated under this Plan on a Participant's
behalf for a Limitation Year, shall not exceed the lesser of:
A. the Maximum Permissible Amount, reduced by the sum
of any Annual Additions allocated to the Participant's
accounts for the same Limitation Year under such other defined
contribution plan or plans; or
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B. any other limitation contained in this Plan.
2. Prior to the determination of the Participant's actual
Compensation for the Limitation Year, the amount referred to in
paragraph 1.A. above may be determined on the basis of the
Participant's estimated annual Compensation for such Limitation Year.
Such estimated annual Compensation shall be determined on a reasonable
basis and shall be uniformly determined for all Participants similarly
situated. Any Employer Contribution (including allocation of
forfeitures) based on estimated annual Compensation shall be reduced by
any Excess Amounts carried over from prior years.
3. As soon as is administratively feasible after the end of
the Limitation Year, the amounts referred to in paragraph 1.A. above
shall be determined on the basis of the Participant's actual
Compensation for such Limitation Year.
4. If a Participant's Annual Additions under this Plan and all
such other defined contribution plans result in an Excess Amount, such
Excess Amount shall be deemed to consist of the amounts last allocated.
5. If an Excess Amount was allocated to a Participant on an
allocation date of this Plan which coincides with an allocation date of
another plan, the Excess Amount attributed to this Plan will be the
product of:
A. the total Excess Amount allocated as of such date
(including any amount which would have been allocated but for
the limitations of Section 415 of the Code); TIMES
B. the ratio of (i) the amount allocated to the
Participant as of such date under this Plan divided by (ii)
the total amount allocated as of such date under all qualified
defined contribution plans (determined without regard to the
limitations of Section 415 of the Code).
6. Any Excess Amounts attributed to this Plan shall be
disposed of as provided in paragraph (a) above.
(c) DEFINED CONTRIBUTION PLAN AND DEFINED BENEFIT PLAN
1. GENERAL RULE: If the Employer maintains (or has ever
maintained) one or more defined contribution plans and one or more
defined benefit plans, the sum of the "defined contribution plan
fraction" and the "defined benefit plan fraction," as defined below,
cannot exceed 1.0 for any Limitation Year. For purposes of this
paragraph (c) of Section 5.5, employee contributions to a qualified
defined benefit plan are treated as a separate defined contribution
plan, and all defined contribution plans of an Employer are to be
treated as one defined
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contribution plan, and all defined benefit plans of an Employer are to
be treated as one defined benefit plan, whether or not such plans have
been terminated.
2. If the sum of the defined contribution plan fraction and
defined benefit plan fraction exceeds 1.0, the annual benefit of the
defined benefit plan or plans will be reduced so that the sum of the
fractions will not exceed 1.0. If additional reductions are required
for the sum of the fractions to equal 1.0, the reductions will then be
made first to the Annual Additions of the defined contribution plans.
3. Defined Contribution Fraction
A. GENERAL RULE: The defined contribution fraction
for any year is (i) divided by (ii), where (i) and (ii) are:
(i) the numerator: the sum of the actual
Annual Additions to the Participant's account at the
close of the Limitation Year; and
(ii) the denominator: the sum of the
lesser of the following amounts determined for such
year and for each prior year of service of the
Employee:
a. 1.25 times the dollar
limitation in effect for each such year
(without regard to the special dollar
limitations for employee stock
ownership plans); or
b. 1.4 times 25% of the
Participant's Compensation for each such
year.
B. SPECIAL ADJUSTMENT TO DEFINED CONTRIBUTION PLAN
FRACTION: The numerator of the Defined Contribution Plan
Fraction of any Participant in the Plan on December 31, 1982
shall be reduced by an amount required to decrease the
combined fractions of such Participant to 1.0 as of December
31, 1982. The amount to be subtracted is the product of (i)
the excess of the sum of the fractions over 1.0 and (ii) the
denominator of the Defined Contribution Plan Fraction, as
computed through the Limitation Year ending December 31, 1982.
If the Employee was a Participant as of the
end of the first day of the first Limitation Year beginning
after December 31,
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1986, in one or more defined contribution plans maintained by
the Employer which were in existence on May 6, 1986, the
numerator of this fraction will be adjusted if the sum of this
fraction and the defined benefit fraction would otherwise
exceed 1.0 under the terms of this Plan. Under the adjustment,
an amount equal to the product of (i) the excess of the sum of
the fractions over 1.0 times (ii) the denominator of this
fraction, will be permanently subtracted from the numerator of
this fraction. The adjustment is calculated using the
fractions as they would be computed as of the end of the last
Limitation Year beginning before January 1, 1987, and
disregarding any changes in the terms and conditions of the
Plan made after May 5, 1986, but using the Code Section 415
limitation applicable to the first Limitation Year beginning
on or after January 1, 1987.
The Annual Addition for any Limitation Year
beginning before January 1, 1987, shall not be recomputed to
treat all employee contributions as Annual Additions.
4. Defined Benefit Plan Fraction
A. GENERAL RULE: The defined benefit plan fraction
for any year is (i) divided by (ii), where:
(i) is the projected annual benefit of the
Participant under the Plan (determined as of the
close of the Limitation Year); and
(ii) is the lesser of:
a. 1.25 times the dollar limitation
(adjusted, if necessary) for such year; or
b. 1.4 times 100% of the
Participant's Average Compensation for the
high three years (adjusted, if necessary).
B. SPECIAL RULE FOR ACCRUED BENEFITS ON DECEMBER 31,
1982: In the case of an individual who before January 1, 1983
was a Member in the Retirement Plan for Employees of Houston
Industries Incorporated whose current accrued benefit under
said Plan on December 31, 1982 exceeded the limitation of
Section 415(b) of the Code, as amended by the Tax Equity and
Fiscal Responsibility Act of 1982, then, for purposes of
-41-
subsections (b) and (e) of said Section 415 of the Code, the
maximum permissible amount under the limitation described in
subsection (b) of Section 415 with respect to such individual
shall be equal to such current accrued benefit under said
Plan; and for purposes hereof, the term "current accrued
benefit" shall be defined as provided in Section 415(b)(2) of
the Code.
Notwithstanding the above, if the
Participant was a participant as of the first day of the first
Limitation Year beginning after December 31, 1986, in one or
more defined benefit plans maintained by the Employer which
were in existence on May 6, 1986, the denominator of this
fraction will not be less than 125% of the sum of the annual
benefits accrued by the participant under such plans as of the
close of the last Limitation Year beginning before January 1,
1987, disregarding any changes in the terms and conditions of
the Plan after May 5, 1986. The preceding sentence applies
only if the defined benefit plans individually and in the
aggregate satisfied the requirements of Code Section 415 for
all Limitation Years beginning before January 1, 1987.
(d) DEFINITIONS
1. EMPLOYER: The Employer that adopts this Plan. In
the case of a group of employers which constitutes a
controlled group of corporations (as defined in Section 414(b)
of the Code as modified by Section 415(h)) or which
constitutes trades and businesses (whether or not
incorporated) which are under common control (as defined in
Section 414(c) as modified by Section 415(h)) or an affiliated
service group (as defined in Section 414(m)), all such
employers shall be considered a single Employer for purposes
of applying the limitations of this Section.
2. ANNUAL ADDITIONS: With respect to each Plan Year
(Limitation Year), the total of the Employer Matching
Contributions, ESOP Contributions (except to the extent herein
provided), Pre-Tax Contributions, After-Tax Contributions,
forfeitures, and amounts described in Sections 415(e)(1) and
419(d)(2) of the Code, which are allocated to the
Participant's Account; excluding, however, any amounts
contributed to reinstate an amount forfeited or an unclaimed
benefit. ESOP Contributions used to repay interest on an
Exempt Loan as described in Section 5.6 of the Plan shall not
constitute an Annual Addition. Subject to the provisions of
Section 415(c)(6) of the Code, Annual Additions shall not
include (i) forfeitures of Financed Stock, or
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(ii) ESOP Contributions used to pay interest on the Exempt
Loan and charged against the Participant's Account.
3. EXCESS AMOUNT: The excess of the Participant's
Annual Additions for the Limitation Year over the Maximum
Permissible Amount.
4. LIMITATION YEAR: A 12 consecutive month period
ending on December 31.
5. MAXIMUM PERMISSIBLE AMOUNT: For a Limitation Year,
the Maximum Permissible Amount with respect to any Participant
shall be the lesser of:
A. $30,000 (or, if greater, 1/4 of the
defined benefit dollar limitation set forth in
Section 415(b)(1) of the Code as in effect for the
Limitation Year); or
B. 25% of the Participant's Compensation for
the Limitation Year.
6. COMPENSATION: For purposes of applying the
limitations of Code Section 415, Compensation shall include
the Participant's wages, salaries, fees for professional
service and other amounts received (without regard to whether
or not an amount is paid in cash) for personal services
actually rendered in the course of employment with an Employer
maintaining the Plan to the extent that the amounts are
includable in gross income (including, but not limited to,
commissions paid to salesmen, compensation for services on the
basis of a percentage of profits, commissions on insurance
premiums, tips, bonuses, fringe benefits, reimbursements and
expense allowances) and shall exclude the following:
A. (i) Contributions made by the Employer to
a plan of deferred compensation to the extent that,
before the application of the Code Section 415
limitations to the Plan, the contributions are not
includable in the gross income of the Employee for
the taxable year in which contributed, (ii) Employer
contributions made on behalf of an Employee to a
simplified employee pension plan described in Code
Section 408(k) to the extent such contributions are
excludable from the Employee's gross income and (iii)
any distributions from a plan
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of deferred compensation regardless of whether such
amounts are includable in the gross income of the
Employee when distributed, except any amounts
received by an Employee pursuant to an unfunded
non-qualified plan to the extent such amounts are
includable in the gross income of the Employee;
B. Amounts realized from the exercise of a
non-qualified stock option or when restricted stock
(or property) held by an Employee either becomes
freely transferable or is no longer subject to a
substantial risk of forfeiture;
C. Amounts realized from the sale, exchange
or other disposition of stock acquired under a
qualified stock option; and
D. Other amounts which receive special tax
benefits, such as premiums for group life insurance
(but only to the extent that the premiums are not
includable in the gross income of the Employee), or
contributions made by the Employer (whether or not
under a salary reduction agreement) towards the
purchase of any annuity contract described in Code
Section 403(b) (whether or not the contributions are
excludable from the gross income of the Employee).
For the purposes of this Section, the
determination of Compensation shall be made by not including
amounts that would otherwise be excluded from a Member's gross
income by reason of the application of Code Sections 125,
402(a)(8), 402(h)(1)(B) and, in the case of Employer
contributions made pursuant to a salary reduction agreement,
Code Section 403(b). For "Limitation Years" beginning after
December 31, 1993, Compensation shall be limited to $150,000
(unless adjusted in the same manner as permitted under Code
Section 415(d)). Notwithstanding anything to the contrary, the
definition Code Section 415 Compensation shall include any and
all items which may be included under Code Section 415(c)(3).
7. AVERAGE COMPENSATION: The average compensation
during a Participant's high three years of Service, which
period is the three consecutive calendar years (or, the actual
number of consecutive years of employment for those Employees
who are
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employed for less than three consecutive years with the
Employer) during which the Participant had the greatest
aggregate compensation from the Employer.
8. ANNUAL BENEFIT: A benefit payable annually in the
form of a straight life annuity (with no ancillary benefits)
under a plan to which Employees do not contribute and under
which no rollover contributions are made.
5.6 CERTAIN CONDITIONS APPLICABLE TO COMPANY STOCK: It is the express
purpose of this Plan and the Trust Agreement to invest substantial sums in
Company Stock for the benefit of Participants in the Plan. Pursuant to this
purpose, the Trustee has borrowed funds either through installment purchase
contract, loan agreement or other instrument of indebtedness in order to
purchase Company Stock (with such indebtedness qualifying as an "Exempt Loan"
within the ambit of Section 54.4975-7(b)(1)(iii) of the Treasury Regulations).
Such loans shall continue to be primarily for the benefit of Participants and
their Beneficiaries within the meaning of Treasury Regulation Section
54.4975-7(b)(3). In addition to other provisions of the Plan as may be
applicable from time to time, the provisions of this Section 5.6 shall be
especially applicable to indebtedness which was incurred to purchase Company
Stock and Company Stock purchased with loan proceeds.
(a) USE OF PROCEEDS: All proceeds of such an Exempt Loan shall
continue to be used within a reasonable time after receipt by the
Trustee only for any or all of the following purposes: to purchase
Company Stock, to repay obligations incurred under the loan agreement
or to repay a prior Exempt Loan.
(b) NON-RECOURSE LOANS ONLY: Any loan must continue to be
without recourse as against the Plan and the Trust Fund.
(c) COLLATERAL: The only assets of the Plan and Trust Fund
that may be given as collateral for a loan are shares of Company Stock
acquired with the proceeds of the loan and those shares of Company
Stock that were used as collateral on a prior Exempt Loan repaid with
the proceeds of the current Exempt Loan; provided, however, that such
shares of Company Stock shall be proportionately adjusted upon any
share split, share dividend or combination of outstanding shares of
such Company Stock.
(d) CREDITOR'S RIGHTS TO ASSETS: No person entitled to payment
under the loan agreement shall have any right to assets of the Plan or
Trust Fund other than collateral given for the loan, contributions
(other than contributions of Company Stock) that are made under the
Plan to meet the Plan's obligations under the loan and earnings
attributable to such collateral and the investment of such
contributions.
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(e) TRANSFERS UPON DEFAULT: In the event of default of the
Exempt Loan, the value of Plan assets transferred in satisfaction of
the loan must not exceed the amount of default. If the lender is a
"disqualified person," the loan must continue to provide for a transfer
of Plan assets upon default only upon and to the extent of failure of
the Plan to meet the payment schedule of the loan.
(f) INTEREST: The interest rate of any loan described herein
must not be in excess of a reasonable rate of interest. In determining
what is a reasonable rate of interest, all relevant factors will be
considered, including the amount and duration of the loan, the security
and guarantee (if any) involved, the credit standing of the Plan and
Trust Fund and the guarantor (if any), and the interest rate prevailing
for comparable loans. A variable interest rate is permissible if
determined to be reasonable.
(g) RELEASE FROM COLLATERAL OR SUSPENSE: The instrument
evidencing indebtedness shall continue to provide for release from
collateral or suspense in accordance with the provisions of Section
5.4(b) of the Plan.
(h) LIMITATION ON RESTRICTIONS ON COMPANY STOCK: No Company
Stock acquired with the proceeds of a loan described herein may be
subject to a put, call, or other option, or buy-sell or similar
arrangement while held by and when distributed from the Plan or its
related Trust Fund, whether or not the Plan is then an "ESOP" within
the ambit of Section 54.4975-7(b)(1) of the Treasury Regulations,
unless specifically required or permitted by such regulations.
(i) LIMITATIONS ON PAYMENTS: The payments made during any Plan
Year, with respect to a loan described herein, may not exceed an amount
equal to the sum of the ESOP Contributions and any earnings received
during or previous to the current Plan Year on Company Stock purchased
with such loan, less payments previously made with respect to such
loan; provided, however, that payment may in any event be made from the
proceeds of the sale of any Company Stock which was purchased with the
loan and which has not yet been allocated to Participants' ESOP
Accounts in the event of default, or in the event of termination of the
Trust Fund, to the extent provided in Section 5.3(c) or Section 10.5,
or under other circumstances determined appropriate by the Committee
subject to the requirements of the last sentence of the second
paragraph of Subsection (c) of Section 5.4 of the Plan. The ESOP
Contributions and earnings described herein must be accounted for
separately on the books of account of the Plan and Trust until any
Exempt Loan is repaid, as is provided in the other provisions of
Article V of this Plan. For purposes of this Section 5.6(i), Company
Stock purchased with a loan shall reflect proportionate adjustments
attributable to any share split, share dividend or combination of
outstanding shares of Company Stock.
(j) CERTAIN RIGHTS WITH RESPECT TO FINANCED STOCK: Any
Financed Stock, if it is not publicly traded when distributed or is
subject to a trading
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limitation when distributed, must be subject to a put option. The put
option is to be exercisable only by the Participant, the Participant's
donees, or by a person (including an estate or its distributee) to whom
the Company Stock passes by reason of a Participant's death. The put
option must permit the Participant to put the Company Stock to the
Employer. The put option must be exercisable during the 60 consecutive
days beginning on the date that the Company Stock subject to the put
option is distributed by the Plan, and for another 60 consecutive days
during the Plan Year next following the Plan Year in which the shares
were distributed. The put option may be exercised by the holder
notifying the Employer in writing that the put option is being
exercised. The period during which a put option is exercisable does not
include any period when a distributee is unable to exercise it because
the party bound by the put option is prohibited from honoring it by
applicable Federal or State law. The price at which the put option is
exercisable is the fair market value of the Company Stock on the date
of the transaction determined in good faith based on all relevant
factors. In the discretion of the Committee, either (i) payment under a
put option will be in cash within 30 days after the put option is
exercised or (ii) if the payment in respect of a put option is to
repurchase Company Stock which is distributed as part of a total
distribution, then the amount to be paid may be paid in substantially
equal periodic payments not less frequently than annually over a period
beginning not later than 30 days after the exercise of the put option
and not exceeding five years provided that there is adequate security
provided and a reasonable interest paid on unpaid amounts. For purposes
of the preceding sentence, a total distribution means the distribution
within one taxable year to the recipient of the balance of the credit
of the recipient's Account. The provisions described in this
subparagraph (j) are non-terminable even if the exempt loan is repaid
or the Plan ceases to be an ESOP.
(k) TERM OF EXEMPT LOANS: Any Exempt Loan made by the Plan or
Trust Fund for the purpose of purchasing Company Stock must continue to
be for a specific term and may not be payable on the demand of any
person, except in the case of default.
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ARTICLE VI
PARTICIPANTS' BENEFITS
6.1 TERMINATION OF SERVICE: Notwithstanding any provisions of the Plan
to the contrary, the vesting provisions of this Section 6.1 shall apply to any
former Employee who participated in the Prior Plan and who terminated employment
prior to the Effective Date, but if and only if he has an Account balance in
this Plan on or after the Effective Date. In the event of termination of Service
on or after the Effective Date of any Participant for any reason other than
disability, Retirement on or after Retirement Date, or death, a Participant
shall, subject to the further provisions of the Plan, be entitled to receive
100% of the values in his Pre-Tax Contribution Account and After-Tax
Contribution Account, plus a portion of his Employer Matching Account and ESOP
Account determined by reference to his number of years of Vesting Service and
the following schedule:
VESTING
YEARS OF VESTING SERVICE PERCENTAGE
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 and more 100%
If a Participant terminates Service and, at the time of
termination, the present value of the Participant's vested benefit is zero, the
Participant will be deemed to have then received a distribution of such vested
benefit. Any portion of the Employer Matching Account and ESOP Account of a
terminated Participant in excess of the vested portion specified herein shall be
forfeited to the extent provided in Section 6.9. Payment of benefits due under
this Section shall be made in accordance with Section 6.6.
6.2 DISABILITY OF PARTICIPANTS: If the Committee shall find and advise
the Trustee that the employment of a Participant has been terminated as a
consequence of such Participant having become totally and permanently disabled
and entitled to receive disability benefits under the provisions of the
Employer's Long Term Disability Plan, such Participant shall become entitled to
receive the entire interest in his Pre-Tax Contribution Account, his After-Tax
Contribution Account, his Employer Matching Account and his ESOP Account.
Disability hereunder shall not include any disability sustained in the course
of, or as a consequence of, military service, or occupational hazard arising out
of, and in the course of, employment by any person other than an Employer, or
the commission of any criminal offense.
6.3 DEATH OF PARTICIPANTS: In the event of the death of any Participant,
the entire amount in the Accounts of such Participant after receipt by the
Committee of acceptable proof of death shall be payable as follows:
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(a) The Participant's Account shall be distributed to the
Participant's surviving spouse, but if there is no surviving spouse, or
if the surviving spouse has already consented by a qualified election
pursuant to Section 6.3(b), to the Beneficiary or Beneficiaries
designated by the Participant in a written designation filed with his
Employer, or if no such designation shall have been so filed, or if no
designated Beneficiary survives the Participant or can be located by
the Committee, then to the duly appointed executor or administrator of
the Participant's estate; or if no administration of the estate of such
decedent is necessary, then to the Beneficiary entitled thereto under
the last will of such deceased Participant; or if such decedent left no
will, to the legal heirs of such decedent determined in accordance with
the laws of intestate succession of the state of the decedent's
domicile. No designation of any Beneficiary other than the
Participant's surviving spouse shall be effective unless in writing and
received by the Participant's Employer and in no event shall it be
effective as of the date prior to such receipt. The former spouse of a
Participant shall be treated as a surviving spouse to the extent
provided under a qualified domestic relations order as described in
Section 414(p) of the Code.
(b) The Participant's spouse may waive the right to be the
Participant's sole Beneficiary and consent to the Beneficiary
designation made by the Participant. The waiver must be in writing and
the spouse must acknowledge the effect of the waiver. The spouse's
waiver must be witnessed by a Plan representative or a notary public.
The Beneficiary designated by the Participant may not be changed
without the spouse's consent, unless the consent of the spouse permits
designation of Beneficiaries by the Participant without any requirement
of further consent by the spouse. The Participant may file a waiver
without the spouse's consent if it is established to the satisfaction
of the Committee that such written consent may not be obtained because
there is no spouse or the spouse may not be located. Any consent under
this Section 6.3(b) will be valid only with respect to the spouse who
signs the consent. Additionally, a revocation of a prior spousal waiver
may be made by a Participant without the consent of the spouse at any
time before the distribution of the Account. The number of revocations
shall not be limited.
6.4 RETIREMENT OF PARTICIPANTS ON OR AFTER RETIREMENT DATE: A
Participant's interest in the full balance of his Account shall be fully vested
and non-forfeitable upon reaching his Retirement Date. Any Participant who
terminates his Service on or after his Retirement Date shall attain a fully
vested non-forfeitable interest in the entire amount of his Account and shall be
entitled to receive the entire amount of his Account upon the termination of his
Service.
6.5 IN-SERVICE DISTRIBUTIONS: Cash dividends paid with respect to shares
of Company Stock in a Participant's ESOP Account may be distributed at least
annually in the discretion of the Committee. Otherwise, except to the extent
that distribution of a Participant's Account is required prior to termination of
his employment under Section 6.10 hereof (in the case of a Participant whose
required beginning date occurs prior to his termination of employment) or under
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Section 10.5 hereof relating to termination of the Plan, or at the election of
the Participant under Article VII hereof relating to certain withdrawals and
loans, no distribution or withdrawal of any benefits under the Plan shall be
permitted prior to the Participant's termination of employment.
6.6 PAYMENTS OF BENEFITS: Upon a Participant's entitlement to payment of
benefits under either Section 6.1, 6.2 or 6.4, he shall file his written
election on such form or forms, and subject to such conditions, as the Committee
shall prescribe. His election shall specify whether he wishes payment of his
benefits to be made as of such entitlement or to be deferred to the extent
provided below. If payments become due for any reason other than Retirement,
death or Disability, and if the amounts due from the Participant's Accounts are
in excess of $3,500, payment of such amounts shall be deferred to the extent
provided below unless the Participant consents to earlier payment. If the
Participant so consents to an earlier payment, such payment shall be made as
soon as practicable. If the amounts due from the Participant's Accounts do not
exceed $3,500, payment of such amounts shall automatically be made in a lump-sum
cash payment as soon as possible following termination of employment.
In the case of a distribution under Section 6.3 on account of
the Participant's death, the Committee shall pay the entire amount in the
Participant's Accounts to the party or parties entitled thereto under Section
6.3 within five years after the death of such Participant.
Unless a Participant elects otherwise, payment of his benefits
under this Plan shall be made or commence no later than the 60th day after the
later of (a) the end of the Plan Year of his 65th birthday or (b) the end of the
Plan Year in which his employment terminates. Any distribution to be made to a
Participant under the provisions of this Article VI shall be made within one
week of the termination of employment of such Participant, unless such
Participant duly elects in writing for a deferred distribution as provided
above. A Participant or his designated Beneficiaries (but only by his designated
Beneficiaries in the event of the death of a Participant without having made
such an election), may elect that the benefits payable to the Participant and/or
Beneficiary be paid in one of, or in any combination of, the following methods:
(a) As a lump-sum distribution in cash, provided that no
lump-sum distribution may be paid to the Participant, unless he has
elected such distribution on an election form prescribed by the
Committee.
(b) As a distribution in kind of the shares held for his
Account in the HI Common Stock Fund and the ESOP Fund. If Company Stock
acquired with the proceeds of an Exempt Loan and available for
distribution consists of more than one class, a Participant shall
receive substantially the same proportion of each such class to the
extent the distribution is a distribution from the ESOP Fund. A
Participant may elect to receive any percentage, up to 100%, of the
vested portion of his Accounts in the HI Common Stock Fund and the ESOP
Fund in whole shares of Company Stock, and the remaining HI Common
Stock Fund balance, ESOP Fund balance and other Investment Fund
balances in cash. If a Participant elects to receive the entire vested
portion of his Accounts in the HI Common Stock Fund and the ESOP Fund
in whole shares of Company Stock, such Participant
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shall be entitled to receive a whole number of shares of Company Stock
equal to the total number of shares held in such HI Common Stock Fund
and the ESOP Fund as of the Valuation Date specified in Section 6.8
multiplied by a fraction the numerator of which shall be (i) the value
in the HI Common Stock Fund held in his Pre-Tax Contribution Account
and/or his After-Tax Contribution Account as of such Valuation Date,
plus (ii) the vested portion of the value in the HI Common Stock Fund
held in his Employer Matching Account and the vested portion of the
value in the ESOP Fund held in his ESOP Account as of such Valuation
Date, and the denominator of which shall be the total value in the HI
Common Stock Fund and the ESOP Fund held in the Pre-Tax Contribution
Accounts, After-Tax Contribution Accounts, Employer Matching Accounts
and ESOP Accounts for all Participants as of such Valuation Date. If a
Participant elects to receive a percentage which is less than 100% of
the vested portion of his Accounts in the HI Common Stock Fund and the
ESOP Fund in whole shares of Company Stock, then the result obtained
from the preceding formula shall be multiplied by such percentage to
obtain the number of whole shares of Company Stock to be distributed to
such Participant.
All amounts attributable to (i) any excess of the values
attributable to the interest in his Pre-Tax Contribution Account and/or his
After-Tax Contribution Account, and the vested portion of his interest in his
Employer Matching Account and his ESOP Account that are invested in the HI
Common Stock Fund and the ESOP Fund, over the interest therein provided to be
distributed to him in kind, plus (ii) any interest of such Participant in his
Pre-Tax Contribution Account and/or his After-Tax Contribution Account in any
other Investment Fund, with the exception of the HI Common Stock Fund shall be
distributed in cash.
6.7 PAYMENT OF DISTRIBUTION DIRECTLY TO ELIGIBLE RETIREMENT PLAN:
(a) Notwithstanding any provision of the Plan to the contrary
that would otherwise limit a Distributee's election under this Section,
a Distributee may elect, at the time and in the manner prescribed by
the Committee, to have any portion of an Eligible Rollover Distribution
paid directly to an Eligible Retirement Plan specified by the
Distributee in a Direct Rollover.
(b) The terms used in Section 6.7(a) above shall have the
following meaning:
(i) ELIGIBLE ROLLOVER DISTRIBUTION: An Eligible
Rollover Distribution is any distribution of all or any
portion of the balance to the credit of the Distributee,
except that an Eligible Rollover Distribution does not
include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the
Distributee or the joint lives (or joint life expectancies) of
the Distributee and the Distributee's designated Beneficiary,
or for a
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specified period of ten years or more; any distribution to the
extent that such distribution is required under Section
401(a)(9) of the Code; and the portion of any distribution
that is not includable in gross income (determined without
regard to the exclusion for net unrealized appreciation with
respect to employer securities).
(ii) ELIGIBLE RETIREMENT PLAN: An Eligible Retirement
Plan is an individual retirement account described in Section
408(a) of the Code, an individual retirement annuity described
in Section 408(b) of the Code, an annuity plan described in
Section 403(a) of the Code, or a qualified trust described in
Section 401(a) of the Code, that accepts the Distributee's
Eligible Rollover Distribution. However, in the case of an
Eligible Rollover Distribution to the surviving spouse, an
Eligible Retirement Plan is an individual retirement account
or individual retirement annuity.
(iii) DISTRIBUTEE: A Distributee includes an Employee
or former Employee. In addition, the Employee's or former
Employee's surviving spouse and the Employee's or former
Employee's spouse or former spouse who is the alternate payee
under a qualified domestic relations order, as defined in
Section 414(p) of the Code, are Distributees with regard to
the interest of the spouse or former spouse.
(iv) DIRECT ROLLOVER: A Direct Rollover is a
payment by the Plan to the Eligible Retirement Plan
specified by the Distributee.
(c) In the event that a Distributee, after receiving the
explanation required by Section 402(f) of the Code, does not
affirmatively elect a Direct Rollover under Section 6.7(a) above, the
Distributee shall be deemed to have elected not to have any portion of
the Eligible Rollover Distribution paid directly to an Eligible
Retirement Plan.
(d) Each Eligible Rollover Distribution which a Distributee
elects to have distributed in a Direct Rollover may be paid to only one
Eligible Retirement Plan designated by the Distributee.
(e) Notwithstanding any provisions of this Section to the
contrary, a Distributee may not elect a Direct Rollover with respect to
Eligible Rollover Distributions under this Plan which are reasonably
expected to total less than $200 during any calendar year.
6.8 PARTICIPATION RIGHTS DETERMINED AS OF VALUATION DATE COINCIDING WITH
OR PRECEDING TERMINATION OF EMPLOYMENT: In the case of any Participant whose
employment shall be
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terminated for any reason, no further credits or charges arising from any source
shall be made to the Accounts of any such terminating Participant after the
credits or charges made as of the Valuation Date coinciding with or immediately
preceding his termination of employment, except for:
(a) Pre-Tax Contributions, After-Tax Contributions and
Employer Matching Contributions and ESOP Contributions made subsequent
to such Valuation Date;
(b) Withdrawals or distributions made subsequent to such
Valuation Date; or
(c) In the case of a delayed distribution pursuant to a
Participant's election as provided in Section 6.6, such subsequent
adjustments to the values in the Accounts of such Participant up to the
Valuation Date coinciding with or preceding the receipt of the
Participant's election for distribution.
6.9 TREATMENT OF NON-VESTED ACCOUNT BALANCES UPON TERMINATION OF
SERVICE: This Section 6.9 does not apply to Participants who are fully vested at
the time of termination of Service.
If a Participant receives an actual or deemed distribution
pursuant to Section 6.1 prior to the close of the second Plan Year following the
Plan Year in which the Participant's Service terminates, the non-vested portion
of his Employer Matching Account and ESOP Account shall be forfeited and shall
become available for allocation as provided in Section 5.3(d)(iii). If a
Participant who has received an actual distribution as described in this
paragraph thereafter resumes Service under the Plan at any time, he shall be
entitled to have the forfeited amounts reinstated to such Accounts upon his
recommencement of participation in the Plan. If a Participant who has received a
deemed distribution as described in this paragraph thereafter resumes Service
under the Plan before incurring five consecutive one-year Breaks in Service, he
shall be entitled to have the forfeited amounts reinstated to such Accounts upon
his recommencement of participation in the Plan.
If a Participant does not receive a distribution of his vested
benefit by the close of the second Plan Year following the Plan Year in which
his Service terminates, but receives such a distribution before incurring five
consecutive one-year Breaks in Service, the non-vested balance in the
Participant's Employer Matching Account and ESOP Account shall be credited to a
suspense account at the time of distribution of the vested benefit. If such a
Participant is thereafter reemployed prior to incurring five consecutive
one-year Breaks in Service, the Participant's vested interest in the suspense
account, including any gains or losses thereon, at any subsequent relevant time
shall be an amount "X" determined by the following formula: X = P(AB + D) - D.
For purposes of applying this formula: P is the vested percentage at such
relevant time; AB is the account balance at the relevant time; D is the amount
of the prior distribution to the Participant. If the Participant is not
reemployed before he has incurred five
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consecutive one-year Breaks in Service, his suspense account shall then be
forfeited and shall become available for allocation as described in Section
5.3(d)(iii).
If a Participant does not receive a distribution of his vested
benefit before incurring five consecutive one-year Breaks in Service, the
non-vested balance in the Participant's Employer Matching Account and ESOP
Account shall then be forfeited and shall become available for allocation as
described in Section 5.3(d)(iii).
If more than one class of Company Stock acquired with an
Exempt Loan has been allocated to a Participant's ESOP Account and any amounts
are forfeited from such Account pursuant to this Section, the same proportion
shall be forfeited from each class.
6.10 REQUIRED MINIMUM DISTRIBUTIONS: Notwithstanding any provision of
this Plan to the contrary, any benefits to which a Participant is entitled shall
commence not later than the April 1 following the calendar year in which the
Participant attains age 70 1/2, whether or not his employment had terminated in
such year. Such distribution shall be at least equal to the required minimum
distributions under the Code; however, any installment distributions pursuant to
this Section 6.10 to Participants who have not terminated employment shall be
made over a period not to exceed ten years.
6.11 UNCLAIMED BENEFITS: If at, after or during the time when a benefit
hereunder is payable to any Participant, Beneficiary or other distributee, the
Committee, upon request of the Trustee, or at its own instance, shall mail by
registered or certified mail to such distributee, at his last known address, a
written demand for his present address or for satisfactory evidence of his
continued life, or both, and if such distributee shall fail to furnish the same
to the Committee within two years from mailing of such demand, then the
Committee may, in its sole discretion, determine that such Participant,
Beneficiary or other distributee has forfeited his right to such benefit and may
declare such benefit, or any unpaid portion thereof, terminated, as if the death
of the distributee (with no surviving Beneficiary) had occurred on the later of
the date of the last payment made thereon, or the date such Participant,
Beneficiary or other distributee first became entitled to receive benefit
payments. Any such forfeited benefit shall be applied as a part of (and to
reduce to such extent) the Employer Contributions required to be made next
following the date such forfeiture is declared to be forfeited by the Committee.
Notwithstanding the provisions of this Section 6.11, any such forfeited benefit
shall be reinstated if a claim for the same is made by the Participant,
Beneficiary or other distributee at any time thereafter. The reinstatement shall
be made by a mandatory contribution by the Company, allocated solely to such
reinstatement.
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ARTICLE VII
WITHDRAWALS AND LOANS
7.1 WITHDRAWAL OF AFTER-TAX EXCESS CONTRIBUTIONS: Pursuant to advance
notice given in the manner prescribed by the Committee from time to time, and
subject to the conditions of Section 7.3, each Participant may elect to withdraw
all or any amounts attributable to his After-Tax Excess Contributions determined
as of the Valuation Date immediately preceding the withdrawal date.
7.2 WITHDRAWAL OF AFTER-TAX BASIC CONTRIBUTIONS: Pursuant to advance
notice given in the manner prescribed by the Committee from time to time, and
subject to the conditions of Section 7.3, each Participant may elect to withdraw
(in addition to any amounts attributable to his After-Tax Excess Contributions)
an amount specified by the Participant which may be attributable to his
After-Tax Basic Contributions under this Plan and to his After-Tax Basic
Contributions under the Prior Plan determined as of the Valuation Date
immediately preceding such withdrawal date. No withdrawal shall be charged to
the After-Tax Basic Contributions of a Participant until the withdrawable
amounts attributable to the After-Tax Excess Contributions of a Participant have
been withdrawn.
7.3 CONDITIONS OF WITHDRAWALS: Each Participant who elects to withdraw
all or a portion of his After-Tax Basic Contributions shall be suspended from
participation in the Plan from the Valuation Date preceding the distribution of
the withdrawal until the date following six full months from the date of such
withdrawal provided the Committee or its agent has received prior to such date
the Participant's election (in the form and manner prescribed in Section 3.4
hereof) to commence participation after such suspension; provided further,
however, that such suspension shall not apply to any Participant who has at
least five years of Service. There shall be no limit on the number of
withdrawals a Participant may make from his After-Tax Contribution Account
within any 12-month period. No Participant shall be permitted to withdraw from
his After-Tax Contribution Account less than $500, or the balance of his
Account, if less than $500. Except as provided under Article VI, no withdrawals
shall be permitted from a Participant's Pre-Tax Contribution Account, Employer
Matching Account or ESOP Account.
7.4 LOANS: Any Participant who is an Employee (including any such
Participant on an Authorized Absence) may make application to borrow from his
Pre-Tax Contribution Account in the Trust Fund. In addition to Participants who
are Employees (including any such Participant on an Authorized Absence), loans
shall be available to any former Participant or any Beneficiary or "alternate
payee" with respect to a former Participant, but, if and only if, such person is
a "party in interest" with respect to the Plan within the meaning of ERISA
Section 3(14) and who must be eligible to obtain a Plan loan in order for
exemptions set forth in 29 C.F.R. ss. 2550.408b-1 to apply to the Plan (herein,
together with Participants who are Employees and those on Authorized Absence,
collectively referred to as "Borrower"). Loans shall be granted in a uniform and
non-discriminatory manner on terms and conditions determined by the Committee
which shall not result in more favorable treatment of highly compensated
employees and shall be set forth in written procedures promulgated by the
Committee in accordance with applicable
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governmental regulations. All such loans shall also be subject to the following
terms and conditions:
(a) The amount of the loan when added to the amount of any
outstanding loan or loans to the Borrower from any other plan of the
Employer or an Affiliate which is qualified under Code Section 401(a)
shall not exceed the lesser of (i) $50,000, reduced by the excess, if
any, of the highest outstanding balance of loans from all such plans
during the one-year period ending on the day before the date on which
such loan was made over the outstanding balance of loans from the Plan
on the date on which such loan was made or (ii) 50% of the present
value of Borrower's vested Account balance under the Plan. In no event
shall a loan of less than $500 be made to a Borrower.
(b) The loan shall be for a term not to exceed five years and
shall be evidenced by a note signed by the Borrower. The loan shall be
payable in periodic installments and shall bear interest at a
reasonable rate which shall be determined on a uniform and consistent
basis in accordance with procedures established by the Committee, which
shall be in accordance with applicable governmental regulations.
Payments by a Borrower who is an Employee will be made by means of
payroll deduction from the Borrower's compensation. If the Borrower is
not receiving compensation from the Employer, the loan repayment shall
be made in accordance with the terms and procedures established by the
Committee. A Borrower may repay an outstanding loan in full at any
time; provided, however, that there shall be a 30-day wait between the
time the Participant pays the full balance of a loan under this Section
7.4 and the time such Participant may request a subsequent loan under
this Section 7.4.
(c) In the event an installment payment is not paid within
seven days following the monthly due date, written notice shall be sent
to the Borrower at his last known address. If such installment payment
is not made within 30 days thereafter, the Committee or its agent shall
proceed with foreclosure in order to collect the full remaining loan
balance or shall make such other arrangements with the Borrower as the
Committee deems appropriate. Foreclosures need not be effected until
occurrence of a distributable event under the terms of the Plan and no
rights against the Borrower or the security shall be deemed waived by
the Plan as a result of such delay.
(d) The unpaid balance of the loan, together with interest
thereon, shall become due and payable upon the date of distribution of
the Account and the Trustee shall first satisfy the indebtedness from
the amount payable to the Borrower or to the Borrower's Beneficiary
before making any payments to the Borrower or to the Beneficiary.
(e) Any loan to a Borrower under the Plan shall be adequately
secured. Such security shall include a pledge of a portion of the
Borrower's right, title and
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interest in the Trust Fund which shall not exceed 50% of the present
value of the Borrower's vested Account balance under the Plan as
determined immediately after the loan is extended. Such pledge shall be
evidenced by the execution of a promissory note by the Borrower which
shall grant the security interest and provide that, in the event of any
default by the Borrower on a loan repayment, the Committee or any agent
appointed by the Committee to administer such loan shall be authorized
to take any and all appropriate lawful actions necessary to enforce
collection of the unpaid loan.
(f) A request by a Borrower for a loan shall be made by
electronic, telephonic, written or other such manner as the Committee
shall prescribe from time to time and shall specify the amount of the
loan. If a Borrower's request for a loan is approved, the Committee or
any agent appointed by the Committee to administer such loan shall
furnish the Trustee with written instructions directing the Trustee to
make the loan in a lump-sum payment of cash to the Borrower. The cash
for such payment shall be obtained by redeeming proportionately as of
the date of payment the Investment Fund or Funds, or portions thereof,
that are credited to the Pre-Tax Contribution Account of such Borrower.
A fee of $25 ("Loan Origination Fee") shall be charged to each Borrower
who receives a loan under this Section 7.4. The Trustee shall first
satisfy the Loan Origination Fee from the amount payable to the
Borrower before making any payment to the Borrower.
(g) A loan to a Borrower shall be considered an investment of
the Pre-Tax Contribution Account of the Borrower from which the loan is
made. All loan repayments shall be credited pro rata to such Pre-Tax
Contribution Account and reinvested exclusively in shares of one or
more of the Investment Funds in accordance with Section 8.1.
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ARTICLE VIII
INVESTMENT DIRECTIONS
8.1 INVESTMENT OF TRUST FUND: Except as provided in Article VII with
respect to Plan loans and as provided below with respect to the ESOP Fund, prior
to July 1, 1995, the Trust Fund was divided into four separate Investment Funds,
namely, Fund A, Fund B, Fund C and Fund D.
Effective July 1, 1995 except as provided in Article VII with
respect to Plan loans and as provided below with respect to the ESOP Fund, the
Trustee shall divide the Trust Fund into the following separate Investment Funds
in accordance with the directions of the Participant and following such rules
and procedures prescribed by the Committee:
(a) HI Common Stock Fund: Contributions are primarily invested
and reinvested in Company Stock.
(b) Capital Appreciation Equity Fund: Contributions are
primarily invested and reinvested in a pool of stock funds that have a
goal of long-term growth with no emphasis on current income. The funds
are invested in stocks of rapidly growing companies or companies with
the potential for exceptional growth.
(c) Growth & Income Equity Fund: Contributions are primarily
invested and reinvested in a pool of stock funds with the goals of
growth and current income. The funds buy stocks of growing companies
and companies that have a history of paying steady dividends.
(d) International Equity Fund: Contributions are primarily
invested and reinvested in a pool of international stock funds that
have a goal of long-term growth by investing in stocks of companies
based outside the United States. These funds buy stocks of growing and
established companies outside of the United States with the potential
for growth.
(e) Balanced Fund: Contributions are primarily invested and
reinvested in both stock and bond funds. The funds invested in may
change from time to time, with the intent being to invest in
high-quality, limited term bonds and a wide variety of corporate
stocks.
(f) Fixed Income Fund: Contributions are primarily invested
and reinvested in short-term, high-quality government and corporate
bonds and other fixed income securities.
(g) Money Market Fund: Contributions are primarily invested
and reinvested in high-quality government and corporate fixed income
securities with maturities of less than one year.
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The Committee from time to time may revise the number and type
of Investment Funds provided hereunder. Subject to such rules and procedures
adopted by the Committee, each Participant shall have the right to direct the
Committee or any agent appointed by the Committee to administer the investment
of the Trust Fund to instruct the Trustee to invest his Pre-Tax Contributions
and After-Tax Contributions, and the earnings and accretions thereon, in any
whole percentages totalling 100% between the Investment Funds. In the event a
Participant does not make an election with respect to the transfer of his
Pre-Tax Contribution Account and/or After- Tax Contribution Account effective
July 1, 1995, such amounts and any subsequent Pre-Tax and/or After-Tax
Contributions shall be invested and reinvested in the Money Market Fund until
the Participant provides investment directions for such amounts.
From and after September 1, 1995, with no restrictions on
frequency, each Participant may by electronic, telephonic, written or other such
manner as may be prescribed from time to time by the Committee and subject to
any restrictions or conditions which may be established by the Committee, direct
the investment of his future After-Tax and/or Pre-Tax Contributions or the
transfer of the current values in his After-Tax and Pre-Tax Contribution
Accounts among the various Investment Funds in any whole percentages totalling
100%. Notwithstanding the above, in the event a Participant transfers the
current values in his After-Tax and Pre-Tax Contribution Accounts into or out of
the HI Common Stock Fund, such Participant will not be permitted to enter into
any other transactions affecting the HI Common Stock Fund for thirty days. Any
such change in Investment Funds shall be effective as soon as reasonably
practicable following receipt of the change of Investment Funds, but in no event
shall such change be effective earlier than the close of business on the
Valuation Date on which such change is received.
Except as otherwise expressly provided herein, interest,
dividends and other income and all profits and gains produced by each Investment
Fund shall be paid in such Investment Fund, and such interest, dividends and
other income, and profits or gains without distinction between principal and
income, shall be invested and reinvested, but only in property of the class
hereinabove specified for the particular Investment Fund. However, the Committee
may direct that dividends paid with respect to shares in the ESOP Fund be
distributed on an annual basis or more frequently in order that the deduction
under Code Section 404(k) be available to the Company, in which event income
that constitutes dividends on shares of Company Stock in the ESOP Fund shall not
be invested in Company Stock but shall be temporarily invested in cash
equivalents until distribution to Participants. In making payments in respect of
Exempt Loans, the Trustee shall utilize income and ESOP Contributions as is
specified in Section 5.3 hereof; namely, that income shall be first used to fund
principal payments and ESOP Contributions shall be first used to fund interest
payments. All purchases of Company Stock shall be made at prices which, in the
judgment of the Trustee, do not exceed the fair market value of such Company
Stock. Pending such investment or application of cash, the Trustee may retain
cash uninvested without liability for interest if it is prudent to do so, or may
invest all or any part thereof in Treasury Bills, commercial paper, or like
holdings.
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It is hereby explicitly provided and expressly acknowledged
that up to 100% of the assets of the Plan held in the Trust Fund may be invested
in Common Stock, as contemplated by the exception provided in Section 407(b) of
ERISA.
8.2 DIVERSIFICATION ELECTION: Each qualified Participant (as defined
herein) may elect within 90 days after the close of each Plan Year in the
initial election period (as defined herein), to direct the investment of up to
25% of the sum of the balances in the Participant's ESOP Account and Employer
Matching Account (to the extent such portion exceeds the amount to which a prior
election to diversify under this Section 8.2 applies) into any or all Investment
Funds with the exception of the HI Common Stock Fund, and such election shall be
effective as of the last Valuation Date in March. In each Plan Year after the
initial election period, the percentage shall be 50% instead of 25%. A qualified
Participant is any Participant who has completed at least ten years of
participation in the Plan and the Prior Plan and who has attained age 55. The
initial election period means the five Plan Year period beginning with the first
Plan Year on or after January 1, 1992 in which the Participant first became a
qualified Participant.
8.3 VOTING OF COMPANY STOCK; EXERCISE OF OTHER RIGHTS:
(a) Voting rights with respect to shares of Company Stock in
the ESOP Fund allocated to the ESOP Accounts of Participants and shares
in the HI Common Stock Fund allocated to the Accounts of Participants
shall be voted by the Trustee in such manner as may be directed by the
respective Participants, with fractional shares being voted on a
combined basis to the extent possible to reflect the direction of the
voting Participants. The Trustee shall vote both allocated shares of
Company Stock for which they have not received direction, as well as
shares of Company Stock held in the Stock Suspense Account, in the same
proportion as directed shares are voted, giving effect to all
affirmative directions by Participants, including directions to vote
for or against, to abstain or to withhold the vote, and the Trustee
shall have no discretion in such matter.
(b) In the event that there is a tender offer or exchange
offer for outstanding shares of Company Stock, rights with respect to
the tender offer or exchange offer shall be as with respect to voting
rights described in Section 8.3(a) above. If the Trustee shall not
receive timely instruction from a Participant as to the manner in which
to respond to such a tender offer, the Trustee shall not tender or
exchange any shares of Company Stock with respect to which such
Participant has the right to direction, and the Trustee shall have no
discretion in such matter. With respect to shares of Company Stock held
in the Stock Suspense Account and fractional shares of Company Stock
allocated to Participants' ESOP Accounts and Employer Matching
Accounts, voting rights and rights to tender or exchange in connection
with a tender offer or exchange offer for the shares of Company Stock
shall be exercised by the Trustee in the same proportion as they vote,
tender or exchange shares of Company Stock with respect to shares
allocated to the Participants' ESOP Accounts and Employer Matching
Accounts, and the Trustee shall have no discretion in such matter.
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(c) Solicitation of exercise of Participants' voting rights by
management of the Company and others under a proxy or consent provision
applicable to all holders of Company Stock shall be permitted.
Solicitation of exercise of Participant tender or exchange offer rights
by management of the Company and others shall be permitted. The Trustee
shall notify Participants of each occasion for the exercise of voting
rights or rights with respect to a tender offer or exchange offer
within a reasonable time before such rights are to be exercised. Such
notification shall include all information distributed to shareholders
by the Company regarding the exercise of such rights. Copies of Company
written communications to Participants relating to each opportunity for
Participant exercise of rights under this Section 8.3 shall be promptly
furnished to the Trustee. The instructions received by the Trustee from
Participants shall be held by the Trustee in confidence and shall not
be divulged or released to any person, including the Committee or
officers or employees of the Company or its Affiliates. In the event
any shares of Company Stock held in the Stock Suspense Account are
tendered or exchanged pursuant to this Section 8.3, the proceeds shall
at the direction of the Board of Directors of the Company either (i) if
and to the extent the proceeds are attributable to unallocated Company
Stock be used to repay installment purchase or other indebtedness used
to purchase the Common Stock to which such proceeds are attributable or
(ii) be reinvested in Company Stock within 90 days, or within such
longer period as may be approved by the Commissioner of Internal
Revenue.
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ARTICLE IX
TRUST AGREEMENT AND TRUST FUND
9.1 TRUST AGREEMENT: As part of the Plan, the Company has entered into a
trust agreement with The Northern Trust Company, as Trustee, effective July 1,
1995, known as the Houston Industries Incorporated Savings Trust. Said Trust is
an amendment, restatement and continuation of the Houston Industries
Incorporated Master Savings Trust, as amended and restated effective January 1,
1994, and the Savings Plan of Houston Industries Incorporated ESOP Trust, as
established effective October 5, 1990. The provisions of such Trust Agreement
are herein incorporated by reference as fully as if set out herein, and the
assets held under said Trust Agreement on behalf of this Plan shall constitute
the Trust Fund.
9.2 BENEFITS PAID SOLELY FROM TRUST FUND: All of the benefits provided
to be paid under Article VI hereof shall be paid by the Trustee out of the Trust
Fund to be administered under such Trust Agreement. Neither the Employer nor the
Trustee shall be responsible or liable in any manner for payment of any such
benefits, and all Participants hereunder shall look solely to such Trust Fund
and to the adequacy thereof for the payment of any such benefits of any nature
or kind which may at any time be payable hereunder.
9.3 COMMITTEE DIRECTIONS TO TRUSTEE: The Trustee shall make only such
payments out of the Trust Fund as may be directed by the Committee. The Trustee
shall not be required to determine or make any investigation to determine the
identity or mailing address of any person entitled to any payments out of the
Trust Fund and shall have discharged its obligation in that respect when it
shall have sent checks or other papers by ordinary mail to such persons and
addresses as may be certified to it by the Committee.
9.4 TRUSTEE'S RELIANCE ON COMMITTEE INSTRUCTIONS: In any case where the
Trustee shall be required hereunder to act upon instructions to be received from
the Committee, the Trustee shall be protected in relying on any such
instructions which shall be in writing and signed by any member of, or Secretary
of, the Committee, and the Trustee shall be protected in relying upon the
authority to act of any person certified to it by the Company as a member of, or
Secretary of, the Committee until a successor to any such person shall be
certified to the Trustee by the Company.
9.5 AUTHORITY OF TRUSTEE IN ABSENCE OF INSTRUCTIONS FROM THE COMMITTEE:
If at any time the Committee shall be incapable for any reason of giving any
directions, instructions or authorizations to the Trustee as are herein provided
for and as may be required incidental to the administration of this Plan, the
Trustee may act and shall be completely protected and without liability in so
acting without such directions, instructions and authorizations as it in its
sole discretion deems appropriate and advisable under the circumstances for the
carrying out of the provisions of this Plan. In the event of termination of this
Plan for any reason, the Committee shall be authorized to give all such
instructions to the Trustee, and the Trustee shall be protected in relying on
all such instructions, as may be necessary to make payment to any persons then
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interested in the Trust Fund of all such amounts as are specified herein to be
paid under Section 10.3 hereof upon the termination of this Plan and the Trust
Agreement.
9.6 COMPLIANCE WITH EXCHANGE ACT RULE 10(B)(18): At any time that the
Trustee makes open market purchases of Company Stock, the Trustee will either
(i) be an "agent independent of the issuer" as that term is defined in Rule
10(b)(18) promulgated pursuant to the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") or (ii) make such open market purchases in
accordance with the provisions, and subject to the restrictions, of Rule
10(b)(18) of the Exchange Act.
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ARTICLE X
ADOPTION OF PLAN BY OTHER CORPORATIONS,
AMENDMENT AND TERMINATION OF THE PLAN, AND
DISCONTINUANCE OF CONTRIBUTIONS TO THE TRUST FUND
10.1 ADOPTION BY EMPLOYERS: Every Employer which shall have adopted the
Plan shall thereby become a participating Employer whose eligible Employees,
subject to the Plan provisions, shall make and receive Contributions and have
established for them Accounts under the Plan. Any corporation or other
organization with employees, now in existence or hereafter formed or acquired
which is not already an Employer under this Plan and which is otherwise legally
eligible may, with the approval of the Company as evidenced by action of the
Committee, adopt and become an Employer by executing and delivering to the
Committee and the Trustee an adoptive instrument specifying the classification
of its Employees who shall be eligible to participate in the Plan and evidencing
the terms of the Plan with respect to its eligible Employees. The adoptive
instrument may contain such changes and amendments in the terms and provisions
of the Plan as adopted by such Employer as may be desired by such Employer and
acceptable to the Committee. Any such Affiliate which shall adopt this Plan
shall designate the Company as its agent to act for it in all transactions
affecting the administration of the Plan and shall designate the Committee to
act for such corporation and its Participants in the same manner in which the
Committee may act for the Company and its Participants hereunder. The adoptive
instrument shall specify the effective date of such adoption of the Plan and
shall become, as to such corporation and its Employees, a part of this Plan.
Upon an Employer's liquidation, bankruptcy, insolvency, sale, consolidation or
merger to or with another organization that is not an Employer hereunder, in
which such Employer is not the surviving company, all obligations of that
Employer hereunder and under the Trust Agreement shall terminate automatically,
and the Trust Fund assets attributable to the Employees of such Employer shall
be held or distributed as herein provided unless, with the approval of the
Company as evidenced by action of the Committee, the successor to that Employer
assumes the duties and responsibilities of such Employer, by adopting this Plan
and the Trust Agreement, or by establishment of a separate plan and trust to
which the assets of the Trust Fund held on behalf of the Employees of such
Employer shall be transferred with the consent and agreement of that Employer.
Upon the consolidation or merger of two or more of the Employers under this Plan
with each other, the surviving Employer or organization shall automatically
succeed to all the rights and duties under the Plan and Trust Agreement of the
Employers involved.
10.2 CONTINUOUS SERVICE: The following special provisions shall apply to
all Employers:
(a) An Employee shall be considered in continuous Service
while regularly employed simultaneously or successively by one or more
Employers.
(b) The transfer of a Participant from one Employer to another
Employer shall not be deemed a termination of Service.
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10.3 AMENDMENT OF THE PLAN: Except as otherwise expressly provided in
this Section, (i) the Company shall have the right to amend or modify this Plan
and the Trust Agreement (with the consent of the Trustee, if required) at any
time and from time to time to the extent that it may deem advisable and (ii) the
Committee shall have the right to amend or modify this Plan and the Trust
Agreement (with the consent of the Trustee, if required) to modify the
administrative provisions of the Plan, to change the Investment Funds offered
under the Plan and for any changes required by applicable law or by the Internal
Revenue Service to maintain the qualified status of the Plan and related Trust
at any time and from time to time to the extent that it may deem advisable. Any
such amendment or modification shall be set out in an instrument in writing duly
authorized by the Board of Directors of the Company or the Committee, as the
case may be, and executed by an appropriate officer of the Company or member of
the Committee. Upon delivery by the Company of such an instrument amending the
Plan to the Trustee, this Plan shall be deemed to have been amended or modified
in such manner and to such extent and effective as of the date therein set
forth, and thereupon any and all Participants whether or not they shall have
become such prior to such amendment or modification shall be bound thereby. No
such amendment or modification shall, however, increase the duties or
responsibilities of the Trustee without its consent thereto in writing, or have
the effect of transferring to or vesting in any Employer any interest or
ownership in any properties of the Trust Fund, or of permitting the same to be
used for or diverted to purposes other than for the exclusive benefit of the
Participants and their Beneficiaries. No such amendment shall decrease the
Account of any Participant or shall decrease any Participant's vested interest
in his Account. No amendment shall directly or indirectly reduce a Participant's
non-forfeitable vested percentage in his benefits under Section 6.1 of this
Plan, unless each Participant having not less than three years of Service is
permitted to elect to have his non-forfeitable vested percentage in his benefits
computed under the provisions of Section 6.1 without regard to the amendment.
Such election shall be available during an election period, which shall begin on
the date such amendment is adopted, and shall end on the latest of (i) the date
60 days after such amendment is adopted, (ii) the date 60 days after such
amendment is effective, or (iii) the date 60 days after such Participant is
issued written notice of the amendment by the Committee or the Employer.
Notwithstanding anything herein to the contrary, the Plan or the Trust Agreement
may be amended in such manner as may be required at any time to make it conform
to the requirements of the Code or of any United States statutes with respect to
employees' trusts, or of any amendment thereto, or of any regulations or rulings
issued pursuant thereto, and no such amendment shall be considered prejudicial
to any then existing rights of any Participant or his Beneficiary under the
Plan.
10.4 TERMINATION OF THE PLAN: The Plan may be terminated pursuant to the
provisions of, and as of any subsequent date specified in, an instrument in
writing executed by the Company, and approved and authorized by the Board of
Directors of the Company, and which said instrument shall be delivered to the
Trustee.
10.5 DISTRIBUTION OF TRUST FUND ON TERMINATION: In the event of a
termination of the Plan by the Company, the assets and properties of the Trust
Fund shall be valued and allocated as provided in Sections 5.2 and 5.3, and each
Participant shall be fully vested in all amounts attributable to his Employer
Matching Account and his ESOP Account, and thereafter, each such Participant
shall become entitled to distributions in respect of his Accounts in the Plan in
the
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manner as provided in Sections 6.6(a) and 6.6(b) herein provided that no
Employer or Affiliate then establishes or maintains another defined contribution
plan (other than an employee stock ownership plan within the meaning of Code
Section 4975(e)(7) or Code Section 409 or a simplified employee pension within
the meaning of Code Section 408(k)). In the event the Plan is terminated with
respect to all Employers, any Company Stock held in the Suspense Stock Account
shall be sold to the extent necessary to pay the outstanding principal balance
and any accrued interest on any installment purchase contracts and/or loan
obligations of the Trust Fund incurred for the purpose of directly or indirectly
funding the purchase of such Stock, and any such installment purchase contracts
and/or loan obligations shall be paid in full prior to distribution of the
assets of the Trust Fund to Participants; provided, however, that the Board of
Directors of the Company may authorize distribution of Trust Fund assets prior
to satisfaction of installment purchase contracts and/or loan obligations, but
only if under applicable federal law such assets or income attributable thereto
cannot be used to repay such installment purchase contracts or loan obligations.
10.6 EFFECT OF DISCONTINUANCE OF CONTRIBUTIONS: If the Company shall
discontinue its Contributions to the Trust Fund, or suspend its Contributions to
the Trust Fund under such circumstances so as to constitute a discontinuance of
Contributions within the purview of the reasoning of Treasury Regulations
Section 1.401-6(c), then all amounts theretofore credited to the Accounts of the
Participants shall become fully vested, and throughout any such period of
discontinuance of Contributions, all other provisions of the Plan shall continue
in full force and effect other than the provisions for Contributions by an
Employer or Participants and the forfeiture provisions of Section 6.1.
10.7 MERGER OF PLAN WITH ANOTHER PLAN: In the case of any merger or
consolidation of the Plan with, or transfer in whole or in part of the assets
and liabilities of the Trust Fund to another trust fund held under, any other
plan of deferred compensation maintained or to be established for the benefit of
all or some of the Participants of this Plan, the assets of the Trust Fund
applicable to such Participants shall be transferred to the other trust fund
only if:
(a) Each Participant would (if either this Plan or the other
plan then terminated) receive a benefit immediately after the merger,
consolidation or transfer which is equal to or greater than the benefit
he would have been entitled to receive immediately before the merger,
consolidation or transfer (if this Plan had then terminated);
(b) Resolutions of the Board of Directors of the Employer
under this Plan, and of any new or successor employer of the affected
Participants, shall authorize such transfer of assets; and, in the case
of the new or successor employer of the affected Participants, its
resolutions shall include an assumption of liabilities with respect to
such Participants' inclusion in the new employer's plan; and
(c) Such other plan and trust are qualified under Sections
401(a) and 501(a) of the Code.
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ARTICLE XI
TOP-HEAVY PLAN REQUIREMENTS
11.1 GENERAL RULE: For any Plan Year for which this Plan is a Top-Heavy
Plan, as defined in Section 11.8, and despite any other provisions of this Plan
to the contrary, this Plan shall be subject to the provisions of this Article
XI.
11.2 VESTING PROVISIONS: Each Participant who has completed an Hour of
Service after the Plan becomes top-heavy and while the Plan is top-heavy and who
has completed the Vesting Service specified in the following table shall be
vested in his Account under this Plan at least as rapidly as is provided in the
following schedule:
VESTING SERVICE VESTED PERCENT
Less than 2 years 0%
2 but less than 3 years 20%
3 but less than 4 years 40%
4 but less than 5 years 60%
5 but less than 6 years 80%
6 years or more 100%
If an Account becomes vested by reason of the application of the preceding
schedule, it may not therefore be forfeited by reason of re-employment after
retirement pursuant to a suspension of benefits provision, by reason of
withdrawal of any mandatory employee contributions to which employer
contributions were keyed, or for any other reason. If the Plan subsequently
ceases to be top-heavy, the preceding schedule shall continue to apply with
respect to any Participant who had at least three years of Service (as defined
in Treasury Regulation Section 1.411(a)-8T(b)(3)) as of the close of the last
year that the Plan was top-heavy. For all other Participants, the
non-forfeitable percentage of their Accounts provided in the preceding schedule
prior to the date the Plan ceases to be top-heavy shall not be reduced.
11.3 MINIMUM CONTRIBUTION PROVISIONS: Each Participant who (i) is a
Non-Key Employee, as defined in Section 11.8 and (ii) is employed on the last
day of the Plan Year (regardless of whether or not such Participant has
completed 1,000 Hours of Service) will be entitled to have contributions and
forfeitures (if applicable) allocated to his Account of not less than 3% (the
"Minimum Contribution Percentage") of the Participant's Compensation. This
minimum allocation percentage shall be provided without taking Pre-Tax
Contributions into account. A Non-Key Employee may not fail to receive a Minimum
Contribution Percentage because of a failure to receive a specified minimum
amount of Compensation or a failure to make mandatory employee or elective
contributions. This Minimum Contribution Percentage will be reduced for any Plan
Year to the percentage at which contributions (including forfeitures) are made
or are required to be made under the Plan for the Plan Year for the Key Employee
for whom such percentage is the highest for such Plan Year. For this purpose,
the percentage with respect to a Key Employee will be determined by dividing the
contributions (including forfeitures)
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made for such Key Employee by his total compensation (as defined in Section 415
of the Code) not in excess of $150,000 for the Plan Year. Such amount will be
adjusted in the same manner as the amount set forth in Section 11.4 below.
Contributions considered under the first paragraph of this
Section 11.3 will include Employer contributions under this Plan and under all
other defined contribution plans required to be included in an Aggregation Group
(as defined in Section 11.8 below), but will not include Employer contributions
under any plan required to be included in such aggregation group if the plan
enables a defined benefit plan required to be included in such group to meet the
requirements of the Code prohibiting discrimination as to contributions in favor
of employees who are officers, shareholders, or the highly compensated or
prescribing the minimum participation standards. If the highest rate allocated
to a Key Employee for a year in which the Plan is top-heavy is less than 3%,
amounts contributed as a result of a salary reduction agreement must be included
in determining contributions made on behalf of Key Employees.
Employer Contributions made on behalf of Non-Key Employees
that are taken into account to satisfy the Minimum Contribution Percentage shall
not be treated as Employer Matching Contributions for purposes of determining
the Actual Contribution Percentage under Article IV and must meet the
non-discrimination requirements of Section 401(a)(4) without regard to Section
401(m).
Contributions considered under this Section will not include
any contributions under the Social Security Act or any other federal or state
law.
11.4 LIMITATION ON COMPENSATION: Each Participant's Compensation taken
into account under this Article XI and under Section 1.11 for purposes of
computing benefits under this Plan will not exceed $150,000. Such amount will be
adjusted automatically for each Plan Year to the amount prescribed by the
Secretary of the Treasury or his delegate pursuant to regulations for the
calendar year in which such Plan Year commences.
11.5 LIMITATION ON CONTRIBUTIONS: In the event that the Company, other
Employer or an Affiliate (herein in this Article collectively referred to as a
"Considered Company") also maintains a defined benefit plan providing benefits
on behalf of Participants in this Plan, one of the two following provisions will
apply:
(a) If for the Plan Year this Plan would not be a Top-Heavy
Plan if "90%" were substituted for "60%" in Section 11.8, then the
percentage of 3% used in Section 11.3 is changed to 4%.
(b) If for the Plan Year this Plan would continue to be a
Top-Heavy Plan if "90%" were substituted for "60%," in Section 11.8,
then the denominator of both the defined contribution plan fraction
and the defined benefit plan fraction will be calculated as set forth
in Section 5.5 for the limitation year ending in such Plan Year by
substituting "1.0" for "1.25" in each place such figure appears. This
subsection (b) will not apply for such Plan Year with respect to any
individual for
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whom there are no (i) Employer contributions, forfeitures or voluntary
non-deductible contributions allocated to such individual or (ii)
accruals earned under the defined benefit plan. Furthermore, the
transitional rule set forth in Section 415(e)(6)(B)(i) of the Code
shall be applied by substituting "Forty-One Thousand Five Hundred
Dollars ($41,500)" for "Fifty-One Thousand Eight Hundred Seventy-Five
Dollars ($51,875)" where it appears therein.
11.6 COORDINATION WITH OTHER PLANS: If another defined contribution or
defined benefit plan maintained by a Considered Company provides contributions
or benefits on behalf of a Participant in this Plan, the other plan will be
treated as part of this Plan pursuant to applicable principles prescribed by
U.S. Treasury Regulations or applicable IRS rulings (such as Revenue Ruling
81-202 or any successor ruling) to determine whether this Plan satisfies the
requirements of Sections 11.2, 11.3 and 11.4 and to avoid inappropriate
omissions or inappropriate duplication of minimum contributions. The
determination will be made by the Plan Administrator upon the advice of counsel.
In the event a Participant is covered by a defined benefit
plan which is top-heavy pursuant to Section 416 of the Code, a comparability
analysis (as prescribed by Revenue Ruling 81-202 or any successor ruling) shall
be performed in order to establish that the plans are providing benefits at
least equal to the defined benefit minimum.
11.7 DISTRIBUTIONS TO CERTAIN KEY EMPLOYEES: Notwithstanding any other
provision of this Plan, the entire interest in this Plan of each Participant who
is a Key Employee, by reason of clause (iii) of subparagraph (c) of Section 11.8
in the calendar year in which the Participant attains age 70 1/2, shall commence
to be distributed to such Participant not later than the April 1 following such
calendar year.
11.8 DETERMINATION OF TOP-HEAVY STATUS: The Plan will be a Top-Heavy
Plan for any Plan Year if, as of the Determination Date, the aggregate of the
Accounts under the Plan (determined as of the Valuation Date) for Participants
(including former Participants) who are Key Employees exceeds 60% of the
aggregate of the Accounts of all Participants, excluding former Key Employees,
or if this Plan is required to be in an Aggregation Group in any such Plan Year
in which such Group is a Top-Heavy Group. In determining Top-Heavy status if an
individual has not performed one Hour of Service for any Considered Company at
any time during the five-year period ending on the Determination Date, any
accrued benefit for such individual and the aggregate Accounts of such
individual shall not be taken into account.
For purposes of this Section, the capitalized words have the
following meanings:
(a) "Aggregation Group" means the group of plans, if any, that
includes both the group of plans required to be aggregated and the
group of plans permitted to be aggregated. The group of plans required
to be aggregated (the "required aggregation group") includes:
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(i) each plan of a Considered Company in which a Key
Employee is a participant; and
(ii) each other plan, including collectively
bargained plans, of a Considered Company which enables a plan
in which a Key Employee is a participant to meet the
requirements of Code Section 401(a)(4) or 410.
The group of plans that are permitted to be aggregated (the
"permissive aggregation group") includes the required aggregation
group plus one or more plans of a Considered Company that is not part
of the required aggregation group and that the Considered Company
certifies as a plan within the permissive aggregation group. Such plan
or plans may be added to the permissive aggregation group only if,
after the addition, the aggregation group as a whole continues to
satisfy the requirements of Code Sections 401(a)(4) and 410.
(b) "Determination Date" means for any Plan Year the last day
of the immediately preceding Plan Year.
(c) "Key Employee" means any Employee or former Employee under
this Plan who, at any time during the Plan Year in question or during
any of the four preceding Plan Years, is or was one of the following:
(i) An officer of a Considered Company having an
annual compensation greater than 50% of the amount in effect
under Code Section 415(b)(1)(A) for any such Plan Year.
Whether an individual is an officer shall be determined by the
Considered Company on the basis of all the facts and
circumstances, such as an individual's authority, duties and
term of office, not on the mere fact that the individual has
the title of an officer. For any such Plan Year, officers
considered to be Key Employees will be no more than the fewer
of:
(A) 50 employees; or
(B) 10% of the employees or, if greater than
10%, three employees.
For this purpose, the highest paid officers shall be selected.
(ii) One of the ten employees owning (or considered
as owning, within the meaning of the constructive ownership
rules of Code Section 416(i)(1)(B)) the largest interests in
the Considered Company. An employee who has some ownership
interest is considered to be one of the top ten owners unless
at least ten other
-70-
employees own a greater interest than that employee. However,
an employee will not be considered a top ten owner for a Plan
Year if the employee earns less than the limitation in effect
under Code Section 415(c)(1)(A) as in effect for the calendar
year in which the Determination Date falls.
(iii) Any person who owns (or is considered as
owning, within the meaning of the constructive ownership rules
of Code Section 416(i)(1)(B)) more than 5% of the outstanding
stock of a Considered Company or stock possessing more than 5%
of the combined voting power of all stock of the Considered
Company.
(iv) Any person who has an annual compensation from
the Considered Company of more than One Hundred Fifty Thousand
Dollars ($150,000) and who owns (or is considered as owning,
within the meaning of the constructive ownership rules of Code
Section 416(i)(1)(B)) more than 1% of the outstanding stock of
the Considered Company or stock possessing more than 1% of the
outstanding stock of the Considered Company or stock
possessing more than 1% of the combined voting power of all
stock of the Considered Company. For purposes of this
subsection, Annual Compensation includes all items includable
as Compensation within the meaning of Section 11.8(k) and
further includes the amount otherwise excludable from an
employee's gross income by reason of Code Section 125,
402(e)(3) or 402(h)(1)(B).
For purposes of this subsection (c), a Beneficiary of a Key Employee
shall be treated as a Key Employee. For purposes of parts (iii) and
(iv), each Considered Company is treated separately in determining
ownership percentages; but all such Considered Companies shall be
considered a single employer in determining the amount of
compensation.
(d) "Non-Key Employee" means any employee (and any Beneficiary
of an employee) who is not a Key Employee.
(e) "Top-Heavy Group" means the Aggregation Group if, as of
the applicable Determination Date, the sum of the present value of the
cumulative accrued benefits for Key Employees under all defined
benefit plans included in the Aggregation Group plus the aggregate of
the accounts of Key Employees under all defined contribution plans
included in the Aggregation Group exceeds 60% of the sum of the
present value of the cumulative accrued benefits for all employees,
excluding former Key Employees as provided in paragraph (i) below,
under all such defined benefit plans plus the aggregate accounts for
all employees, excluding former Key Employees as provided in paragraph
(i) below, under all such defined contribution plans. In determining
Top-Heavy status, if an individual
-71-
has not performed one Hour of Service for any Considered Company at
any time during the five-year period ending on the Determination Date,
any accrued benefit for such individual and the aggregate accounts of
such individual shall not be taken into account. If the Aggregation
Group that is a Top-Heavy Group is a required aggregation group, each
plan in the group will be a Top-Heavy Plan. If the Aggregation Group
that is a Top-Heavy Group is a permissive aggregation group, only
those plans that are part of the required aggregation group will be
treated as Top-Heavy Plans. If the Aggregation Group is not a
Top-Heavy Group, no plan within such group will be a Top-Heavy Plan.
In determining whether this Plan constitutes a Top-Heavy Plan, the
Committee (or its agent) will make the following adjustments:
(f) When more than one plan is aggregated, the Committee shall
determine separately for each plan as of each plan's Determination
Date the present value of the accrued benefits (for this purpose using
the actuarial assumptions set forth in the applicable plan) or account
balance. The results shall then be aggregated by adding the results of
each plan as of the Determination Dates for such plans that fall
within the same calendar year.
(g) In determining the present value of the cumulative accrued
benefit or the amount of the account of any employee, such present
value or account will include the amount in dollar value of the
aggregate distributions made to such employee under the applicable
plan during the five-year period ending on the Determination Date
unless reflected in the value of the accrued benefit or account
balance as of the most recent Valuation Date. The amounts will include
distributions to employees representing the entire amount credited to
their accounts under the applicable plan.
(h) Further, in making such determination, such present value
or such account shall include any rollover contribution (or similar
transfer), as follows:
(i) If the rollover contribution (or similar
transfer) is initiated by the employee and made to or from a
plan maintained by another Considered Company, the plan
providing the distribution shall include such distribution in
the present value or such account and the plan accepting the
distribution shall not include such distribution in the
present value or such account unless the plan accepted it
before December 31, 1983.
(ii) If the rollover contribution (or similar
transfer) is not initiated by the employee or made from a plan
maintained by another Considered Company, the plan accepting
the distribution shall include such distribution in the
present value or such account, whether the plan accepted the
distribution before or after
-72-
December 31, 1983; the plan making the distribution shall not
include the distribution in the present value or such account.
(i) In any case where an individual is a Non-Key Employee with
respect to an applicable plan but was a Key Employee with respect to
such plan for any prior Plan Year, any accrued benefit and any account
of such employee will be altogether disregarded. For this purpose, to
the extent that a Key Employee is deemed to be a Key Employee if he or
she met the definition of Key Employee within any of the four
preceding Plan Years, this provision will apply following the end of
such period of time.
(j) "Valuation Date" means for purposes for determining the
present value of an accrued benefit as of the Determination Date the
date determined as of the most recent valuation date which is within a
12-month period ending on the Determination Date. For the first plan
year of a plan, the accrued benefit for a current employee shall be
determined either (i) as if the individual terminated service as of
the Determination Date or (ii) as if the individual terminated service
as of the valuation date, but taking into account the estimated
accrued benefit as of the Determination Date. The Valuation Date shall
be determined in accordance with the principles set forth in Q&A-T-25
of Treasury Regulations Section 1.416-1.
(k) For purposes of this Section, "Compensation" shall have
the meaning given to it in Section 5.5(d)(6) of the Plan.
-73-
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 TERMS OF EMPLOYMENT: The adoption and maintenance of the provisions
of this Plan shall not be deemed to constitute a contract between the Employer
and any Employee, or to be a consideration for, or an inducement or condition
of, the employment of any person. Nothing herein contained shall be deemed to
give to any Employee the right to be retained in the employ of the Employer or
to interfere with the right of the Employer to discharge any Employee at any
time, nor shall it be deemed to give the Employer the right to require any
Employee to remain in its employ, nor shall it interfere with any Employee's
right to terminate his employment at any time.
12.2 CONTROLLING LAW: This Plan and the Trust shall be construed,
regulated and administered under the laws of the State of Texas, subject,
however, to such determinations under the Plan as may be governed by ERISA and
related provisions of the Code.
12.3 INVALIDITY OF PARTICULAR PROVISIONS: In the event any provision of
this Plan shall be held illegal or invalid for any reason, said illegality or
invalidity shall not affect the remaining provisions of this Plan but shall be
fully severable, and this Plan shall be construed and enforced as if said
illegal or invalid provisions had never been inserted herein.
12.4 NON-ALIENABILITY OF RIGHTS OF PARTICIPANTS: No interest, right or
claim in or to the part of the Trust Fund attributable to the Pre-Tax
Contribution Account, the After-Tax Contribution Account, the Employer Matching
Account or the ESOP Account of any Participant, or any distribution of benefits
therefrom, shall be assignable, transferable or subject to sale, mortgage,
pledge, hypothecation, commutation, anticipation, garnishment, attachment,
execution, claim or levy of any kind, voluntary or involuntary (excluding a levy
on an Account other than a Pre-Tax Contribution Account for taxes filed upon the
Plan by the Internal Revenue Service), including without limitation any claim
asserted by a spouse or former spouse of any Participant, and the Trustee shall
not recognize any attempt to assign, transfer, sell, mortgage, pledge,
hypothecate, commute or anticipate the same. The preceding sentence shall also
apply to the creation, assignment or recognition of a right to any benefit
payable with respect to a Participant pursuant to a domestic relations order,
unless such order is determined to be a qualified domestic relations order, as
defined in Section 414(p) of the Code. The Committee shall establish a written
procedure to be used to determine the qualified status of such orders and to
administer distributions under such orders. Further, to the extent provided
under the qualified domestic relations order, a former spouse of a Participant
shall be treated as a spouse for all purposes of the Plan. If the Committee
receives a qualified domestic relations order with respect to a Participant, the
amount assigned to the Participant's former spouse may be immediately
distributed, to the extent permitted by law, from the Participant's Pre-Tax
Contribution Account, After-Tax Contribution Account, and the vested portion of
his Employer Matching Account and ESOP Account.
-74-
12.5 PAYMENTS IN SATISFACTION OF CLAIMS OF PARTICIPANTS: Any
distribution to any Participant or his Beneficiary or legal representative, in
accordance with the provisions of the Plan, of the interest in the Trust Fund
attributable to his Pre-Tax Contribution Account and/or After-Tax Contribution
Account, and the vested portion of his Employer Matching Account and ESOP
Account, shall be in full satisfaction of all claims under the Plan against the
Trust Fund, the Trustee, the Company, and the Employer. The Trustee may require
that any distributee execute and deliver to the Trustee a receipt and a full and
complete release of the Employer as a condition precedent to any payment or
distribution under the Plan.
12.6 PAYMENTS DUE MINORS AND INCOMPETENTS: If the Committee determines
that any person to whom a payment is due hereunder is a minor or is incompetent
by reason of physical or mental disability, the Committee shall have power to
cause the payments becoming due such person to be made to the guardian of the
minor or the guardian of the estate of the incompetent, without the Committee or
the Trustee being responsible to see to the application of such payment.
Payments made pursuant to such power shall operate as a complete discharge of
the Committee, the Trustee and the Employer.
12.7 ACCEPTANCE OF TERMS AND CONDITIONS OF PLAN BY PARTICIPANTS: Each
Participant, through execution of the application required under the terms of
the Plan as a condition of participation herein, for himself, his heirs,
executors, administrators, legal representatives and assigns, approves and
agrees to be bound by the provisions of this Plan and the Trust Agreement and
any subsequent amendments thereto and all actions of the Committee and the
Trustee hereunder. In consideration of the adoption of this Plan by the Employer
and the Contributions of the Employer to the Trust Fund, each Participant agrees
by the execution of his application to participate herein to release and hold
harmless to the extent permitted by ERISA the Employer, the Committee and the
Trustee from any liability for any act whatsoever, past, present, or future,
performed in good faith in such respective capacities pursuant to the provisions
of this Plan or the Trust Agreement.
12.8 IMPOSSIBILITY OF DIVERSION OF TRUST FUND: Notwithstanding any
provision herein to the contrary, no part of the corpus or the income of the
Trust Fund shall ever be used for or diverted to purposes other than for the
exclusive benefit of the Participants or their Beneficiaries or for the payment
of expenses of the Plan. No part of the Trust Fund shall ever revert to the
Employer.
-75-
IN WITNESS WHEREOF, the BENEFITS COMMITTEE OF HOUSTON
INDUSTRIES INCORPORATED has executed these presents as evidenced by the
signatures affixed hereto of its officers hereunto duly authorized, in a number
of copies, all of which shall constitute but one and the same instrument, which
instrument may be sufficiently evidenced by any such executed copy hereof, this
27th day of April, 1995, effective as of July 1, 1995.
BENEFITS COMMITTEE OF HOUSTON
INDUSTRIES INCORPORATED
By D. D. SYKORA
D. D. Sykora
Chairman
ATTEST: E. P. WEYLANDT
Secretary
-76-
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)
THREE TWELVE
MONTHS ENDED MONTHS ENDED
MARCH 31,1995 MARCH 31, 1995
------------------ ------------------
Fixed Charges as Defined:
(1) Interest on Long-Term Debt........... $ 61,518 $ 246,210
(2) Other Interest....................... 3,135 8,732
(3) Amortization of (Premium)
Discount.......................... 2,122 8,485
(4) Interest Component of Rentals
Charged to Operating Expense......... 936 3,813
------------------ ------------------
(5) Total Fixed Charges............. $ 67,711 $ 267,240
================== ==================
Earnings as Defined:
(6) Net Income........................... $ 42,894 $ 479,699
------------------ ------------------
Federal Income Taxes:
(7) Current.............................. 14,988 174,567
(8) Deferred (Net)....................... 3,817 71,534
------------------ ------------------
(9) Total Federal Income Taxes........... 18,805 246,101
------------------ ------------------
(10) Fixed Charges (line 5)............... 67,711 267,240
------------------ ------------------
(11) Earnings Before Income Taxes and
Fixed Charges (line 6 plus
line 9 plus line 10).............. $ 129,410 $ 993,040
================== ==================
Ratio of Earnings to Fixed Charges
(line 11 divided by line 5)............... 1.91 3.72
Preferred Dividends Requirements:
(12) Preferred Dividends ................. $ 8,985 $ 34,295
(13) Less Tax Deduction for
Preferred Dividends............... 14 54
------------------ ------------------
(14) Total........................... 8,971 34,241
(15) Ratio of Pre-Tax Income to Net
Income (line 6 plus line 9
divided by line 6)................ 1.44 1.51
------------------ ------------------
(16) Line 14 times line 15................ 12,918 51,704
(17) Add Back Tax Deduction
(line 13)......................... 14 54
------------------ ------------------
(18) Preferred Dividends Factor........... $ 12,932 $ 51,758
================== ==================
(19) Fixed Charges (line 5)............... $ 67,711 $ 267,240
(20) Preferred dividends Factor
(line 18)......................... 12,932 51,758
------------------ ------------------
(21) Total........................... $ 80,643 $ 318,998
================== ==================
Ratio of Earnings to Fixed Charges and
Preferred Dividends
(line 11 divided by line 21).............. 1.60 3.11
UT
0000048732
HOUSTON LIGHTING & POWER COMPANY
1000
3-MOS
DEC-31-1995
MAR-31-1995
PER-BOOK
8,934,675
0
405,110
1,367,013
0
10,706,798
1,675,927
0
2,104,768
3,780,695
121,910
351,345
3,066,649
0
0
0
110,143
45,700
8,004
3,614
3,218,738
10,706,798
746,166
19,018
622,582
641,600
104,566
1,176
105,742
62,848
42,894
8,985
33,909
82,250
61,497
48,552
0
0
Total annual interest charges on all bonds for year-to-date 3/31/95.
EXHIBIT 99(a)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(f) DEFERRED PLANT COSTS. The Utility Commission authorized deferred
accounting treatment for certain costs related to the South Texas
Project Electric Generating Station (South Texas Project) in two
contexts. The first was "deferred accounting" where HL&P was permitted
to continue to accrue carrying costs in the form of AFUDC and defer
and capitalize depreciation and other operating costs on its
investment in the South Texas Project until such costs were reflected
in rates. The second was the "qualified phase-in plan" where HL&P was
permitted to capitalize as deferred charges allowable costs, including
return, deferred for future recovery
-39-
under the approved plan. The accumulated deferrals for "deferred
accounting" and "qualified phase-in plan" are being recovered over the
estimated depreciable life of the South Texas Project and within the
ten year phase-in period, respectively. The amortization of these
deferrals totaled $25.8 million for each of the years 1994, 1993, and
1992 and is included on the Company's Statements of Consolidated
Income and HL&P's Statements of Income in depreciation and
amortization expense. Under the terms of the settlement agreement
regarding the issues raised in Docket Nos. 12065 and 13126 (Proposed
Settlement), see Note 3, the South Texas Project deferrals will
continue to be amortized using the schedules discussed above.
-40-
(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four
co-owners) of the South Texas Project, which consists of two 1,250
megawatt nuclear generating units. HL&P has a 30.8 percent interest in
the project and bears a corresponding share of capital and operating
costs associated with the project. As of December 31, 1994, HL&P's
investments (net of accumulated depreciation and amortization) in the
South Texas Project and in nuclear fuel, including AFUDC, were $2.1
billion and $99 million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. Both generating units at the South Texas Project were out
of service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994.
HL&P removed the units from service in February 1993 when a problem
was encountered with certain of the units' auxiliary feedwater pumps.
In February 1995, the NRC removed the South Texas Project from its
"watch list" of plants with weaknesses that warranted increased NRC
attention. The NRC placed the South Texas Project on the "watch list"
in June 1993, following the issuance of a report by an NRC Diagnostic
Evaluation Team (DET) which conducted a review of the South Texas
Project operations.
Certain current and former employees of HL&P or contractors of HL&P
have asserted claims that their employment was terminated or disrupted
in retaliation for their having made safety-related complaints to the
NRC. Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P,
and the NRC has jurisdiction to take enforcement action against HL&P
and/or individual employees with respect to these matters. Based on
its own internal investigation, in October 1994 the NRC issued a
notice of violation and proposed a $100,000 civil penalty against HL&P
in one such case in which HL&P had terminated the site access of a
former contractor employee. In that action, the NRC also requested
information relating to possible further enforcement action in this
matter against two HL&P managers involved in such termination. HL&P
strongly disagrees with the NRC's conclusions, and has requested the
NRC to give further consideration of its notice. In February 1995, the
NRC conducted an enforcement conference with respect to that matter,
but no result has been received.
HL&P has provided documents and other assistance to a subcommittee of
the U. S. House of Representatives (Subcommittee) that is conducting
an inquiry related to the South Texas Project. Although the precise
focus and timing of the inquiry has not been identified by the
Subcommittee, it is anticipated that the Subcommittee will inquire
into matters related to HL&P's handling of employee concerns and to
issues related to the NRC's 1993 DET review of the South Texas
Project. In connection with that inquiry, HL&P has been advised that
the U. S. General Accounting Office (GAO) is conducting a review of
the NRC's inspection process as it relates to the South Texas Project
and other plants, and HL&P is cooperating with the GAO in its
investigation and with the NRC in a similar review it has initiated.
While no prediction can
-41-
be made at this time as to the ultimate outcome of these matters, the
Company and HL&P do not believe that they will have a material adverse
effect on the Company's or HL&P's financial condition or results of
operations.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February
1994, the City of Austin (Austin), one of the four co-owners of the
South Texas Project, filed suit (Austin II Litigation) against HL&P.
That suit is pending in the 152nd District Court for Harris County,
Texas, which has set a trial date for October 1995. Austin alleges
that the outages at the South Texas Project from early 1993 to early
1994 were due to HL&P's failure to perform obligations it owed to
Austin under the Participation Agreement among the four co-owners of
the South Texas Project (Participation Agreement). Austin also asserts
that HL&P breached certain undertakings voluntarily assumed by HL&P
under the terms and conditions of the Operating Licenses and Technical
Specifications relating to the South Texas Project. Austin claims that
such failures have caused Austin damages of at least $125 million due
to the incurrence of increased operating and maintenance costs, the
cost of replacement power and lost profits on wholesale transactions
that did not occur. In May 1994, the City of San Antonio (San
Antonio), another co-owner of the South Texas Project, intervened in
the litigation filed by Austin against HL&P and asserted claims
similar to those asserted by Austin. San Antonio has not identified
the amount of damages it intends to seek from HL&P. HL&P is contesting
San Antonio's intervention and has called for arbitration of San
Antonio's claim under the arbitration provisions of the Participation
Agreement. The trial court has denied HL&P's requests, but review of
these decisions is currently pending before the 1st Court of Appeals
in Houston.
In a previous lawsuit (Austin I Litigation) filed in 1983 against the
Company and HL&P, Austin alleged that it had been fraudulently induced
to participate in the South Texas Project and that HL&P had failed to
perform properly its duties as project manager. In May 1993, the
courts entered a judgement in favor of the Company and HL&P,
concluding, among other things, that the Participation Agreement did
not impose on HL&P a duty to exercise reasonable skill and care as
project manager. During the course of the Austin I Litigation, San
Antonio and Central Power and Light Company (CPL), a subsidiary of
Central and South West Corporation, two of the co-owners in the South
Texas Project, also asserted claims for unspecified damages against
HL&P as project manager of the South Texas Project, alleging HL&P
breached its duties and obligations. San Antonio and CPL requested
arbitration of their claims under the Participation Agreement. In
1992, the Company and HL&P entered into a settlement agreement with
CPL (CPL Settlement) providing for CPL's withdrawal of its demand for
arbitration. San Antonio's claims for arbitration remain pending.
Under the Participation Agreement, San Antonio's arbitration claims
will be heard by a panel of five arbitrators consisting of four
arbitrators named by each co-owner and a fifth arbitrator selected by
the four appointed arbitrators.
Although the CPL Settlement did not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL reached certain
understandings in such agreement which contemplated that: (i) CPL's
previously appointed arbitrator would be replaced by CPL; (ii)
arbitrators approved by CPL or HL&P in any future arbitrations would
be mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL would
resolve any future disputes between them concerning the South Texas
Project without resorting to the arbitration provision of the
-42-
Participation Agreement. Austin and San Antonio have asserted in the
pending Austin II Litigation that such understandings have rendered
the arbitration provisions of the Participation Agreement void and
that neither Austin nor San Antonio should be required to participate
in or be bound by such proceedings.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability insurance
coverage as required by law and periodically review available limits
and coverage for additional protection. The owners of the South Texas
Project currently maintain the maximum amount of property damage
insurance currently available through the insurance industry,
consisting of $500 million in primary property damage insurance and
excess property insurance in the amount of $2.25 billion. Under the
excess property insurance which became effective on March 1, 1995 and
under portions of the excess property insurance coverage in effect
prior to March 1, 1995, HL&P and the other owners of the South Texas
Project are subject to assessments, the maximum aggregate assessment
under current policies being $26.9 million during any one policy year.
The application of the proceeds of such property insurance is subject
to the priorities established by the NRC regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.0 billion to $8.92 billion effective in
November 1994. Owners are required under the Act to insure their
liability for nuclear incidents and protective evacuations by
maintaining the maximum amount of financial protection available from
private sources and by maintaining secondary financial protection
through an industry retrospective rating plan. The assessment of
deferred premiums provided by the plan for each nuclear incident is up
to $75.5 million per reactor subject to indexing for inflation, a
possible 5 percent surcharge (but no more than $10 million per reactor
per incident in any one year) and a 3 percent state premium tax. HL&P
and the other owners of the South Texas Project currently maintain the
required nuclear liability insurance and participate in the industry
retrospective rating plan.
There can be no assurance that all potential losses or liabilities
will be insurable, or that the amount of insurance will be sufficient
to cover them. Any substantial losses not covered by insurance would
have a material effect on HL&P's and the Company's financial
condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South
Texas Project are required by the NRC to meet minimum decommissioning
funding requirements to pay the costs of decommissioning the South
Texas Project. Pursuant to the terms of the order of the Utility
Commission in Docket No. 9850, HL&P is currently funding
decommissioning costs for the South Texas Project with an independent
trustee at an annual amount of $6 million, which is recorded in
depreciation and amortization expense. HL&P's funding level is
estimated to provide approximately $146 million, in 1989 dollars, an
amount which exceeds the current NRC minimum.
-43-
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective January 1, 1994. At December
31, 1994, the securities held in the Company's nuclear decommissioning
trust totaling $25.1 million (reflected on the Company's Consolidated
and HL&P's Balance Sheets in deferred debits and deferred credits) are
classified as available for sale. Such securities are reported on the
balance sheets at fair value, which at December 31, 1994 approximates
cost, and any unrealized gains or losses will be reported as a
separate component of common stock equity. Earnings, net of taxes and
administrative costs, are reinvested in the funds.
In May 1994, an outside consultant estimated HL&P's portion of
decommissioning costs to be approximately $318 million, in 1994
dollars. The consultant's calculation of decommissioning costs for
financial planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the
NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration
of their 40 year operating licenses. Under the terms of the Proposed
Settlement, HL&P would increase funding of decommissioning costs to an
annual amount of approximately $14.8 million consistent with such
study. While the current and projected funding levels presently exceed
minimum NRC requirements, no assurance can be given that the amounts
held in trust will be adequate to cover the actual decommissioning
costs of the South Texas Project or the assumptions used in estimating
decommissioning costs will ultimately prove to be correct.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Utility Commission initiated a proceeding
(Docket No. 12065) to determine whether HL&P's existing rates are just
and reasonable. Subsequently, the scope of the docket was expanded to
include reconciliation of HL&P's fuel costs from April 1, 1990 to July
31, 1994. The Utility Commission also initiated a separate proceeding
(Docket No. 13126) to review issues regarding the prudence of
operation of the South Texas Project from the date of commercial
operation through the present. That review would encompass the outage
at the South Texas Project during 1993 through 1994.
Hearings began in Docket No. 12065 in January 1995, and the Utility
Commission has retained a consultant to review the South Texas Project
for the purpose of providing testimony in Docket No. 13126 regarding
the prudence of HL&P's management of operation of the South Texas
Project. In February 1995, all major parties to these proceedings
signed the Proposed Settlement resolving the issues with respect to
HL&P, including the prudence issues related to operation of the South
Texas Project. Approval of the Proposed Settlement by the Utility
Commission will be required. To that end, the parties have established
procedural dates for a hearing on issues raised by the parties who are
opposed to the Proposed Settlement. A decision by the Utility
Commission on the Proposed Settlement is not anticipated before early
summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and rates would be frozen for three years, subject to certain
conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment of $218 million in the cancelled Malakoff plant
over a period not to exceed
-44-
seven years. HL&P also would increase its decommissioning expense for
the South Texas Project by $9 million per year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This
$70 million was recorded as a one-time, pre-tax charge to reconcilable
fuel revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately
17 percent below that currently in effect and would refund to
customers the balance in its fuel over-recovery account, estimated to
be approximately $180 million after giving effect to the amounts not
recoverable from ratepayers.
HL&P recovers fuel costs incurred in electric generation through a
fixed fuel factor that is set by the Utility Commission. The
difference between fuel revenues billed pursuant to such factor and
fuel expense incurred is recorded as an addition to or a reduction of
revenue, with a corresponding entry to under- or over-recovered fuel,
as appropriate. Amounts collected pursuant to the fixed fuel factor
must be reconciled periodically against actual, reasonable costs as
determined by the Utility Commission. Currently, HL&P has an
over-recovery fuel account balance that will be refunded pursuant to
the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the
Utility Commission, including issues related to the South Texas
Project, Docket No. 12065 will be remanded to an Administrative Law
Judge (ALJ) to resume detailed hearings in this docket. Prior to
reaching agreement on the terms of the Proposed Settlement, HL&P
argued that its existing rates were just and reasonable and should not
be reduced. Other parties argued that rate decreases in annual amounts
ranging from $26 million to $173 million were required and that
additional decreases might be justified following an examination of
the prudence of the management of the South Texas Project and the
costs incurred in connection with the outages at the South Texas
Project. Testimony filed by the Utility Commission staff included a
recommendation to remove from rate base $515 million of HL&P's
investment in the South Texas Project to reflect the staff's view that
such investment was not fully "used and useful" in providing service,
a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did
not result from imprudent management. HL&P also filed testimony
analyzing the extent to which regulatory issues extended the outages.
In that testimony an outside consultant retained by HL&P concluded
that the duration of the outages was controlled by both the resolution
of NRC regulatory issues as well as necessary equipment repairs
unrelated to NRC regulatory issues and that the incremental effect of
NRC regulatory issues on the duration of the outages was only 39 days
per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range
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of assumptions would result in replacement fuel costs of less than $10
million for the 39 day periods identified by HL&P's consultant and
less than $100 million for the entire length of the outages. Any fuel
costs determined to have been unreasonably incurred would not be
recoverable from customers and would be charged against the Company's
earnings.
Although the Company and HL&P believe that the Proposed Settlement is
in the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility
Commission ultimately will approve the terms of the Proposed
Settlement or (ii) in the event the Proposed Settlement is not
approved and proceedings against HL&P resumed, that the outcome of
such proceedings would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years,
the Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant
construction, including the South Texas Project. Although Utility
Commission action on those applications has been completed, judicial
review of a number of the Utility Commission orders is pending. In
Texas, Utility Commission orders may be appealed to a District Court
in Travis County, and from that Court's decision an appeal may be
taken to the Court of Appeals for the 3rd District at Austin (Austin
Court of Appeals). Discretionary review by the Supreme Court of Texas
may be sought from decisions of the Austin Court of Appeals. The
pending appeals from the Utility Commission orders are in various
stages. In the event the courts ultimately reverse actions of the
Utility Commission in any of these proceedings, such matters would be
remanded to the Utility Commission for action in light of the courts'
orders. Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and HL&P
generally are not in a position at this time to predict the outcome of
the matters on appeal or the ultimate effect that adverse action by
the courts could have on the Company and HL&P. On remand, the Utility
Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the
Utility Commission approved a non-unanimous settlement agreement
providing for a $313 million increase in HL&P's base rates,
termination of deferrals granted with respect to Unit No. 2 of the
South Texas Project and of the qualified phase-in plan deferrals
granted with respect to Unit No. 1 of the South Texas Project, and
recovery of deferred plant costs. The settlement authorized a 12.55
percent return on common equity for HL&P. Rates contemplated by the
settlement agreement were implemented in May 1991 and remain in effect
(subject to the outcome of the current rate proceeding described in
Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on
review by a District Court, and the Austin Court of Appeals affirmed
that decision on procedural grounds due to the failure of the
appellant to file the record with the court in a timely manner. On
review, the Texas
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Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility
Commission's order, which include issues regarding deferred
accounting, the treatment of federal income tax expense and certain
other matters. As to federal tax issues, a recent decision of the
Austin Court of Appeals, in an appeal involving GTE-SW (and to which
HL&P was not a party), held that when a utility pays federal income
taxes as part of a consolidated group, the utility's ratepayers are
entitled to a fair share of the tax savings actually realized, which
can include savings resulting from unregulated activities. The Texas
Supreme Court has agreed to hear an appeal of that decision, but on
points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any
disallowance that might be required if the court's ruling in the GTE
decision were applied in Docket No. 9850 would be offset by that
greater amount. However, that amount may not be sufficient if the
Austin Court of Appeals also concludes that the Utility Commission's
inclusion of deferred accounting costs in the settlement was improper.
For a discussion of the Texas Supreme Court's decision on deferred
accounting treatment, see Note 4(c). Although HL&P believes that it
could demonstrate entitlement to rate relief equal to that agreed to
in the stipulation in Docket No. 9850, HL&P cannot rule out the
possibility that a remand and reopening of that settlement would be
required if decisions unfavorable to HL&P are rendered on both the
deferred accounting treatment and the calculation of tax expense for
rate making purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the
Utility Commission granted HL&P a $227 million increase in base
revenues, allowed a 12.92 percent return on common equity, authorized
a qualified phase-in plan for Unit No. 1 of the South Texas Project
(including approximately 72 percent of HL&P's investment in Unit No. 1
of the South Texas Project in rate base) and authorized HL&P to use
deferred accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented
by HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with
deductions taken for expenses disallowed in cost of service. The court
held that the Utility Commission had failed to require that such tax
savings be passed on to ratepayers, and ordered that the case be
remanded to the Utility Commission with instructions to adjust HL&P's
cost of service accordingly. Discretionary review is being sought from
the Texas Supreme Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing
its appeal in Docket No. 6668. A separate party to this appeal,
however, has not agreed to dismiss its appeal.
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(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized
by the Utility Commission in Docket No. 8230 and was extended in
Docket No. 9010. Similar deferred accounting treatment with respect to
Unit No. 2 of the South Texas Project was authorized in Docket No.
8425. For a discussion of the deferred accounting treatment granted,
see Note 1(f).
In June 1994, the Texas Supreme Court decided the appeal of Docket
Nos. 8230 and 9010, as well as all other pending deferred accounting
cases involving other utilities, upholding deferred accounting
treatment for both carrying costs and operation and maintenance
expenses as within the Utility Commission's statutory authority and
reversed the Austin Court of Appeals decision to the extent that the
Austin Court of Appeals had rejected deferred accounting treatment for
carrying charges. Because the lower appellate court had upheld
deferred accounting only as to operation and maintenance expenses, the
Texas Supreme Court remanded Docket Nos. 8230 and 9010 to the Austin
Court of Appeals to consider the points of error challenging the
granting of deferred accounting for carrying costs which it had not
reached in its earlier consideration of the case. The Texas Supreme
Court opinion did state, however, that when deferred costs are
considered for addition to the utility's rate base in an ensuing rate
case, the Utility Commission must then determine to what extent
inclusion of the deferred costs is necessary to preserve the utility's
financial integrity. Under the terms of the Proposed Settlement, South
Texas Project deferrals will continue to be amortized under the
schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant
to the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In
June 1990, the Utility Commission ruled in a separate docket (Docket
No. 6668) that had been created to review the prudence of HL&P's
planning and construction of the South Texas Project that $375.5
million out of HL&P's $2.8 billion investment in the two units of the
South Texas Project had been imprudently incurred. That ruling was
incorporated into HL&P's 1988 and 1991 rate cases and resulted in
HL&P's recording an after-tax charge of $15 million in 1990. Several
parties appealed the Utility Commission's decision, but a District
Court dismissed these appeals on procedural grounds. The Austin Court
of Appeals reversed and directed consideration of the appeals, and the
Texas Supreme Court denied discretionary review in 1994. At this time,
no action has been taken by the appellants to proceed with the
appeals. Unless the order in Docket No. 6668 is modified or reversed
on appeal, the amount found imprudent by the Utility Commission will
be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
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(5)MALAKOFF
The scheduled in-service dates for the Malakoff units were postponed
during the 1980's as expectations of continued strong load growth were
tempered. In 1987, all developmental work was stopped and AFUDC
accruals ceased. These units have been cancelled due to the
availability of other cost effective resource options.
In Docket No. 8425, the Utility Commission allowed recovery of certain
costs associated with the cancelled Malakoff units by amortizing those
costs over ten years for rate making purposes. Such recoverable costs
were not included in rate base and, as a result, no return on
investment is being earned during the recovery period. The remaining
balance at December 31, 1994 is $34 million with a recovery period of
66 months.
Also as a result of the final order in Docket No. 8425, the costs
associated with the engineering design work for the Malakoff units
were included in rate base and are earning a return. Subsequently, in
December 1992, HL&P determined that such costs would have no future
value and reclassified $84.1 million from plant held for future use to
recoverable project costs. In 1993, an additional $7 million was
reclassified to recoverable project costs. Amortization of these
amounts began in 1993. The balance at December 31, 1994 was $65
million with a remaining recovery period of 60 months. The
amortization amount is approximately equal to the amount currently
earning a cash return in rates. The Utility Commission's decision to
allow treatment of these costs as plant held for future use has been
challenged in the pending appeal of the Docket No. 8425 final order.
See Note 4(b) for a discussion of this proceeding.
In June 1990, HL&P purchased from its then fuel supply affiliate,
Utility Fuels, Inc. (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 lignite reserves as of
December 31, 1994 of $153 million is included on the Company's
Consolidated and HL&P's Balance Sheets in plant held for future use.
HL&P anticipates that an additional $8 million of expenditures
relating to lignite reserves will be incurred in 1995 and 1996.
In Docket No. 12065, HL&P filed testimony in support of the
amortization of substantially all of its remaining investment in
Malakoff, including the portion of the engineering design costs for
which amortization had not previously been authorized and the amount
attributable to related lignite reserves which had not previously been
addressed by the Utility Commission. Under the Proposed Settlement of
Docket No. 12065, HL&P would amortize its investment in Malakoff over
a period not to exceed seven years such that the entire investment
will be written off no later than December 31, 2002. See Note 3. In
the event that the Utility Commission does not
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approve the Proposed Settlement, and 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.
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EXHIBIT 99(b)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four co-owners)
of the South Texas Project, which consists of two 1,250 megawatt nuclear
generating units. HL&P has a 30.8 percent interest in the project and
bears a corresponding share of capital and operating
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costs associated with the project. As of December 31, 1994, HL&P's
investments (net of accumulated depreciation and amortization) in the
South Texas Project and in nuclear fuel, including AFUDC, were $2.1
billion and $99 million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. Both generating units at the South Texas Project were out of
service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994.
HL&P removed the units from service in February 1993 when a problem was
encountered with certain of the units' auxiliary feedwater pumps.
In February 1995, the NRC removed the South Texas Project from its
"watch list" of plants with weaknesses that warranted increased NRC
attention. The NRC placed the South Texas Project on the "watch list" in
June 1993, following the issuance of a report by an NRC Diagnostic
Evaluation Team (DET) which conducted a review of the South Texas
Project operations.
Certain current and former employees of HL&P or contractors of HL&P have
asserted claims that their employment was terminated or disrupted in
retaliation for their having made safety-related complaints to the NRC.
Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P, and
the NRC has jurisdiction to take enforcement action against HL&P and/or
individual employees with respect to these matters. Based on its own
internal investigation, in October 1994 the NRC issued a notice of
violation and proposed a $100,000 civil penalty against HL&P in one such
case in which HL&P had terminated the site access of a former contractor
employee. In that action, the NRC also requested information relating to
possible further enforcement action in this matter against two HL&P
managers involved in such termination. HL&P strongly disagrees with the
NRC's conclusions, and has requested the NRC to give further
consideration of its notice. In February 1995, the NRC conducted an
enforcement conference with respect to that matter, but no result has
been received.
HL&P has provided documents and other assistance to a subcommittee of
the U. S. House of Representatives (Subcommittee) that is conducting an
inquiry related to the South Texas Project. Although the precise focus
and timing of the inquiry has not been identified by the Subcommittee,
it is anticipated that the Subcommittee will inquire into matters
related to HL&P's handling of employee concerns and to issues related to
the NRC's 1993 DET review of the South Texas Project. In connection with
that inquiry, HL&P has been advised that the U. S. General Accounting
Office (GAO) is conducting a review of the NRC's inspection process as
it relates to the South Texas Project and other plants, and HL&P is
cooperating with the GAO in its investigation and with the NRC in a
similar review it has initiated. While no prediction can be made at this
time as to the ultimate outcome of these matters, the Company and HL&P
do not believe that they will have a material adverse effect on the
Company's or HL&P's financial condition or results of operations.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February 1994,
the City of Austin (Austin), one of the four co-owners of the South
Texas Project, filed suit (Austin II Litigation) against HL&P. That suit
is pending in the 152nd District Court for Harris County, Texas, which
has set a trial date for October 1995. Austin alleges that the outages
at the South Texas
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Project from early 1993 to early 1994 were due to HL&P's failure to
perform obligations it owed to Austin under the Participation Agreement
among the four co-owners of the South Texas Project (Participation
Agreement). Austin also asserts that HL&P breached certain undertakings
voluntarily assumed by HL&P under the terms and conditions of the
Operating Licenses and Technical Specifications relating to the South
Texas Project. Austin claims that such failures have caused Austin
damages of at least $125 million due to the incurrence of increased
operating and maintenance costs, the cost of replacement power and lost
profits on wholesale transactions that did not occur. In May 1994, the
City of San Antonio (San Antonio), another co-owner of the South Texas
Project, intervened in the litigation filed by Austin against HL&P and
asserted claims similar to those asserted by Austin. San Antonio has not
identified the amount of damages it intends to seek from HL&P. HL&P is
contesting San Antonio's intervention and has called for arbitration of
San Antonio's claim under the arbitration provisions of the
Participation Agreement. The trial court has denied HL&P's requests, but
review of these decisions is currently pending before the 1st Court of
Appeals in Houston.
In a previous lawsuit (Austin I Litigation) filed in 1983 against the
Company and HL&P, Austin alleged that it had been fraudulently induced
to participate in the South Texas Project and that HL&P had failed to
perform properly its duties as project manager. In May 1993, the courts
entered a judgement in favor of the Company and HL&P, concluding, among
other things, that the Participation Agreement did not impose on HL&P a
duty to exercise reasonable skill and care as project manager. During
the course of the Austin I Litigation, San Antonio and Central Power and
Light Company (CPL), a subsidiary of Central and South West Corporation,
two of the co-owners in the South Texas Project, also asserted claims
for unspecified damages against HL&P as project manager of the South
Texas Project, alleging HL&P breached its duties and obligations. San
Antonio and CPL requested arbitration of their claims under the
Participation Agreement. In 1992, the Company and HL&P entered into a
settlement agreement with CPL (CPL Settlement) providing for CPL's
withdrawal of its demand for arbitration. San Antonio's claims for
arbitration remain pending. Under the Participation Agreement, San
Antonio's arbitration claims will be heard by a panel of five
arbitrators consisting of four arbitrators named by each co-owner and a
fifth arbitrator selected by the four appointed arbitrators.
Although the CPL Settlement did not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL reached certain
understandings in such agreement which contemplated that: (i) CPL's
previously appointed arbitrator would be replaced by CPL; (ii)
arbitrators approved by CPL or HL&P in any future arbitrations would be
mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL would
resolve any future disputes between them concerning the South Texas
Project without resorting to the arbitration provision of the
Participation Agreement. Austin and San Antonio have asserted in the
pending Austin II Litigation that such understandings have rendered the
arbitration provisions of the Participation Agreement void and that
neither Austin nor San Antonio should be required to participate in or
be bound by such proceedings.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
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(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas Project
maintain nuclear property and nuclear liability insurance coverage as
required by law and periodically review available limits and coverage
for additional protection. The owners of the South Texas Project
currently maintain the maximum amount of property damage insurance
currently available through the insurance industry, consisting of $500
million in primary property damage insurance and excess property
insurance in the amount of $2.25 billion. Under the excess property
insurance which became effective on March 1, 1995 and under portions of
the excess property insurance coverage in effect prior to March 1, 1995,
HL&P and the other owners of the South Texas Project are subject to
assessments, the maximum aggregate assessment under current policies
being $26.9 million during any one policy year. The application of the
proceeds of such property insurance is subject to the priorities
established by the NRC regulations relating to the safety of licensed
reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.0 billion to $8.92 billion effective in
November 1994. Owners are required under the Act to insure their
liability for nuclear incidents and protective evacuations by
maintaining the maximum amount of financial protection available from
private sources and by maintaining secondary financial protection
through an industry retrospective rating plan. The assessment of
deferred premiums provided by the plan for each nuclear incident is up
to $75.5 million per reactor subject to indexing for inflation, a
possible 5 percent surcharge (but no more than $10 million per reactor
per incident in any one year) and a 3 percent state premium tax. HL&P
and the other owners of the South Texas Project currently maintain the
required nuclear liability insurance and participate in the industry
retrospective rating plan.
There can be no assurance that all potential losses or liabilities will
be insurable, or that the amount of insurance will be sufficient to
cover them. Any substantial losses not covered by insurance would have a
material effect on HL&P's and the Company's financial condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South Texas
Project are required by the NRC to meet minimum decommissioning funding
requirements to pay the costs of decommissioning the South Texas
Project. Pursuant to the terms of the order of the Utility Commission in
Docket No. 9850, HL&P is currently funding decommissioning costs for the
South Texas Project with an independent trustee at an annual amount of
$6 million, which is recorded in depreciation and amortization expense.
HL&P's funding level is estimated to provide approximately $146 million,
in 1989 dollars, an amount which exceeds the current NRC minimum.
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective January 1, 1994. At December 31,
1994, the securities held in the Company's nuclear decommissioning trust
totaling $25.1 million (reflected on the Company's Consolidated and
HL&P's Balance Sheets in deferred debits and deferred credits) are
classified as available for sale. Such securities are reported on the
balance sheets at fair value, which at December 31, 1994 approximates
cost, and any unrealized gains or losses will be reported as a separate
component of common stock equity. Earnings, net of taxes and
administrative costs, are reinvested in the funds.
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In May 1994, an outside consultant estimated HL&P's portion of
decommissioning costs to be approximately $318 million, in 1994 dollars.
The consultant's calculation of decommissioning costs for financial
planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the
NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration
of their 40 year operating licenses. Under the terms of the Proposed
Settlement, HL&P would increase funding of decommissioning costs to an
annual amount of approximately $14.8 million consistent with such study.
While the current and projected funding levels presently exceed minimum
NRC requirements, no assurance can be given that the amounts held in
trust will be adequate to cover the actual decommissioning costs of the
South Texas Project or the assumptions used in estimating
decommissioning costs will ultimately prove to be correct.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Utility Commission initiated a proceeding (Docket
No. 12065) to determine whether HL&P's existing rates are just and
reasonable. Subsequently, the scope of the docket was expanded to
include reconciliation of HL&P's fuel costs from April 1, 1990 to July
31, 1994. The Utility Commission also initiated a separate proceeding
(Docket No. 13126) to review issues regarding the prudence of operation
of the South Texas Project from the date of commercial operation through
the present. That review would encompass the outage at the South Texas
Project during 1993 through 1994.
Hearings began in Docket No. 12065 in January 1995, and the Utility
Commission has retained a consultant to review the South Texas Project
for the purpose of providing testimony in Docket No. 13126 regarding the
prudence of HL&P's management of operation of the South Texas Project.
In February 1995, all major parties to these proceedings signed the
Proposed Settlement resolving the issues with respect to HL&P, including
the prudence issues related to operation of the South Texas Project.
Approval of the Proposed Settlement by the Utility Commission will be
required. To that end, the parties have established procedural dates for
a hearing on issues raised by the parties who are opposed to the
Proposed Settlement. A decision by the Utility Commission on the
Proposed Settlement is not anticipated before early summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and rates would be frozen for three years, subject to certain
conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment of $218 million in the cancelled Malakoff plant
over a period not to exceed seven years. HL&P also would increase its
decommissioning expense for the South Texas Project by $9 million per
year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This $70
million was recorded as a one-time, pre-tax charge to reconcilable fuel
revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately 17
percent below that currently in effect and would
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refund to customers the balance in its fuel over-recovery account,
estimated to be approximately $180 million after giving effect to the
amounts not recoverable from ratepayers.
HL&P recovers fuel costs incurred in electric generation through a fixed
fuel factor that is set by the Utility Commission. The difference
between fuel revenues billed pursuant to such factor and fuel expense
incurred is recorded as an addition to or a reduction of revenue, with a
corresponding entry to under- or over-recovered fuel, as appropriate.
Amounts collected pursuant to the fixed fuel factor must be reconciled
periodically against actual, reasonable costs as determined by the
Utility Commission. Currently, HL&P has an over-recovery fuel account
balance that will be refunded pursuant to the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the Utility
Commission, including issues related to the South Texas Project, Docket
No. 12065 will be remanded to an Administrative Law Judge (ALJ) to
resume detailed hearings in this docket. Prior to reaching agreement on
the terms of the Proposed Settlement, HL&P argued that its existing
rates were just and reasonable and should not be reduced. Other parties
argued that rate decreases in annual amounts ranging from $26 million to
$173 million were required and that additional decreases might be
justified following an examination of the prudence of the management of
the South Texas Project and the costs incurred in connection with the
outages at the South Texas Project. Testimony filed by the Utility
Commission staff included a recommendation to remove from rate base $515
million of HL&P's investment in the South Texas Project to reflect the
staff's view that such investment was not fully "used and useful" in
providing service, a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did not
result from imprudent management. HL&P also filed testimony analyzing
the extent to which regulatory issues extended the outages. In that
testimony an outside consultant retained by HL&P concluded that the
duration of the outages was controlled by both the resolution of NRC
regulatory issues as well as necessary equipment repairs unrelated to
NRC regulatory issues and that the incremental effect of NRC regulatory
issues on the duration of the outages was only 39 days per unit.
Estimates as to the cost of replacement power may vary significantly
based on a number of factors, including the capacity factor at which the
South Texas Project might be assumed to have operated had it not been
out of service due to the outages. However, HL&P believes that applying
a reasonable range of assumptions would result in replacement fuel costs
of less than $10 million for the 39 day periods identified by HL&P's
consultant and less than $100 million for the entire length of the
outages. Any fuel costs determined to have been unreasonably incurred
would not be recoverable from customers and would be charged against the
Company's earnings.
Although the Company and HL&P believe that the Proposed Settlement is in
the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility Commission
ultimately will approve the terms of the Proposed Settlement or
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(ii) in the event the Proposed Settlement is not approved and
proceedings against HL&P resumed, that the outcome of such proceedings
would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years, the
Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant construction,
including the South Texas Project. Although Utility Commission action on
those applications has been completed, judicial review of a number of
the Utility Commission orders is pending. In Texas, Utility Commission
orders may be appealed to a District Court in Travis County, and from
that Court's decision an appeal may be taken to the Court of Appeals for
the 3rd District at Austin (Austin Court of Appeals). Discretionary
review by the Supreme Court of Texas may be sought from decisions of the
Austin Court of Appeals. The pending appeals from the Utility Commission
orders are in various stages. In the event the courts ultimately reverse
actions of the Utility Commission in any of these proceedings, such
matters would be remanded to the Utility Commission for action in light
of the courts' orders. Because of the number of variables which can
affect the ultimate resolution of such matters on remand, the Company
and HL&P generally are not in a position at this time to predict the
outcome of the matters on appeal or the ultimate effect that adverse
action by the courts could have on the Company and HL&P. On remand, the
Utility Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the Utility
Commission approved a non-unanimous settlement agreement providing for a
$313 million increase in HL&P's base rates, termination of deferrals
granted with respect to Unit No. 2 of the South Texas Project and of the
qualified phase-in plan deferrals granted with respect to Unit No. 1 of
the South Texas Project, and recovery of deferred plant costs. The
settlement authorized a 12.55 percent return on common equity for HL&P.
Rates contemplated by the settlement agreement were implemented in May
1991 and remain in effect (subject to the outcome of the current rate
proceeding described in Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on review
by a District Court, and the Austin Court of Appeals affirmed that
decision on procedural grounds due to the failure of the appellant to
file the record with the court in a timely manner. On review, the Texas
Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility Commission's
order, which include issues regarding deferred accounting, the treatment
of federal income tax expense and certain other matters. As to federal
tax issues, a recent decision of the Austin Court of Appeals, in an
appeal involving GTE-SW (and to which HL&P was not a party), held that
when a utility pays federal income taxes as part of a consolidated
group, the utility's ratepayers are entitled to a fair share of the tax
savings actually realized, which can include savings resulting from
unregulated activities. The
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Texas Supreme Court has agreed to hear an appeal of that decision, but
on points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any disallowance
that might be required if the court's ruling in the GTE decision were
applied in Docket No. 9850 would be offset by that greater amount.
However, that amount may not be sufficient if the Austin Court of
Appeals also concludes that the Utility Commission's inclusion of
deferred accounting costs in the settlement was improper. For a
discussion of the Texas Supreme Court's decision on deferred accounting
treatment, see Note 4(c). Although HL&P believes that it could
demonstrate entitlement to rate relief equal to that agreed to in the
stipulation in Docket No. 9850, HL&P cannot rule out the possibility
that a remand and reopening of that settlement would be required if
decisions unfavorable to HL&P are rendered on both the deferred
accounting treatment and the calculation of tax expense for rate making
purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the Utility
Commission granted HL&P a $227 million increase in base revenues,
allowed a 12.92 percent return on common equity, authorized a qualified
phase-in plan for Unit No. 1 of the South Texas Project (including
approximately 72 percent of HL&P's investment in Unit No. 1 of the South
Texas Project in rate base) and authorized HL&P to use deferred
accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented by
HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with deductions
taken for expenses disallowed in cost of service. The court held that
the Utility Commission had failed to require that such tax savings be
passed on to ratepayers, and ordered that the case be remanded to the
Utility Commission with instructions to adjust HL&P's cost of service
accordingly. Discretionary review is being sought from the Texas Supreme
Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing its
appeal in Docket No. 6668. A separate party to this appeal, however, has
not agreed to dismiss its appeal.
(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized by
the Utility Commission in Docket No. 8230 and was extended in Docket No.
9010. Similar deferred accounting treatment with respect to Unit No. 2
of the South Texas Project was authorized in Docket No. 8425. For a
discussion of the deferred accounting treatment granted, see Note 1(f).
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In June 1994, the Texas Supreme Court decided the appeal of Docket Nos.
8230 and 9010, as well as all other pending deferred accounting cases
involving other utilities, upholding deferred accounting treatment for
both carrying costs and operation and maintenance expenses as within the
Utility Commission's statutory authority and reversed the Austin Court
of Appeals decision to the extent that the Austin Court of Appeals had
rejected deferred accounting treatment for carrying charges. Because the
lower appellate court had upheld deferred accounting only as to
operation and maintenance expenses, the Texas Supreme Court remanded
Docket Nos. 8230 and 9010 to the Austin Court of Appeals to consider the
points of error challenging the granting of deferred accounting for
carrying costs which it had not reached in its earlier consideration of
the case. The Texas Supreme Court opinion did state, however, that when
deferred costs are considered for addition to the utility's rate base in
an ensuing rate case, the Utility Commission must then determine to what
extent inclusion of the deferred costs is necessary to preserve the
utility's financial integrity. Under the terms of the Proposed
Settlement, South Texas Project deferrals will continue to be amortized
under the schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant to
the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In June
1990, the Utility Commission ruled in a separate docket (Docket No.
6668) that had been created to review the prudence of HL&P's planning
and construction of the South Texas Project that $375.5 million out of
HL&P's $2.8 billion investment in the two units of the South Texas
Project had been imprudently incurred. That ruling was incorporated into
HL&P's 1988 and 1991 rate cases and resulted in HL&P's recording an
after-tax charge of $15 million in 1990. Several parties appealed the
Utility Commission's decision, but a District Court dismissed these
appeals on procedural grounds. The Austin Court of Appeals reversed and
directed consideration of the appeals, and the Texas Supreme Court
denied discretionary review in 1994. At this time, no action has been
taken by the appellants to proceed with the appeals. Unless the order in
Docket No. 6668 is modified or reversed on appeal, the amount found
imprudent by the Utility Commission will be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
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