UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 1-7629
HOUSTON INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-1885573
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 Post Oak Park
4400 Post Oak Parkway
Houston, Texas 77027
(Address of principal executive offices) (Zip Code)
(713) 629-3000
(Registrant's telephone number, including area code)
Commission file number 1-3187
HOUSTON LIGHTING & POWER COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-0694415
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
611 Walker Avenue
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 228-9211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject
to such filing requirements for the past 90 days. Yes /X/ No / /
As of October 31, 1994, Houston Industries Incorporated had 131,296,631 shares
of common stock outstanding, including 7,895,308 shares not outstanding for
financial statement purposes. See Note 2 to the financial statements in Item 1
of this Report. As of October 31, 1994, all 1,000 authorized and outstanding
shares of Houston Lighting & Power Company's Class A voting common stock,
without par value, were held by Houston Industries Incorporated and all 100
authorized and outstanding shares of Houston Lighting & Power Company's Class B
non-voting common stock were held by Houston Industries (Delaware) Incorporated.
HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1994
This combined Form 10-Q is separately filed by Houston Industries
Incorporated and Houston Lighting & Power Company. Information contained
herein relating to Houston Lighting & Power Company is filed by Houston
Industries Incorporated and separately by Houston Lighting & Power Company
on its own behalf. Houston Lighting & Power Company makes no
representation as to information relating to Houston Industries
Incorporated (except as it may relate to Houston Lighting & Power Company)
or to any other affiliate or subsidiary of Houston Industries Incorporated.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Houston Industries Incorporated and Subsidiaries
Statements of Consolidated Income
Three Months and Nine Months Ended
September 30, 1994 and 1993 ....................... 3
Consolidated Balance Sheets
September 30, 1994 and December 31, 1993 .......... 5
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 1994 and 1993 ..... 7
Statements of Consolidated Retained Earnings
Three Months and Nine Months Ended
September 30, 1994 and 1993 ....................... 9
Notes to Consolidated Financial Statements ........ 16
Houston Lighting & Power Company
Statements of Income
Three Months and Nine Months Ended
September 30, 1994 and 1993 ....................... 10
Balance Sheets
September 30, 1994 and December 31, 1993 .......... 11
Statements of Cash Flows
Nine Months Ended September 30, 1994 and 1993 ..... 13
Statements of Retained Earnings
Three Months and Nine Months Ended
September 30, 1994 and 1993 ....................... 15
Notes to Financial Statements ..................... 16
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations ................................. 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings .......................... 37
Item 6. Exhibits and Reports on Form 8-K ........... 37
Signatures............................................ 39
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
REVENUES:
Electric............................... $1,150,946 $1,355,339 $2,977,433 $3,166,173
Cable television....................... 65,034 60,993 187,308 183,871
---------- ---------- ---------- ----------
Total .............................. 1,215,980 1,416,332 3,164,741 3,350,044
---------- ---------- ---------- ----------
EXPENSES:
Electric:
Fuel................................... 211,235 345,580 663,937 806,746
Purchased power........................ 102,225 127,705 304,680 386,628
Operation and maintenance.............. 212,507 225,525 610,447 633,627
Taxes other than income taxes.......... 65,184 51,021 191,255 175,353
Cable television operating expenses.... 39,942 36,562 118,092 110,353
Depreciation and amortization.......... 120,849 116,079 360,822 347,810
---------- ---------- ---------- ----------
Total .............................. 751,942 902,472 2,249,233 2,460,517
---------- ---------- ---------- ----------
OPERATING INCOME........................ 464,038 513,860 915,508 889,527
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Allowance for other funds used
during construction................. 1,170 981 2,579 2,769
Interest income........................ 1,174 8,355 1,591 25,093
Equity in income of cable television
partnerships........................ 8,125 8,554 23,825 23,563
Other - net............................ (8,425) (5,741) (21,758) (9,699)
---------- ---------- ---------- ----------
Total............................... 2,044 12,149 6,237 41,726
---------- ---------- ---------- ----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt............. 62,851 96,826 236,313 290,449
Other interest......................... 28,950 871 40,607 9,165
Allowance for borrowed funds used
during construction................. (1,616) (1,062) (3,433) (2,976)
Preferred dividends of subsidiary...... 8,305 8,238 24,981 26,172
---------- ---------- ---------- ----------
Total............................... 98,490 104,873 298,468 322,810
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS................ 367,592 421,136 623,277 608,443
INCOME TAXES............................ 131,624 160,727 226,486 220,770
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS............................... 235,968 260,409 396,791 387,673
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POSTEMPLOYMENT BENEFITS (NET OF
INCOME TAXES OF $4,415)................ (8,200)
---------- ---------- ---------- ----------
NET INCOME.............................. $ 235,968 $ 260,409 $ 388,591 $ 387,673
========== ========== ========== ==========
-3-
EARNINGS PER COMMON SHARE:
EARNINGS PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS............................ $ 1.92 $ 2.00 $ 3.23 $ 2.99
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS............................ (.06)
--------- --------- --------- ---------
EARNINGS PER COMMON SHARE.............. $ 1.92 $ 2.00 $ 3.17 $ 2.99
========= ========= ========= =========
DIVIDENDS DECLARED PER COMMON
SHARE............................... $ .75 $ 1.50 $ 2.25 $ 3.00
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000)................... 123,060 130,114 122,665 129,856
See Notes to Consolidated Financial Statements.
-4-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
September 30, December 31,
1994 1993
------------- -------------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Plant in service.................................... $ 11,677,330 $ 11,480,244
Construction work in progress....................... 298,405 242,661
Nuclear fuel........................................ 212,195 211,785
Plant held for future use........................... 197,710 196,330
Electric plant acquisition adjustments................ 3,166 3,166
Cable television property............................. 433,639 372,178
Other property........................................ 61,081 47,494
------------- -------------
Total........................................... 12,883,526 12,553,858
Less accumulated depreciation and amortization........ 3,617,257 3,355,616
------------- -------------
Property, plant and equipment - net............. 9,266,269 9,198,242
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents............................. 7,878 14,884
Special deposits...................................... 13 11,834
Accounts receivable:
Customers - net..................................... 16,475 4,985
Others.............................................. 31,651 11,153
Accrued unbilled revenues............................. 19,823 29,322
Fuel stock, at lifo cost.............................. 56,972 58,585
Materials and supplies, at average cost............... 165,355 166,477
Prepayments........................................... 17,751 20,432
------------- -------------
Total current assets............................ 315,918 317,672
------------- -------------
OTHER ASSETS:
Cable television franchises and intangible
assets - net........................................ 1,042,159 984,032
Deferred plant costs.................................. 645,362 664,699
Deferred debits....................................... 286,609 371,773
Unamortized debt expense and premium on
reacquired debt..................................... 164,057 169,465
Equity investment in cable television
partnerships........................................ 150,876 122,531
Equity investment in foreign electric utility......... 35,473 36,984
Regulatory asset - net................................ 238,556 246,763
Recoverable project costs............................. 103,519 118,016
------------- -------------
Total other assets.............................. 2,666,611 2,714,263
------------- -------------
Total........................................ $ 12,248,798 $ 12,230,177
============= =============
See Notes to Consolidated Financial Statements.
-5-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
September 30, December 31,
1994 1993
------------ -----------
CAPITALIZATION:
Common Stock Equity:
Common stock, no par value ............... $ 2,438,107 $ 2,415,256
Note receivable from ESOP ................ (332,489)
Unearned ESOP shares ..................... (295,973)
Retained earnings ........................ 1,303,139 1,191,230
------------- ------------
Total common stock equity ......... 3,445,273 3,273,997
------------- ------------
Preference Stock, no par value, authorized
10,000,000 shares; none outstanding
Cumulative Preferred Stock of Subsidiary,
no par value:
Not subject to mandatory redemption .... 351,345 351,354
Subject to mandatory redemption ........ 121,910 167,236
------------- ------------
Total cumulative preferred stock .. 473,255 518,590
------------- ------------
Long-Term Debt:
Debentures ............................... 548,682 548,544
Long-term debt of subsidiaries:
Electric:
First mortgage bonds ................ 3,020,261 3,019,843
Pollution control revenue bonds ..... 155,240 155,218
Other ............................... 11,944 15,010
Cable television:
Senior bank debt .................... 364,000 364,000
Senior and subordinated notes ....... 124,783 140,580
------------- ------------
Total long-term debt .............. 4,224,910 4,243,195
------------- ------------
Total capitalization ............ 8,143,438 8,035,782
------------- ------------
CURRENT LIABILITIES:
Notes payable .............................. 378,600 591,385
Accounts payable ........................... 173,892 239,814
Taxes accrued .............................. 181,318 187,503
Interest accrued ........................... 96,426 84,178
Dividends accrued .......................... 105,095 105,207
Accrued liabilities to municipalities ...... 31,124 22,589
Customer deposits .......................... 65,515 65,604
Current portion of long-term debt and
preferred stock .......................... 83,391 55,109
Other ...................................... 68,601 62,688
------------- ------------
Total current liabilities ....... 1,183,962 1,414,077
------------- ------------
DEFERRED CREDITS:
Accumulated deferred income taxes .......... 2,081,460 1,987,336
Unamortized investment tax credit .......... 419,742 434,597
Other ...................................... 420,196 358,385
------------- ------------
Total deferred credits .......... 2,921,398 2,780,318
------------- ------------
COMMITMENTS AND CONTINGENCIES
Total ........................ $ 12,248,798 $ 12,230,177
============= ============
See Notes to Consolidated Financial Statements.
-6-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
Nine Months Ended
September 30,
------------------------
1994 1993
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 388,591 $ 387,673
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............... 360,822 347,810
Amortization of nuclear fuel ................ 13,352 2,101
Deferred income taxes ....................... 64,702 204,657
Investment tax credits ...................... (14,855) (15,209)
Allowance for other funds used during
construction ............................. (2,579) (2,769)
Fuel cost (refund) and over/(under)
recovery - net ........................... 152,130 (81,540)
Equity in income of cable television
partnerships ............................. (23,825) (23,563)
Regulatory asset - net ...................... 8,207 (72,602)
Cumulative effect of change in accounting
for postemployment benefits .............. 8,200
Changes in other assets and liabilities:
Accounts receivable and accrued
unbilled revenues....................... (22,489) 250,224
Inventory ................................ 2,735 15,079
Other current assets ..................... 14,502 263
Accounts payable ......................... (65,922) (33,947)
Interest and taxes accrued ............... 10,063 5,960
Other current liabilities ................ 13,767 11,471
Other - net .............................. 47,537 53,078
--------- -----------
Net cash provided by operating
activities ................................ 954,938 1,048,686
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital and nuclear fuel
expenditures (including allowance for
borrowed funds used during construction) .... (297,861) (216,177)
Cable television additions .................... (92,706) (36,328)
Other capital expenditures .................... (22,558)
Other - net ................................... (12,678) (10,201)
--------- -----------
Net cash used in investing activities ....... (425,803) (262,706)
--------- -----------
-7-
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock .................. $ 32,796
Proceeds from first mortgage bonds .......... 743,284
Proceeds from senior bank debt .............. 20,000
Extinguishment of long-term debt ............ (477,433)
Payment of matured bonds .................... $ (19,500) (136,000)
Payment of senior bank debt ................. (238,349)
Payment of senior and subordinated notes .... (10,384) (6,390)
Payment of common stock dividends ........... (276,202) (292,122)
Decrease in notes payable - net ............. (212,785) (463,749)
Redemption of preferred stock ............... (20,000) (40,000)
Other - net ................................. 2,730 23,776
---------- ----------
Net cash used in financing activities ..... (536,141) (834,187)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........ (7,006) (48,207)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ......................................... 14,884 69,317
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....... $ 7,878 $ 21,110
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ..... $ 262,570 $ 294,412
Income taxes .............................. 136,933 85,375
See Notes to Consolidated Financial Statements.
-8-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
Balance at Beginning of Period............. $1,160,081 $1,190,903 $1,191,230 $1,254,584
Net Income for the Period.................. 235,968 260,409 388,591 387,673
---------- ---------- ---------- ----------
Total............................... 1,396,049 1,451,312 1,579,821 1,642,257
Common Stock Dividends..................... (92,910) (195,245) (276,682) (389,800)
Tax Benefit of ESOP Dividends.............. 2,124 6,136
Redemption of HL&P Preferred
Stock.................................... (402)
---------- ---------- ---------- ----------
Balance at End of Period................... $1,303,139 $1,258,191 $1,303,139 $1,258,191
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
-9-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
OPERATING REVENUES.................... $1,150,946 $1,355,339 $2,977,433 $3,166,173
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Fuel................................ 211,235 345,580 663,937 806,746
Purchased power..................... 102,225 127,705 304,680 386,628
Operation........................... 156,809 161,018 431,611 445,523
Maintenance......................... 55,698 64,507 178,836 188,104
Depreciation and amortization....... 99,571 96,500 298,175 288,932
Income taxes........................ 139,365 153,787 248,359 217,440
Other taxes......................... 65,184 51,021 191,255 175,353
---------- ---------- ---------- ----------
Total............................. 830,087 1,000,118 2,316,853 2,508,726
---------- ---------- ---------- ----------
OPERATING INCOME...................... 320,859 355,221 660,580 657,447
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Allowance for other funds used
during construction............... 1,170 981 2,579 2,769
Other - net......................... (1,494) (3,554) (7,253) (4,730)
---------- ---------- ---------- ----------
Total........................... (324) (2,573) (4,674) (1,961)
---------- ---------- ---------- ----------
INCOME BEFORE INTEREST CHARGES........ 320,535 352,648 655,906 655,486
---------- ---------- ---------- ----------
INTEREST CHARGES:
Interest on long-term debt.......... 61,565 71,352 184,964 211,810
Other interest...................... 1,189 2,526 5,938 11,547
Allowance for borrowed funds used
during construction............... (1,616) (1,062) (3,433) (2,976)
---------- ---------- ---------- ----------
Total........................... 61,138 72,816 187,469 220,381
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS............. 259,397 279,832 468,437 435,105
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS (NET OF INCOME TAXES OF
$4,415)............................. (8,200)
---------- ---------- ---------- ----------
NET INCOME............................ 259,397 279,832 460,237 435,105
DIVIDENDS ON PREFERRED STOCK.......... 8,305 8,238 24,981 26,172
---------- ---------- ---------- ----------
INCOME AFTER PREFERRED DIVIDENDS...... $ 251,092 $ 271,594 $ 435,256 $ 408,933
========== ========== ========== ==========
See Notes to Financial Statements.
-10-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
September 30, December 31,
1994 1993
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant ................................. $11,677,330 $11,480,244
Construction work in progress .................. 298,405 242,661
Plant held for future use ...................... 197,710 196,330
Nuclear fuel ................................... 212,195 211,785
Electric plant acquisition adjustments ......... 3,166 3,166
----------- -----------
Total ..................................... 12,388,806 12,134,186
Less accumulated depreciation and
amortization ................................. 3,433,716 3,194,127
----------- -----------
Property, plant and equipment - net ....... 8,955,090 8,940,059
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ...................... 229,087 12,413
Special deposits ............................... 13 11,834
Accounts receivable:
Affiliated companies ......................... 2,925 1,792
Others ....................................... 23,856 2,540
Accrued unbilled revenues ...................... 19,823 29,322
Inventory:
Fuel stock, at lifo cost ..................... 56,972 58,585
Materials and supplies, at average cost ...... 155,051 160,371
Prepayments .................................... 11,715 9,234
----------- -----------
Total current assets ...................... 499,442 286,091
----------- -----------
OTHER ASSETS:
Deferred plant costs ........................... 645,362 664,699
Deferred debits ................................ 234,057 333,620
Unamortized debt expense and premium on
reacquired debt .............................. 160,326 164,368
Regulatory asset - net ......................... 238,556 246,763
Recoverable project costs ...................... 103,519 118,016
----------- -----------
Total other assets ........................ 1,381,820 1,527,466
----------- -----------
Total ................................... $10,836,352 $10,753,616
=========== ===========
See Notes to Financial Statements.
-11-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
September 30, December 31,
1994 1993
------------ ------------
CAPITALIZATION:
Common Stock Equity:
Common stock, class A; no par value ......... $ 1,524,949 $ 1,524,949
Common stock, class B; no par value ......... 150,978 150,978
Retained earnings ........................... 2,217,434 2,028,924
----------- -----------
Total common stock equity ................. 3,893,361 3,704,851
----------- -----------
Cumulative Preferred Stock:
Not subject to mandatory redemption ......... 351,345 351,354
Subject to mandatory redemption ............. 121,910 167,236
----------- -----------
Total cumulative preferred stock .......... 473,255 518,590
----------- -----------
Long-Term Debt:
First mortgage bonds ........................ 3,020,261 3,019,843
Pollution control revenue bonds ............. 155,240 155,218
Other ....................................... 11,944 15,010
----------- -----------
Total long-term debt ...................... 3,187,445 3,190,071
----------- -----------
Total capitalization ................... 7,554,061 7,413,512
----------- -----------
CURRENT LIABILITIES:
Notes payable ................................. 171,100
Accounts payable .............................. 127,277 190,583
Accounts payable to affiliated companies ...... 12,934 8,449
Taxes accrued ................................. 197,487 187,517
Interest and dividends accrued ................ 67,709 65,238
Accrued liabilities to municipalities ......... 31,124 22,589
Customer deposits ............................. 65,515 65,604
Current portion of long-term debt and
preferred stock ............................. 51,553 44,725
Other ......................................... 68,642 63,607
----------- -----------
Total current liabilities .............. 622,241 819,412
----------- -----------
DEFERRED CREDITS:
Accumulated deferred federal income taxes ..... 1,877,648 1,798,976
Unamortized investment tax credit ............. 416,436 430,996
Other ......................................... 365,966 290,720
----------- -----------
Total deferred credits ................. 2,660,050 2,520,692
----------- -----------
COMMITMENTS AND CONTINGENCIES
Total ................................ $10,836,352 $10,753,616
=========== ===========
See Notes to Financial Statements.
-12-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
Nine Months Ended
September 30,
------------------------
1994 1993
------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................... $ 460,237 $ 435,105
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................. 298,175 288,932
Amortization of nuclear fuel ................... 13,352 2,101
Deferred income taxes .......................... 83,088 200,862
Investment tax credits ......................... (14,560) (14,919)
Allowance for other funds used during
construction ................................. (2,579) (2,769)
Fuel cost (refund) and over/(under) recovery
- net ........................................ 152,130 (81,540)
Regulatory asset - net ......................... 8,207 (72,602)
Cumulative effect net of change in accounting
for postemployment benefits .................. 8,200
Changes in other assets and liabilities:
Accounts receivable - net .................... (12,950) 116,399
Material and supplies ........................ 5,320 3,285
Fuel stock ................................... 1,612 14,391
Accounts payable ............................. (58,821) (26,197)
Interest and taxes accrued ................... 12,441 12,940
Other current liabilities .................... 14,537 38,567
Other - net .................................. 34,902 58,506
------------ ---------
Net cash provided by operating activities ........ 1,003,291 973,061
------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction) ...................... (297,861) (216,177)
Other - net ...................................... (9,808) (8,930)
------------ ---------
Net cash used in investing activities .......... (307,669) (225,107)
------------ ---------
-13-
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from first mortgage bonds ................ $ 743,284
Payment of matured bonds .......................... $ (19,500) (136,000)
Payment of dividends .............................. (272,259) (290,376)
Decrease in notes payable ......................... (171,100) (139,440)
Decrease in notes payable to affiliated
company ......................................... (19,000)
Redemption of preferred stock ..................... (20,000) (40,000)
Extinguishment of long-term debt .................. (477,433)
Other - net ....................................... 3,911 6,205
--------- ---------
Net cash used in financing activities ........... (478,948) (352,760)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............ 216,674 395,194
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..... 12,413 4,254
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $ 229,087 $ 399,448
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ........... $ 186,778 $ 226,488
Income taxes .................................... 136,889 82,142
See Notes to Financial Statements.
-14-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
Balance at Beginning of
Period ................ $ 2,048,593 $ 1,876,504 $ 2,028,924 $ 1,922,558
Net Income for the Period . 259,397 279,832 460,237 435,105
Redemption of Preferred
Stock ................. (402)
----------- ----------- ----------- -----------
Total ................. 2,307,990 2,156,336 2,489,161 2,357,261
----------- ----------- ----------- -----------
Deductions - Cash
Dividends:
Preferred ............. 8,305 8,238 24,981 26,172
Common ................ 82,251 79,995 246,746 262,986
----------- ----------- ----------- -----------
Total .............. 90,556 88,233 271,727 289,158
----------- ----------- ----------- -----------
Balance at End of Period .. $ 2,217,434 $ 2,068,103 $ 2,217,434 $ 2,068,103
=========== =========== =========== ===========
See Notes to Financial Statements.
-15-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) REGULATORY PROCEEDINGS AND LITIGATION REFERENCE
The information presented in the following Notes in this Form 10-Q
should be read in conjunction with the Houston Industries Incorporated
(Company) Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7629), filed in combined form with the Houston
Lighting & Power Company (HL&P) Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-3187) (collectively, the 1993
Combined Form 10-K), including the notes to the financial statements
included in Item 8 thereof. Notes 9, 10 and 11 of the notes to the
financial statements included in the 1993 Combined Form 10-K, as
updated by the description of developments in the regulatory and
litigation matters contained in Notes 8, 9 and 10 to these financial
statements, are incorporated herein by reference as they relate to the
Company and HL&P, respectively.
(2) COMMON STOCK
COMPANY. At September 30, 1994, and December 31, 1993, the Company had
authorized 400,000,000 shares of common stock, of which 123,360,067
and 130,658,755 shares, respectively, were outstanding. The decrease
in shares outstanding at September 30, 1994 reflects a change in
accounting related to the employee stock ownership plan (ESOP)
component of the Company's savings plan, as discussed below. For a
discussion of additional shares issued by the Company in July 1994,
see Note 12 to these financial statements.
In October 1990, the Company amended its savings plan to add a
leveraged ESOP component. The Company may use ESOP shares to
satisfy its obligation to make matching contributions under the
savings plan. For information regarding the formation of the ESOP
(including the ESOP loan), see Note 7(b) of the notes to the
financial statements included in the 1993 Combined Form 10-K.
Debt service on the ESOP loan is paid using all dividends on
shares in the ESOP, interest earnings on funds held in the ESOP
and cash contributions by the Company. Shares of the Company's
common stock are released from encumbrance of the ESOP loan based
on the proportion of debt service paid during the period.
In the third quarter of 1994, the Company adopted the American
Institute of Certified Public Accountants Statement of Position 93-6
(SOP 93-6), "Employers' Accounting for Employee
-16-
Stock Ownership Plans" effective January 1, 1994. SOP 93-6 requires
that the Company recognize benefit expense for the ESOP equal to
fair value of the ESOP shares committed to be released. Following
the adoption of SOP 93-6, the Company no longer reports the ESOP
loan as a note receivable from the ESOP or recognizes interest
income on such receivable. The Company is instead required to
establish a new contra-equity account (unearned ESOP shares)
which reflects shares not yet committed for release at their
original purchase price. As shares are committed to be released,
they are credited to the unearned ESOP shares account based on
the original purchase price of the shares. The difference between
the fair value of the shares at the time such shares are
committed for release and the original purchase price is charged
or credited to common stock. Dividends on allocated ESOP shares
are recorded as a reduction to retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt or
accrued interest on the ESOP loan. SOP 93-6 is effective only
with respect to financial statements for periods after January 1,
1994 and no restatements have been made for prior periods.
Earnings for the three and nine months ended September 30, 1994
were reduced by $.4 million and $11.8 million, respectively, as a
result of the adoption of SOP 93-6. For a discussion of the
impact of SOP 93-6 on the earnings per common share calculation,
see Notes 4 and 14 to these financial statements.
As computed under SOP 93-6, the Company's benefit expenses for the
ESOP for the three and nine months ended September 30, 1994 are
approximately $4.6 million and $13.6 million, respectively. The ESOP
shares as of September 30, 1994 and December 31, 1993 were as follows:
September 30, 1994 December 31, 1993
------------------ -----------------
Allocated Shares ............... 1,410,211 1,031,187
Unallocated Shares ............. 7,936,564 8,317,649
--------- ---------
Total ESOP Shares .............. 9,346,775 9,348,836
========= =========
Fair value of unallocated
ESOP shares................... $279,763,881 $396,128,034
HL&P. All issued and outstanding Class A voting common stock of HL&P
is held by the Company and all issued and outstanding Class B
non-voting common stock of HL&P is held by Houston Industries
(Delaware) Incorporated (Houston Industries Delaware), a wholly-owned
subsidiary of the Company.
(3) HL&P PREFERRED STOCK
At September 30, 1994, and December 31, 1993, HL&P had 10,000,000
shares of preferred stock authorized, of which 5,232,397 and 5,432,397
shares, respectively, were outstanding.
In June 1994, HL&P redeemed, at $100 per share, 200,000 shares of its
$8.50 cumulative preferred stock in satisfaction of mandatory sinking
fund requirements.
-17-
(4) EARNINGS PER COMMON SHARE
COMPANY. Earnings per common share for the Company is computed by
dividing net income by the weighted average number of shares
outstanding during the respective period.
Pursuant to the adoption of SOP 93-6, the number of weighted average
common shares outstanding for the three and nine months ended
September 30, 1994 reflects a reduction for ESOP shares not yet
committed for release to savings plan participants. In accordance with
SOP 93-6, earnings per common share for periods prior to January 1,
1994 have not been restated. The unallocated shares as of September
30, 1994 and 1993 were 7,936,564 and 8,410,108, respectively. See also
Notes 2 and 14 to these financial statements.
HL&P. Earnings per share data for HL&P is not computed since all of
its common stock is held by the Company and Houston Industries
Delaware.
(5) LONG-TERM DEBT
COMPANY. In March 1994, KBL Cable, Inc. made a scheduled principal
repayment of $10.4 million of its senior notes and senior
subordinated notes.
HL&P. In January 1994, HL&P repaid at maturity $19.5 million principal
amount of Series A collateralized medium-term notes.
(6) POSTEMPLOYMENT BENEFITS FOR THE COMPANY AND HL&P
For a description of the Company's and HL&P's adoption, effective
January 1, 1994, of Statement of Financial Accounting Standards No.
112, "Employer's Accounting for Postemployment Benefits" and the
recording of a one-time, after-tax charge to income of $8.2 million in
the first quarter of 1994, see Note 6 of the notes to the financial
statements included in the Combined Form 10-Q (Combined Form 10-Q) for
the quarter ended June 30, 1994, which Note is incorporated herein by
reference.
(7) ENVIRONMENTAL AND CABLE REGULATIONS
(a) ENVIRONMENTAL REGULATIONS. For information regarding the impact of
environmental regulations on the Company and its subsidiaries, see the
fifth paragraph of Note 8(a) of the notes to the financial statements
included in the 1993 Combined Form 10-K, which paragraph is
incorporated herein by reference.
(b) IMPACT OF THE CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT
OF 1992 ON KBLCOM INCORPORATED (KBLCOM). For a description of the 1992
Cable Act's benchmark rate rules and interim cost of service rules,
as revised in March 1994 (each of which became effective in May of
1994), see Note 7(b) of the notes to the financial statements included
in the Combined Form 10-Q for the quarter ended June 30, 1994, which
Note, as updated by this Note, is incorporated herein by reference.
-18-
KBLCOM incurred increased administrative burdens under these new
rules, and the revised benchmark rate rules resulted in some
additional reductions in KBLCOM's rates for regulated services. The
decline in revenue due to such rules is not expected to have a
material adverse effect on KBLCOM's financial position or results of
operations.
(8) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. As of September 30, 1994, HL&P's 30.8% interest in
the South Texas Project Electric Generating Station (South Texas
Project) and in nuclear fuel, including Allowance for Funds Used
During Construction, were $2.1 billion and $106.5 million,
respectively. For a further discussion regarding the South Texas
Project, see Note 9(a) of the notes to the financial statements
included in the 1993 Combined Form 10-K.
(b) CITY OF AUSTIN LITIGATION. In February 1994, the City of Austin
(Austin), one of the other owners of the South Texas Project, filed
suit against HL&P. That suit remains pending in the 152nd District
Court for Harris County, Texas. Austin alleges that the outages at the
South Texas Project 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.
As it did in litigation filed against HL&P in 1983, Austin asserts
that HL&P breached obligations HL&P owed under the Participation
Agreement to Austin, and Austin seeks a declaration that HL&P had a
duty to exercise reasonable care in the operation and maintenance of
the South Texas Project. In that earlier litigation (which was won by
HL&P at trial, affirmed on appeal and became final in 1993), the
courts concluded that the Participation Agreement did not impose on
HL&P a duty to exercise reasonable skill and care as project manager.
In April 1994, HL&P filed a motion for partial summary judgment on the
grounds that Austin's negligence claims are barred by RES JUDICATA and
collateral estoppel. Following a hearing, that motion for summary
judgment was denied, and trial has been set for October 1995.
Austin also asserts in the pending suit that certain terms of a
settlement reached in 1992 among HL&P and Central and South West
Corporation (CSW) and its subsidiary, Central Power and Light Company
(CPL), another co-owner of the South Texas Project, are invalid and
void. The Participation Agreement permits arbitration of certain
disputes among the owners, and the challenged settlement terms provide
that in any future arbitration, HL&P and CPL would each appoint an
arbitrator acceptable to the other. Austin asserts that, as a result
of this agreement, the arbitration provisions of the Participation
Agreement are void and Austin should not be required to participate in
or be bound by arbitration proceedings. HL&P, however, considers that
Austin's claims on this issue have largely been rendered moot in this
case as a result of HL&P's election not to demand arbitration of
Austin's current claims as
-19-
permitted by the Participation Agreement, but to proceed to trial in
the Harris County district court.
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, though San Antonio has not identified the amount of damages it
seeks from HL&P. In its petition, San Antonio has also adopted
arguments similar to those of Austin regarding the effect of HL&P's
settlement with CPL on the arbitration provisions of the Participation
Agreement. HL&P has opposed San Antonio's intervention on the grounds
that San Antonio has already elected to arbitrate its claims against
HL&P regarding HL&P's management of the South Texas Project in the
arbitration proceeding currently pending among HL&P, San Antonio,
Austin and CPL, and to that end, HL&P has asserted its own demand for
arbitration of San Antonio's 1993-94 outage claims pursuant to the
terms of the Participation Agreement (see Note 8(c) to these financial
statements). However, in September 1994, the Harris County district
court ruled that San Antonio may participate in the Austin litigation.
HL&P is seeking appellate review of the district court's decision.
HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims, and they intend to defend vigorously
against them. However, there can be no assurance as to the ultimate
outcome of these matters.
For more detailed information regarding the outage of the South
Texas Project, the previous litigation filed by Austin and the
settlement with CSW and CPL referred to above, see Notes 9(b), 9(c)
and 9(f) of the notes to the financial statements included in the 1993
Combined Form 10-K. Also, see Note 8(f) to these financial statements.
(c) ARBITRATION WITH CO-OWNERS. For a discussion of the arbitration
requested by San Antonio for its claim under the Participation
Agreement, see Note 8(b) to these financial statements and Note 9(c)
of the notes to the financial statements included in the 1993 Combined
Form 10-K.
The four arbitrators appointed by the owners to consider San
Antonio's claims against HL&P in this arbitration have met and are
currently considering the appointment of a fifth arbitrator which they
are to select under the terms of the arbitration provisions in the
Participation Agreement.
(d) NUCLEAR INSURANCE. For information regarding the nuclear property and
liability insurance maintained in connection with the South Texas
Project and potential assessments connected therewith, see Note 8(d)
of the notes to the financial statements included in the Combined Form
10-Q for the quarter ended June 30, 1994, which Note is incorporated
herein by reference.
Pursuant to the Price Anderson Act, the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.2 billion to $9.0 billion effective
August 29, 1994.
-20-
(e) NUCLEAR DECOMMISSIONING. For information regarding the nuclear
decommissioning costs of the South Texas Project, the estimate of such
costs as recently calculated by an outside consultant and the effect
of HL&P's pending rate proceeding on the determination of the funding
requirements for such decommissioning costs, see Note 8(e) of the
notes to the financial statements included in the Combined Form 10-Q
for the quarter ended June 30, 1994, which Note is incorporated herein
by reference, and Note 9(a) to these financial statements.
(f) 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.
At that time HL&P concluded, and the NRC confirmed, that the units
should not resume operation until HL&P had determined the root cause
of the failure, had briefed the NRC, and had taken corrective action.
The South Texas Project is currently listed on the NRC's "watch
list" of plants with "weaknesses that warrant increased NRC
attention." The decision to place the South Texas Project on the
"watch list" followed the June 1993 issuance of a report by a
Diagnostic Evaluation Team (DET) which conducted a review of the South
Texas Project and identified a number of areas requiring improvement
at the South Texas Project. Plants in this category are authorized to
operate but are subject to close monitoring by the NRC. The NRC
reviews the status of plants on the list semi-annually with the last
review conducted in June 1994 and the next review planned in early
1995.
Other proceedings concerning the South Texas Project also remain
pending. As previously reported, certain former employees and an
employee of a contractor have asserted claims that their employment
was terminated or disrupted in retaliation for their having made
safety related complaints to the NRC. In 1993, it was reported that
the NRC had referred these claims to the Department of Justice. HL&P
understands that these matters are no longer under consideration by
the Department of Justice. However, civil proceedings by the
complaining personnel and administrative proceedings by the Department
of Labor remain pending against HL&P, and the NRC 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 connection with HL&P's
termination of the site access of a former contractor employee and
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, but HL&P is not
required to respond to the NRC's proposed enforcement action until
after completion of currently pending proceedings before the
Department of Labor.
A subcommittee of the U.S. House of Representatives (Subcommittee)
has notified HL&P that the Subcommittee is conducting an inquiry
related to the South Texas Project, and HL&P has provided documents
and other assistance to the Subcommittee's staff in connection with
that
-21-
inquiry. Although the precise focus and timing of the inquiry has not
been identified by the Subcommittee, it is anticipated that the
Subcommittee will inquire into matters related to HL&P's handling of
employee concerns and to issues related to the NRC's DET review of the
South Texas Project. In connection with that inquiry, HL&P has been
advised that the U. S. General Accounting Office (GAO) has begun a
review of the NRC's inspection process as it relates to the South
Texas Project and other plants, and HL&P is cooperating with the GAO
in its investigation and with the NRC in a similar review it has
initiated.
For additional information regarding the foregoing matters,
including the DET's report on weaknesses at the South Texas Project,
increases in fuel and non-fuel expenditures relating to the outage,
the possible impact of the outage on the results of HL&P's pending
rate proceeding under Section 42 of the Texas Public Utility
Regulatory Act of 1975, as amended (PURA), involving the Company's
rates, and various civil and administrative proceedings relating to
the South Texas Project, see Notes 9(f) and 10(g) of the notes to the
financial statements included in the 1993 Combined Form 10-K. Also,
see Note 9(a) to these financial statements.
(g) LOW-LEVEL RADIOACTIVE WASTE. For information regarding the federal
Low-Level Radioactive Waste Policy Act of 1980 and the closing of the
low-level waste disposal facility at Barnwell, South Carolina, to
certain generators of nuclear waste and the utilization of a temporary
Low-Level Radioactive waste disposal facility at the South Texas
Project, see Note 8(g) of the notes to the financial statements
included in the Combined Form 10-Q for the quarter ended June 30,
1994, which Note is incorporated herein by reference.
(9) PUBLIC UTILITY COMMISSION OF TEXAS (UTILITY COMMISSION) PROCEEDINGS
Pursuant to a series of applications filed by HL&P in recent years,
the Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant
construction, including the South Texas Project. Although Utility
Commission action on those applications has been completed, judicial
review of a number of the Utility Commission orders is pending. In
Texas, Utility Commission orders may be appealed to a District Court
in Travis County, and from that court's decision an appeal may be
taken to the Court of Appeals for the 3rd District at Austin (Austin
Court of Appeals). Discretionary review by the Texas Supreme Court 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.
-22-
Judicial review is pending on the final orders of the Utility
Commission in (b) through (e) described below.
(a) DOCKET NOS. 12065 AND 13126. In February 1994, an administrative law
judge (ALJ) of the Utility Commission ruled that a proceeding should
be conducted pursuant to Section 42 of PURA in order to inquire into
HL&P's existing rates. That order subsequently was affirmed by the
Utility Commission, and in July 1994, HL&P filed data in support of
its existing rates, as required by the ALJ. In that material, HL&P
asserts that its existing rates continue to be just and reasonable and
should not be reduced by the Utility Commission. HL&P further asserts
that it can demonstrate an entitlement to an increase in rates if it
were to file for a rate increase. No such increase is currently being
sought.
In connection with the review of HL&P's current rates, the Utility
Commission will also reconcile the amounts incurred by HL&P for
fuel during the period from April 1, 1990 through July 31, 1994.
A major issue in the fuel reconciliation phase of Docket No.
12065 will be whether the incremental fuel costs incurred as a
result of outages at the South Texas Project represent reasonable
costs. A separate inquiry (Docket No. 13126) will be conducted by
the Utility Commission into the prudence of the management of the
South Texas Project. The results of this separate inquiry will be
utilized in Docket No. 12065. In July 1994, the Utility
Commission approved the hiring of a consultant to conduct the
review of the prudence in the management of the South Texas
Project in order to assist the Utility Commission staff in
preparing testimony for the prudence inquiry. Hearings regarding
the matters to be considered in connection with Docket No. 12065
are expected to begin in January 1995. No final decision by the
Utility Commission on these matters is expected before the summer
of 1995.
HL&P has filed testimony in Docket No. 13126, which testimony
concludes that the outages at the South Texas Project had not resulted
from imprudent management. HL&P has also prepared testimony analyzing
(i) the prudence of the management of the South Texas Project during
the outages and (ii) the extent to which regulatory issues, such as
those raised in the DET report, extended the outages. In that
testimony, an outside consultant retained by HL&P concludes 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 will
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.
Although HL&P and the Company believe that the Section 42 inquiry
into HL&P's rates is unwarranted and that the South Texas Project
has not been imprudently managed, there can be no assurance as to
the outcome of this proceeding, and HL&P's rates could be reduced
following a hearing. HL&P believes that any reduction in base
rates as a result of a Section 42 inquiry would take effect
prospectively. Any fuel costs that are determined to have been
-23-
unreasonably incurred would not be recoverable from customers and
would be charged against the Company's earnings.
For additional information regarding Docket No. 12065 and the fuel
reconciliation, see Notes 10(f) and 10(g) of the notes to the
financial statements included in the 1993 Combined Form 10-K.
(b) DOCKET NO. 8425. For information concerning HL&P's application for a
rate increase in Docket No. 8425 (1988 rate case) and the status of
appeals relating thereto, see Note 10(b) of the notes to the financial
statements included in the 1993 Combined Form 10-K. For information on
the decision of the Texas Supreme Court regarding deferred accounting
with respect to Docket Nos. 8230 and 9010, see Note 9(e) to these
financial statements.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 with respect to (i) the
inclusion of certain upgrades at the W. A. Parish Electric Generating
Station in HL&P's rate base, (ii) the inclusion of a portion of the
costs of HL&P's Malakoff Electric Generating Station (Malakoff)
Project, then designated as plant held for future use, in HL&P's rate
base and (iii) the application of deferred accounting of certain costs
associated with Unit No. 2 of the South Texas Project. The Austin
Court of Appeals held that the Utility Commission had failed to
require that tax savings associated with deductions taken for expenses
disallowed in cost of service 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 consistent with the ruling on the tax
issue. Discretionary review is being sought from the Texas Supreme
Court.
(c) DOCKET NO. 9850. For a discussion of Docket No. 9850 (1991 rate case),
the settlement agreement approved by the Utility Commission, and the
status of appeals relating thereto, see Note 10(c) of the notes to the
financial statements included in the 1993 Combined Form 10-K.
In August 1992, a district court in Travis County affirmed the
Utility Commission's final order in Docket No. 9850. That decision was
appealed by certain parties to the Austin Court of Appeals, raising
issues concerning the Utility Commission's approval of a non-unanimous
settlement in that docket, the Utility Commission's calculation of
federal income tax expense and the allowance of deferred accounting
reflected in the settlement. (See Note 9(e) to these financial
statements.) In August 1993, the Austin Court of Appeals affirmed the
ruling by the Travis County District Court on the procedural ground
that the appellant had not filed a statement of facts in the time
allowed.
On review of that decision in June 1994, the Texas Supreme Court
reversed the decision of the Austin Court of Appeals insofar as it
refused to consider all assertions of error by the appellant. The
Texas Supreme Court held that, even in the absence of a timely filed
statement of facts, the Austin Court of Appeals could take judicial
notice of the Utility Commission's published order and consider errors
of law that may be evident from the face of the order and do not
require reference to the administrative record. Accordingly, it
remanded the case for limited reconsideration by the Austin Court of
Appeals. For a discussion of certain other judicial decisions which
may affect the Utility Commission's
-24-
calculation of federal income tax expense in Docket No. 9850, see Note
10(b) of the notes to the financial statements included in the 1993
Combined Form 10-K.
(d) DOCKET NO. 6668. For a discussion of Docket No. 6668, the Utility
Commission's inquiry into the prudence of the planning, management and
construction of the South Texas Project, see Note 10(d) of the notes
to the financial statements included in the 1993 Combined Form 10-K.
Separate appeals are pending from Utility Commission orders in Docket
Nos. 8425 and 9850 in which the findings of the order in Docket
No. 6668 are reflected in rates. See also Notes 9(b) and 9(c) above.
(e) DOCKET NOS. 8230 AND 9010. For a description of the Utility
Commission's authorization of deferred accounting for the South Texas
Project (Docket Nos. 8230 and 9010) and appeals thereof, see Note
10(e) of the notes to the financial statements included in the 1993
Combined Form 10-K.
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, upholding deferred accounting treatment for both carrying costs
and operation and maintenance expenses as within the Utility
Commission's statutory authority and reversed the Austin Court of
Appeals decision to the extent that the Austin Court of Appeals had
rejected deferred accounting treatment for carrying charges. Because
the lower appellate court had upheld deferred accounting only as to
operating and maintenance expenses, the 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.
(10) DEFERRED PLANT COSTS
The Utility Commission authorized deferred accounting with respect to
the South Texas Project (Docket Nos. 8230 and 9010 for Unit No. 1 and
Docket No. 8425 for Unit No. 2). For a discussion of the status of
the judicial review of Docket No. 8425 and Docket Nos. 8230 and 9010,
see Notes 9(b) and 9(e) to these financial statements.
In May 1991, HL&P implemented under bond, in Docket No. 9850, a $313
million base rate increase. At that time, HL&P ceased all cost
deferrals related to the South Texas Project and began the
recovery of such amounts. These deferrals are being amortized on
a straight-line basis as allowed by the final order in Docket No.
9850. The amortization of these deferrals totaled $6.4 million
and $19.3 million for the three months and nine months ended
September 30, 1994, respectively, and is recorded on the
Company's Statements of Consolidated Income and HL&P's Statements
of Income in depreciation and amortization expense.
-25-
The following table shows the original balance of the deferrals and
the unamortized balance at September 30, 1994.
Balance at
Original September 30,
Balance 1994
--------------- ----------------
(Thousands of Dollars)
Deferred Accounting: (a)
Deferred Expenses........... $ 250,151 $ 228,538
Deferred Carrying Costs
on Plant Investment..... 399,972 365,414
-------------- ---------------
Total....................... 650,123 593,952
Qualified Phase-In Plan: (b).. 82,254 51,410
-------------- ---------------
Total Deferred Plant Costs.... $ 732,377 $ 645,362
============== ===============
------------
(a) Amortized over the estimated depreciable life of the South Texas
Project.
(b) Amortized over nine years beginning in May 1991.
As of September 30, 1994, HL&P has recorded deferred income taxes of
$196.9 million with respect to deferred accounting and $12.8 million
with respect to the deferrals associated with the qualified phase-in
plan.
The accounting for deferred plant costs is described in greater detail
in Note 11 of the notes to the financial statements included in the
1993 Combined Form 10-K.
(11) MALAKOFF
As previously disclosed, HL&P ceased all development work on Malakoff
in 1987. HL&P is no longer considering construction of the power
generating units due to the availability of other cost effective
options. Previously, the Utility Commission has addressed portions of
HL&P's investment in Malakoff and has accorded various rate treatments
for those costs, including amortization of portions of those costs.
For a further discussion of the accounting treatment of costs related
to Malakoff and the Utility Commission's previous treatment of those
costs, see Note 12 of the notes to the financial statements included
in the 1993 Combined Form 10-K, which Note is incorporated herein by
reference and Note 9(b) to these financial statements.
In Docket No. 12065 (described in Note 9(a) to these financial
statements), HL&P has filed testimony in support of the amortization
of substantially all of its remaining investment in Malakoff,
including $78.2 million attributable to
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the portion of the engineering design costs for which amortization had
not previously been authorized and $147.6 million attributable to
related lignite reserves which had not previously been addressed by
the Utility Commission. If appropriate rate treatment of these amounts
is not ultimately received, HL&P could be required to write off any
unrecoverable portions of its Malakoff investment.
(12) CABLE TELEVISION ACQUISITION
In July 1994, KBLCOM acquired the stock of three cable companies
serving approximately 48,000 customers in the Minneapolis area in
exchange for 587,646 shares of common stock of the Company. The total
purchase price of approximately $80 million included the assumption of
approximately $60 million in liabilities.
(13) RAILROAD SETTLEMENT PAYMENTS
In July 1994, HL&P contributed as equity its rights to receive certain
railroad settlement payments to HL&P Receivables, Inc. (HLPR), a
wholly-owned subsidiary of HL&P. HLPR transferred the receivables to a
trust. A bank purchased certificates evidencing a senior interest in
the trust and HLPR holds a certificate evidencing a subordinate
interest in the trust. HL&P received as a dividend on its equity
investment in HLPR approximately $66.1 million, an amount equal to
HLPR's proceeds from the sale. Consistent with the manner in which
HL&P recorded receipts of the settlement payments, HL&P recorded the
transaction as a $66.1 million reduction to reconcilable fuel expense
in July 1994. The reduction to reconcilable fuel expense had no effect
on earnings.
(14) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative of
results expected for the year due to the seasonal nature of HL&P's
business. In the opinion of management, the interim information
reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a full presentation of the results for the
interim periods. Certain amounts from the previous year have been
reclassified to conform to the 1994 presentation of consolidated
financial statements. Such reclassifications do not affect earnings.
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As a result of the third quarter 1994 adoption of SOP 93-6 effective
January 1, 1994, quarterly net income and earnings per common share
amounts for the first and second quarter of 1994 required restatement
as follows:
Earnings
Operating Net per
Quarter Ended Revenues Income Income Share(a)
------------- ---------- -------- -------- ---------
1994 (Thousands of Dollars)
----
March 31............. $ 882,101 $150,673 $ 30,175 $ 0.23
Adjustment 1(b)...... (4,277) (0.03)
Adjustment 2(c)...... 0.01
---------- -------- -------- ---------
March 31 Restated.... $ 882,101 $150,673 $ 25,898 $ 0.21
========== ======== ======== =========
June 30.............. $1,066,660 $300,797 $133,828 $ 1.02
Adjustment 1(b)...... (7,103) (0.06)
Adjustment 2(c)...... 0.07
---------- -------- -------- ----------
June 30 Restated..... $1,066,660 $300,797 $126,725 $ 1.03
========== ======== ======== ==========
(a) Quarterly earnings per share are based on the weighted average
number of shares outstanding during the quarter.
(b) Adjustment to reflect the adoption of SOP 93-6. See Note 2 to
these financial statements.
(c) Adjustment to reflect the restatement of weighted average shares
outstanding. Pursuant to the adoption of SOP 93-6, weighted
average shares outstanding were reduced by the shares in the ESOP
not yet committed to be released to savings plan participants.
Adjusted weighted average shares outstanding for the three months
ended March 31, 1994 and June 30, 1994 were 122,421,159 and
122,507,671, respectively. See Note 4 to these financial
statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPANY. Selected financial data for Houston Industries Incorporated
(Company) is set forth below:
Three Months Ended
September 30,
---------------------------- Percent
1994 1993 Change
---------- ---------- ------
(Thousands of Dollars)
Revenues .................... $1,215,980 $1,416,332 (14)
Operating Expenses .......... 751,942 902,472 (17)
Operating Income ............ 464,038 513,860 (10)
Other Income ................ 2,044 12,149 (83)
Interest and Other Charges .. 98,490 104,873 (6)
Income Taxes ................ 131,624 160,727 (18)
Net Income .................. 235,968 260,409 (9)
Nine Months Ended
September 30,
---------------------------- Percent
1994 1993 Change
---------- ---------- ------
(Thousands of Dollars)
Revenues .................... $3,164,741 $3,350,044 (6)
Operating Expenses .......... 2,249,233 2,460,517 (9)
Operating Income ............ 915,508 889,527 3
Other Income ................ 6,237 41,726 (85)
Interest and Other Charges .. 298,468 322,810 (8)
Income Taxes ................ 226,486 220,770 3
Net Income .................. 388,591 387,673 --
The Company had consolidated earnings per share of $1.92 for the third
quarter of 1994, compared to consolidated earnings per share of $2.00 for the
third quarter of 1993. Consolidated earnings per share for the nine months ended
September 30, 1994 was $3.17, compared to $2.99 per share for the same period in
1993. Earnings per share for the third quarter of 1994 compared to the same
period in 1993 decreased primarily due to the decline in earnings at Houston
Lighting & Power (HL&P) partially offset by the effects of the adoption of
Statement of Position 93-6 (SOP 93-6), both discussed below. Earnings per share
for the first nine months of 1994 were positively affected by both increased
earnings at HL&P and the adoption of SOP 93-6 when compared to the same period
in 1993.
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In the third quarter of 1994, the Company adopted the American Institute
of Certified Public Accountants SOP 93-6, "Employers' Accounting for Employee
Stock Ownership Plans" effective January 1, 1994, which reduced net income but
increased earnings per share. Earnings for the three and nine months ended
September 30, 1994 were reduced by $.4 million and $11.8 million, respectively,
as a result of the adoption of SOP 93-6. SOP 93-6 required that weighted average
common shares outstanding be reduced by the shares in the Employee Stock
Ownership Plan not yet allocated to savings plan participants (7,936,564 shares
at September 30, 1994). The net effect was an increase in consolidated earnings
per share for the third quarter and first nine months of 1994. Without the
effects of the SOP 93-6 adoption, the Company's consolidated earnings per share
for the three and nine months ended September 30,1994 would have been $1.80 and
$3.06, respectively. For a further discussion of the effects of adoption of SOP
93-6, see Notes 2, 4 and 14 to the financial statements in Item 1 of this
Report.
The Company recorded in the first quarter of 1994 a one-time, after-tax
charge to income of $8.2 million in connection with the adoption of Statement
of Financial Accounting Standards (SFAS) No.112, "Employer's Accounting for
Postemployment Benefits". The ongoing 1994 charges to income related to SFAS
No. 112 are not expected to be material.
Electric Utility Operations:
HL&P. GENERAL. Selected financial data for HL&P is set forth below:
Three Months Ended
September 30,
---------------------------- Percent
1994 1993 Change
---------- ---------- ------
(Thousands of Dollars)
Revenues .......................... $1,150,946 $1,355,339 (15)
Operating Expenses ................ 830,087 1,000,118 (17)
Operating Income .................. 320,859 355,221 (10)
Interest Charges .................. 61,138 72,816 (16)
Income After Preferred Dividends .. 251,092 271,594 (8)
Nine Months Ended
September 30,
---------------------------- Percent
1994 1993 Change
---------- ---------- ------
(Thousands of Dollars)
Revenues .......................... $2,977,433 $3,166,173 (6)
Operating Expenses ................ 2,316,853 2,508,726 (8)
Operating Income .................. 660,580 657,447 --
Interest Charges .................. 187,469 220,381 (15)
Income After Preferred Dividends .. 435,256 408,933 6
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The decrease in HL&P's earnings for the third quarter of 1994 as compared
to the same period in 1993 resulted primarily from lower residential kilowatt
hour (KWH) sales due to relatively mild weather in August and September of 1994
as compared to the hotter-than-normal weather in the third quarter of 1993,
partially offset by increased commercial sales. Additionally, a $13.0 million
franchise tax refund received in the third quarter of 1993 and reduced interest
expense resulting from previous refinancing activities contributed to the change
in earnings. HL&P's earnings for the nine month period of 1994 increased in
comparison to earnings for the nine month period of 1993 primarily due to
improved sales and reduced interest expense in 1994. The reduced interest
expense reflects the continuing effects of previous refinancing activities.
Additionally, the change in earnings between the first nine months of 1994 and
1993 was affected by the franchise tax refund received in the third quarter of
1993.
OPERATING REVENUES AND SALES. Electric operating revenues decreased
$204.4 million for the third quarter and $188.7 million for the first nine
months of 1994, compared to the same periods in 1993. The decrease in the third
quarter of 1994 was primarily due to a 3% decrease in residential KWH sales and
a decrease in reconcilable fuel revenues, partially offset by a 2% increase in
commercial KWH sales. The decrease for the first nine months of 1994 was
primarily due to a decrease in reconcilable fuel revenues, partially offset by
increases in residential and commercial KWH sales of 2% and 4%, respectively.
Base revenues for the third quarter of 1994 decreased $40.1 million compared to
1993 due mainly to differences in weather conditions between the two periods,
partially offset by a 1.7% increase in the number of customers in 1994. The
increase in base revenues of $40.1 million for the first nine months of 1994
when compared to 1993 resulted primarily from improved sales in the service
area.
FUEL AND PURCHASED POWER EXPENSES. Fuel expenses decreased $134.3 million
and $142.8 million for the third quarter and first nine months of 1994,
respectively, compared to the same periods of the previous year. These decreases
were primarily due to decreases in the unit cost of all fuels, a reduction to
reconcilable fuel expense resulting from payments HL&P received upon the
transfer of its rights to receive certain railroad settlement payments, and the
resumption of the use of nuclear fuel coinciding with the start up of Unit Nos.
1 and 2 of the South Texas Project Electric Generating Station (South Texas
Project). For information regarding the railroad settlement payments, see Note
13 to the financial statements in Item 1 of this Report. Purchased power expense
decreased $25.5 million for the third quarter and $81.9 million for the first
nine months of 1994 when compared to the same period in 1993 due to the
expiration of a purchase power contract. For information regarding reconcilable
fuel revenues and HL&P's fuel reconciliation proceeding, see Note 9(a) to the
financial statements in Item 1 of this Report and Note 10(g) of the Notes to the
Company's Consolidated and HL&P's Financial Statements included in the 1993
Combined Form 10-K.
OPERATION AND MAINTENANCE, DEPRECIATION AND AMORTIZATION, AND INTEREST
EXPENSES. Electric operation and maintenance expense for the third quarter and
first nine months of 1994 decreased $13.0 million and $23.2 million,
respectively, compared to the same periods in 1993. Depreciation and
amortization expense for the third quarter and first nine months of 1994
increased $3.1 million and $9.2 million, respectively, compared to the same
periods in 1993, primarily due to an increase in depreciable property and the
amortization, beginning in January 1994, of Demand Side
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Management expenditures. Interest expense for the third quarter and first nine
months of 1994 decreased $11.1 million and $32.5 million, respectively, compared
to the same periods in 1993, primarily due to previous refinancing activities.
RATE PROCEEDINGS, SOUTH TEXAS PROJECT AND RELATED MATTERS. HL&P is a
party to a proceeding (Docket No. 12065) pursuant to Section 42 of the Texas
Public Utility Regulatory Act of 1975, as amended (PURA), to determine whether
its existing rates are just and reasonable. Other issues to be addressed in this
and related proceedings before the Public Utility Commission of Texas (Utility
Commission) include (i) whether additional fuel-related expenses incurred during
the 1993-1994 outages at the South Texas Project should be deemed unreasonable
and not recoverable by HL&P; (ii) an inquiry into the prudence of HL&P's
operation of the South Texas Project; and (iii) whether any mismanagement of the
South Texas Project should be taken into account in considering HL&P's
appropriate rate of return in the pending Section 42 rate proceeding. No final
decisions by the Utility Commission are expected before the summer of 1995.
In a Section 42 rate proceeding involving Central Power & Light Company
(CPL), one of the South Texas Project's other owners, a staff member of the
Utility Commission recommended removal from CPL's rate base of an aggregate
amount equal to 19% of CPL's investment in the South Texas Project Unit No. 1,
16% of CPL's investment in the South Texas Project Unit No. 2, and 17.5% of
CPL's investment in the South Texas Project's common facilities. The staff
member's recommendation is based on his conclusion that these portions of the
South Texas Project are not "used and useful." The staff member contends that
because the South Texas Project has not operated at a capacity in accordance
with alleged preconstruction projections of operating capacity, the percentage
difference between those alleged projections and the units' actual performance
represents capacity not used and useful in providing service. The staff member
who made the recommendations in CPL's Section 42 proceeding is expected to
testify in HL&P's Section 42 proceeding (Docket No. 12065). HL&P intends to
vigorously oppose the adoption of such a recommendation by the Utility
Commission in HL&P's proceeding.
Although the Company and HL&P believe that the Section 42 inquiry into
HL&P's rates is unwarranted and that the South Texas Project has been prudently
managed, there can be no assurance as to the outcome of this proceeding, and
HL&P's rates could be reduced following such a hearing. HL&P believes, however,
that any reduction in base rates as a result of a Section 42 inquiry would take
effect prospectively.
For additional information concerning these and other related matters
(including the United States Nuclear Regulatory Commission (NRC) diagnostic
evaluation of the South Texas Project and the NRC's listing of the South Texas
Project on the "watch list" as well as litigation on administrative proceedings
involving the South Texas Project), see Notes 8, 9(a), and 11 to the financial
statements in Item 1 of this Report.
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Cable Television Operations:
KBLCOM. KBLCOM Incorporated (KBLCOM), the Company's cable television
subsidiary, experienced a loss, before long-term financing cost with parent, of
$2.5 million in the third quarter of 1994 compared to a loss of $7.2 million for
the same period in 1993. For the nine months ended September 30, 1994, KBLCOM
experienced a loss of $8.6 million compared to $11.4 million for the same period
in the prior year.
KBLCOM's results of operations for the third quarter of 1994 improved
from the third quarter of 1993 due to higher revenues resulting from the
addition of approximately 86,000 customers, including 48,000 from the July 1994
cable television acquisition. For a discussion of the cable television
acquisition, see Note 12 to the financial statements in Item 1 of this Report.
This growth was partially offset by the introduction of lower rates for basic
service mandated by the Cable Television Consumer Protection and Competition Act
of 1992 (1992 Cable Act). KBLCOM's results of operations for the first nine
months of 1994 improved, when compared to the same period of 1993, due to a
one-time charge in 1993 of $6.9 million resulting from a 1% increase in the
corporate tax rate. This increase was partially offset by the effects of the
mandatory rate reduction noted above, as well as, higher operating expenses and
higher depreciation and amortization costs.
REVENUES AND EXPENSES. Revenues for the third quarter and first nine
months of 1994 increased $4.0 million or 6.6% and $3.4 million or 1.9%,
respectively, compared to the same periods in 1993. Operating expenses for the
third quarter and first nine months of 1994 increased $3.4 million or 9.2% and
$7.7 million or 7.0%, respectively, compared to the same periods in 1993.
Operating margins (revenue less operating expenses exclusive of depreciation and
amortization) decreased from 40% to 39% for the third quarter of 1993 and 1994,
respectively, and from 40% to 37% for the nine months ended September 30, 1993
and 1994, respectively. Depreciation and amortization expense for the third
quarter and nine months ended September 30, 1994 increased $1.7 million or 8.8%
and $3.8 million or 6.5%, respectively, compared to the same periods in 1993.
KBLCOM's equity interest in the pre-tax earnings of its jointly-owned cable
television partnership, Paragon Communications (Paragon), for the third quarter
of 1994 was $8.2 million, a decrease of $.3 million or 3.7% from the third
quarter of 1993. KBLCOM's share of Paragon's earnings for the nine months ended
September 30, 1994 was $23.9 million, an increase of $.1 million or .5% over the
same periods of the previous year.
Basic service revenues for the third quarter of 1994 increased $1.5
million or 3.7% while they decreased $3.4 million or 2.7% for the nine months
ended September 30, 1994 compared to the same periods of the previous year. The
decline was due to the regulation (commencing in the third quarter of 1993) of
basic service rates under the 1992 Cable Act. This decrease was partially offset
by the addition of approximately 86,000 customers (including 48,000 acquired in
the cable television acquisition) from the third quarter of 1993. At September
30, 1994 and 1993, KBLCOM operated systems serving approximately 678,000 and
592,000 basic subscribers, respectively.
Premium service revenues for the quarter and nine months ended September
30, 1994 increased $1.1 million or 11.4% and $2.1 million or 7.1%, respectively,
compared to the same periods in the previous year due primarily to the
additional revenue derived from the cable television acquisition and increased
sales of premium products.
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Pay-per-view revenues for the third quarter of 1994 were unchanged from
the same period of the prior year. For the nine months ended September 30, 1994,
pay-per-view revenues decreased $.3 million or 3.4% compared to the same period
of the previous year.
Ancillary revenues including advertising and installation fees for the
quarter and nine months ended September 30, 1994 increased $1.4 million or 18.1%
and $5.0 million or 23.2%, respectively, compared to the same periods of the
previous year.
1992 CABLE ACT. In October 1992, the 1992 Cable Act became law. The 1992
Cable Act significantly revised various provisions of the Cable Communications
Policy Act of 1984. For a further discussion regarding the 1992 Cable Act, see
"Business-Business of KBLCOM - Regulation" in Item 1 of the 1993 Combined Form
10-K, Item 5 of Part II of the Combined Form 10-Q filed for the quarter ended
March 31, 1994 and Note 7(b) to the financial statements in Item 1 of this
Report.
Regulations issued under the 1992 Cable Act are lengthy and complex.
KBLCOM has adjusted its rates for regulated services in accordance with these
rules. Due to continuing ambiguity and uncertainty in the enforcement of the
1992 Cable Act, KBLCOM's basic, tier, equipment and installation rates may be
further reduced. The decline in revenue due to such rules is not expected to
have a material adverse effect on KBLCOM's financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company:
GENERAL. The Company's cash requirements stem primarily from operating
expenses, capital expenditures, payment of common stock dividends, payment of
preferred stock dividends of subsidiary and interest and principal payments on
debt. Net cash provided by operating activities totaled $954.9 million for the
nine months ended September 30, 1994.
Net cash used in investing activities for the nine months ended September
30, 1994, totaled $425.8 million, primarily due to electric capital and nuclear
fuel expenditures of $297.9 million, cable television additions of $92.7 million
and other capital expenditures of $22.6 million.
Financing activities for the nine months of 1994 resulted in a net cash
outflow of $536.1 million. The Company's primary financing activities include
the repayment of short-term borrowings, the redemption of preferred stock, the
payment of dividends and the repayment of matured long-term debt. For further
information with respect to these matters, reference is made to Notes 3 and 5 to
the financial statements in Item 1 of this Report.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY. The Company has registered
with the Securities and Exchange Commission (SEC) $250 million of debt
securities which remain unissued. Proceeds from any sales of these securities
are expected to be used for general corporate purposes including investments in
and loans to subsidiaries.
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The Company also has registered with the SEC five million shares of its
common stock. Proceeds from the sale of these securities could be used for
general corporate purposes, including, but not limited to, the redemption,
repayment or retirement of outstanding indebtedness of the Company or the
advance or contribution of funds to one or more of the Company's subsidiaries to
be used for their general corporate purposes, including, without limitation, the
redemption, repayment or retirement of indebtedness or preferred stock.
The Company's outstanding commercial paper at September 30, 1994, was
approximately $378.6 million, which is supported by a $600 million bank credit
facility.
RATIOS OF EARNINGS TO FIXED CHARGES. The Company's ratios of earnings to
fixed charges for the nine and twelve months ended September 30, 1994 were 2.95
and 2.56, respectively. The Company believes that the ratio for the nine-month
period is not necessarily indicative of the ratio for a twelve-month period due
to the seasonal nature of HL&P's business.
Electric Utility:
HL&P. GENERAL. HL&P's cash requirements stem primarily from operating
expenses, capital expenditures, payment of dividends and interest and principal
payments on debt. HL&P's net cash provided by operating activities for the first
nine months of 1994 totaled $1.0 billion. In July 1994, HL&P contributed as
equity its rights to receive certain railroad settlement payments to HL&P
Receivables, Inc., a wholly-owned subsidiary of HL&P. Following the transfer of
such receivables to a trust, HL&P received $66.1 million, which was recorded as
a reduction to its reconcilable fuel expense in July 1994. The reduction to
reconcilable fuel expense had no effect on earnings. For a further discussion
of this transaction, see Note 13 to the financial statements in Item 1 of this
Report.
Net cash used in HL&P's investing activities for the first nine months of
1994 totaled $307.7 million. HL&P's capital and nuclear fuel expenditures
(excluding Allowance for Funds Used During Construction) for the first nine
months of 1994 totaled $297.9 million out of the $478 million annual budget.
HL&P expects to finance its remaining 1994 capital expenditures through funds
generated internally from operations.
HL&P's financing activities for the first nine months of 1994 resulted in
a net cash outflow of approximately $478.9 million. Included in these activities
were the payment of dividends, repayment of short-term borrowings, the
redemption of preferred stock, and the repayment of matured long-term debt. For
further information with respect to these matters, reference is made to Notes 3
and 5 to the financial statements in Item 1 of this Report.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY. HL&P has registered with the
SEC $230 million aggregate liquidation value of preferred stock and $580 million
aggregate principal amount of debt securities that may be issued as first
mortgage bonds and/or as debt securities collateralized by first mortgage bonds.
Proceeds from any sales of these securities could be used for general corporate
purposes including the purchase, redemption (to the extent permitted by the
terms of the outstanding securities), repayment or retirement of HL&P's
outstanding indebtedness or preferred stock.
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At September 30, 1994, HL&P had approximately $229 million in cash and
cash equivalents invested in short-term investments. In addition, HL&P has a
commercial paper program supported by a bank line of credit of $400 million.
HL&P had no commercial paper outstanding at September 30, 1994.
RATIOS OF EARNINGS TO FIXED CHARGES. HL&P's ratios of earnings to fixed
charges for the nine and twelve months ended September 30, 1994, were 4.58 and
3.91, respectively. HL&P's ratios of earnings to fixed charges and preferred
dividends for the nine and twelve months ended September 30, 1994, were 3.84 and
3.30, respectively. HL&P believes that the ratios for the nine-month period are
not necessarily indicative of the ratios for a twelve-month period due to the
seasonal nature of HL&P's business.
Cable Television:
KBLCOM. GENERAL. KBLCOM's cash requirements stem primarily from
operating expenses, capital expenditures, and interest and principal payments
on debt. KBLCOM's net cash provided by operating activities was $35.5 million
for the nine months ended September 30, 1994.
Net cash used in KBLCOM's investing activities for the nine months ended
September 30, 1994 totaled $57.6 million, primarily due to cable television
additions of $51.0 million. These amounts were financed principally through
internally generated funds and intercompany borrowings.
KBLCOM's financing activities for the nine months ended September 30,
1994 resulted in a net cash inflow of $22.1 million. Included in these
activities were the reduction of third party debt, and an increase in borrowings
from the Company.
The Company has engaged an investment banking firm to assist in finding a
strategic partner or investor for KBLCOM in the telecommunications industry.
In July 1994, KBLCOM acquired the stock of three cable companies serving
approximately 48,000 customers in the Minneapolis area in exchange for 587,646
shares of common stock of the Company. The total purchase price of approximately
$80 million included the assumption of approximately $60 million in liabilities.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY. In March 1994, KBL Cable,
Inc. (KBL Cable) reduced its outstanding indebtedness by $10.4 million through
scheduled principal payments. Additional borrowings under KBL Cable's bank
facilities are subject to certain covenants which relate primarily to the
maintenance of certain financial ratios, principally debt to cash flow and
interest coverages. KBL Cable presently is in compliance with such covenants.
KBLCOM's cash requirements for the remainder of 1994 are expected to be met
primarily through operations and intercompany borrowings.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the
Company and its subsidiaries, including HL&P, reference is made
to the information set forth in Item 1 of Part II of the Combined
Form 10-Q for the quarters ended March 31, 1994 and June 30,
1994, and Item 3 of the 1993 Combined Form 10-K and Notes 9, 10
and 11 to the Company's financial statements in Item 8 of the
1993 Combined Form 10-K, as updated by the description of
developments in regulatory and litigation matters contained in
Notes 8, 9 and 10 of the Notes in Part 1 to the financial
statements of this Report, all of which are incorporated herein
by reference.
In October 1994, the United States Court of Appeals for
the Fifth Circuit affirmed a district court's decision granting
summary judgment in favor of the Company and HL&P and dismissing
a lawsuit filed by former HL&P employees who claimed their
employment had been terminated in violation of the WORKER
ADJUSTMENT AND RETRAINING NOTIFICATION ACT.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
HOUSTON INDUSTRIES INCORPORATED:
Exhibit 11 - Computation of Earnings per Common Share and Common
Equivalent Share.
Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a) - Notes 8(a), 9, 10, 11 and 12 of the Notes to the
Consolidated Financial Statements included on pages 83
through 97 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 (File No. 1-7629).
Exhibit 99(b) - Part I, Item 3 - Legal Proceedings included on pages
37 and 38 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 (File No. 1-7629).
Exhibit 99(c) - Part II, Item 1 - Legal Proceedings included on
pages 31 and 32 of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994 (File
No. 1-7629).
Exhibit 99(d) - Part II, Item 1 - Legal Proceedings included on page
35 of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994 (File No. 1-7629).
Exhibit 99(e) - Notes 6, 7(b), 8(d), 8(e) and 8(g) of the Notes to
the Consolidated Financial Statements included on pages
17 through 20 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 (File No.
1-7629).
Exhibit 99(f) - Second Amendment to Houston Industries Incorporated
Savings Plan as Amended and Restated effective January
1, 1994, effective as of January 1, 1994.
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HOUSTON LIGHTING & POWER COMPANY:
Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges
and Ratios of Earnings to Fixed Charges and Preferred
Dividends.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a) - Notes 8(a), 9, 10, 11 and 12 of the Notes to the
Financial Statements included on page 104 of HL&P's
Annual Report on Form 10-K for the year ended December
31, 1993 (File No. 1-3187) (incorporated by reference
to Exhibit 99(a) to the Quarterly Report on Form 10-Q
of the Company for the quarter ended September 30, 1994
(File No. 1-7269).)
Exhibit 99(b) - Part I, Item 3 - Legal Proceedings included on pages
37 and 38 of HL&P's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-3187)
(incorporated by reference to Exhibit 99(b) to the
Quarterly Report on Form 10-Q of the Company for the
quarter ended September 30, 1994 (File No. 1-7269).)
Exhibit 99(c) - Part II, Item 1 - Legal Proceedings included on
pages 31 and 32 of HL&P's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994 (File No. 1-3187)
(incorporated by reference to Exhibit 99(c) to the
Quarterly Report on Form 10-Q of the Company for the
quarter ended September 30, 1994 (File No. 1-7269).)
Exhibit 99(d) - Part II, Item 1 - Legal Proceedings included on page
35 of HL&P's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994 (File No. 1-7629)
(incorporated by reference to Exhibit 99(d) to the
Quarterly Report on Form 10-Q of the Company for the
quarter ended September 30, 1994 (File No. 1-7269).)
Exhibit 99(e) - Notes 6, 7(b), 8(d), 8(e) and 8(g) of the Notes to
the Financial Statements included on pages 17 through
20 of HL&P's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994 (File No. 1-7629)
(incorporated by reference to Exhibit 99(e) to the
Quarterly Report on Form 10-Q of the Company for the
quarter ended September 30, 1994 (File No. 1-7269).)
(b) Reports on Form 8-K.
None.
-38-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HOUSTON INDUSTRIES INCORPORATED
(Registrant)
/s/ Mary P. Ricciardello
Mary P. Ricciardello
Comptroller and Principal
Accounting Officer
Date: November 11, 1994
-39-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HOUSTON LIGHTING & POWER COMPANY
(Registrant)
/s/ Ken W. Nabors
Ken W. Nabors
Vice President and Comptroller
and Principal Accounting Officer
Date: November 11, 1994
-40-
Exhibit 11
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
Primary Earnings Per Share:
(1) Weighted average shares of
common stock outstanding....... 123,060,083 130,114,095 122,665,312 129,856,442
(2) Effect of issuance of shares
from assumed exercise of
stock options
(treasury stock method)........ (51,776) 4,738 (43,374) 3,294
------------ ------------ ------------ ------------
(3) Weighted average shares........ 123,008,307 130,118,833 122,621,938 129,859,736
============ ============ ============ ============
(4) Net income..................... $ 235,968 $ 260,409 $ 388,591 $ 387,673
(5) Primary earnings per share
(line 4/line 3)................ $ 1.92 $ 2.00 $ 3.17 $ 2.99
Fully Diluted Earnings Per Share:
(6) Weighted average shares per
computation on line 3 above.... 123,008,307 130,118,833 122,621,938 129,859,736
(7) Shares applicable to options
included on line 2 above....... 51,776 (4,738) 43,374 (3,294)
(8) Dilutive effect of stock
options based on the average
price for the period or period-
end price, whichever is higher,
of $35.25 and $46.63 for the
third quarter of 1994 and 1993,
respectively, and $36.39 and
$46.63 for the first nine months
of 1994 and 1993, respectively
(treasury stock method)........ (50,426) 4,870 (43,374) 4,870
------------ ------------ ------------ ------------
(9) Weighted average shares........ 123,009,657 130,118,965 122,621,938 129,861,312
============ ============ ============ ============
(10) Net income..................... $ 235,968 $ 260,409 $ 388,591 $ 387,673
(11) Fully diluted earnings per
share (line 10/line 9)......... $ 1.92 $ 2.00 $ 3.17 $ 2.99
Notes:
These calculations are submitted in accordance with Regulation S-K item 601(b)
(11) although it is not required for financial presentation disclosure per
footnote 2 to paragraph 14 of Accounting Principles Board (APB) Opinion No. 15
because it does not meet the 3% dilutive test.
The calculations for the three and nine months ended September 30, 1994 are
submitted in accordance with Regulation S-K item 601(b) (11) although they are
contrary to paragraphs 30 and 40 of APB No. 15 because they produce
anti-dilutive results.
Three and nine months ended September 30, 1994 reflect the reduction of weighted
average common shares outstanding resulting from the adoption of Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans"
effective January 1, 1994.
EXHIBIT 12
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
Nine Twelve
Months Ended Months Ended
September 30, 1994 September 30, 1994
------------------ ------------------
Fixed Charges as Defined:
(1) Interest on Long-Term Debt .... $ 236,313 $ 325,954
(2) Other Interest ................ 40,607 43,806
(3) Preferred Dividends Factor
of Subsidiary (line 12) .... 39,220 51,920
(4) Interest Component of Rentals
Charged to Operating Expense 2,947 4,021
--------- -----------
(5) Total Fixed Charges ........... $ 319,087 $ 425,701
========= ===========
Earnings as Defined:
(6) Income Before Cumulative Effect
of Change in Accounting for
Postemployment Benefits .... $ 396,791 $ 425,208
(7) Income Taxes .................. 226,486 236,805
(8) Fixed Charges (line 5) ........ 319,087 425,701
--------- -----------
(9) Earnings Before Income Taxes
and Fixed Charges .......... $ 942,364 $ 1,087,714
========= ===========
Preferred Dividends Factor of
Subsidiary:
(10) Preferred Stock Dividends of
Subsidiary ................. $ 24,981 $ 33,282
(11) Ratio of Pre-Tax Income to
Net Income (line 6 plus
line 7 divided by line 6) .. 1.57 1.56
--------- -----------
(12) Preferred Dividends Factor of
Subsidiary (line 10 times
line 11) ................... $ 39,220 $ 51,920
========= ===========
Ratio of Earnings to Fixed Charges
(line 9 divided by line 5) ......... 2.95 2.56
UT
0000202131
HOUSTON INDUSTRIES INC
1,000
9-MOS
DEC-31-1994
SEP-30-1994
PER-BOOK
8,955,090
497,528
315,918
931,971
1,548,291
12,248,798
2,142,134
0
1,303,139
3,445,273
121,910
351,345
4,213,921
0
0
378,600
33,641
45,700
10,989
4,050
3,643,369
12,248,798
3,164,741
226,486
2,249,233
2,249,233
915,508
6,237
921,745
273,487
413,572
24,981
388,591
276,682
184,964
954,938
3.17
3.17
Includes cumulative effect of change in accounting for postemployment
benefits of $8,200.
Total annual interest charges on HL&P bonds for year-to-date 9/30/94.
Reflects the reduction of weighted average common shares outstanding
resulting from the adoption of Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" effective January 1, 1994.
EXHIBIT 99(a)
(8) COMMITMENTS AND CONTINGENCIES
(a) HL&P. HL&P has various commitments for capital expenditures, fuel,
purchased power, cooling water and operating leases. Commitments in
connection with HL&P's capital program are generally revocable by HL&P
subject to reimbursement to manufacturers for expenditures incurred or
other cancellation penalties. HL&P's other commitments have various
quantity requirements and durations. However, if these requirements
could not be met, various alternatives are available to mitigate the
cost associated with the contracts' commitments.
HL&P's capital program (exclusive of AFUDC) is presently estimated to
cost $478 million in 1994, $381 million in 1995 and $418 million in
1996. These amounts do not include expenditures on projects for which
HL&P expects to be reimbursed by customers or other parties.
-83-
HL&P has entered into several long-term coal, lignite and natural gas
contracts which have various quantity requirements and durations.
Minimum obligations for coal and transportation agreements are
approximately $167 million in 1994, and $165 million in 1995 and 1996.
In addition, the minimum obligations under the lignite mining and lease
agreements will be approximately $14 million annually during the
1994-1996 period. HL&P has entered into several gas purchase agreements
containing contract terms in excess of one year which provide for
specified purchase and delivery obligations. Minimum obligations for
natural gas purchase and natural gas storage contracts are approximately
$57.4 million in 1994, $58.9 million in 1995 and $60.5 million in 1996.
Collectively, the gas supply contracts included in these figures could
amount to 11% of HL&P's annual natural gas requirements. The Utility
Commission's rules provide for recovery of the coal, lignite and natural
gas costs described above through the energy component of HL&P's
electric rates. Nuclear fuel costs are also included in the energy
component of HL&P's electric rates based on the cost of nuclear fuel
consumed in the reactor.
HL&P has commitments to purchase firm capacity from cogenerators of
approximately $145 million in 1994, $32 million in 1995 and $22 million
in 1996. The Utility Commission's rules allow recovery of these costs
through HL&P's base rates for electric service and additionally
authorize HL&P to charge or credit customers for any variation in actual
purchased power cost from the cost utilized to determine its base rates.
In the event that the Utility Commission, at some future date, does not
allow recovery through rates of any amount of purchased power payments,
the three principal firm capacity contracts contain provisions allowing
HL&P to suspend or reduce payments and seek repayment for amounts
disallowed.
In November 1990, the Clean Air Act was extensively amended by Congress.
HL&P has already made an investment in pollution control facilities, and
all of its generating facilities currently comply in all material
respects with sulfur dioxide emission standards established by the
legislation. Provisions of the Clean Air Act dealing with urban air
pollution required establishing new emission limitations for nitrogen
oxides from existing sources. The cost of modifications necessary to
reduce nitrogen oxide emissions from existing sources has been estimated
at $29 million in 1994 and $10.5 million in 1995. In addition,
continuous emission monitoring regulations are anticipated to require
expenditures of $12 million in 1994 and $2 million in 1995. Capital
expenditures are expected to total $71 million for the years 1994
through 1996.
The Energy Policy Act of 1992, which became law in October 1992,
includes a provision that assesses a fee upon domestic utilities having
purchased enrichment services from the Department of Energy before
October 22, 1992. This fee is to cover a portion of the cost to
decontaminate and decommission the enrichment facilities. It is
currently estimated that the assessment to the South Texas Project
Electric Generating Station (South Texas Project) will be approximately
$4 million in 1994 and approximately $2 million each year thereafter
(subject to escalation for inflation), of which HL&P's share is 30.8%.
This assessment will continue until the earlier of 15 years or when
$2.25 billion (adjusted for inflation) has been collected from domestic
utilities. Based on HL&P's actual payment of $579,810 in 1993, it
recorded an estimated liability of $8.7 million.
HL&P's service area is heavily dependent on oil, gas, refined products,
petrochemicals and related business. Significant adverse events
affecting these industries would negatively impact the revenues of the
Company and HL&P.
-84-
(9) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is project manager and one of four co-owners in
the South Texas Project, which consists of two 1,250 megawatt nuclear
generating units. Unit Nos. 1 and 2 of the South Texas Project achieved
commercial operation in August 1988 and June 1989, respectively. Each
co-owner funds its own share of capital and operating costs associated
with the plant, with HL&P's interest in the project being 30.8%. HL&P's
share of the operation and maintenance expenses is included in electric
operation and maintenance expenses on the Company's Statements of
Consolidated Income and in the corresponding operating expense amounts
on HL&P's Statements of Income.
As of December 31, 1993, HL&P's investments (net of accumulated
depreciation and amortization) in the South Texas Project and in nuclear
fuel, including AFUDC, were $2.1 billion and $119 million, respectively.
(b) CITY OF AUSTIN LITIGATION. In 1983, the City of Austin (Austin), one of
the four co-owners of the South Texas Project, filed a lawsuit against
the Company and HL&P alleging that it was fraudulently induced to
participate in the South Texas Project and that HL&P failed to perform
properly its duties as project manager. After a jury trial in 1989,
judgment was entered in favor of HL&P, and that judgment was affirmed on
appeal. In May 1993, following the expiration of Austin's rights to
appeal to the United States Supreme Court, the judgment in favor of the
Company and HL&P became final.
On February 22, 1994, Austin filed a new suit against HL&P. In that
suit, filed in the 164th District Court for Harris County, Texas, Austin
alleges that the outages at the South Texas Project since February 1993
are due to HL&P's failure to perform obligations it owed to Austin under
the Participation Agreement among the four co-owners of the South Texas
Project (Participation Agreement). Austin asserts that such failures
have caused Austin damages of at least $125 million, which are
continuing, due to the incurrence of increased operating and maintenance
costs, the cost of replacement power and lost profits on wholesale
transactions that did not occur. Austin states that it will file a
"more detailed" petition at a later date. For a discussion of the 1993
outage, see Note 9(f).
-85-
As it did in the litigation filed against HL&P in 1983, Austin asserts
that HL&P breached obligations HL&P owed under the Participation
Agreement to Austin, and Austin seeks a declaration that HL&P had as
duty to exercise reasonable care in the operation and maintenance of the
South Texas Project. In that earlier litigation, however, the courts
concluded that the Participation Agreement did not impose on HL&P a duty
to exercise reasonable skill and care as Project Manager.
Austin also asserts in its new suit that certain terms of a settlement
reached in 1992 among HL&P and Central and South West Corporation (CSW)
and its subsidiary, Central Power and Light Company (CPL), are invalid
and void. The Participation Agreement permits arbitration of certain
disputes among the owners, and the challenged settlement terms provide
that in any future arbitration, HL&P and CPL would each appoint an
arbitrator acceptable to the other. Austin asserts that, as a result of
this agreement, the arbitration provisions of the Participation
Agreement are void and Austin should not be required to participate in
or be bound by arbitration proceedings; alternatively, Austin asserts
that HL&P's rights with respect to CPL's appointment of an arbitrator
should be shared with all the owners or canceled, and Austin seeks
injunctive relief against arbitration of its dispute with HL&P. For a
further discussion of the settlement among HL&P, CSW and CPL, see Note
9(c) below.
HL&P and the Company do not believe there is merit to Austin's claims,
and they intend to defend vigorously against them. However, there can
be no assurance as to the ultimate outcome of this matter.
(c) ARBITRATION WITH CO-OWNERS. During the course of the litigation filed
by Austin in 1983, the City of San Antonio (San Antonio) and CPL, the
other two co-owners in the South Texas Project, asserted claims for
unspecified damages against HL&P as project manager of the South Texas
Project, alleging HL&P breached its duties and obligations. San Antonio
and CPL requested arbitration of their claims under the Participation
Agreement. This matter was severed from the Austin litigation and is
pending before the 101st District Court in Dallas County, Texas.
The 101st District Court ruled that the demand for arbitration is valid
and enforceable under the Participation Agreement, and that ruling has
been upheld by appellate courts. Arbitrators were appointed by HL&P and
each of the other co-owners in connection with the District Court's
ruling. The Participation Agreement provides that the four appointed
arbitrators will select a fifth arbitrator, but that action has not yet
occurred.
In 1992, the Company and HL&P entered into a settlement with CPL and
CSW with respect to various matters including the arbitration and
related legal proceedings. Pursuant to the settlement, CPL withdrew its
demand for arbitration under the Participation Agreement, and the
Company, HL&P, CSW and CPL dismissed litigation associated with the
dispute. The settlement also resolved other disputes between the
parties concerning various transmission agreements and related billing
disputes. In addition, the parties also agreed to support, and to seek
consent of the other owners of the South Texas Project to, certain
amendments to the Participation Agreement, including changes in the
management structure of the South Texas Project through which HL&P would
be replaced as project manager by an independent entity.
Although settlement with CPL does not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL have reached certain other
understandings which contemplate that: (i) CPL's arbitrator previously
appointed for that proceeding would be replaced by CPL; (ii) arbitrators
-86-
approved by CPL and HL&P for any future arbitrations will be mutually
acceptable to HL&P and CPL; and (iii) HL&P and CPL will resolve any
future disputes between them concerning the South Texas Project without
resorting to the arbitration provision of the Participation Agreement.
The settlement with CPL did not have a material adverse effect on the
Company's or HL&P's financial position and results of operations.
In February 1994, San Antonio indicated a desire to move forward with
its demand for arbitration and suggested that San Antonio considers all
allegations of mismanagement against HL&P to be appropriate subjects for
arbitration in that proceeding, not just allegations related to the
planning and construction of the South Texas Project. It is unclear
what additional allegations San Antonio may make, but it is possible
that San Antonio will assert that HL&P has liability for all or some
portion of the additional costs incurred by San Antonio due to the 1993
outage of the South Texas Project. For a discussion of that outage see
Note 9(f).
HL&P and the Company continue to regard San Antonio's claims to be
without merit. From time to time, HL&P and other parties to these
proceedings have held discussions with a view toward settling their
differences on these matters.
While HL&P and the Company cannot give definite assurance regarding the
ultimate resolution of the San Antonio litigation and arbitration, they
presently do not believe such resolutions will have a material adverse
impact on HL&P's or the Company's financial position and results of
operations.
(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas Project
maintain nuclear property and nuclear liability insurance coverages as
required by law and periodically review available limits and coverage
for additional protection. The owners of the South Texas Project
currently maintain $500 million in primary property damage insurance
from American Nuclear Insurers (ANI). Effective November 15, 1993, the
maximum amounts of excess property insurance available through the
insurance industry increased from $2.125 billion to $2.2 billion. This
$2.2 billion of excess property insurance coverage includes $800 million
of excess insurance from ANI and $1.4 billion of excess property
insurance coverage through participation in the Nuclear Electric
Insurance Limited (NEIL) II program. The owners of the South Texas
Project have approved the purchase of the additional available excess
property insurance coverage. Additionally, effective January 1, 1994,
ANI will be increasing their excess property insurance limits to $850
million, and the owners of the South Texas Project have also approved
the purchase of the additional limits at the March 1, 1994 renewal for
ANI excess property insurance. Under NEIL II, HL&P and the other owners
of the South Texas Project are subject to a maximum assessment, in the
aggregate, of approximately $15.9 million in any one policy year. The
application of the proceeds of such property insurance is subject to the
priorities established by the United States Nuclear Regulatory
Commission (NRC) regulations relating to the safety of licensed reactors
and decontamination operations.
Pursuant to the Price Anderson Act, the maximum liability to the public
for owners of nuclear power plants, such as the South Texas Project, was
increased from $7.9 billion to $9.3 billion effective February 18, 1994.
Owners are required under the Act to insure their liability for nuclear
incidents and protective evacuations by maintaining the maximum amount
of financial protection available from private sources and by
maintaining secondary financial protection through an industry
retrospective rating plan. Effective August 20, 1993, the assessment of
deferred premiums provided by the plan for each nuclear incident has
increased from $63 million to up to $75.5 million per reactor subject to
indexing for inflation, a possible 5%
-87-
surcharge (but no more than $10 million per reactor per incident in
any one year) and a 3% state premium tax. HL&P and the other owners of
the South Texas Project currently maintain the required nuclear
liability insurance and participate in the industry retrospective rating
plan.
There can be no assurance that all potential losses or liabilities will
be insurable, or that the amount of insurance will be sufficient to
cover them. Any substantial losses not covered by insurance would have
a material effect on HL&P's and the Company's financial condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South
Texas Project are required by the NRC to meet minimum decommissioning
funding requirements to pay the costs of decommissioning the South Texas
Project. Pursuant to the terms of the order of the Utility Commission
in Docket No. 9850, HL&P is currently funding decommissioning costs for
the South Texas Project with an independent trustee at an annual amount
of $6 million.
As of December 31, 1993, the trustee held approximately $18.7 million
for decommissioning, for which the asset and liability are reflected on
the Company's Consolidated and HL&P's Balance Sheets in deferred debits
and deferred credits, respectively. HL&P's funding level is estimated
to provide approximately $146 million in 1989 dollars, an amount which
currently exceeds the NRC minimum. However, the South Texas Project
co-owners have engaged an outside consultant to review the estimated
decommissioning costs of the South Texas Project which review should be
completed by the end of 1994. While changes to present funding levels,
if any, cannot be estimated at this time, a substantial increase in
funding may be necessary. No assurance can be given that the amounts
held in trust will be adequate to cover the decommissioning costs.
(f) NRC INSPECTIONS AND OPERATIONS. Both generating units at the South
Texas Project were out of service from February 1993 to February 1994,
when Unit No. 1 was authorized by the NRC to return to service.
Currently, Unit No. 1 is out of service for repairs to a small steam
generator leak encountered following the unit's shutdown to repair a
feedwater control valve. Those repairs are scheduled for completion by
mid-March 1994, and no formal NRC approval is required to resume
operation of Unit No. 1. Unit No. 2 is currently scheduled to resume
operation after completion of regulatory reviews, in the spring of 1994.
HL&P removed the units from service in February 1993 when a problem was
encountered with certain pumps. At that time HL&P concluded that the
units should not resume operation until HL&P had determined the root
cause of the failure and had briefed the NRC and corrective action had
been taken. The NRC formalized that commitment in a Confirmatory Action
Letter, which confirmed that HL&P would not resume operations until it
had briefed the NRC on its findings and actions. Subsequently, that
Confirmatory Action Letter was supplemented by the NRC to require HL&P,
prior to resuming operations, to address additional matters which were
identified during the course of analyzing the issues associated with the
original pump failure and during various subsequent NRC inspections and
reviews.
In June 1993, the NRC announced that the South Texas Project had been
placed on the NRC's "watch list" of plants with "weaknesses that warrant
increased NRC attention." Plants in this category are authorized to
operate but are subject to close monitoring by the NRC. The NRC reviews
the status of plants on this list semi-annually, but HL&P does not
anticipate that the South Texas Project would be removed from that list
until there has been a period of operation for both units, and the NRC
concludes that the concerns which led the NRC to place the South Texas
Project on that list have been satisfactorily addressed.
-88-
The NRC's decision to place the South Texas Project on its "watch list"
followed the June 1993 issuance of a report by its Diagnostic Evaluation
Team (DET) which conducted a review of the South Texas Project in the
spring of 1993 and identified a number of areas requiring improvement at
the South Texas Project. Conducted infrequently, NRC diagnostic
evaluations do not evaluate compliance with NRC regulations but are
broad-based evaluations of overall plant operations and are intended to
review the strengths and weaknesses of the licensee's performance and to
identify the root cause of performance problems.
The DET report found, among other things, weaknesses in maintenance and
testing, deficiencies in training and in the material condition of some
equipment, strained staffing levels in operations and several weaknesses
in engineering support. The report cited the need to reduce backlogs of
engineering and maintenance work and to simplify work processes which,
the DET found, placed excessive burdens on operating and other plant
personnel. The report also identified the need to strengthen management
communications, oversight and teamwork as well as the capability to
identify and correct the root causes of problems. The DET also
expressed concern with regard to the adequacy of resources committed to
resolving issues at the South Texas Project but noted that many issues
had already been identified and were being addressed by HL&P.
In response to the DET report, HL&P presented its plan to address the
issues raised in that report and began its action program to address
those concerns. While those programs were being implemented, HL&P also
initiated additional activities and modifications that were not
previously scheduled during 1993 but which are designed to eliminate the
need for some future outages and to enhance operations at the South
Texas Project. The NRC conducted additional inspections and reviews of
HL&P's plans and agreed in February 1994 that HL&P's progress in
addressing the NRC's concerns had satisfied the issues raised in the
Confirmatory Action Letter with respect to Unit No. 1. The NRC
concurred in HL&P's determination that Unit No. 1 could resume
operation. Work is now underway to address the NRC's concerns with
respect to Unit No. 2, which HL&P anticipates will not require as
extensive an effort as was required by the NRC for Unit No. 1. However,
difficulties encountered in completing actions required on Unit No. 2
and any additional issues which may be raised in the conduct of those
activities or in the operation of Unit No. 1 could adversely affect the
anticipated schedule for resuming operation of Unit No. 2. During the
outage, HL&P has not had, and does not anticipate having, difficulty in
meeting its energy needs.
During the outage, both fuel and non-fuel expenditures have been higher
for HL&P than levels originally projected for the year. HL&P's non-fuel
expenditures for the South Texas Project during 1993 were approximately
$115 million greater than originally budgeted levels (of which HL&P's
share was $35 million) for work undertaken in connection with the DET
and for other initiatives taken during the year. It is expected that,
subsequent to 1993, operation and maintenance costs will continue to be
higher than previous levels in order to support additional initiatives
developed in 1993. Fuel costs also were necessarily higher due to the
use of higher cost alternative fuels. However, these increased
expenditures are expected to be offset to some extent by savings from
future outages that can now be avoided as a result of activities
accelerated into 1993 and from overall improvement in operations
resulting from implementing the programs developed during the outage.
For a discussion of regulatory treatment related to the outage, see
Notes 10(f) and 10(g).
During 1993, the NRC imposed a total of $500,000 in civil penalties (of
which HL&P's share was $154,000) in connection with violations of NRC
requirements.
-89-
In March 1993, a Houston newspaper reported that the NRC had referred to
the Department of Justice allegations that the employment of three
former employees and an employee of a contractor to HL&P had been
terminated or disrupted in retaliation for their having made
safety-related complaints to the NRC. Such retaliation, if proved,
would be contrary to requirements of the Atomic Energy Act and
regulations promulgated by the NRC. The NRC has confirmed to HL&P that
these matters have been referred to the Department of Justice for
consideration of further action and has notified HL&P that the NRC is
considering enforcement action against HL&P and one or more HL&P
employees in connection with one of those cases. HL&P has been advised
by counsel that most referrals by the NRC to the Department of Justice
do not result in prosecutions. The Company and HL&P strongly believe
that the facts underlying these events would not support action by the
Department of Justice against HL&P or any of its personnel; accordingly,
HL&P intends to defend vigorously against such charges. HL&P also
intends to defend vigorously against civil proceedings filed in the
state court in Matagorda County, Texas, by the complaining employees and
against administrative proceedings before the Department of Labor and
the NRC, which, independently of the Department of Justice, could impose
administrative sanctions if they find violations of the Atomic Energy
Act or the NRC regulations. These administrative sanctions may include
civil penalties in the case of the NRC and, in the case of the
Department of Labor, ordering reinstatement and back pay and/or imposing
civil penalties. Although the Company and HL&P do not believe these
allegations have merit or will have a material adverse effect on the
Company or HL&P, neither the Company nor HL&P can predict at this time
their outcome.
(10) UTILITY COMMISSION PROCEEDINGS
Pursuant to a series of applications filed by HL&P in recent years, the
Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant construction,
including the South Texas Project. Although Utility Commission action
on those applications has been completed, judicial review of a number of
the Utility Commission orders is pending. In Texas, Utility Commission
orders may be appealed to a District Court in Travis County, and from
that Court's decision an appeal may be taken to the Court of Appeals for
the 3rd District at Austin (Austin Court of Appeals). Discretionary
review by the Supreme Court of Texas may be sought from decisions of the
Austin Court of Appeals. The pending appeals from the Utility
Commission orders are in various stages. In the event the courts
ultimately reverse actions of the Utility Commission in any of these
proceedings, such matters would be remanded to the Utility Commission
for action in light of the courts' orders. Because of the number of
variables which can affect the ultimate resolution of such matters on
remand, the Company and HL&P generally are not in a position at this
time to predict the outcome of the matters on appeal or the ultimate
effect that adverse action by the courts could have on the Company and
HL&P. On remand, the Utility Commission's action could range from
granting rate relief substantially equal to the rates previously
approved, to a reduction in the revenues to which HL&P was entitled
during the time the applicable rates were in effect, which could require
a refund to customers of amounts collected pursuant to such rates.
Judicial review has been concluded or currently is pending on the
final orders of the Utility Commission described below.
(a) DOCKET NOS. 6765, 6766 AND 5779. In February 1993, the Austin Court of
Appeals granted a motion by the Office of Public Utility Counsel (OPC)
to voluntarily dismiss its appeal of the Utility Commission's order in
HL&P's 1984 rate case (Docket No. 5779). In December 1993, the Supreme
Court of Texas granted a similar motion by OPC to dismiss its appeal of
the Utility
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Commission's order in HL&P's 1986 rate case (Docket Nos. 6765 and 6766).
As a result, appellate review of the Utility Commission's orders in
those dockets has been concluded, and the orders have been affirmed.
(b) DOCKET NO. 8425. In October 1992, a District Court in Travis County,
Texas affirmed the Utility Commission's order in HL&P's 1988 rate case
(Docket No. 8425). An appeal to the Austin Court of Appeals is pending.
In its final order in that docket, the Utility Commission granted HL&P a
$227 million increase in base revenues, allowed a 12.92% return on
common equity, authorized a qualified phase-in plan for Unit No. 1 of
the South Texas Project (including approximately 72% of HL&P's
investment in Unit No. 1 of the South Texas Project in rate base) and
authorized HL&P to use deferred accounting for Unit No. 2 of the South
Texas Project. Rates substantially corresponding to the increase
granted were implemented by HL&P in June 1989 and remained in effect
until May 1991.
In the appeal of the Utility Commission's order, certain parties have
challenged the Utility Commission's decision regarding deferred
accounting, treatment of federal income tax expense and certain other
matters. A recent decision of the Austin Court of Appeals, in an appeal
involving another utility (and to which HL&P was not a party), adopted
some of the arguments being advanced by parties challenging the Utility
Commission's order in Docket No. 8425. In that case, Public Utility
Commission of Texas vs. GTE-SW, the Austin Court of Appeals ruled that
when a utility pays federal income taxes as part of a consolidated
group, the utility's ratepayers are entitled to a fair share of the tax
savings actually realized, which can include savings resulting from
unregulated activities. The Texas Supreme Court has agreed to hear an
appeal of that decision, but on points not involving the federal income
tax issues, though tax issues could be decided in such opinion.
In its final order in Docket No. 8425, the Utility Commission did not
reduce HL&P's tax expense by any of the tax savings resulting from the
Company's filing of a consolidated tax return. Although the GTE
decision was not legally dispositive of the tax issues presented in the
appeal of Docket No. 8425, it is possible that the Austin Court of
Appeals could utilize the reasoning in GTE in addressing similar issues
in the appeal of Docket No. 8425. However, in February 1993 the Austin
Court of Appeals, considering an appeal involving another telephone
utility, upheld Utility Commission findings that the tax expense for the
utility included the utility's fair share of the tax savings resulting
from a consolidated tax return, even though the utility's fair share of
the tax savings was determined to be zero. HL&P believes that the
Utility Commission findings in Docket No. 8425 and in Docket No. 9850
(see Note 10(c)) should be upheld on the same principle (i.e., that the
Utility Commission determined that the fair share of tax savings to be
allocated to ratepayers is determined to be zero). However, no
assurance can be made as to the ultimate outcome of this matter.
The Utility Commission's order in Docket No. 8425 may be affected also
by the ultimate resolution of appeals concerning the Utility
Commission's treatment of deferred accounting. For a discussion of
appeals of the Utility Commission's orders on deferred accounting, see
Notes 10(e) and 11.
(c) DOCKET NO. 9850. In August 1992, a district court in Travis County
affirmed the Utility Commission's final order in HL&P's 1991 rate case
(Docket No. 9850). That decision was appealed by certain parties to the
Austin Court of Appeals, raising issues concerning the Utility
Commission's approval of a non-unanimous settlement in that docket, the
Utility Commission's calculation of federal income tax expense and the
allowance of deferred accounting reflected in the settlement. In August
1993, the Austin Court of Appeals
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affirmed on procedural grounds the ruling by the Travis County District
Court, and applications for writ of error were filed with the Supreme
Court of Texas by one of the other parties to the proceeding. The
Supreme Court has not yet ruled on these applications. In Docket No.
9850, the Utility Commission approved a settlement agreement reached
with most parties. That settlement agreement provided for a $313
million increase in HL&P's base rates, termination of deferrals granted
with respect to Unit No. 2 of the South Texas Project and of the
qualified phase-in plan deferrals granted with respect to Unit No. 1 of
the South Texas Project, and recovery of deferred plant costs. The
settlement authorized a 12.55% return on common equity for HL&P, and
HL&P agreed not to request additional increases in base rates that would
be implemented prior to May 1, 1993. Rates contemplated by that
settlement agreement were implemented in May 1991 and remain in effect.
The Utility Commission's order in Docket No. 9850 found that HL&P would
have been entitled to more rate relief than the $313 million agreed to
in the settlement, but certain recent actions of the Austin Court of
Appeals could, if ultimately upheld and applied to the appeal of Docket
No. 9850, require a remand of that settlement to the Utility Commission.
HL&P believes that the amount which the Utility Commission found HL&P
was entitled to would exceed any disallowance that would have been
required under the Austin Court of Appeals' ruling regarding deferred
accounting (see Notes 10(e) and 11) or any adverse effect on the
calculation of tax expense if the court's ruling in the GTE decision
were applied to that settlement (see Note 10(b) above). However, the
amount of rate relief to which the Utility Commission found HL&P to be
entitled in excess of the $313 million agreed to in the settlement may
not be sufficient if the reasoning in both the GTE decision and the
ruling on deferred accounting were to be applied to the settlement
agreement in Docket No. 9850. Although HL&P believes that it should be
entitled to demonstrate entitlement to rate relief equal to that agreed
to in the stipulation in Docket No. 9850, HL&P cannot rule out the
possibility that a remand and reopening of that settlement would be
required if decisions unfavorable to HL&P are rendered on both the
deferred accounting treatment and the calculation of tax expense for
ratemaking purposes.
(d) DOCKET NO. 6668. In June 1990, the Utility Commission issued the final
order in Docket No. 6668, the Utility Commission's inquiry into the
prudence of the planning, management and construction of the South Texas
Project. The Utility Commission's findings and order in Docket No. 6668
were incorporated in Docket No. 8425, HL&P's 1988 general rate case.
Pursuant to the findings in Docket No. 6668, the Utility Commission
found imprudent $375.5 million out of HL&P's $2.8 billion investment in
the two units of the South Texas Project.
The Utility Commission's findings did not reflect $207 million in
benefits received in a settlement of litigation with the former
architect-engineer of the South Texas Project or the effects of federal
income taxes, investment tax credits or certain deferrals. In addition,
accounting standards require that the equity portion of AFUDC accrued
for regulatory purposes under deferred accounting orders be utilized to
determine the cost disallowance for financial reporting purposes. After
taking all of these items into account, HL&P recorded an after-tax
charge of $15 million in 1990 and continued to reduce such loss with the
equity portion of deferrals in 1991 related to Unit No. 2 of the South
Texas Project. The findings in Docket No. 6668 represent the Utility
Commission's final determination regarding the prudence of expenditures
associated with the planning and construction of the South Texas
Project. Unless the order is modified or reversed on appeal, HL&P will
be precluded from recovering in rate proceedings the amount found
imprudent by the Utility Commission.
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Appeals by HL&P and other parties of the Utility Commission's order in
Docket No. 6668 were dismissed by a District Court in Travis County in
May 1991. However, in December 1992 the Austin Court of Appeals
reversed the District Court's dismissals on procedural grounds. HL&P
and other parties have filed applications for writ of error with the
Supreme Court of Texas concerning the order by the Austin Court of
Appeals, but unless the order is modified on further review, HL&P
anticipates that the appeals of the parties will be reinstated and that
the merits of the issues raised in those appeals of Docket No. 6668 will
be considered by the District Court, with the possibility of subsequent
judicial review once the District Court has acted on those appeals. In
addition, separate appeals are pending from Utility Commission orders in
Dockets Nos. 8425 and 9850, in which the findings of the order in Docket
No. 6668 are reflected in rates. See Notes 10(b) and 10(c).
(e) DOCKET NOS. 8230 AND 9010. Deferred accounting treatment for Unit No. 1
of the South Texas Project was authorized by the Utility Commission in
Docket No. 8230 and was extended in Docket No. 9010. Similar deferred
accounting treatment with respect to Unit No. 2 of the South Texas
Project was authorized in Docket No. 8425. For a discussion of the
deferred accounting treatment granted, see Note 11. In September 1992,
the Austin Court of Appeals, in considering the appeal of the Utility
Commission's final order in Docket Nos. 8230 and 9010, upheld the
Utility Commission's action in granting deferred accounting treatment
for operation and maintenance expenses, but rejected such treatment for
the carrying costs associated with the investment in Unit No. 1 of the
South Texas Project. That ruling followed the Austin Court of Appeals
decision rendered in August 1992, on a motion for rehearing, involving
another utility which had been granted similar deferred accounting
treatment for another nuclear plant. In its August decision, the court
ruled that Texas law did not permit the Utility Commission to allow the
utility to place the carrying costs associated with the investment in
the utility's rate base, though the court observed that the Utility
Commission could allow amortization of such costs.
The Supreme Court of Texas has granted applications for writ of error
with respect to the Austin Court of Appeals decision regarding Docket
Nos. 8230 and 9010. The Supreme Court of Texas has also granted
applications for writ of error on three other decisions by the Austin
Court of Appeals regarding deferred accounting treatment granted to
other utilities by the Utility Commission. The Supreme Court heard oral
arguments on these appeals on September 13, 1993. The court has not yet
ruled.
(f) DOCKET NO. 12065. HL&P is not currently seeking authority to change its
base rates for electric service, but the Utility Commission has
authority to initiate a rate proceeding pursuant to Section 42 of the
Public Utility Regulatory Policy Act (PURA) to determine whether
existing rates are unjust or unreasonable. In 1993, the Utility
Commission referred to an administrative law judge (ALJ) the complaint
of a former employee of HL&P seeking to initiate such a proceeding.
On February 23, 1994, the ALJ concluded that a Section 42 proceeding
should be conducted and that HL&P should file full information,
testimony and schedules justifying its rates. The ALJ acknowledged that
the decision was a close one, and is subject to review by the Utility
Commission. However, he concluded that information concerning HL&P's
financial results as of December 1992 indicated that HL&P's adjusted
revenues could be approximately $62 million (or 2.33% of its adjusted
base revenues) more than might be authorized in a current rate
proceeding. The ALJ's conclusion was based on various accounting
considerations, including use of a different treatment of federal income
tax expense than the method utilized in HL&P's last rate case. The ALJ
also found that there could be a link between the 1993 outage at the
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South Texas Project, the NRC's actions with respect to the South Texas
Project and possible mismanagement by HL&P, which in turn could result
in a reduction of HL&P's authorized rate of return as a penalty for
imprudent management.
HL&P and the Company believe that the examiner's analysis is incorrect,
that the South Texas Project has not been imprudently managed, and that
ordering a Section 42 proceeding at this time is unwarranted and
unnecessarily expensive and burdensome. HL&P has appealed
the ALJ's decision to the Utility Commission.
If HL&P ultimately is required to respond to a Section 42 inquiry, it
will assert that it remains entitled to rates at least at the levels
currently authorized. However, there can be no assurance as to the
outcome of a Section 42 proceeding if it is ultimately authorized, and
HL&P's rates could be reduced following a hearing. HL&P believes that
any reduction in base rates as a result of a Section 42 inquiry would
take effect prospectively.
HL&P is also a defendant in a lawsuit filed in a Fort Bend County,
Texas, district court by the same former HL&P employee who originally
initiated the Utility Commission complaint concerning HL&P's rates. In
that suit, Pace and Scott v. HL&P, the former employee contends that
HL&P is currently charging illegal rates since the rates authorized by
the Utility Commission do not allocate to ratepayers tax benefits
accruing to the Company and to HL&P by virtue of the fact that HL&P's
federal income taxes are paid as part of a consolidated group. HL&P is
seeking dismissal of that suit because in Texas exclusive jurisdiction
to set electric utility rates is vested in municipalities and in the
Utility Commission, and the courts have no jurisdiction to set such
rates or to set aside authorized rates except through judicial appeals
of Utility Commission orders in the manner prescribed in applicable law.
Although substantial damages have been claimed by the plaintiffs in that
litigation, HL&P and the Company consider this litigation to be wholly
without merit, and do not presently believe that it will have a material
adverse effect on the Company's or HL&P's results of operations, though
no assurances can be given as to its ultimate outcome at this time.
(g) FUEL RECONCILIATION. HL&P recovers fuel costs incurred in electric
generation through a fixed fuel factor that is set by the Utility
Commission. The difference between fuel revenues billed pursuant to
such factor and fuel expense incurred is recorded as an addition to or a
reduction of revenues, with a corresponding entry to under- or
over-recovered fuel, as appropriate. Amounts collected pursuant to the
fixed fuel factor must be reconciled periodically by the Utility
Commission against actual, reasonable costs as determined by the Utility
Commission. Any fuel costs which the Utility Commission determines are
unreasonable in a fuel reconciliation proceeding would not be
recoverable from customers, and a charge against earnings would result.
Under Utility Commission rules, HL&P is required to file an application
to reconcile those costs in 1994. Such a filing would also be required
in conjunction with any rate proceeding that may be filed, such as the
Section 42 proceeding described in Note 10(f).
Unless filed earlier in conjunction with a rate proceeding, HL&P
currently anticipates filing its fuel reconciliation application in the
fourth quarter of 1994 in accordance with a schedule proposed by the
Utility Commission staff. If that schedule is approved by the Utility
Commission, HL&P anticipates that fuel costs through some time in 1994
will be submitted for reconciliation. No hearing would be anticipated
in that reconciliation proceeding before 1995.
The schedule for a fuel reconciliation proceeding could be affected by
the institution of a prudence inquiry concerning the outage at the South
Texas Project. The Utility Commission staff has indicated a desire to
conduct an inquiry into the prudence of HL&P's management prior to and
during the outage, but it is currently unknown what action the Utility
Commission will take on that request or what the nature and scope of any
such proceeding
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would be. Such an inquiry could also be conducted in connection with a
rate proceeding under Section 42 of PURA if one is instituted by the
Utility Commission.
Through the end of 1993, HL&P had recovered through the fuel factor
approximately $115 million (including interest) less than the amounts
expended for fuel, a significant portion of which under recovery
occurred in 1993 during the outage at the South Texas Project. In any
review of costs incurred during the period of the 1993 outage at the
South Texas Project, it is anticipated that other parties will contend
that a portion of fuel costs incurred should be attributed to imprudence
on the part of HL&P and thus should be disallowed as unreasonable, with
recovery from rate payers denied. Those amounts could be substantial.
HL&P intends to defend vigorously against any allegation that its
actions have been imprudent or that any portion of its costs incurred
should be judged to be unreasonable, but no prediction can be made as to
the ultimate outcome of such a proceeding.
(11) DEFERRED PLANT COSTS
Deferred plant costs were authorized for the South Texas Project by the
Utility Commission in two contexts. In the first context, or "deferred
accounting," the Utility Commission orders permitted HL&P, for
regulatory purposes, to continue to accrue carrying costs in the form of
AFUDC (at a 10% rate) on its investment in the two units of the South
Texas Project until costs of such units were reflected in rates (which
was July 1990 for approximately 72% of Unit No. 1, and May 1991 for the
remainder of Unit No. 1 and 100% of Unit No. 2) and to defer and
capitalize depreciation, operation and maintenance, insurance and tax
expenses associated with such units during the deferral period.
Accounting standards do not permit the accrual of the equity portion of
AFUDC for financial reporting purposes under these circumstances.
However, in accordance with accounting standards, such amounts were
utilized to determine the amount of plant cost disallowance for
financial reporting purposes.
The deferred expenses and the debt portion of the carrying costs
associated with the South Texas Project are included on the Company's
Statements of Consolidated Income in deferred expenses and deferred
carrying costs, respectively.
Beginning with the June 1990 order in Docket No. 8425, deferrals were
permitted in a second context, a "qualified phase-in plan" for Unit No.
1 of the South Texas Project. Accounting standards require allowable
costs deferred for future recovery under a qualified phase-in plan to be
capitalized as a deferred charge if certain criteria are met. The
qualified phase-in plan as approved by the Utility Commission meets
these criteria.
During the period June 1990 through May 15, 1991, HL&P deferred
depreciation and property taxes related to the 28% of its investment in
Unit No. 1 of the South Texas Project not reflected in the Docket No.
8425 rates and recorded a deferred return on that investment as part of
the qualified phase-in plan. Deferred return represents the financing
costs (equity and debt) associated with the qualified phase-in plan. The
deferred expenses and deferred return related to the qualified phase-in
plan are included on the Company's Statements of Consolidated Income and
HL&P's Statements of Income in deferred expenses and deferred return
under phase-in plan, respectively. Under the phase-in plan, these
accumulated deferrals will be recoverable within ten years of the June
1990 order.
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On May 16, 1991, HL&P implemented under bond, in Docket No. 9850, a
$313 million base rate increase consistent with the terms of the
settlement. Accordingly, HL&P ceased all cost deferrals related to the
South Texas Project and began the recovery of such amounts. These
deferrals are being amortized on a straight-line basis as allowed by the
final order in Docket No. 9850. The amortization of these deferrals
totaled $25.8 million for both 1993 and 1992 and $16.1 million in 1991,
and is included on the Company's Statements of Consolidated Income and
HL&P's Statements of Income in depreciation and amortization expense.
See also Notes 10(b), 10(c) and 10(e).
The following table shows the original balance of the deferrals and the
unamortized balance at December 31, 1993.
Balance at
Original December 31,
Balance 1993
--------- -----------
(Thousands of Dollars)
Deferred Accounting: (a)
Deferred Expenses . . . . . $ 250,151 $ 233,341
Deferred Carrying Costs on
Plant Investment . . . 399,972 373,094
--------- ---------
Total . . . . . . . . . . 650,123 606,435
Qualified Phase-In Plan: (b) . 82,254 58,264
--------- ---------
Total Deferred Plant Cost . . . $ 732,377 $ 664,699
========= =========
__________
(a) Amortized over the estimated depreciable life of the South Texas
Project.
(b) Amortized over nine years beginning in May 1991.
As of December 31, 1993, HL&P has recorded deferred income taxes of
$200.9 million with respect to deferred accounting and $14.5 million
with respect to the deferrals associated with the qualified phase-in
plan.
(12) MALAKOFF ELECTRIC GENERATING STATION
The scheduled in-service dates for the Malakoff Electric Generating
Station (Malakoff) units were postponed during the 1980's as
expectations of continued strong load growth were tempered. These units
have been indefinitely deferred due to the availability of other cost
effective resource options. In 1987, all developmental work was stopped
and AFUDC accruals ceased.
Due to the indefinite postponement of the in-service date for Malakoff,
the engineering design work is no longer considered viable. The costs
associated with this engineering design work are currently included in
rate base and are earning a return per the Utility Commission's final
order in Docket No. 8425. Pursuant to HL&P's determination that such
costs will have no future value, $84.1 million was reclassified from
plant held for future use to recoverable project costs as of December
31, 1992. An additional $7.0 million was reclassified to recoverable
project costs in 1993. Amortization of these amounts began in 1993.
Amortization amounts will correspond to the amounts being earned as a
result of the inclusion of such costs in rate base. The Utility
Commission's action in allowing treatment of those costs as plant held
for future use has been challenged in the pending appeal of the Utility
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Commission's final order in Docket No. 8425. Also, recovery of such
Malakoff costs may be addressed if rate proceedings are initiated such
as that proposed under Section 42 of PURA. See Notes 10(b) and 10(f) for
a discussion of these respective proceedings.
In June 1990, HL&P purchased from its then fuel supply affiliate,
Utility Fuels, all of Utility Fuels' interest in the lignite reserves
and lignite handling facilities for Malakoff. The purchase price was
$138.2 million, which represented the net book value of Utility Fuels'
investment in such reserves and facilities. As part of the June 1990
rate order (Docket No. 8425), the Utility Commission ordered that issues
related to the prudence of the amounts invested in the lignite reserves
be considered in HL&P's next general rate case which was filed in
November 1990 (Docket No. 9850). However, under the October 1991
Utility Commission order in Docket No. 9850, this determination was
postponed to a subsequent docket.
HL&P's remaining investment in Malakoff through December 31, 1993 of
$167 million, consisting primarily of lignite reserves and land, is
included on the Company's Consolidated and HL&P's Balance Sheets in
plant held for future use. For the 1994-1996 period, HL&P anticipates
$14 million of expenditures relating to lignite reserves, primarily to
keep lignite leases and other related agreements in effect.
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EXHIBIT 99(b)
ITEM 3. LEGAL PROCEEDINGS.
For a description of certain legal and regulatory proceedings
affecting the Company and its subsidiaries, see Notes 9 through 12 to the
Company's Consolidated and HL&P's Financial Statements in Item 8 of this
Report, which notes are incorporated herein by reference.
In August 1993, HL&P entered into a Consent Agreement with the EPA
that resolved three Administrative Orders issued by the EPA in 1991 and 1992
regarding alleged violations of certain provisions of the Clean Water Act at
Limestone during the period 1989 through 1992. Pursuant to the Consent
Agreement, HL&P, while neither admitting nor denying the allegations contained
in the complaint, agreed to pay the EPA $87,500. On August 29, 1991, the EPA
issued an Administrative Order related to alleged noncompliance at W. A.
Parish. HL&P has taken action to address the issues cited by the EPA and
believes them to be substantially resolved at this time.
From time to time, HL&P sells equipment and material it no longer
requires for its business. In the past, some purchasers may have improperly
handled the material, principally through improper disposal of oils containing
PCBs used in older transformers. Claims have been asserted against HL&P for
clean-up of environmental contamination as well as for personal injury and
property damages resulting from the purchasers' alleged improper activities.
Although HL&P has disputed its responsibility for the actions of such
purchasers, HL&P has, in some cases, participated in or contributed to the
remediation of those sites. Such undertakings in the past have not required
material expenditures by HL&P. In 1990, HL&P, together with other companies,
participated in the clean-up of one such site. Three suits have been brought
against HL&P and a number of other parties for personal injury and property
damages in connection with that site and its cleanup. In two of the cases,
Dumes, et al. vs. Houston Lighting & Power Company, et al., pending in the
United States District Court for the Southern District of Texas, Corpus Christi
Division, and Trevino, et al. vs. Houston Lighting & Power Company, et al.,
pending before the 117th District Court of Nueces County, Texas, landowners
near the site are seeking damages primarily for lead contamination to their
property. A third lawsuit, Holland vs. Central Power and Light Company, et
al., involving an allegation of exposure to PCBs disposed of at the site, was
dismissed pursuant to a settlement agreement entered into by the parties in
July 1993. The terms of the settlement were not material. In all these
cases, HL&P has disputed its responsibility for the actions of the disposal
site operator and whether injuries or damages occurred. In addition, Gulf
States has filed suit in the United States District Court for the Southern
District of Texas, Houston Division, against HL&P and two other utilities
concerning another site in Houston, Texas, which allegedly has been
contaminated by PCBs and which Gulf States has undertaken to remediate pursuant
to an EPA order. Gulf States seeks contribution from HL&P and the other
utilities for Gulf States' remediation costs. HL&P does not currently believe
that it has any responsibility for that site, and HL&P has not been determined
by the EPA to be a responsible party for that site. Discovery is underway in
all these pending cases and, although their ultimate outcomes cannot be
predicted at this time, HL&P and the Company believe, based on information
currently available, that none of these cases will result in a material adverse
effect on the Company's or HL&P's financial condition or results of operations.
For information with respect to the EPA's identification of HL&P as a
"potentially responsible party" for remediation of a CERCLA site
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adjacent to one of HL&P's transmission lines in Harris County, see "Liquidity
and Capital Resources - HL&P - Environmental Expenditures" in Item 7 of this
Report, which information is incorporated herein by reference.
HL&P and the other owners of the South Texas Project have filed suit
against Westinghouse in the District Court for Matagorda County, Texas (Cause
No. 90-S-0684-C), alleging breach of warranty and misrepresentation in
connection with the steam generators supplied by Westinghouse for the South
Texas Project. In recent years, other utilities have encountered stress
corrosion cracking in steam generator tubes in Westinghouse units similar to
those supplied for the South Texas Project. Failure of such tubes can result
in a reduction of plant efficiency, and, in some cases, utilities have replaced
their steam generators. During an inspection concluded in the fall of 1993,
evidence was found of stress corrosion cracking consistent with that
encountered with Westinghouse steam generators at other facilities, and a small
number of tubes were found to require plugging. To date, stress corrosion
cracking has not had a significant impact on operation of either unit; however,
the owners of the South Texas Project have approved remedial operating plans
and have undertaken expenditures to minimize and delay further corrosion. The
litigation, which is in discovery, seeks appropriate damages and other relief
from Westinghouse and is currently scheduled for trial in the fall of 1994. No
prediction can be made as to the ultimate outcome of that litigation.
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EXHIBIT 99(c)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the
Company and its subsidiaries, including HL&P, reference is
made to the information set forth in Item 3 of the 1993
Combined Form 10-K and Notes 9, 10 and 11 to the Company's
Consolidated and HL&P's Financial Statements in Item 8 of
the 1993 Combined Form 10-K, which information, as qualified
and updated by the description of developments in regulatory
and litigation matters contained in Notes 10, 11 and 12 of
the Notes to the Company's Consolidated and HL&P's Financial
Statements included in Part I of this Form 10-Q, is
incorporated herein by reference.
In April 1994, two former employees of HL&P filed a
lawsuit against the Company, HL&P and certain executive
officers and directors of the Company and HL&P. In this
lawsuit (PACE AND FUENTEZ V. THE COMPANY, HL&P, ET AL.), the
former employees alleged that certain officers and directors
of the Company and HL&P had engaged in various acts of
mismanagement. The lawsuit, which purports to have been
filed as a class action and shareholder derivative suit on
behalf of all shareholders of the Company, is pending in the
212th Judicial District Court of Galveston County, Texas.
Management believes that the suit is without merit.
In April 1994, the state district judge of the 268th
Judicial District Court, Fort Bend County, Texas, dismissed
for lack of subject matter jurisdiction a suit (PACE AND
SCOTT V. HL&P) filed by two former employees of HL&P, who
alleged that HL&P was charging illegal rates. The claim was
based on the argument that the Utility Commission had failed
to allocate to ratepayers the alleged tax benefits accruing
to the Company and HL&P by virtue of the fact that HL&P's
federal income taxes are paid as part of a consolidated
group.
In March 1994, the United States District Court for the
Southern District of Texas granted summary judgment in favor
of the Company and HL&P and dismissed a lawsuit filed by
former HL&P employees who claimed that their employment had
been terminated in violation of the WORKER ADJUSTMENT AND
RETRAINING NOTIFICATION ACT (WARN). In a separate order,
another judge of the United States District Court for the
Southern District of Texas granted summary judgment in favor
of the Company and HL&P on the validity of releases executed
by most of the employees who had been terminated in the 1992
reduction which gave rise to the claims under the WARN Act. The
question of the validity of those releases in the WARN Act case
and in other pending cases involving that staff reduction was
consolidated for decision. Notices of appeal to the United States
Court of Appeals for the Fifth Circuit have been filed from both
decisions. Other legal proceedings, which the Company and HL&P
believe to be immaterial and without merit, have been filed by
former employees of HL&P seeking damages alleged to have been
caused by that staff reduction. Although there can be no assurance
that additional proceedings asserting labor related claims will not
-31-
be filed, the Company and HL&P believe that the resolution
of these claims will not have a material adverse effect on
the Company's or HL&P's results of operations.
EXHIBIT 99(d)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the
Company and its subsidiaries, including HL&P, reference is
made to the information set forth in Item 1 of Part II of the
Combined Form 10-Q for the quarter ended March 31, 1994, and
Item 3 of the 1993 Combined Form 10-K and Notes 9, 10 and 11
to the Company's Consolidated and HL&P's Financial Statements
in Item 8 of the 1993 Combined Form 10-K, as updated by the
description of developments in regulatory and litigation
matters contained in Notes 8, 9 and 10 of the Notes to the
Company's Consolidated and HL&P's Financial Statements
included in Part I of this Form 10- Q, all of which are
incorporated herein by reference.
In April 1994, the state district judge of the 268th
Judicial District Court, Fort Bend County, Texas, dismissed
for lack of subject matter jurisdiction a suit (PACE AND SCOTT
v. HL&P) in which it was alleged that HL&P was charging
illegal rates. The claim was based on the argument that the
Utility Commission had failed to allocate to ratepayers the
alleged tax benefits accruing to the Company and HL&P by
virtue of the fact that HL&P's federal income taxes are paid
as part of a consolidated group. The time within which an
appeal of the District Court's dismissal could be perfected
has now expired. However, one of the two plaintiffs filed a
second lawsuit (PACE, INDIVIDUALLY AND AS A REPRESENTATIVE FOR
ALL OTHERS SIMILARLY SITUATED v. HL&P) alleging substantially
the same causes of action in the 56th Judicial District Court
of Galveston County, Texas in June 1994. Management believes
that the suit is without merit.
EXHIBIT 99(e)
(6) POSTEMPLOYMENT BENEFITS FOR THE COMPANY AND HL&P
The Company and HL&P adopted Statement of Financial Accounting
Standards (SFAS) No. 112, "Employer's Accounting for
Postemployment Benefits", effective January 1, 1994. SFAS No.
112 requires the recognition of a liability for benefits, not
previously accounted for on the accrual basis, provided to
former or inactive employees, their beneficiaries and covered
dependents, after employment but before retirement. In the
Company's and HL&P's case, this liability is principally health
care and life insurance benefits for participants in the
long-term disability plan. As required by SFAS No. 112, the
Company and HL&P expensed the transition obligation (liability
from prior years) upon adoption, and recorded a one-time,
after-tax charge to income of $8.2 million in the first quarter
of 1994. Ongoing 1994 charges to income are expected to be
immaterial.
(7) ENVIRONMENTAL AND CABLE REGULATIONS
(b) IMPACT OF THE CABLE TELEVISION CONSUMER PROTECTION AND
COMPETITION ACT OF 1992 ON KBLCOM INCORPORATED (KBLCOM). In
March 1994, the Federal Communications Commission (FCC) issued
its revised benchmark rules (Rate Rule II) as well as its
interim cost-of-service rule (Interim COS Rule). Each of these
rules became effective on May 15, 1994. Rate Rule II revises the
"benchmark formulas" established by the FCC in May 1993. Under
Rate Rule II (which will be applied prospectively), cable
operators must reduce their existing rates to the higher of (i)
the rates calculated using the revised benchmark formulas
(Revised Benchmarks) or (ii) a level 17% below such cable
operators' rates as of September 30, 1992, adjusted for
inflation. Cable operators which cannot or do not wish to comply
with the Revised Benchmarks may choose to justify their existing
rates under the Interim COS Rule. The Interim COS Rule
establishes a cost-of-service rate system similar to that used
in the telephone industry. KBLCOM expects that it will incur
increased administrative burdens under these new rules, and that
the Revised Benchmarks will impose some additional reductions in
KBLCOM's rates for regulated services. The extent of the
anticipated decline in revenues cannot be determined at this
time, but will have an adverse impact on KBLCOM's financial
position and results of operations.
-17-
(8) JOINTLY-OWNED NUCLEAR PLANT
(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability
insurance coverages as required by law and periodically review
available limits and coverage for additional protection. The
owners of the South Texas Project currently maintain $500
million in primary property damage insurance from American
Nuclear Insurers (ANI). Additionally, the owners of the South
Texas Project maintain the maximum amounts of excess property
insurance available through the insurance industry, $2.25
billion. This excess property insurance coverage consists
of $850 million of excess insurance from ANI and $1.4 billion of
excess property insurance coverage through participation in the
Nuclear Electric Insurance Limited (NEIL) II program. Under NEIL
II, HL&P and the other owners of the South Texas Project are
subject to a maximum assessment, in the aggregate, of
approximately $15.9 million in any one policy year. The
application of the proceeds of such property insurance is
subject to the priorities established by the United States
-19-
Nuclear Regulatory Commission (NRC) regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act, the maximum liability to the
public for owners of nuclear power plants, such as the South
Texas Project, was decreased from $9.3 billion to $9.2 billion
effective June 3, 1994. Owners are required under the Act to
insure their liability for nuclear incidents and protective
evacuations by maintaining the maximum amount of financial
protection available from private sources and by maintaining
secondary financial protection through an industry retrospective
rating plan. The assessment of deferred premiums provided by the
plan is $75.5 million per reactor subject to indexing for
inflation, a possible 5% surcharge (but no more than $10 million
per reactor per incident in any one year) and a 3% state premium
tax. HL&P and the other owners of the South Texas Project
currently maintain the required nuclear liability insurance and
participate in the industry retrospective rating plan.
There can be no assurance that all potential losses or
liabilities will be insurable, or that the amount of insurance
will be sufficient to cover them. Any substantial losses not
covered by insurance could have a material adverse effect on
HL&P's and the Company's financial condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South
Texas Project are required by the NRC to meet minimum
decommissioning funding requirements to pay the costs of
decommissioning the South Texas Project. Pursuant to the terms
of the order of the Public Utility Commission of Texas (Utility
Commission) in Docket No. 9850, HL&P is currently funding
decommissioning costs with an independent trustee at an annual
amount of $6 million. This funding level was estimated to
provide approximately $146 million in 1989 dollars at the time
of scheduled decommissioning. In May 1994, an outside consultant
estimated HL&P's portion of decommissioning costs to be
approximately $318 million in 1994 dollars with a corresponding
funding level of $16 million per year. The consultant's calculation
of decommissioning costs for financial planning purposes used
the DECON methodology (prompt removal/dismantling), one of three
alternatives acceptable to the NRC, and assumed deactivation of
Unit No. 1 and Unit No. 2 upon expiration of their 40 year
operating licenses. HL&P is currently in a rate proceeding, see
Note 9(e) of the Notes to the Company's Consolidated and HL&P's
Financial Statements in this Report. Until the issuance of an
order in the pending rate proceeding, the exact funding level in
excess of the minimum NRC requirements cannot be determined.
While the current funding levels exceed minimum NRC
requirements, no assurance can be given that (i) the amount held
in the trust will be adequate to cover the actual
decommissioning costs of the South Texas Project or (ii) the
assumptions used in estimating decommissioning costs will
ultimately prove to be correct.
-20-
(g) LOW-LEVEL RADIOACTIVE WASTE. In response to the federal Low-Level
Radioactive Waste Policy Act of 1980 which assigns
responsibility for low-level waste disposal to the states, Texas
has created the Texas Low-Level Radioactive Waste Disposal
Authority (Waste Disposal Authority) to build and operate a
low-level waste disposal facility. HL&P's portion of the State
of Texas assessment for the development work on this facility
was approximately $0.7 million in 1994 and will be approximately
$1.3 million for 1995. Nuclear facilities in Texas formerly had
access to the low-level waste disposal facility at Barnwell,
South Carolina which was closed in June 1994 to generators
-21-
of radioactive waste located in states which are not members
of the Southeast compact.
HL&P has constructed a temporary low-level radioactive waste
storage facility at the South Texas Project which will be
utilized for interim storage of low-level radioactive waste
prior to the opening of the Texas Low-Level Radioactive Waste
Site. The Waste Disposal Authority currently estimates that the
Texas site could begin receiving waste in mid-1997.
-22-
EXHIBIT 99(f)
HOUSTON INDUSTRIES INCORPORATED
SAVINGS PLAN
(As Amended and Restated Effective January 1, 1994)
SECOND AMENDMENT
Houston Industries Incorporated, a Texas corporation (the "Company"),
having established the Houston Industries Incorporated Savings Plan, as
amended and restated effective January 1, 1994 and amended on April 7, 1994
(the "Plan"), and having reserved the right to amend the Plan under
Section 10.3 thereof, does hereby amend the Plan, effective January 1,
1994, except as otherwise specified herein, as follows:
1. Section 1.8 of the Plan is amended, effective June 1, 1994,
to read as follows:
"1.8 COMMITTEE: The Benefits Committee as described in
Article II."
2. The first sentence of Section 1.11 of the Plan is hereby
amended to read as follows:
"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."
3. The third sentence of Section 1.11 of the Plan is hereby
amended to read as follows:
"Compensation specifically excludes expense allowances, benefits
received under the Long Term Disability Plan of an Employer and
contributions of the Employer to or benefits under this Plan or any other
welfare or deferred compensation plan not expressly included above."
-1-
4. Section 1.15 of the Plan is hereby amended to read as
follows:
"1.15 EMPLOYEE: Any person regularly and principally
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 `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."
5. Section 1.20 of the Plan is hereby amended, effective
October 1, 1994, to read as follows:
"1.20 ENTRY DATE: January 1, April 1, July 1 and October 1
of each Plan Year."
6. Section 1.33 of the Plan is hereby amended to read as
follows:
"1.33 PARTICIPANT: A current or former eligible Employee
who, pursuant to 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 8.1 hereof."
7. The first sentence of the second paragraph of Section 2.15
of the Plan is hereby amended to read as follows:
"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."
-2-
8. Section 2.15 is hereby amended to add the following sentence
to the end thereof:
"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."
9. The third sentence of Section 2.16 is hereby amended to read
as follows:
"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."
10. The fifth sentence of Section 2.16 is hereby amended to read
as follows:
"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."
11. Section 3.1 of the Plan is hereby amended, effective October 1,
1994, by deleting the last sentence and inserting the following in lieu
thereof:
"Each Employee who is eligible, who is not a Participant and who
began Service with an Employer after October 1, 1993 but prior to
October 1, 1994 shall be initially eligible to participate in the Plan as
of October 1, 1994. Each Employee who is eligible and who began Service
with an Employer on or after October 1, 1994 shall be initially eligible to
participate in the Plan as of the first Entry Date next following the date
he first begins Service."
12. The fourth sentence of Section 4.2 of the Plan is hereby
amended to read as follows:
"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."
-3-
13. The last paragraph of Section 4.2 of the Plan is hereby
amended, effective October 1, 1994, to read as follows:
"Subject to the last sentence of this Paragraph, in addition to the
election made during annual enrollment, a Participant may change the rate
of his Pre-Tax Basic Contribution and/or Pre-Tax Excess Contribution as of
any Entry Date during the Plan Year by prior written notice to the
Committee given in such manner and at such time 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 as of any Entry Date
during the Plan Year by prior written notice to the Committee given in such
manner and at such time as may be prescribed from time to time by the
Committee. Any Participant who discontinues his Pre-Tax Basic Contribution
or Pre-Tax Excess Contribution at any time during the Plan Year except
January 1 shall be ineligible to recommence such Contribution prior to the
next following January 1. A Participant in the Plan can change or
discontinue the amount of his Contributions to the Plan as described above;
provided that only one such election to change or discontinue shall be
permitted during each Plan Year."
14. The third paragraph of Section 4.3 of the Plan is hereby
amended, effective October 1, 1994, to read as follows:
"Subject to the last sentence of this Paragraph, an HII Participant
may change the amount of his After-Tax Basic Contribution and/or After-Tax
Excess Contribution as of any Entry Date during the Plan Year by prior
written notice to the Committee given in such manner and at such time 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 as of any Entry Date during the Plan Year by prior written
notice to the Committee given in such manner and at such time as may be
prescribed from time to time by the Committee. Any HII Participant who
discontinues his After-Tax Basic Contribution and/or After-Tax Excess
Contribution at any time during the Plan Year except January 1 shall be
ineligible to recommence such Contribution prior to the next following
January 1. Participants in the Plan can change or discontinue the amount
of his Contributions to the Plan as described above; provided that only one
such election to change or discontinue shall be permitted during each Plan
Year."
15. Paragraph (f) of Section 4.18 of the Plan is hereby amended
to read as follows:
"(f) A rollover account shall be subject to the same rules as a
Pre-Tax Contribution Account for all purposes of the Plan, including, but
not by way of
-4-
limitation, rules regarding investments, withdrawals,
distributions and loans under the Plan."
16. The second paragraph of Section 6.6 of the Plan is hereby
amended in its entirety to read as follows:
"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."
17. The first sentence of Section 7.3 of the Plan is hereby
amended to read as follows:
"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 first Entry Date coincident with or next following six full
months from the date of such withdrawal provided the Committee has received
prior to such Entry Date the Participant's written 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."
18. The first two sentences of Section 7.4 of the Plan are
hereby amended to read as follows:
"Any Participant who is an Employee (including any such
Participant on an Authorized Absence) may make application to the Committee
to borrow from his Pre-Tax Contribution Account in the Trust Fund, and the
Committee in its sole discretion may permit such a loan. 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.
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")."
-5-
19. The third full paragraph of Section 8.1 of the Plan is
hereby amended, effective October 1, 1994, to read as follows:
"Each Participant shall elect an investment option at the time he
begins participating in the Plan. The Participant, effective on any
succeeding monthly Valuation Date, by prior written notice to the Committee
given in such manner and at such time as may be prescribed from time to
time by the Committee, may (i) change his instructions with respect to the
investment of his future Pre-Tax and After-Tax Contributions in the Trust
Fund in any combination of 10% increments and/or (ii) change his
instructions with respect to the investment of the current values in his
Pre-Tax Contribution Account and After-Tax Contribution Account in any
whole percentage increments as he may determine between the investment
accounts."
20. The first two sentences of Section 10.3 of the Plan are
hereby amended, effective September 7, 1994, to read as follows:
"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 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."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused these
presents to be executed by its duly authorized officers in a number of
copies, all of which shall constitute one and the same instrument, which
may be sufficiently evidenced by any executed
-6-
copy hereof, on this 7th day of September, 1994, but effective as of the
dates specified herein.
HOUSTON INDUSTRIES INCORPORATED
By D. D. Sykora
President and Chief Operating Officer
ATTEST:
Assistant Corporate Secretary
-7-
EXHIBIT 12
HOUSTON LIGHTING & POWER COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(THOUSANDS OF DOLLARS)
Nine Twelve
Months Ended Months Ended
September 30, 1994 September 30, 1994
------------------ ------------------
Fixed Charges as Defined:
(1) Interest on Long-Term Debt ......... $184,964 $ 249,203
(2) Other Interest ..................... 5,938 6,709
(3) Amortization of Premium/Discount-net 6,363 8,448
(4) Interest Component of Rentals
Charged to Operating Expense ....... 2,947 4,021
-------- ----------
(5) Total Fixed Charges ............ $200,212 $ 268,381
======== ==========
Earnings as Defined:
(6) Net Income ......................... $460,237 $ 509,355
(7) Cumulative Effect of Change in
Accounting for Postemployment
Benefits ........................ 8,200 8,200
-------- ----------
(8) Income Before Cumulative Effect of
Change in Accounting for
Postemployment Benefits ......... 468,437 517,555
-------- ----------
Federal Income Taxes:
(9) Current ............................ 171,647 178,252
(10) Deferred (Net) ..................... 71,673 81,651
(11) Cumulative Effect of Change in
Accounting for Postemployment
Benefits ........................ 4,415 4,415
-------- ----------
(12) Total Federal Income Taxes
Before Cumulative Effect of
Change in Accounting for
Postemployment Benefits ......... 247,735 264,318
-------- ----------
(13) Fixed Charges (line 5) ............. 200,212 268,381
-------- ----------
(14) Earnings Before Income Taxes and
Fixed Charges (line 8 plus
line 12 plus line 13) ........... $916,384 $1,050,254
======== ==========
Ratio of Earnings to Fixed Charges
(line 14 divided by line 5) ............ 4.58 3.91
Preferred Dividends Requirements:
(15) Preferred Dividends ................ $ 24,981 $ 33,282
(16) Less Tax Deduction for Preferred
Dividends ....................... 41 54
-------- ----------
(17) Total ......................... 24,940 33,228
(18) Ratio of Pre-Tax Income to Net
Income (line 8 plus line 12
divided by line 8) .............. 1.53 1.51
-------- ----------
(19) Line 17 times line 18 .............. 38,158 50,174
(20) Add Tax Deduction for Preferred
Dividends (line 16) ............. 41 54
-------- ----------
(21) Preferred Dividends Factor ......... $ 38,199 $ 50,228
======== ==========
(22) Fixed Charges (line 5) ............. $200,212 $ 268,381
(23) Preferred Dividends Factor
(line 21) ....................... 38,199 50,228
-------- ----------
(24) Total ......................... $238,411 $ 318,609
======== ==========
Ratio of Earnings to Fixed Charges and
Preferred Dividends
(line 14 divided by line 24) ............ 3.84 3.30
UT
0000048732
HOUSTON LIGHTING & POWER
1,000
9-MOS
DEC-31-1994
SEP-30-1994
PER-BOOK
8,955,090
0
499,442
879,419
502,401
10,836,352
1,675,927
0
2,217,434
3,893,361
121,910
351,345
3,176,456
0
0
0
1,849
45,700
10,989
4,004
3,230,738
10,836,352
2,977,433
248,359
2,068,494
2,316,853
660,580
(4,674)
655,906
187,469
460,237
24,981
435,256
246,746
184,964
1,003,291
0
0
Includes cumulative effect of change in accounting for postemployment
benefits of $8,200.
Total annual interest charges on all bonds for year-to-date 9/30/94.
