UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 12, 1995
______________________________
HOUSTON INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
TEXAS 1-7629 74-1885573
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
5 POST OAK PARK
4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 629-3000
______________________________
HOUSTON LIGHTING & POWER COMPANY
(Exact name of registrant as specified in its charter)
TEXAS 1-3187 74-0694415
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
611 WALKER AVENUE
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 228-9211
This combined Form 8-K is separately filed by Houston Industries Incorporated
(Company) and Houston Lighting & Power Company (HL&P). Information contained
herein relating to HL&P is filed by the Company and, separately, by HL&P on its
own behalf. HL&P makes no representation as to information relating to the
Company and its subsidiaries (other than HL&P).
ITEM 5 - OTHER EVENTS
In January 1995, Time Warner Inc. (Time Warner) and the Company reached an
agreement in which Time Warner would acquire KBLCOM Incorporated (KBLCOM) in a
tax-deferred, stock-for-stock merger with a subsidiary of Time Warner for a
sales price of approximately $2.2 billion, subject to closing adjustments. (For
additional details concerning this transaction, see the Company's Current Report
on Form 8-K dated January 26, 1995.) In connection with the pending sale,
effective January 1, 1995, the operations of KBLCOM have been accounted for as
discontinued and prior periods have been restated for consistency in reflecting
KBLCOM as a discontinued operation. The Company's restated consolidated
financial statements, selected five-year data and Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) (which includes
the description of the pending sale) are set forth herein.
Because the Company and HL&P filed their Annual Reports on Form 10-K for the
year ended December 31, 1994 on a combined basis (File Nos. 1-7629 and 1-3187,
respectively) (collectively, the 1994 Combined Form 10-K), the HL&P financial
statements, selected five-year data and MD&A contained in the 1994 Combined Form
10-K are included herein for ease of reference only. HL&P information has not
been restated.
The Company information contained herein, as restated, is set forth as of the
filing of the 1994 Combined Form 10-K. For updated information about the Company
and HL&P, see the Company's and HL&P's Combined Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995.
- 1 -
SELECTED FINANCIAL DATA OF THE COMPANY.
The following table sets forth selected financial data with respect to the
Company's consolidated financial condition and results of consolidated
operations and should be read in conjunction with the Company's Consolidated and
HL&P's Financial Statements and the related notes in this Report. In January
1995, the Company entered into an agreement to dispose of its cable television
operations. In connection with the pending sale, effective January 1, 1995, the
operations of KBLCOM have been accounted for as discontinued and prior periods
have been restated for consistency in reflecting KBLCOM as a discontinued
operation.
Year Ended December 31,
------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------
(Restated) (Restated) (Restated) (Restated) (Restated)
(Thousands of Dollars, except per share amounts)
Revenues ..................................... $ 3,746,085 $ 4,079,863 $ 3,826,841 $ 3,674,543 $ 3,468,682
------------ ------------ ------------ ------------ ------------
Income from continuing operations before
cumulative effect of change in
accounting (1) ............................ 423,985 440,531 370,031 484,275 417,422
Loss from discontinued operations ............ (16,524) (24,495) (29,544) (67,521) (74,633)
Cumulative effect of change in accounting
for income taxes - discontinued
operations (2) ............................ (241,064)
Cumulative effect of change in accounting (2) (8,200) 94,180 21,346
------------ ------------ ------------ ------------ ------------
Net income (1) ............................... $ 399,261 $ 416,036 $ 434,667 $ 416,754 $ 123,071
============ ============ ============ ============ ============
Earnings per common share:
Continuing operations before cumulative
effect of change in accounting (1) ..... $ 3.45 $ 3.39 $ 2.86 $ 3.76 $ 3.28
Discontinued operations ................... (.13) (.19) (.23) (.52) (.59)
Cumulative effect of change in accounting
for income taxes - discontinued
operations (2) ......................... (1.89)
Cumulative effect of change in
accounting (2) ......................... (.07) .73 .17
------------ ------------ ------------ ------------ ------------
Earnings per common share (1) ................ $ 3.25 $ 3.20 $ 3.36 $ 3.24 $ .97
============ ============ ============ ============ ============
Cash dividends declared per common
share (3) ................................. $ 3.00 $ 3.75 $ 2.98 $ 2.96 $ 2.96
Return on average common equity .............. 11.9% 12.8% 13.4% 12.7% 3.6%
Ratio of earnings from continuing
operations to fixed charges before
cumulative effect of change in accounting . 2.89 2.78 2.29 2.55 2.40
- ----------------------------------------------------------------------------------------------------------------------------
At year-end:
Book value per common share (1) ........... $ 27.28 $ 25.06 $ 25.36 $ 24.96 $ 26.76
Market price per common share ............. $ 35.63 $ 47.63 $ 45.88 $ 44.25 $ 36.75
Market price as a percent of book value (1) 131% 190% 181% 177% 137%
- ----------------------------------------------------------------------------------------------------------------------------
At year-end:
Total assets of continuing operations ..... $ 10,784,095 $ 10,867,581 $ 11,075,897 $ 10,820,562 $ 10,660,615
Net assets of discontinued operations ..... 669,132 541,223 277,309 219,429 236,979
------------ ------------ ------------ ------------ ------------
Total assets ........................... $ 11,453,227 $ 11,408,804 $ 11,353,206 $ 11,039,991 $ 10,897,594
============ ============ ============ ============ ============
Long-term obligations including current
maturities - continuing operations (4) . $ 3,905,518 $ 3,950,576 $ 4,244,077 $ 4,488,628 $ 4,144,722
Long-term obligations including current
maturities included in net assets of
discontinued operations ................ 504,580 514,964 740,453 813,203 829,815
Capitalization from continuing operations:
Common stock equity .................... 44% 43% 42% 41% 43%
Cumulative preferred stock of HL&P
(including current maturities) ...... 7% 7% 7% 6% 7%
Long-term debt (including current
maturities) ......................... 49% 50% 51% 53% 50%
- ----------------------------------------------------------------------------------------------------------------------------
Capital expenditures:
Electric capital and nuclear fuel
expenditures (excluding AFUDC) ......... $ 412,899 $ 329,016 $ 337,082 $ 365,486 $ 355,285
Cable television additions and other
cable-related investments - discontinued 84,071 61,856 45,233 26,624 31,186
Corporate headquarters expenditures
(excluding capitalized interest) ....... 44,250 26,034
Non-regulated electric power project
expenditures ........................... 454 35,796 1,625
- ----------------------------------------------------------------------------------------------------------------------------
(1) The Company adopted Statement of Position 93-6 (SOP 93-6), "Employers'
Accounting for Employee Stock Ownership Plans," effective January 1, 1994,
which had the effect of reducing net income while increasing earnings per
share. See also Notes 1(i) and 12(b) to the Financial Statements in this
Report. SOP 93-6 is effective only with respect to financial statements for
periods after January 1, 1994, and no restatement was permitted for prior
periods.
(2) The 1994 cumulative effect relates to the change in accounting for
postemployment benefits. See also Note 12(d) to the Financial Statements in
this Report. The 1992 cumulative effect relates to the change in accounting
for revenues. See also Note 6 to the Financial Statements in this Report.
The 1990 cumulative effect reflects the effects for years prior to 1990 of
the adoption of SFAS No. 109, "Accounting for Income Taxes."
(3) Year ended December 31, 1993 includes five quarterly dividends of $.75 per
share due to a change in the timing of the Company's Board of Directors'
declaration of dividends. Dividend payout was $3.00 per share for 1993. See
also Note 8(a) to the Financial Statements in this Report.
(4) Includes Cumulative Preferred Stock subject to mandatory redemption.
-2-
SELECTED FINANCIAL DATA OF HL&P.
The following table sets forth selected financial data with respect to HL&P's
financial condition and results of operations and should be read in conjunction
with the Financial Statements and the related notes in this Report.
Year Ended December 31,
---------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ----------- ----------- ----------- -----------
(Thousands of Dollars)
Revenues .............................. $ 3,746,085 $ 4,079,863 $ 3,826,841 $ 3,674,543 $ 3,468,682
------------ ----------- ----------- ----------- -----------
Income after preferred dividends but
before cumulative effect of change
in accounting ...................... $ 461,381 $ 449,750 $ 375,955 $ 472,712 $ 429,209
Cumulative effect of change in
accounting (1) ..................... (8,200) 94,180
------------ ----------- ----------- ----------- -----------
Income after preferred dividends ...... $ 453,181 $ 449,750 $ 470,135 $ 472,712 $ 429,209
============ =========== =========== =========== ===========
Return on average common
equity ............................. 12.0% 12.3% 13.3% 13.8% 12.8%
Ratio of earnings to fixed charges
before cumulative effect of change
in accounting ...................... 3.80 3.40 2.73 2.97 2.85
Ratio of earnings to fixed charges and
preferred dividend requirements
before cumulative effect of change
in accounting ...................... 3.20 2.90 2.34 2.53 2.40
- --------------------------------------------------------------------------------------------------------------
At year-end:
Total assets ....................... $ 10,850,981 $10,753,616 $10,790,052 $10,620,642 $10,475,774
Long-term obligations including
current maturities (2) .......... $ 3,356,789 $ 3,402,032 $ 3,796,719 $ 4,150,454 $ 4,065,853
Capitalization:
Common stock equity ............. 51% 50% 47% 44% 43%
Cumulative preferred stock
(including current maturities) 7% 7% 7% 6% 8%
Long-term debt (including current
maturities) .................. 42% 43% 46% 50% 49%
- --------------------------------------------------------------------------------------------------------------
Capital and nuclear fuel expenditures
(excluding AFUDC) .................. $ 412,899 $ 329,016 $ 337,082 $ 365,486 $ 355,285
Percent of capital expenditures
financed internally from
operations ......................... 216% 158% 137% 126% 60%
- --------------------------------------------------------------------------------------------------------------
(1) The 1994 cumulative effect relates to the change in accounting for
postemployment benefits. See also Note 12(d) to the Financial Statements
in this Report. The 1992 cumulative effect relates to the change in
accounting for revenues. See Note 6 to the Financial Statements in this
Report.
(2) Includes Cumulative Preferred Stock subject to mandatory redemption.
-3-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
CURRENT ISSUES
HOUSTON LIGHTING & POWER COMPANY (HL&P)
RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS. In February 1994, the
Public Utility Commission of Texas (Utility Commission) initiated a proceeding
(Docket No. 12065) to determine whether HL&P's existing rates are just and
reasonable. Subsequently, the scope of the docket was expanded to include a
reconciliation of HL&P's fuel costs from April 1, 1990 to July 31, 1994. The
Utility Commission also initiated a separate proceeding (Docket No. 13126) to
review issues regarding the prudence of operation of the South Texas Project
Electric Generating Station (South Texas Project) from the date of commercial
operation through the present. That review would encompass the outage at the
South Texas Project during 1993 through 1994.
In February 1995, all major parties to these proceedings signed a settlement
agreement resolving the issues with respect to HL&P, including the prudence
issues related to operation of the South Texas Project (Proposed Settlement).
Approval of that settlement by the Utility Commission will be required. To that
end, the parties have established procedural dates for a hearing on issues
raised by the parties who are opposed to the Proposed Settlement. A decision by
the Utility Commission on the Proposed Settlement is not anticipated before
early summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January 1, 1995,
and rates would be frozen for three years, subject to certain conditions. Under
the Proposed Settlement, HL&P would amortize its remaining investment of $218
million in the cancelled Malakoff Electric Generating Station (Malakoff) plant,
over a period not to exceed seven years. HL&P also would increase its
decommissioning expense for the South Texas Project by $9 million per year.
Under the Proposed Settlement, approximately $70 million of fuel expenditures
and related interest incurred by HL&P during the fuel reconciliation period
would not be recoverable from ratepayers. This $70 million was recorded as a
one-time, pre-tax charge to reconcilable fuel revenues to reflect the
anticipation of approval of the Proposed Settlement. HL&P would also establish a
new fuel factor approximately 17 percent below that currently in effect and
would refund to customers the balance in its over-recovery account, estimated to
be approximately $180 million after giving effect to the amounts not recoverable
from ratepayers. For additional information regarding HL&P's rate proceeding,
see Note 3 to Houston Industries Incorporated's (Company) Consolidated and
HL&P's Financial Statements (Financial Statements) in this Report.
UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) DIAGNOSTIC EVALUATION OF THE
SOUTH TEXAS PROJECT. In June 1993, the NRC added the South Texas Project to its
"watch list" of plants with weaknesses that warranted increased NRC attention.
The decision to place the South Texas Project on the "watch list" followed the
issuance of a report by a Diagnostic Evaluation Team which conducted a review of
the South Texas Project operations. At a meeting on February 3, 1995, the NRC
removed the South Texas Project from the "watch list". For a further discussion
-4-
of the NRC diagnostic evaluation of the South Texas Project, see Note 2(b) to
the Financial Statements in this Report.
COMPETITION. HL&P and other members of the electric utility industry, like other
regulated industries, are being subjected to technological, regulatory and
economic pressures that are increasing competition and offer the possibility for
fundamental changes in the industry and its regulation. The electric utility
industry historically has been composed of vertically integrated companies which
largely have been the exclusive providers of electric service within a
governmentally-defined geographic area. Prices for that service have been set by
governmental authority under principles that were designed to provide the
utility with an opportunity to recover its costs of providing electric service
plus a reasonable return on its invested capital.
By legislation adopted in 1978, Congress contributed to the development of new
sources of electric generation by freeing cogenerators (i.e., facilities which
produce electrical energy along with thermal energy used for industrial
processes, usually the generation of steam) from most regulatory constraints
applicable to traditional utilities, such as state and federal pricing
regulation and organizational restrictions arising under the Public Utility
Holding Company Act of 1935 (1935 Act). This legislation contributed to the
development of approximately 40 cogeneration facilities in the highly
industrialized Houston area, with a power generation capability of over 5,000
megawatts (MW). As a consequence, HL&P has lost some industrial customers to
self-generation (representing approximately 2,500 MW), and additional projects
continue to be considered by customers.
In 1992 Congress authorized, in the Energy Policy Act, another category of
wholesale generators, Exempt Wholesale Generators (EWGs). Like cogenerators,
these entities exist to sell electric energy at wholesale, but unlike
cogenerators, EWGs may be formed for the generation of electricity without
regard to the simultaneous production of thermal energy. Congress chose to free
EWGs from the structural constraints applicable to traditional utilities under
the 1935 Act, but Congress also authorized traditional utilities to form such
entities themselves without being burdened by those restrictions. At the same
time, Congress placed significant limitations on the ability of traditional
utilities to purchase power in their own service territories from an affiliated
EWG.
There are increasing pressures today by both cogenerators and exempt wholesale
generators for access to the electric transmission and distribution systems of
the regulated utilities in order to have greater flexibility in moving power to
other purchasers, including access for the purpose of making retail sales to
either affiliates of the unregulated generator or to other customers of the
regulated utility. In February 1995, a new entity sought permission from the
Utility Commission to construct a transmission line within HL&P's service
territory for the purpose of transmitting power from a cogeneration facility
owned by an industrial concern to an affiliate of that concern. This proceeding
has been docketed by the Utility Commission, but currently is in its early
stages.
Neither federal nor Texas law currently permits retail sales by unregulated
entities. However, changes to the Federal Power Act made in the Energy Policy
Act of 1992 increase the power of the Federal Energy Regulatory Commission to
order utilities to transmit power generated by both regulated and unregulated
entities to other wholesale customers, and efforts are underway in
-5-
some states that may lead to broader authorization of transmission access for
such entities and even to retail sales by such entities. HL&P anticipates that
some of those arguments will be advanced in the current session of the Texas
legislature during the consideration of the reenactment to the Public Utility
Regulatory Act, which governs electric regulation in Texas.
At this time it is impossible to predict what changes to the electric utility
industry will emerge as a result of any legislative changes that may be adopted
by the Texas legislature. Nor is it possible to predict what other changes to
the industry will emerge from federal regulatory and legislative initiatives or
from regulatory decisions of the Utility Commission, though, it seems likely
that such changes ultimately will increase the competition HL&P faces in
supplying electric energy to its customers.
KBLCOM INCORPORATED (KBLCOM) - DISCONTINUED OPERATIONS
PENDING DISPOSITION OF CABLE OPERATIONS. On January 26, 1995, Time Warner Inc.
(Time Warner) and the Company reached an agreement in which Time Warner would
acquire KBLCOM in a tax-deferred, stock-for-stock merger with a subsidiary of
Time Warner. For a discussion of the transaction, see "LIQUIDITY AND CAPITAL
RESOURCES - COMPANY" below and Note 20(a) to the Financial Statements in this
Report. In connection with the pending sale, effective January 1, 1995, the
operations of KBLCOM have been accounted for as discontinued and prior periods
have been restated for consistency in reflecting KBLCOM as a discontinued
operation.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992 (1992 CABLE
ACT). KBLCOM continues to adapt to changes mandated by the 1992 Cable Act. The
1992 Cable Act directed the Federal Communications Commission (FCC) to set
guidelines for retail prices on basic cable and cable programming services
(other than premium, pay-per-view and a la carte services) which are then
regulated by local governments and the FCC, respectively. It also required cable
programmers to license their services on a fair basis to cable competitors and
to refrain from practices which would restrain the ability of cable competitors
to compete fairly. In addition, at the option of the broadcasters, cable
operators are required to obtain the permission of, and potentially pay a charge
to, broadcast television stations to retransmit their programming to cable
customers.
During 1994, KBLCOM faced further changes in rate regulations when the FCC
announced its revised benchmark rules (Rate Rule II) and its interim
cost-of-service rule (Interim COS Rule). Rate Rule II revised the "benchmark
formulas" established by the FCC in May 1993 and was applied prospectively from
May 1994. Rate Rule II required cable operators to reduce existing rates to the
higher of (i) the rates calculated using the revised benchmark formulas or (ii)
a level 17 percent below such cable operators' rates as of September 30, 1992,
adjusted for inflation and certain increases in programming costs. Cable
operators which cannot or do not wish to comply with Rate Rule II may choose to
justify their existing rates under the Interim COS Rule. This rule established a
cost-of-service rate system which evaluates the rates charged by cable systems
based on their operating expenses and capital costs. Both Rate Rule II and the
Interim COS Rule are lengthy and complex. KBLCOM has complied with these rules
by further adjusting rates
-6-
for regulated services. Due to continuing ambiguity and uncertainty in the
enforcement of the 1992 Cable Act, KBLCOM's basic, tier, equipment and
installation fees may be further reduced.
Any possible decline in revenues due to such rules is not expected to have a
material adverse effect on KBLCOM's financial position or results of operations.
RESULTS OF OPERATIONS
COMPANY
Summary of selected financial data for the Company and its subsidiaries is set
forth below:
Year Ended December 31,
---------------------------- Percent
1994 1993 Change
----------- ----------- ------
(Restated) (Restated)
(Thousands of Dollars)
Revenues ............................ $ 3,746,085 $ 4,079,863 (8)
Operating Expenses .................. 2,749,267 3,075,275 (11)
Operating Income .................... 996,818 1,004,588 (1)
Interest and Other Charges .......... 318,599 350,299 (9)
Income Taxes ........................ 230,424 228,863 1
Discontinued Operations ............. (16,524) (24,495) 33
Net Income .......................... 399,261 416,036 (4)
Year Ended December 31,
---------------------------- Percent
1993 1992 Change
----------- ----------- ------
(Restated) (Restated)
(Thousands of Dollars)
Revenues ............................ $ 4,079,863 $ 3,826,841 7
Operating Expenses .................. 3,075,275 2,904,367 6
Operating Income .................... 1,004,588 922,474 9
Interest and Other Charges .......... 350,299 395,230 (11)
Income Taxes ........................ 228,863 177,276 29
Discontinued Operations ............. (24,495) (29,544) 17
Net Income .......................... 416,036 434,667 (4)
GENERAL
1994 COMPARED TO 1993. Consolidated earnings per share were $3.25 for 1994,
compared to $3.20 per share in 1993. The Company adopted Statement of Position
93-6 (SOP 93-6), "Employers' Accounting for Employee Stock Ownership Plans,"
effective January 1, 1994, which had the effect of reducing 1994 net income by
$12.8 million at the time of adoption while increasing earnings per common share
by $.10. Earnings per common share increased as a result of the weighted average
common shares outstanding for the period ended December 31,
-7-
1994 being reduced by 7,770,313 shares not yet allocated to participants in the
Company's Employee Stock Ownership Plan. For a further discussion of the effects
of the adoption of SOP 93-6, see Notes 1(i) and 12(b) to the Financial
Statements in this Report.
HL&P, the Company's electric utility subsidiary, contributed $3.69 to the 1994
consolidated earnings per share on income of $453.2 million after preferred
dividends. In 1994, discontinued operations contributed a loss of $.13 per
share. The remaining loss of $.31 per share resulted from financing and
corporate costs of the Company and a combined loss of the Company's other
subsidiaries, partially offset by the effects of the adoption of SOP 93-6, as
discussed above.
1993 COMPARED TO 1992. Consolidated earnings per share were $3.20 for 1993,
compared to $3.36 per share in 1992. However, the Company's 1992 earnings were
increased by nonrecurring items at HL&P, as discussed below. Without these
items, the Company's earnings for the year ended 1992 would have been $397.5
million, or $3.07 per share.
HL&P contributed $3.46 to the 1993 consolidated earnings per share on income of
$449.8 million after preferred dividends. In 1993, discontinued operations
contributed a loss of $.19 per share. The remaining loss of $.07 per share
resulted from financing and corporate costs of the Company and a combined loss
of the Company's other subsidiaries.
As a result of the 1 percent general corporate income tax rate increase imposed
by the Omnibus Budget Reconciliation Act of 1993 (OBRA), the Company's 1993
results were reduced by $14.3 million. For additional information regarding the
effect of OBRA on the Company, see Note 13 to the Financial Statements in this
Report.
HL&P
Summary of selected financial data for HL&P is set forth below:
Year Ended December 31,
------------------------- Percent
1994 1993 Change
----------- ---------- ------
(Thousands of Dollars)
Revenues ................................ $3,746,085 $4,079,863 (8)
Operating Expenses ...................... 3,003,203 3,313,577 (9)
Operating Income ........................ 742,882 766,286 (3)
Interest Charges ........................ 249,472 284,585 (12)
Income After Preferred Dividends ........ 453,181 449,750 1
-8-
Year Ended December 31,
------------------------- Percent
1993 1992 Change
----------- ---------- ------
(Thousands of Dollars)
Revenues ................................ $4,079,863 $3,826,841 7
Operating Expenses ...................... 3,313,577 3,077,771 8
Operating Income ........................ 766,286 749,070 2
Interest Charges ........................ 284,585 324,565 (12)
Income After Preferred Dividends ........ 449,750 470,135 (4)
GENERAL
1994 COMPARED TO 1993. The increase in earnings in 1994 compared to 1993
primarily resulted from (i) higher residential and commercial kilowatt-hour
(KWH) sales, which rose 1 percent and 4 percent, respectively, from the previous
year, (ii) lower operating costs associated with reductions in production plant
maintenance and employee benefits, and (iii) lower interest expenses. This
increase in earnings was partially offset by the recording of a one-time,
pre-tax charge to reconcilable fuel revenues of $70 million to reflect the
anticipation of the approval of the Proposed Settlement. Additionally, earnings
in 1994 reflected the recognition of postemployment benefit costs as required by
the adoption, beginning in January 1994, of Statement of Financial Accounting
Standards (SFAS) No. 112, "Employer's Accounting for Postemployment Benefits."
Earnings for 1993 included approximately $33 million in franchise tax refunds.
For information regarding HL&P's current regulatory proceedings and the Proposed
Settlement, and SFAS No. 112, see "CURRENT ISSUES - HL&P - Rate Review, Fuel
Reconciliation and Other Proceedings" above and Notes 3 and 12(d), respectively,
to the Financial Statements in this Report.
1993 COMPARED TO 1992. The decline in earnings in 1993 compared to 1992 was
primarily due to nonrecurring items recorded during 1992 of (i) $142.7 million
of pre-tax income associated with the adoption of a change in accounting
principle related to the timing of recognition of revenue from electricity sales
and (ii) a one-time, pre-tax charge of $86.4 million related to HL&P's
restructuring of operations. For additional information regarding the
restructuring of operations, see Note 16 to the Financial Statements in this
Report. Excluding these two nonrecurring items, earnings for 1992 would have
been $433.0 million. Earnings for 1993 were positively affected by an increase
in KWH sales due to warmer weather compared to 1992 and the addition of
approximately 23,000 customers during the year.
As a result of the 1 percent general corporate income tax rate increase imposed
by OBRA, HL&P's 1993 results were negatively impacted by $8.0 million. For
additional information regarding the effects of OBRA on HL&P, see Note 13 to
HL&P's Financial Statements in this Report.
OPERATING REVENUE AND SALES
1994 COMPARED TO 1993. Operating revenue for 1994 decreased 8.2 percent
primarily due to a decrease in reconcilable fuel revenues and the one-time,
pre-tax charge of $70 million discussed
-9-
above. These decreases were partially offset by increased residential and
commercial KWH sales. Residential and commercial KWH sales increased 1.4 percent
and 4.2 percent, respectively, primarily due to a 1.7 percent increase in the
number of customers. Firm industrial sales remained relatively flat. Firm
industrial sales exclude electricity sold at a reduced rate under agreements
which allow HL&P to interrupt service under some circumstances. As a result of
these increased sales, base (non-fuel) revenues were $49.7 million higher in
1994 compared to the previous year.
1993 COMPARED TO 1992. Operating revenue for 1993 increased 6.6 percent
primarily due to increased KWH sales in all three major customer categories.
Residential and commercial KWH sales increased 3.5 percent and 4.3 percent,
respectively, due to warmer weather and a 1.7 percent increase in the number of
customers. Firm industrial sales increased 1.3 percent. As a result of these
increased sales, base revenues were $70 million higher in 1993 compared to the
previous year.
FUEL AND PURCHASED POWER EXPENSE
1994 COMPARED TO 1993. Fuel expense was $860.9 million in 1994, 19.0 percent
lower than in 1993, primarily due to decreases in both the use and unit cost of
gas, and decreases in the unit cost of all other fuels used in 1994. The average
cost of fuel used by HL&P during 1994 was $1.54 per million British Thermal Unit
(MMBtu) compared to $1.95 per MMBtu in 1993. Purchased power expense decreased
$106.5 million in 1994, a 20.7 percent reduction from 1993, due to lower fuel
costs and the expiration of a purchased power agreement. For information
regarding reconcilable fuel revenues and HL&P's fuel reconciliation proceeding,
see Note 3 to the Financial Statements in this Report.
1993 COMPARED TO 1992. Fuel expense was $1.1 billion in 1993, 16.2 percent
higher than in 1992, primarily due to increases in both the use and unit cost of
gas, partially offset by decreases in the unit cost of all other fuels used in
1993. The average cost of fuel used by HL&P during 1993 was $1.95 per MMBtu
compared to $1.71 per MMBtu in 1992. Purchased power expense increased $29.1
million due to higher fuel costs and escalating capacity charges paid to
cogenerators. The increased fuel costs reflect in part the use of non-nuclear
sources of fuel during the outage of Unit Nos. 1 and 2 of the South Texas
Project. The outage covered substantially all of 1993. For information regarding
the outage of Unit Nos. 1 and 2 of the South Texas Project, see Note 2(b) to the
Financial Statements in this Report.
OPERATION AND MAINTENANCE EXPENSES, DEPRECIATION AND AMORTIZATION, OTHER TAXES
AND INTEREST
1994 COMPARED TO 1993. Operation and maintenance expenses decreased $28.0
million and $41.8 million, respectively, in 1994. These decreases were due
primarily to reduced employee benefits expenses and lower production plant
maintenance costs.
Depreciation and amortization expense in 1994 was $12.4 million higher than in
1993 primarily due to an increase in depreciable property and the additional
amortization, beginning in January 1994, of demand side management expenditures.
-10-
Other taxes increased $40.1 million in 1994, primarily due to the effect of $33
million in franchise tax refunds received in 1993 and increased property taxes
in 1994.
Interest on long-term debt was $29.5 million lower in 1994 than in 1993 because
of previous refinancing activities and the reduction of long-term debt.
Reductions of intercompany borrowings, partially offset by interest on fuel cost
over-recoveries, resulted in a $3.8 million decrease in other interest expense
in 1994.
1993 COMPARED TO 1992. Operation and maintenance expenses increased $55.1
million and $33.1 million, respectively, in 1993. These increases were due
primarily to the recognition of postretirement benefit costs (resulting from the
adoption of SFAS No. 106 on January 1, 1993), costs related to the sale of
receivables, and higher production plant operation and maintenance costs.
Depreciation and amortization expense in 1993 was $14.1 million higher than in
1992 primarily due to an increase in depreciable property and the additional
amortization, beginning in January 1993, of project costs related to Malakoff.
For information regarding Malakoff, see Note 5 to the Financial Statements in
this Report. These increases were partially offset by the cessation of property
loss amortization in 1993.
Other taxes decreased $22.1 million in 1993 primarily due to state franchise tax
refunds totaling approximately $33 million, partially offset by increased
property taxes due to increased tax rates.
Interest on long-term debt was $35.2 million lower in 1993 than in 1992 because
of refinancing activities and the reduction of long-term debt. Reductions of
intercompany borrowings and fuel cost under-recoveries resulted in a $7.2
million decrease in other interest expense in 1993.
KBLCOM - DISCONTINUED OPERATIONS
Summary of selected financial data for KBLCOM reflected as discontinued
operations is set forth below:
Year Ended December 31,
------------------------- Percent
1994 1993 Change
----------- ---------- ------
(Restated) (Restated)
(Thousands of Dollars)
Revenues .................................. $ 255,772 $ 244,067 5
Operating Expenses (1) .................... 156,084 148,325 5
Gross Operating Margin (1) ................ 99,688 95,742 4
Depreciation, Amortization, Interest
and Other ............................... 128,023 117,982 9
Income Taxes (Benefit) .................... (11,811) 2,255 --
Loss from Discontinued Operations ......... (16,524) (24,495) 33
- ------------------
Basic Subscribers (000) ................... 690 605 14
-11-
Year Ended December 31,
------------------------- Percent
1993 1992 Change
----------- ---------- ------
(Restated) (Restated)
(Thousands of Dollars)
Revenues ................................ $ 244,067 $ 235,258 4
Operating Expenses (1) .................. 148,325 140,242 6
Gross Operating Margin (1) .............. 95,742 95,016 1
Depreciation, Amortization, Interest
and Other ............................. 117,982 137,227 (14)
Income Taxes (Benefit) .................. 2,255 (12,667) --
Loss from Discontinued Operations ....... (24,495) (29,544) 17
- ------------------
Basic Subscribers (000) ................. 605 577 5
(1) Exclusive of depreciation and amortization.
GENERAL
1994 COMPARED TO 1993. KBLCOM's net loss per share declined for 1994 from 1993
due to higher revenues resulting from the addition of approximately 85,000
customers, including 51,000 served at year end by three cable companies acquired
by KBLCOM in July 1994 (Acquisition). For a discussion of the Acquisition, see
Note 17 to the Financial Statements in this Report. KBLCOM's operating margin
for 1994 was 39.0 percent, compared to 39.2 percent for 1993.
In 1994, KBLCOM's income tax benefit of $11.8 million was primarily due to a
$7.5 million reduction of deferred state income tax liabilities.
KBLCOM's future earnings outlook is dependent, to a large degree, on the success
of its marketing programs to increase basic subscribers and premium programming
services, its success in marketing other services, such as advertising and
pay-per-view, and the general economic conditions in the areas it serves. In
addition, the cable television industry in general, including KBLCOM, is faced
with various uncertainties, including the impact of recent regulation of basic
service rates by municipalities, the potential entry of telephone companies into
the cable business and increased competition from other entities. Recent changes
to the legislative and regulatory environment in which the cable television
industry operates could limit KBLCOM's ability to increase prices charged for
cable television services in the future. See "CURRENT ISSUES - KBLCOM - 1992
Cable Act."
1993 COMPARED TO 1992. KBLCOM's net loss per share declined due to increased
revenues, reduced interest expense and increased earnings from the Paragon
Communications (Paragon) partnership, which is discussed below. KBLCOM's
operating margin for 1993 was 39.2 percent, compared to 40.4 percent for 1992.
The 1 percent general corporate income tax rate increase imposed by OBRA
negatively impacted KBLCOM's 1993 results by $6.8 million.
-12-
The following discussions of operating revenues and sales and depreciation and
interest expense relate to KBLCOM and its wholly-owned subsidiaries, excluding
the investment in Paragon, which is not included because it is accounted for
under the equity method of accounting.
OPERATING REVENUES AND SALES
1994 COMPARED TO 1993. In 1994, cable television revenues were favorably
impacted by the addition of approximately 34,000 basic subscribers, excluding
the Acquisition, an increase of 5.6 percent and 85,000 basic subscribers,
including the Acquisition, an increase of 14.1 percent. Excluding the
Acquisition, basic service revenues decreased $3.2 million or 2.0 percent in
1994 as compared to 1993 primarily because revenues from additional outlets
declined by $7.1 million. However, including the Acquisition, basic service
revenues increased $1.7 million or 1.1 percent. Basic service revenue increases
are due primarily to additional customers and the Acquisition partially offset
by lower rates for basic service, including additional outlets, mandated by the
1992 Cable Act, which were placed in effect in September 1993 and July 1994. See
"CURRENT ISSUES - KBLCOM - 1992 Cable Act."
Ancillary service revenues from sources, such as advertising and installation
fees, increased $6.9 million, or 22.3 percent, in 1994 from the prior year. This
increase was due primarily to increased advertising sales and telephony-related
and premium fees. Pay-per-view revenues declined 3.1 percent in 1994 from 1993
primarily due to the lack of major feature movies and local pay-per-view
sporting events in 1994. Premium revenues increased $3.4 million, or 8.8 percent
due primarily to new packaging of premium units and multiplexing, which is the
delivery of multiple channels of premium service with no change in price to the
subscriber. The Acquisition did not have a material impact on these revenue
categories.
1993 COMPARED TO 1992. Basic service revenues increased $5.4 million, or 3.4
percent, primarily due to the addition of 28,000 basic subscribers. However, the
revenue increase related to the additional subscribers was partially offset by a
reduction in basic rates effective on September 1, 1993 implemented as a result
of the 1992 Cable Act. A large portion of this reduction resulted from the loss
of revenues from additional outlets.
Ancillary service revenues from sources, such as advertising and installation
fees, increased $3.2 million, or 11.8 percent, in 1993 from the prior year. This
increase was due primarily to increased advertising sales and higher
installation and other related transaction fees. Pay-per-view revenues were
approximately the same in 1993 as in 1992. Premium revenues were approximately
the same in 1993 as in 1992, ending a long decline in this revenue category.
DEPRECIATION AND INTEREST EXPENSE
1994 COMPARED TO 1993. Excluding the Acquisition, depreciation and amortization
increased $4.2 million or 5.5 percent in 1994 compared to 1993 due primarily to
asset additions. Including the Acquisition, such costs increased $6.8 million or
8.7 percent in 1994. In 1994, interest expense increased $5.5 million, or 7.6
percent, due to an increase in interest rates and higher debt balances.
-13-
1993 COMPARED TO 1992. Depreciation and amortization increased $2.3 million, or
3.0 percent, in 1993 due primarily to asset additions. In 1993, interest expense
decreased $12.5 million, or 14.6 percent, due primarily to lower debt balances.
The Company recapitalized KBLCOM to reduce the amount of debt in its capital
structure. As part of this recapitalization, the Company contributed $177.3
million of equity which was used to reduce KBLCOM's indebtedness. This
recapitalization increased KBLCOM's equity, reduced the financial risks
associated with indebtedness and increased KBLCOM's financial flexibility.
PARAGON PARTNERSHIP
1994 COMPARED TO 1993. A subsidiary of KBLCOM owns a 50 percent interest in
Paragon, a Colorado partnership, which, in turn, owns cable television systems
which served approximately 967,000 basic cable customers in seven states as of
December 31, 1994. Paragon's revenues were favorably impacted in 1994 by the
addition of approximately 35,000 basic subscribers, an increase of 3.8 percent
from 1993. KBLCOM's 1994 equity interest in the pre-tax earnings of Paragon was
$33.5 million, compared to $32.2 million in 1993. The increase was due to
increased revenue and reduced interest expense at Paragon, partially offset by
the impact of the 1992 Cable Act.
1993 COMPARED TO 1992. Paragon served approximately 932,000 basic cable
customers in seven states as of December 31, 1993. Paragon's revenues were
favorably impacted in 1993 by the addition of approximately 31,000 subscribers,
an increase of 3.4 percent. KBLCOM's 1993 equity interest in the pre-tax
earnings of Paragon was $32.2 million, compared to $24.9 million in 1992. The
increase was due to increased revenue, improved operating margins and reduced
interest expense at Paragon, partially offset by the impact of the 1992 Cable
Act.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company's cash requirements stem primarily from operating expenses, capital
expenditures, payment of common stock dividends, payment of preferred stock
dividends, and interest and principal payments on debt. Net cash provided by
operating activities totaled $1.2 billion in 1994.
Net cash used in investing activities in 1994 totaled $561.8 million, primarily
due to electric capital expenditures of $418.5 million (including allowance for
borrowed funds used during construction). Net cash used in discontinued cable
television investing activities for 1994 totaled $84.1 million, primarily due to
property additions and other cable-related investments.
Financing activities for 1994 resulted in a net cash outflow of $639.7 million.
The Company's primary financing activities were the payment of dividends,
repayment of short-term borrowings, redemption of preferred stock and payment of
long-term debt.
-14-
The liquidity and capital requirements of the Company and its subsidiaries are
affected primarily by capital programs and debt service requirements. The
capital requirements for 1994, and as estimated for 1995 through 1997, are as
follows:
Millions of Dollars
----------------------------
1994 1995 1996 1997
---- ---- ---- ----
Electric capital and nuclear fuel (excluding Allowance
for Funds Used During Construction (AFUDC)) ....... $413 $364 $385 $338
Corporate headquarters expenditures (excluding
capitalized interest) (1) ......................... 44 79 6
Non-regulated electric power project expenditures (2) 35
Maturities of long-term debt, preferred stock
and minimum capital lease payments ................ 45 49 400 254
Discontinued Operations:
Cable television additions and other cable
related investments (3) ...................... 84 91
Cable acquisitions ................................ 80
Maturities of long-term debt ...................... 10 16 76 130
---- ---- ---- ----
Total ................................................ $676 $634 $867 $722
==== ==== ==== ====
- ------------
(1) In December 1993, a subsidiary of the Company acquired a new
headquarters building in downtown Houston. Structural improvements and
various renovations have been ongoing to accommodate the Company's
business requirements.
(2) Additional capital expenditures are dependent upon the nature and extent
of future project commitments entered into by Houston Industries Energy,
Inc. (HI Energy).
(3) Due to the pending disposition of KBLCOM, capital requirements after
1995 have not been presented.
For a discussion of the Company's commitments for capital expenditures, see Note
14 to the Financial Statements in this Report.
COMPANY
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
The Company has consolidated its financing activities in order to provide a
coordinated, cost-effective method of meeting short and long-term capital
requirements. As part of the consolidated financing program, the Company has
established a "money fund" through which its subsidiaries can borrow or invest
on a short-term basis. The funding requirements of individual subsidiaries are
aggregated and borrowing or investing is conducted by the Company based on the
net cash position. In 1994, net funding requirements were met with borrowings
under the Company's commercial paper program, except that HL&P's borrowing
requirements were generally met with HL&P's commercial paper program. In 1995,
net funding requirements of the Company and HL&P are expected to be met with a
combination of commercial paper and bank borrowings. As
-15-
of December 31, 1994, the Company had a bank credit facility of $600 million
(exclusive of bank credit facilities of subsidiaries), which was used to support
its commercial paper program. At December 31, 1994, the Company had
approximately $423 million of commercial paper outstanding. Rates paid by the
Company on its short-term borrowings are generally lower than the prime rate. In
March 1995, the Company's bank credit facility was increased to $800 million.
On January 26, 1995, the Company entered into an agreement with Time Warner to
sell all of its cable television operations. In exchange for KBLCOM's common
stock, Time Warner will issue to the Company one million shares of its common
stock and 11 million shares of a newly-issued series of its convertible
preferred stock (with a liquidation value of $100 per share). The preferred
stock will be convertible into approximately 22.9 million shares of Time Warner
common stock. After four years, Time Warner will have the right to exchange the
preferred stock for common stock at the stated conversion rate, unless the
Company elects to convert the shares before such time. In addition, Time Warner
will purchase KBLCOM's intercompany debt for an estimated $600 million in cash.
Approximately $685 million of KBLCOM's third party debt and other liabilities
will be assumed by Time Warner upon the closing of the sale. Closing of the
transaction, which is expected to occur in the second half of 1995, is subject
to the approval of certain franchise authorities and other governmental
entities.
Based on a Time Warner common stock price of $35.50 and assuming the closing
occurs on September 30, 1995, the Company estimates that it will recognize an
after-tax gain of approximately $650 million. The Company anticipates that it
will record a portion of this gain (estimated to be approximately $100 million)
in the first quarter of 1995 in recognition of the deferred tax asset arising
from the Company's excess tax basis in KBLCOM stock. The remainder of the gain
will be recognized at closing. The Company believes that the transaction will
improve its liquidity by exchanging the Company's investment in KBLCOM for cash
and marketable securities. In addition, the terms of the preferred stock to be
issued by Time Warner provide for the payment of an annual cash dividend of
$3.75 per share for four years. Assuming Time Warner common stock were to
continue to pay its current dividend of $.36 per share, the Company would expect
to receive after-tax dividend payments on the Time Warner common and preferred
stock of approximately $37 million per year.
It is anticipated that the $600 million proceeds to be received in connection
with the sale of KBLCOM's intercompany debt would be used for general corporate
purposes, including but not limited to the redemption of or retirement of
indebtedness of the Company, the advance or contribution of funds to one or more
subsidiaries to be used for their general corporate purposes or (depending on
market and other conditions) the possible repurchase of certain outstanding
shares of the Company's common stock.
The Company has registered with the Securities and Exchange Commission (SEC)
$250 million principal amount of debt securities which remain unissued. Proceeds
from any sales of these debt securities are expected to be used for general
corporate purposes, including investments in and loans to subsidiaries.
The Company also has registered with the SEC five million shares of its common
stock. Proceeds from the sale of these securities will be used for general
corporate purposes, including,
-16-
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.
HL&P
HL&P's cash requirements stem primarily from operating expenses, capital
expenditures, payment of common stock dividends, payment of preferred stock
dividends, and interest and principal payments on debt. HL&P's net cash provided
by operating activities for 1994 totaled approximately $1.2 billion. Net cash
used in HL&P's investing activities for 1994 totaled $434.3 million including
allowance for borrowed funds used during construction.
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 18 to the Financial
Statements in this Report.
HL&P's financing activities for 1994 resulted in a net cash outflow of $569.2
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 information with respect to these matters, see
Notes 9 and 10(a) to the Financial Statements in this Report.
CAPITAL PROGRAM
HL&P's capital and nuclear fuel expenditures (excluding AFUDC) for 1994 totaled
$413 million, which was below the authorized budgeted level of $478 million.
Estimated expenditures for 1995, 1996 and 1997 are $364 million, $385 million
and $338 million, respectively. Maturities of long-term debt, preferred stock
subject to mandatory redemption, and capital leases for this same period include
$49 million in 1995, $200 million in 1996 and $254 million in 1997.
HL&P's capital program for the next three years is expected to relate to costs
for production, transmission, distribution, and general plant. HL&P began
construction of the San Jacinto Steam Electric Station (San Jacinto Station),
formerly the E. I. du Pont de Nemours Company (DuPont) project, in 1993 in order
to provide generating capacity in 1995. The San Jacinto Station is being
constructed pursuant to an agreement between HL&P and DuPont, whereby HL&P will
construct, own, and operate two 80 MW gas turbine units located at DuPont's La
Porte, Texas facility. The project will supply DuPont with process steam while
all electrical energy will be used in the HL&P system. HL&P's capital program is
subject to periodic review and portions may be revised from time to time due to
changes in load forecasts, changing regulatory and environmental standards and
other factors.
-17-
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
HL&P expects to finance its 1995 through 1997 capital program with funds
generated internally from operations.
HL&P has registered with the SEC $230 million aggregate liquidation value of its
preferred stock and $580 million aggregate principal amount of its debt
securities that may be issued as first mortgage bonds and/or as debt securities
collateralized by first mortgage bonds. Proceeds from any sale of these
securities are expected to be used for general corporate purposes including the
purchase, redemption (to the extent permitted by the terms of the outstanding
securities), repayment or retirement of outstanding indebtedness or preferred
stock of HL&P.
In 1994, HL&P's interim financing requirements were met with commercial paper.
In 1995, HL&P's interim financing requirements are expected to be met with a
combination of commercial paper and bank borrowings. At December 31, 1994, HL&P
had approximately $236 million in short-term investments and no commercial paper
borrowings. HL&P's commercial paper program is supported by a bank credit
facility of $400 million.
HL&P's capitalization at December 31, 1994 was 42 percent long-term debt, 7
percent preferred stock and 51 percent common stock equity.
ENVIRONMENTAL EXPENDITURES
The new requirements of the Clean Air Act will require HL&P to increase its
environmental expenditures. Modifying its existing facilities to reduce
emissions of nitrogen oxides (NOx) cost $4 million in 1994. The date for
additional compliance has been delayed by the United States Environmental
Protection Agency (EPA) and the Texas Natural Resource Conservation Commission
until it becomes certain that additional expenditures for NOx emission
reductions will be required under the provisions of the Clean Air Act. Up to an
additional $40 million may be incurred by HL&P in order to fully comply with new
NOx requirements after 1997. In addition, it is anticipated that $7 million in
1995 will be expended to install continuous emission monitoring equipment;
approximately $4 million was incurred for this equipment in 1994.
The EPA identified HL&P as a potentially responsible party under the
Comprehensive Environmental Response, Compensation, and Liability Act for the
costs of cleaning up a site located adjacent to one of HL&P's transmission
lines. In October 1992, the EPA issued an Administrative Order to HL&P and
several other companies purporting to require them to manage the remediation of
the site. Because of various defenses it believes are available to it, HL&P has
not complied with this Order. To date, neither the EPA nor any other potentially
responsible party has instituted a claim against HL&P for cleanup costs;
however, under current law, potentially responsible parties could be determined
to be jointly and severally liable for such costs. The cleanup of the entire
site may cost $80 million. If, despite its defenses, HL&P were ultimately held
to be responsible for the site, it may be subject to substantial fines and
damages. Although no prediction can be made at this time as to the ultimate
outcome of this matter, in light of all the circumstances involved, the Company
and HL&P do not believe any costs that HL&P will incur
-18-
in this matter will have a material adverse effect on the Company's or HL&P's
financial condition or results of operation.
KBLCOM - DISCONTINUED OPERATIONS
Cash requirements for discontinued operations stem primarily from operating
expenses, capital expenditures, and interest and principal payments on debt. Net
cash provided by discontinued cable television operating activities was $23.4
million in 1994.
Net cash used in discontinued cable television investing activities for 1994
totaled $84.1 million, primarily due to property additions and other
cable-related investments. These amounts were financed principally through
internally generated funds and intercompany advances. A substantial portion of
KBLCOM's 1995 capital requirements is expected to be met through internally
generated funds. It is expected that any shortfall will be met through
intercompany borrowings. For a discussion of the pending disposition of KBLCOM,
see Note 20(a) to the Financial Statements in this Report.
Financing activities for discontinued cable television operations for 1994
resulted in a net cash outflow of $68.2 million. Included in these activities
was the reduction of third party debt through scheduled principal payments and
repayments of debt assumed in the Acquisition.
FINANCING ACTIVITIES
In the first quarter of 1994 and 1995, KBLCOM made mandatory repayments of $10.4
million and $15.8 million, respectively, principal amount of its senior notes
and senior subordinated notes. In January 1994, KBLCOM's letter of credit and
term loan facility was terminated. As of December 31, 1993, the facility was
utilized in the form of letters of credit aggregating approximately $89.3
million which supported debt service obligations on senior subordinated notes.
In July 1994, KBLCOM acquired the stock of three cable companies then 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.
Notes were repaid in connection with the Acquisition in the amount of $57.7
million.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
Additional borrowing under a KBLCOM bank credit facility is subject to certain
covenants which relate primarily to the maintenance of certain financial ratios,
principally debt to cash flow and interest coverages. KBLCOM presently is in
compliance with such covenants. At December 31, 1994, KBLCOM had $76 million
available for borrowing under its credit facility. The facility has scheduled
reductions in March of each year until it is terminated in March 1999.
-19-
HI ENERGY
The Company formed HI Energy in 1993 to seek investment opportunities in
domestic and foreign power generation projects and the privatization of foreign
electric utilities. The international market for private power development has
recently emerged and is currently where HI Energy is concentrating most of its
resources.
During 1994, HI Energy began construction of the Ford Heights Tire-To-Energy
Project, a $106 million electric generating plant south of Chicago, Illinois. HI
Energy is committed to fund $21 million through combined equity contributions
and loans as a result of its participation in this project.
In January 1995, HI Energy acquired for $15.7 million a 90 percent equity
interest in an electric utility operating company in the province of Santiago
del Estero, a rural province in the north central part of Argentina. The utility
system serves approximately 100,000 customers in an area of 136,000 square
kilometers.
Additional capital expenditures are dependent upon the nature and extent of
future project commitments entered into by HI Energy.
NEW ACCOUNTING ISSUES
The staff of the SEC has questioned certain of the current accounting practices
of the electric utility industry regarding the recognition, measurement and
classification of decommissioning costs for nuclear generating facilities
recorded on the financial statements of electric utilities. In response to these
questions, the Financial Accounting Standards Board has agreed to review the
accounting for removal costs, including decommissioning. If the current electric
utility industry accounting practices for such decommissioning are changed: (i)
annual provisions for decommissioning could increase, (ii) the estimated cost
for decommissioning could be recorded as a liability rather than as accumulated
depreciation, and (iii) trust fund income from the external decommissioning
trusts could be reported as investment income rather than as a reduction of
decommissioning expense.
-20-
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
Year Ended December 31,
---------------------------------------
1994 1993 1992
----------- ----------- -----------
(Restated) (Restated) (Restated)
REVENUES .................................... $ 3,746,085 $ 4,079,863 $ 3,826,841
----------- ----------- -----------
EXPENSES:
Fuel .................................... 860,936 1,063,050 914,732
Purchased power ......................... 408,963 515,502 486,414
Operation and maintenance ............... 828,748 898,535 810,379
Taxes other than income taxes ........... 251,421 211,295 233,439
Restructuring ........................... 86,431
Depreciation and amortization ........... 399,199 386,893 372,972
----------- ----------- -----------
Total ............................ 2,749,267 3,075,275 2,904,367
----------- ----------- -----------
OPERATING INCOME ............................ 996,818 1,004,588 922,474
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Allowance for other funds used during
construction ........................ 4,115 3,512 6,169
Interest income ......................... 5,656 33,357 34,361
Other - net ............................. (33,581) (21,764) (20,467)
----------- ----------- -----------
Total ............................ (23,810) 15,105 20,063
----------- ----------- -----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt .............. 265,494 304,462 338,771
Other interest .......................... 25,076 15,145 23,323
Allowance for borrowed funds used
during construction ................. (5,554) (3,781) (6,191)
Preferred dividends of subsidiary ....... 33,583 34,473 39,327
----------- ----------- -----------
Total ............................ 318,599 350,299 395,230
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING .................... 654,409 669,394 547,307
INCOME TAXES ................................ 230,424 228,863 177,276
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING ........................... 423,985 440,531 370,031
LOSS FROM DISCONTINUED CABLE TELEVISION
OPERATIONS (NET OF APPLICABLE INCOME
TAXES) .................................. (16,524) (24,495) (29,544)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
REVENUES (NET OF INCOME TAXES OF $48,517) 94,180
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS (NET OF INCOME
TAXES OF $4,415) ........................ (8,200)
----------- ----------- -----------
NET INCOME .................................. $ 399,261 $ 416,036 $ 434,667
=========== =========== ===========
-21-
EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING....... $ 3.45 $ 3.39 $ 2.86
LOSS FROM DISCONTINUED CABLE TELEVISION
OPERATIONS........................... (.13) (.19) (.23)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR REVENUES......................... .73
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POSTEMPLOYMENT BENEFITS.......... (.07)
----------- ----------- -----------
EARNINGS PER COMMON SHARE.................... $ 3.25 $ 3.20 $ 3.36
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000)........................ 122,853 130,004 129,514
See Notes to Consolidated Financial Statements.
-22-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
---------------------------------------
1994 1993 1992
----------- ----------- -----------
Balance at Beginning of Year ......... $ 1,191,230 $ 1,254,584 $ 1,202,125
Add - Net Income ..................... 399,261 416,036 434,667
----------- ----------- -----------
Total ........................ 1,590,491 1,670,620 1,636,792
Common Stock Dividends:
1994, $3.00; 1993, $3.75; 1992,
$2.98; (per share) ............... (369,270) (487,927) (385,952)
Tax Benefit of ESOP Dividends ........ 8,939 8,944
Redemption of HL&P Preferred Stock ... (402) (5,200)
----------- ----------- -----------
Balance at End of Year ............... $ 1,221,221 $ 1,191,230 $ 1,254,584
=========== =========== ===========
See Notes to Consolidated Financial Statements.
-23-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
December 31,
--------------------------
1994 1993
----------- -----------
(Restated) (Restated)
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Production ................................. $ 7,221,142 $ 7,165,811
Transmission ............................... 876,159 840,736
Distribution ............................... 2,628,450 2,503,964
General .................................... 1,017,319 969,733
Construction work in progress .............. 333,180 242,661
Nuclear fuel ............................... 212,795 211,785
Plant held for future use .................. 201,741 196,330
Electric plant acquisition adjustments ........ 3,166 3,166
Other property ................................ 85,529 47,494
----------- -----------
Total ................................... 12,579,481 12,181,680
Less accumulated depreciation and
amortization ................................ 3,527,598 3,203,945
----------- -----------
Property, plant and equipment - net ..... 9,051,883 8,977,735
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ..................... 10,443 14,884
Special deposits .............................. 10 11,834
Accounts receivable - net ..................... 22,149 3,736
Accrued unbilled revenues ..................... 38,372 29,322
Fuel stock, at lifo cost ...................... 56,711 58,585
Materials and supplies, at average cost ....... 148,007 160,406
Prepayments ................................... 14,398 17,284
----------- -----------
Total current assets .................... 290,090 296,051
----------- -----------
OTHER ASSETS:
Net assets of discontinued cable
television operations ....................... 669,132 541,223
Deferred plant costs - net .................... 638,917 664,699
Deferred debits ............................... 271,454 357,868
Unamortized debt expense and premium
on reacquired debt .......................... 161,885 169,465
Equity investment in foreign electric
utility ..................................... 35,449 36,984
Regulatory asset - net ........................ 235,463 246,763
Recoverable project costs - net ............... 98,954 118,016
----------- -----------
Total other assets .................... 2,111,254 2,135,018
----------- -----------
Total ................................. $11,453,227 $11,408,804
=========== ===========
See Notes to Consolidated Financial Statements.
-24-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
December 31,
-------------------------
1994 1993
----------- -----------
(Restated) (Restated)
CAPITALIZATION (STATEMENTS ON FOLLOWING PAGES):
Common stock equity ............................. $ 3,369,248 $ 3,273,997
----------- -----------
Preference stock, no par; authorized,
10,000,000 shares; none outstanding
Cumulative preferred stock of subsidiary:
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 .................................. 3,734,133 3,738,615
----------- -----------
Total capitalization .................... 7,576,636 7,531,202
----------- -----------
CURRENT LIABILITIES:
Notes payable ................................... 423,291 591,385
Accounts payable ................................ 280,057 204,306
Taxes accrued ................................... 91,394 234,086
Interest accrued ................................ 73,527 73,693
Dividends declared .............................. 98,469 97,994
Accrued liabilities to municipalities ........... 21,307 22,589
Customer deposits ............................... 64,905 65,604
Current portion of long-term debt and
preferred stock .............................. 49,475 44,725
Other ........................................... 64,026 67,142
----------- -----------
Total current liabilities ............... 1,166,451 1,401,524
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes ............... 1,770,844 1,689,712
Unamortized investment tax credit ............... 411,580 430,996
Fuel-related credits ............................ 242,912 77,533
Other ........................................... 284,804 277,837
----------- -----------
Total deferred credits .................. 2,710,140 2,476,078
----------- -----------
COMMITMENTS AND CONTINGENCIES
Total ................................ $11,453,227 $11,408,804
=========== ===========
See Notes to Consolidated Financial Statements.
-25-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
December 31,
-------------------------
1994 1993
----------- -----------
(Restated) (Restated)
COMMON STOCK EQUITY:
Common stock, no par; authorized,
400,000,000 shares; issued, 131,296,663
and 130,658,755 shares at December 31,
1994 and 1993, respectively...................... $2,437,638 $ 2,415,256
Unearned ESOP shares, 7,770,313 shares............ (289,611)
Note receivable from ESOP......................... (332,489)
Retained earnings................................. 1,221,221 1,191,230
----------- -----------
Total common stock equity.............. 3,369,248 3,273,997
----------- -----------
CUMULATIVE PREFERRED STOCK, no par;
authorized, 10,000,000 shares; outstanding,
5,232,397 and 5,432,397 shares at
December 31, 1994 and 1993, respectively
(entitled upon involuntary liquidation
to $100 per share):
Houston Lighting & Power Company:
Not subject to mandatory redemption:
$4.00 series, 97,397 shares............ 9,740 9,740
$6.72 series, 250,000 shares............ 25,115 25,115
$7.52 series, 500,000 shares............ 50,226 50,226
$8.12 series, 500,000 shares............ 50,098 50,098
Series A - 1992, 500,000 shares............ 49,094 49,098
Series B - 1992, 500,000 shares............ 49,104 49,109
Series C - 1992, 600,000 shares............ 58,984 58,984
Series D - 1992, 600,000 shares............ 58,984 58,984
----------- -----------
Total.................................. 351,345 351,354
----------- -----------
Subject to mandatory redemption:
$8.50 series, 400,000 and 600,000 shares
at December 31, 1994 and 1993,
respectively.......................... 39,799 59,597
$9.375 series, 1,285,000 shares............. 127,811 127,639
Current redemptions......................... (45,700) (20,000)
----------- -----------
Total.................................. 121,910 167,236
----------- -----------
Total cumulative preferred stock.... 473,255 518,590
----------- -----------
LONG-TERM DEBT:
Debentures:
7 1/4% series, due 1996..................... 200,000 200,000
9 3/8% series, due 2001..................... 250,000 250,000
7 7/8% series, due 2002..................... 100,000 100,000
Unamortized discount........................ (1,271) (1,456)
----------- -----------
Total debentures.......................... 548,729 548,544
----------- -----------
Houston Lighting & Power Company:
First mortgage bonds:
5 1/4% series, due 1996..................... 40,000 40,000
5 1/4% series, due 1997..................... 40,000 40,000
6 3/4% series, due 1997..................... 35,000 35,000
7 5/8% series, due 1997..................... 150,000 150,000
6 3/4% series, due 1998..................... 35,000 35,000
7 1/4% series, due 2001..................... 50,000 50,000
9.15 % series, due 2021..................... 160,000 160,000
8 3/4% series, due 2022..................... 100,000 100,000
7 3/4% series, due 2023..................... 250,000 250,000
7 1/2% series, due 2023..................... 200,000 200,000
-26-
4.90 % pollution control series, due 2003... $ 16,600 $ 16,600
7 % pollution control series, due 2008... 19,200 19,200
6 3/8% pollution control series, due 2012... 33,470 33,470
6 3/8% pollution control series, due 2012... 12,100 12,100
7 3/4% pollution control series, due 2015... 68,700 68,700
8 1/4% pollution control series, due 2015... 90,000 90,000
7 7/8% pollution control series, due 2016... 68,000 68,000
6.70 % pollution control series, due 2017... 43,820 43,820
5.60 % pollution control series, due 2017... 83,565 83,565
7 7/8% pollution control series, due 2018... 50,000 50,000
7.20 % pollution control series, due 2018... 175,000 175,000
8 1/4% pollution control series, due 2019... 100,000 100,000
8.10 % pollution control series, due 2019... 100,000 100,000
7 7/8% pollution control series, due 2019... 29,685 29,685
7.60 % pollution control series, due 2019... 70,315 70,315
7.70 % pollution control series, due 2019... 75,000 75,000
7 1/8% pollution control series, due 2019... 100,000 100,000
7 5/8% pollution control series, due 2019... 100,000 100,000
6.70 % pollution control series, due 2027... 56,095 56,095
Medium-term notes series A, 9.80%-9.85%,
due 1996-1999................................ 180,500 200,000
Medium-term notes series B, 8 5/8%, due 1996... 100,000 100,000
Medium-term notes series C, 6.10%, due 2000.... 150,000 150,000
Medium-term notes series B, 8.15%, due 2002.... 100,000 100,000
Medium-term notes series C, 6.50%, due 2003.... 150,000 150,000
----------- -----------
Total first mortgage bonds................ 3,032,050 3,051,550
----------- -----------
Pollution control revenue bonds:
Gulf Coast 1980-T series, floating rate,
due 1998..................................... 5,000 5,000
Brazos River 1985 A2 series, 9 3/4%, due 2005.. 4,265 4,265
Brazos River 1985 A1 series, 9 7/8%, due 2015.. 87,680 87,680
Matagorda County 1985 series, 10%, due 2015.... 58,905 58,905
----------- -----------
Total pollution control revenue bonds..... 155,850 155,850
----------- -----------
Unamortized premium (discount) - net.............. (12,253) (12,839)
Capitalized lease obligations, discount rates of
5.2%-11.7%, due 1995-2018....................... 12,403 17,825
Notes payable..................................... 1,129 2,410
----------- -----------
Subtotal.................................. 1,279 7,396
----------- -----------
Total.................................. 3,189,179 3,214,796
----------- -----------
Total............................... 3,737,908 3,763,340
Current maturities.................. (3,775) (24,725)
----------- -----------
Total long-term debt................ 3,734,133 3,738,615
----------- -----------
Total capitalization.............. $ 7,576,636 $ 7,531,202
=========== ===========
See Notes to Consolidated Financial Statements.
-27-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
Year Ended December 31,
------------------------------------------
1994 1993 1992
----------- ----------- -----------
(Restated) (Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations........................... $ 423,985 $ 440,531 $ 370,031
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Depreciation and amortization........................... 399,199 386,893 372,972
Amortization of nuclear fuel............................ 21,561 2,101 29,237
Deferred income taxes................................... 85,547 199,326 64,474
Investment tax credit................................... (19,416) (19,797) (19,926)
Allowance for other funds used during
construction......................................... (4,115) (3,512) (6,169)
Payment of disputed income taxes and
related interest..................................... (52,817)
Fuel cost (refund) and over/(under)
recovery - net....................................... 277,940 (91,863) (84,072)
Restructuring........................................... 86,431
Regulatory asset - net.................................. 11,300 (69,337) (12,180)
Net cash provided by (used in) discontinued
cable television operations.......................... 23,396 (9,213) 35,848
Changes in other assets and liabilities:
Accounts receivable - net............................ (27,463) 302,268 11,663
Inventory............................................ 14,273 13,868 9,190
Other current assets................................. 14,710 (15,138) 2,699
Accounts payable..................................... 75,751 (7,962) 3,400
Interest and taxes accrued........................... (142,858) (13,164) (22,487)
Other current liabilities............................ (5,102) 41,430 (55,508)
Other - net.......................................... 48,396 52,609 60,291
----------- ----------- -----------
Net cash provided by operating
activities........................................ 1,197,104 1,209,040 793,077
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction)............................... (418,453) (332,797) (343,273)
Non-regulated electric power project
expenditures............................................ (454) (35,796) (1,625)
Corporate headquarters expenditures (including
capitalized interest)................................... (46,829) (26,034)
Net cash used in discontinued cable television
operations.............................................. (84,071) (61,856) (45,233)
Other - net................................................. (12,027) (5,295) (9,681)
----------- ----------- -----------
Net cash used in investing activities................ (561,834) (461,778) (399,812)
----------- ----------- -----------
-28-
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock.................................. $ 52,638
Proceeds from preferred stock............................... $ 216,700
Proceeds from first mortgage bonds.......................... 840,427 488,760
Proceeds from debentures.................................... 99,216
Payment of matured first mortgage bonds..................... $ (19,500) (136,000) (157,000)
Payment of common stock dividends........................... (368,790) (389,933) (385,952)
Redemption of preferred stock............................... (20,000) (40,000) (103,000)
Increase (decrease) in notes payable........................ (168,094) 27,136 233,955
Extinguishment of long-term debt............................ (995,751) (717,912)
Net cash used in discontinued cable television
operations.............................................. (68,184) (225,489) (79,255)
Other - net................................................. 4,857 65,277 52,871
----------- ----------- -----------
Net cash used in financing activities................... (639,711) (801,695) (351,617)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................. (4,441) (54,433) 41,648
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................. 14,884 69,317 27,669
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................ $ 10,443 $ 14,884 $ 69,317
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized)....................... $ 366,548 $ 397,911 $ 474,655
Income taxes................................................ 174,657 123,975 172,053
See Notes to Consolidated Financial Statements.
-29-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
Year Ended December 31,
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
OPERATING REVENUES.......................................... $ 3,746,085 $ 4,079,863 $ 3,826,841
----------- ----------- -----------
OPERATING EXPENSES:
Fuel.................................................... 860,936 1,063,050 914,732
Purchased power......................................... 408,963 515,502 486,414
Operation............................................... 580,892 608,912 553,847
Maintenance............................................. 247,856 289,623 256,532
Depreciation and amortization........................... 398,142 385,731 371,645
Income taxes............................................ 254,993 239,464 174,731
Other taxes............................................. 251,421 211,295 233,439
Restructuring........................................... 86,431
----------- ----------- -----------
Total............................................ 3,003,203 3,313,577 3,077,771
----------- ----------- -----------
OPERATING INCOME............................................ 742,882 766,286 749,070
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Allowance for other funds used during
construction........................................ 4,115 3,512 6,169
Interest income......................................... 10,000 3,296 2,447
Other - net............................................. (12,561) (4,286) (17,839)
----------- ----------- -----------
Total............................................ 1,554 2,522 (9,223)
----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES.............................. 744,436 768,808 739,847
----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt.............................. 246,533 276,049 311,208
Other interest.......................................... 8,493 12,317 19,548
Allowance for borrowed funds used during
construction........................................ (5,554) (3,781) (6,191)
----------- ----------- -----------
Total............................................ 249,472 284,585 324,565
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING........................................... 494,964 484,223 415,282
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
REVENUES (NET OF INCOME TAXES OF $48,517)............... 94,180
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS (NET OF INCOME
TAXES OF $4,415)........................................ (8,200)
----------- ----------- -----------
NET INCOME ............................................. 486,764 484,223 509,462
DIVIDENDS ON PREFERRED STOCK................................ 33,583 34,473 39,327
----------- ----------- -----------
INCOME AFTER PREFERRED DIVIDENDS............................ $ 453,181 $ 449,750 $ 470,135
=========== =========== ===========
See Notes to Financial Statements.
-30-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Year Ended December 31,
---------------------------------------
1994 1993 1992
---------- ----------- -----------
Balance at Beginning of Year ........ $2,028,924 $ 1,922,558 $ 1,803,371
Add - Net Income .................... 486,764 484,223 509,462
Redemption of Preferred Stock ....... (402) (5,200)
---------- ----------- -----------
Total ....................... 2,515,688 2,406,379 2,307,633
---------- ----------- -----------
Deduct - Cash Dividends:
Preferred:
$4.00 Series ................ 390 390 390
$6.72 Series ................ 1,680 1,680 1,680
$7.52 Series ................ 3,760 3,760 3,760
$8.12 Series ................ 4,060 4,060 4,060
Series A - 1984 ............. 2,720
Series B - 1985 ............. 2,625
Series A - 1992 ............. 1,740 1,366 1,425
Series B - 1992 ............. 1,683 1,366 1,405
Series C - 1992 ............. 2,040 1,672 356
Series D - 1992 ............. 2,075 1,615 359
$8.50 Series ................ 4,108 6,517 8,500
$9.375 Series ............... 12,047 12,047 12,047
Common .......................... 328,996 342,982 345,748
---------- ----------- -----------
Total ....................... 362,579 377,455 385,075
---------- ----------- -----------
Balance at End of Year .............. $2,153,109 $ 2,028,924 $ 1,922,558
========== =========== ===========
See Notes to Financial Statements.
-31-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
December 31,
------------------------
1994 1993
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Production ..................................... $ 7,221,142 $ 7,165,811
Transmission ................................... 876,159 840,736
Distribution ................................... 2,628,450 2,503,964
General ........................................ 1,017,319 969,733
Construction work in progress .................. 333,180 242,661
Nuclear fuel ................................... 212,795 211,785
Plant held for future use ...................... 201,741 196,330
Electric plant acquisition adjustments ............ 3,166 3,166
----------- -----------
Total ....................................... 12,493,952 12,134,186
Less accumulated depreciation and amortization .... 3,517,923 3,194,127
----------- -----------
Property, plant and equipment - net ......... 8,976,029 8,940,059
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ......................... 235,867 12,413
Special deposits .................................. 10 11,834
Accounts receivable:
Affiliated companies ........................... 4,213 1,792
Others ......................................... 8,896 2,540
Accrued unbilled revenues ......................... 38,372 29,322
Fuel stock, at lifo cost .......................... 56,711 58,585
Materials and supplies, at average cost ........... 147,922 160,371
Prepayments ....................................... 9,665 9,234
----------- -----------
Total current assets ........................ 501,656 286,091
----------- -----------
OTHER ASSETS:
Deferred plant costs - net ........................ 638,917 664,699
Deferred debits ................................... 241,611 333,620
Unamortized debt expense and premium on
reacquired debt ................................. 158,351 164,368
Regulatory asset - net ............................ 235,463 246,763
Recoverable project costs - net ................... 98,954 118,016
----------- -----------
Total other assets .......................... 1,373,296 1,527,466
----------- -----------
Total ..................................... $10,850,981 $10,753,616
=========== ===========
See Notes to Financial Statements.
-32-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
December 31,
-------------------------
1994 1993
----------- -----------
CAPITALIZATION (STATEMENTS ON FOLLOWING PAGES):
Common stock equity ............................. $ 3,829,036 $ 3,704,851
Cumulative preferred stock:
Not subject to mandatory redemption .......... 351,345 351,354
Subject to mandatory redemption .............. 121,910 167,236
Long-term debt .................................. 3,185,404 3,190,071
----------- -----------
Total capitalization ...................... 7,487,695 7,413,512
----------- -----------
CURRENT LIABILITIES:
Notes payable ................................... 171,100
Accounts payable ................................ 268,874 190,583
Accounts payable to affiliated companies ........ 10,936 8,449
Taxes accrued ................................... 60,211 187,517
Interest accrued ................................ 64,732 65,238
Accrued liabilities to municipalities ........... 21,307 22,589
Customer deposits ............................... 64,905 65,604
Current portion of long-term debt and
preferred stock ............................... 49,475 44,725
Other ........................................... 59,912 63,607
----------- -----------
Total current liabilities ................. 600,352 819,412
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes ............... 1,876,300 1,798,976
Unamortized investment tax credit ............... 411,580 430,996
Fuel-related credits ............................ 242,912 77,533
Other ........................................... 232,142 213,187
----------- -----------
Total deferred credits .................... 2,762,934 2,520,692
----------- -----------
COMMITMENTS AND CONTINGENCIES
Total ................................ $10,850,981 $10,753,616
=========== ===========
See Notes to Financial Statements.
-33-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
December 31,
----------------------------
1994 1993
----------- -----------
COMMON STOCK EQUITY:
Common stock, Class A; no par; authorized and outstanding,
1,000 shares voting....................................................... $ 1,524,949 $ 1,524,949
Common stock, Class B; no par; authorized and outstanding,
100 shares, non-voting.................................................... 150,978 150,978
Retained earnings............................................................ 2,153,109 2,028,924
----------- -----------
Total common stock equity......................................... 3,829,036 3,704,851
----------- -----------
CUMULATIVE PREFERRED STOCK, no par; authorized, 10,000,000 shares; outstanding,
5,232,397 and 5,432,397 shares at December 31, 1994 and 1993, respectively
(entitled upon involuntary liquidation to $100 per share):
Not subject to mandatory redemption:
$4.00 series, 97,397 shares....................................... 9,740 9,740
$6.72 series, 250,000 shares....................................... 25,115 25,115
$7.52 series, 500,000 shares....................................... 50,226 50,226
$8.12 series, 500,000 shares....................................... 50,098 50,098
Series A - 1992, 500,000 shares....................................... 49,094 49,098
Series B - 1992, 500,000 shares....................................... 49,104 49,109
Series C - 1992, 600,000 shares....................................... 58,984 58,984
Series D - 1992, 600,000 shares....................................... 58,984 58,984
----------- -----------
Total............................................................. 351,345 351,354
----------- -----------
Subject to mandatory redemption:
$8.50 series, 400,000 shares and 600,000 shares
at December 31, 1994 and 1993, respectively.......................... 39,799 59,597
$9.375 series, 1,285,000 shares....................................... 127,811 127,639
Current redemptions.................................................... (45,700) (20,000)
----------- -----------
Total............................................................. 121,910 167,236
----------- -----------
Total cumulative preferred stock............................... 473,255 518,590
----------- -----------
LONG-TERM DEBT:
First mortgage bonds:
5 1/4% series, due 1996................................................ 40,000 40,000
5 1/4% series, due 1997................................................ 40,000 40,000
6 3/4% series, due 1997................................................ 35,000 35,000
7 5/8% series, due 1997................................................ 150,000 150,000
6 3/4% series, due 1998................................................ 35,000 35,000
7 1/4% series, due 2001................................................ 50,000 50,000
9.15 % series, due 2021................................................ 160,000 160,000
8 3/4% series, due 2022................................................ 100,000 100,000
7 3/4% series, due 2023................................................ 250,000 250,000
7 1/2% series, due 2023................................................ 200,000 200,000
4.90 % pollution control series, due 2003.............................. 16,600 16,600
7 % pollution control series, due 2008.............................. 19,200 19,200
6 3/8% pollution control series, due 2012.............................. 33,470 33,470
6 3/8% pollution control series, due 2012.............................. 12,100 12,100
7 3/4% pollution control series, due 2015.............................. 68,700 68,700
8 1/4% pollution control series, due 2015.............................. 90,000 90,000
7 7/8% pollution control series, due 2016.............................. 68,000 68,000
6.70 % pollution control series, due 2017.............................. 43,820 43,820
5.60 % pollution control series, due 2017.............................. 83,565 83,565
7 7/8% pollution control series, due 2018.............................. 50,000 50,000
7.20 % pollution control series, due 2018.............................. 175,000 175,000
8 1/4% pollution control series, due 2019.............................. 100,000 100,000
8.10 % pollution control series, due 2019.............................. 100,000 100,000
-34-
7 7/8% pollution control series, due 2019............................ $ 29,685 $ 29,685
7.60 % pollution control series, due 2019............................ 70,315 70,315
7.70 % pollution control series, due 2019............................ 75,000 75,000
7 1/8% pollution control series, due 2019............................ 100,000 100,000
7 5/8% pollution control series, due 2019............................ 100,000 100,000
6.70 % pollution control series, due 2027............................ 56,095 56,095
Medium-term notes series A, 9.80%-9.85%, due 1996-1999................. 180,500 200,000
Medium-term notes series B, 8 5/8%, due 1996........................... 100,000 100,000
Medium-term notes series C, 6.10%, due 2000............................ 150,000 150,000
Medium-term notes series B, 8.15%, due 2002............................ 100,000 100,000
Medium-term notes series C, 6.50%, due 2003............................ 150,000 150,000
----------- -----------
Total first mortgage bonds........................................ 3,032,050 3,051,550
----------- -----------
Pollution control revenue bonds:
Gulf Coast 1980-T series, floating rate, due 1998...................... 5,000 5,000
Brazos River 1985 A2 series, 9 3/4%, due 2005.......................... 4,265 4,265
Brazos River 1985 A1 series, 9 7/8%, due 2015.......................... 87,680 87,680
Matagorda County 1985 series, 10%, due 2015............................ 58,905 58,905
----------- -----------
Total pollution control revenue bonds............................. 155,850 155,850
----------- -----------
Unamortized premium (discount) - net......................................... (12,253) (12,839)
Capitalized lease obligations, discount rates of
5.2%-11.7%, due 1995-2018.................................................. 12,403 17,825
Notes payable ............................................................. 1,129 2,410
----------- -----------
Subtotal.......................................................... 1,279 7,396
----------- -----------
Total.......................................................... 3,189,179 3,214,796
Current maturities............................................. (3,775) (24,725)
----------- -----------
Total long-term debt........................................... 3,185,404 3,190,071
----------- -----------
Total capitalization......................................... $ 7,487,695 $ 7,413,512
=========== ===========
See Notes to Financial Statements.
-35-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
Year Ended December 31,
------------------------------------------
1994 1993 1992
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 486,764 $ 484,223 $ 509,462
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 398,142 385,731 371,645
Amortization of nuclear fuel............................ 21,561 2,101 29,237
Deferred income taxes................................... 81,739 214,369 73,943
Investment tax credit................................... (19,416) (19,797) (19,926)
Allowance for other funds used during
construction......................................... (4,115) (3,512) (6,169)
Fuel cost (refund) and over/(under)
recovery - net...................................... 277,940 (91,863) (84,072)
Cumulative effect of change in accounting
for revenues......................................... (94,180)
Cumulative effect of change in accounting
for postemployment benefits.......................... 8,200
Restructuring........................................... 86,431
Regulatory asset - net.................................. 11,300 (69,337) (12,180)
Changes in other assets and liabilities:
Accounts receivable - net............................ (17,827) 170,784 14,633
Materials and supplies............................... 12,449 3,850 10,791
Fuel stock........................................... 1,874 9,979 (1,542)
Accounts payable..................................... 80,778 (11,854) 13,235
Interest and taxes accrued........................... (127,812) (20,035) (24,610)
Other current liabilities............................ (4,936) 18,040 (54,694)
Other - net.......................................... 20,270 63,721 41,382
----------- ----------- -----------
Net cash provided by operating activities............ 1,226,911 1,136,400 853,386
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction)............................... (418,453) (332,797) (343,273)
Other - net................................................. (15,822) (13,067) (10,668)
----------- ----------- -----------
Net cash used in investing activities................... (434,275) (345,864) (353,941)
----------- ----------- -----------
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock............................. $ 216,700
Proceeds from first mortgage bonds........................ $ 840,427 488,760
Payment of matured bonds.................................. $ (19,500) (136,000) (157,000)
Payment of dividends...................................... (363,083) (378,528) (386,049)
Increase (decrease) in notes payable...................... (171,100) 31,660 139,440
Increase (decrease) in notes payable to
affiliated company.................................... (120,001) 19,000
Redemption of preferred stock............................. (20,000) (40,000) (103,000)
Extinguishment of long-term debt.......................... (995,751) (717,912)
Other - net............................................... 4,501 15,817 (5,997)
----------- ----------- -----------
Net cash used in financing activities................. (569,182) (782,376) (506,058)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.......................................... 223,454 8,160 (6,613)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................ 12,413 4,253 10,866
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 235,867 $ 12,413 $ 4,253
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized)..................... $ 251,245 $ 296,201 $ 341,921
Income taxes.............................................. 196,655 127,713 153,010
See Notes to Financial Statements.
-37-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) SYSTEM OF ACCOUNTS AND EFFECTS OF REGULATION. The accounting records
of Houston Lighting & Power Company (HL&P), the principal subsidiary
of Houston Industries Incorporated (Company), are maintained in
accordance with the Federal Energy Regulatory Commission's (FERC)
Uniform System of Accounts. HL&P's accounting practices are subject to
regulation by the Public Utility Commission of Texas (Utility
Commission), which has adopted the FERC system of accounts.
As a result of Utility Commission regulation, HL&P follows the
accounting set forth in Statement of Financial Accounting Standards
(SFAS) No. 71 "Accounting for the Effects of Certain Types of
Regulation". This statement requires a rate-regulated entity to
reflect the effects of regulatory decisions in its financial
statements. In accordance with the statement, the Company has deferred
certain costs pursuant to rate actions of the Utility Commission and
is recovering or expects to recover such costs in electric rates
charged to customers. The regulatory assets are included in plant held
for future use and other assets on the Company's Consolidated and
HL&P's Balance Sheets. The regulatory liabilities are included in
deferred credits on the Company's Consolidated and HL&P's Balance
Sheets. In the event the Company is no longer able to apply SFAS No.
71 due to future changes in regulation or competition, the Company's
ability to recover these assets and/or liabilities may not be assured.
Following are significant regulatory assets and liabilities:
December 31, 1994
---------------------
(Millions of Dollars)
Deferred plant costs - net...................... $ 639
Malakoff Electric Generating Station (Malakoff)
investment..................................... 252
Regulatory tax asset - net...................... 235
Unamortized loss on reacquired debt............. 117
Deferred debits................................. 105
Unamortized investment tax credit............... (412)
Accumulated deferred income taxes -
regulatory tax asset.......................... (82)
(b) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany transactions and balances are eliminated
in consolidation except for, prior to 1993, sales of accounts
receivable to Houston Industries Finance, Inc. (Houston
-38-
Industries Finance), a former subsidiary of the Company, which were
not eliminated because of the distinction for regulatory purposes
between utility and non-utility operations. In January 1993, Houston
Industries Finance sold the receivables back to the respective
subsidiaries and ceased operations. HL&P is now selling its accounts
receivable and most of its accrued unbilled revenues to a third party.
Investments in affiliates in which the Company has a 20 percent to 50
percent interest, or a lesser percent in which the Company has
management influence, which include the investment in Empresa
Distribuidora La Plata S.A. (EDELAP), are recorded using the equity
method of accounting. See Note 7.
(c) ELECTRIC PLANT. Additions to electric plant, betterments to existing
property and replacements of units of property are capitalized at
cost. Cost includes the original cost of contracted services, direct
labor and material, indirect charges for engineering supervision and
similar overhead items and an Allowance for Funds Used During
Construction (AFUDC). Customer payments for construction reduce
additions to electric plant.
HL&P computes depreciation using the straight-line method. The
depreciation provision as a percentage of the depreciable cost of
plant was 3.2 percent for 1994, 3.1 percent for 1993 and 3.2 percent
for 1992.
(d) CABLE TELEVISION PROPERTY. KBLCOM Incorporated (KBLCOM), the Company's
cable television subsidiary, records additions to property at cost,
which include amounts for material, labor, overhead and interest.
Depreciation is computed using the straight-line method. Depreciation
as a percentage of the depreciable cost of property was 11.3 percent
for 1994 and 1993, and 12.1 percent for 1992. Expenditures for
maintenance and repairs are expensed as incurred. In January 1995,
Time Warner Inc. (Time Warner) and the Company reached an agreement
under which Time Warner will acquire KBLCOM. Cable television property
is reflected on the Company's Consolidated Balance Sheets as part of
net assets of discontinued cable television operations. For a
discussion of the agreement, see Note 20(a).
(e) CABLE TELEVISION FRANCHISES AND INTANGIBLE ASSETS. The acquisition
cost in excess of the fair market value of the tangible assets and
liabilities is recorded on the Company's Consolidated Balance Sheets
as part of net assets of discontinued cable television operations.
Such amounts are amortized over periods ranging from 8 to 40 years on
a straight-line basis. KBLCOM periodically reviews the carrying value
of cable television franchises and intangible assets in relation to
current and expected operating results of the business in order to
assess whether there has been a permanent impairment of such amounts.
(f) DEFERRED PLANT COSTS. The Utility Commission authorized deferred
accounting treatment for certain costs related to the South Texas
Project Electric Generating Station (South Texas Project) in two
contexts. The first was "deferred accounting" where HL&P was permitted
to continue to accrue carrying costs in the form of AFUDC and defer
and capitalize depreciation and other operating costs on its
investment in the South Texas Project until such costs were reflected
in rates. The second was the "qualified phase-in plan" where HL&P was
permitted to capitalize as deferred charges allowable costs, including
return, deferred for future recovery
-39-
under the approved plan. The accumulated deferrals for "deferred
accounting" and "qualified phase-in plan" are being recovered over the
estimated depreciable life of the South Texas Project and within the
ten year phase-in period, respectively. The amortization of these
deferrals totaled $25.8 million for each of the years 1994, 1993, and
1992 and is included on the Company's Statements of Consolidated
Income and HL&P's Statements of Income in depreciation and
amortization expense. Under the terms of the settlement agreement
regarding the issues raised in Docket Nos. 12065 and 13126 (Proposed
Settlement), see Note 3, the South Texas Project deferrals will
continue to be amortized using the schedules discussed above.
(g) REVENUES. HL&P records electricity sales under the full accrual
method, whereby unbilled electricity sales are estimated and recorded
each month in order to better match revenues with expenses. Prior to
January 1, 1992, electric revenues were recognized as bills were
rendered (see Note 6).
Cable television revenues are recognized as the services are provided
to subscribers, and advertising revenues are recorded when earned.
These revenues are reflected on the Company's Statements of
Consolidated Income in the loss from discontinued cable television
operations.
(h) INCOME TAXES. The Company follows a policy of comprehensive
interperiod income tax allocation. Investment tax credits are deferred
and amortized over the estimated lives of the related property.
(i) EARNINGS PER COMMON SHARE. Earnings per common share for the Company
are computed by dividing net income by the weighted average number of
shares outstanding during the respective 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 Stock Ownership
Plans," effective January 1, 1994. Pursuant to the adoption of SOP
93-6, the number of weighted average common shares outstanding
reflects a reduction for Employee Stock Ownership Plan (ESOP) shares
not yet committed for release to savings plan participants
(unallocated shares). 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 December 31, 1994 and 1993, were 7,770,313
and 8,317,649, respectively. See also Note 12(b).
(j) STATEMENTS OF CONSOLIDATED CASH FLOWS. For purposes of reporting cash
flows, cash equivalents are considered to be short-term, highly liquid
investments readily convertible to cash.
(k) RESTATEMENT AND RECLASSIFICATION. In January 1995, the Company entered
into an agreement to dispose of its cable television operations. In
connection with this agreement, effective January 1, 1995, the
operations of KBLCOM have been accounted for as discontinued and prior
periods have been restated for consistency in reflecting KBLCOM as a
discontinued operation.
-40-
Certain amounts from the previous years have been reclassified to
conform to the 1994 presentation of financial statements. Such
reclassifications do not affect earnings.
(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four
co-owners) of the South Texas Project, which consists of two 1,250
megawatt nuclear generating units. HL&P has a 30.8 percent interest in
the project and bears a corresponding share of capital and operating
costs associated with the project. As of December 31, 1994, HL&P's
investments (net of accumulated depreciation and amortization) in the
South Texas Project and in nuclear fuel, including AFUDC, were $2.1
billion and $99 million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. Both generating units at the South Texas Project were out
of service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994.
HL&P removed the units from service in February 1993 when a problem
was encountered with certain of the units' auxiliary feedwater pumps.
In February 1995, the NRC removed the South Texas Project from its
"watch list" of plants with weaknesses that warranted increased NRC
attention. The NRC placed the South Texas Project on the "watch list"
in June 1993, following the issuance of a report by an NRC Diagnostic
Evaluation Team (DET) which conducted a review of the South Texas
Project operations.
Certain current and former employees of HL&P or contractors of HL&P
have asserted claims that their employment was terminated or disrupted
in retaliation for their having made safetyrelated complaints to the
NRC. Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P,
and the NRC has jurisdiction to take enforcement action against HL&P
and/or individual employees with respect to these matters. Based on
its own internal investigation, in October 1994 the NRC issued a
notice of violation and proposed a $100,000 civil penalty against HL&P
in one such case in which HL&P had terminated the site access of a
former contractor employee. In that action, the NRC also requested
information relating to possible further enforcement action in this
matter against two HL&P managers involved in such termination. HL&P
strongly disagrees with the NRC's conclusions, and has requested the
NRC to give further consideration of its notice. In February 1995, the
NRC conducted an enforcement conference with respect to that matter,
but no result has been received.
HL&P has provided documents and other assistance to a subcommittee of
the U. S. House of Representatives (Subcommittee) that is conducting
an inquiry related to the South Texas Project. Although the precise
focus and timing of the inquiry has not been identified by the
Subcommittee, it is anticipated that the Subcommittee will inquire
into matters related to HL&P's handling of employee concerns and to
issues related to the NRC's 1993 DET review of the South Texas
Project. In connection with that inquiry, HL&P has been advised that
the U. S. General Accounting Office (GAO) is conducting a review of
the NRC's inspection process as it relates to the South Texas Project
and other plants, and HL&P is cooperating with the GAO in its
investigation and with the NRC in a similar review it has initiated.
While no prediction can
-41-
be made at this time as to the ultimate outcome of these matters, the
Company and HL&P do not believe that they will have a material adverse
effect on the Company's or HL&P's financial condition or results of
operations.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February
1994, the City of Austin (Austin), one of the four co-owners of the
South Texas Project, filed suit (Austin II Litigation) against HL&P.
That suit is pending in the 152nd District Court for Harris County,
Texas, which has set a trial date for October 1995. Austin alleges
that the outages at the South Texas Project from early 1993 to early
1994 were due to HL&P's failure to perform obligations it owed to
Austin under the Participation Agreement among the four co-owners of
the South Texas Project (Participation Agreement). Austin also asserts
that HL&P breached certain undertakings voluntarily assumed by HL&P
under the terms and conditions of the Operating Licenses and Technical
Specifications relating to the South Texas Project. Austin claims that
such failures have caused Austin damages of at least $125 million due
to the incurrence of increased operating and maintenance costs, the
cost of replacement power and lost profits on wholesale transactions
that did not occur. In May 1994, the City of San Antonio (San
Antonio), another co-owner of the South Texas Project, intervened in
the litigation filed by Austin against HL&P and asserted claims
similar to those asserted by Austin. San Antonio has not identified
the amount of damages it intends to seek from HL&P. HL&P is contesting
San Antonio's intervention and has called for arbitration of San
Antonio's claim under the arbitration provisions of the Participation
Agreement. The trial court has denied HL&P's requests, but review of
these decisions is currently pending before the 1st Court of Appeals
in Houston.
In a previous lawsuit (Austin I Litigation) filed in 1983 against the
Company and HL&P, Austin alleged that it had been fraudulently induced
to participate in the South Texas Project and that HL&P had failed to
perform properly its duties as project manager. In May 1993, the
courts entered a judgement in favor of the Company and HL&P,
concluding, among other things, that the Participation Agreement did
not impose on HL&P a duty to exercise reasonable skill and care as
project manager. During the course of the Austin I Litigation, San
Antonio and Central Power and Light Company (CPL), a subsidiary of
Central and South West Corporation, two of the co-owners in the South
Texas Project, also asserted claims for unspecified damages against
HL&P as project manager of the South Texas Project, alleging HL&P
breached its duties and obligations. San Antonio and CPL requested
arbitration of their claims under the Participation Agreement. In
1992, the Company and HL&P entered into a settlement agreement with
CPL (CPL Settlement) providing for CPL's withdrawal of its demand for
arbitration. San Antonio's claims for arbitration remain pending.
Under the Participation Agreement, San Antonio's arbitration claims
will be heard by a panel of five arbitrators consisting of four
arbitrators named by each co-owner and a fifth arbitrator selected by
the four appointed arbitrators.
Although the CPL Settlement did not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL reached certain
understandings in such agreement which contemplated that: (i) CPL's
previously appointed arbitrator would be replaced by CPL; (ii)
arbitrators approved by CPL or HL&P in any future arbitrations would
be mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL would
resolve any future disputes between them concerning the South Texas
Project without resorting to the arbitration provision of the
-42-
Participation Agreement. Austin and San Antonio have asserted in the
pending Austin II Litigation that such understandings have rendered
the arbitration provisions of the Participation Agreement void and
that neither Austin nor San Antonio should be required to participate
in or be bound by such proceedings.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability insurance
coverage as required by law and periodically review available limits
and coverage for additional protection. The owners of the South Texas
Project currently maintain the maximum amount of property damage
insurance currently available through the insurance industry,
consisting of $500 million in primary property damage insurance and
excess property insurance in the amount of $2.25 billion. Under the
excess property insurance which became effective on March 1, 1995 and
under portions of the excess property insurance coverage in effect
prior to March 1, 1995, HL&P and the other owners of the South Texas
Project are subject to assessments, the maximum aggregate assessment
under current policies being $26.9 million during any one policy year.
The application of the proceeds of such property insurance is subject
to the priorities established by the NRC regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.0 billion to $8.92 billion effective in
November 1994. Owners are required under the Act to insure their
liability for nuclear incidents and protective evacuations by
maintaining the maximum amount of financial protection available from
private sources and by maintaining secondary financial protection
through an industry retrospective rating plan. The assessment of
deferred premiums provided by the plan for each nuclear incident is up
to $75.5 million per reactor subject to indexing for inflation, a
possible 5 percent surcharge (but no more than $10 million per reactor
per incident in any one year) and a 3 percent state premium tax. HL&P
and the other owners of the South Texas Project currently maintain the
required nuclear liability insurance and participate in the industry
retrospective rating plan.
There can be no assurance that all potential losses or liabilities
will be insurable, or that the amount of insurance will be sufficient
to cover them. Any substantial losses not covered by insurance would
have a material effect on HL&P's and the Company's financial
condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South
Texas Project are required by the NRC to meet minimum decommissioning
funding requirements to pay the costs of decommissioning the South
Texas Project. Pursuant to the terms of the order of the Utility
Commission in Docket No. 9850, HL&P is currently funding
decommissioning costs for the South Texas Project with an independent
trustee at an annual amount of $6 million, which is recorded in
depreciation and amortization expense. HL&P's funding level is
estimated to provide approximately $146 million, in 1989 dollars, an
amount which exceeds the current NRC minimum.
-43-
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective January 1, 1994. At December
31, 1994, the securities held in the Company's nuclear decommissioning
trust totaling $25.1 million (reflected on the Company's Consolidated
and HL&P's Balance Sheets in deferred debits and deferred credits) are
classified as available for sale. Such securities are reported on the
balance sheets at fair value, which at December 31, 1994 approximates
cost, and any unrealized gains or losses will be reported as a
separate component of common stock equity. Earnings, net of taxes and
administrative costs, are reinvested in the funds.
In May 1994, an outside consultant estimated HL&P's portion of
decommissioning costs to be approximately $318 million, in 1994
dollars. The consultant's calculation of decommissioning costs for
financial planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the
NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration
of their 40 year operating licenses. Under the terms of the Proposed
Settlement, HL&P would increase funding of decommissioning costs to an
annual amount of approximately $14.8 million consistent with such
study. While the current and projected funding levels presently exceed
minimum NRC requirements, no assurance can be given that the amounts
held in trust will be adequate to cover the actual decommissioning
costs of the South Texas Project or the assumptions used in estimating
decommissioning costs will ultimately prove to be correct.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Utility Commission initiated a proceeding
(Docket No. 12065) to determine whether HL&P's existing rates are just
and reasonable. Subsequently, the scope of the docket was expanded to
include reconciliation of HL&P's fuel costs from April 1, 1990 to July
31, 1994. The Utility Commission also initiated a separate proceeding
(Docket No. 13126) to review issues regarding the prudence of
operation of the South Texas Project from the date of commercial
operation through the present. That review would encompass the outage
at the South Texas Project during 1993 through 1994.
Hearings began in Docket No. 12065 in January 1995, and the Utility
Commission has retained a consultant to review the South Texas Project
for the purpose of providing testimony in Docket No. 13126 regarding
the prudence of HL&P's management of operation of the South Texas
Project. In February 1995, all major parties to these proceedings
signed the Proposed Settlement resolving the issues with respect to
HL&P, including the prudence issues related to operation of the South
Texas Project. Approval of the Proposed Settlement by the Utility
Commission will be required. To that end, the parties have established
procedural dates for a hearing on issues raised by the parties who are
opposed to the Proposed Settlement. A decision by the Utility
Commission on the Proposed Settlement is not anticipated before early
summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and rates would be frozen for three years, subject to certain
conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment of $218 million in the cancelled Malakoff plant
over a period not to exceed
-44-
seven years. HL&P also would increase its decommissioning expense for
the South Texas Project by $9 million per year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This
$70 million was recorded as a one-time, pre-tax charge to reconcilable
fuel revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately
17 percent below that currently in effect and would refund to
customers the balance in its fuel over-recovery account, estimated to
be approximately $180 million after giving effect to the amounts not
recoverable from ratepayers.
HL&P recovers fuel costs incurred in electric generation through a
fixed fuel factor that is set by the Utility Commission. The
difference between fuel revenues billed pursuant to such factor and
fuel expense incurred is recorded as an addition to or a reduction of
revenue, with a corresponding entry to under- or over-recovered fuel,
as appropriate. Amounts collected pursuant to the fixed fuel factor
must be reconciled periodically against actual, reasonable costs as
determined by the Utility Commission. Currently, HL&P has an
over-recovery fuel account balance that will be refunded pursuant to
the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the
Utility Commission, including issues related to the South Texas
Project, Docket No. 12065 will be remanded to an Administrative Law
Judge (ALJ) to resume detailed hearings in this docket. Prior to
reaching agreement on the terms of the Proposed Settlement, HL&P
argued that its existing rates were just and reasonable and should not
be reduced. Other parties argued that rate decreases in annual amounts
ranging from $26 million to $173 million were required and that
additional decreases might be justified following an examination of
the prudence of the management of the South Texas Project and the
costs incurred in connection with the outages at the South Texas
Project. Testimony filed by the Utility Commission staff included a
recommendation to remove from rate base $515 million of HL&P's
investment in the South Texas Project to reflect the staff's view that
such investment was not fully "used and useful" in providing service,
a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did
not result from imprudent management. HL&P also filed testimony
analyzing the extent to which regulatory issues extended the outages.
In that testimony an outside consultant retained by HL&P concluded
that the duration of the outages was controlled by both the resolution
of NRC regulatory issues as well as necessary equipment repairs
unrelated to NRC regulatory issues and that the incremental effect of
NRC regulatory issues on the duration of the outages was only 39 days
per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range
-45-
of assumptions would result in replacement fuel costs of less than $10
million for the 39 day periods identified by HL&P's consultant and
less than $100 million for the entire length of the outages. Any fuel
costs determined to have been unreasonably incurred would not be
recoverable from customers and would be charged against the Company's
earnings.
Although the Company and HL&P believe that the Proposed Settlement is
in the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility
Commission ultimately will approve the terms of the Proposed
Settlement or (ii) in the event the Proposed Settlement is not
approved and proceedings against HL&P resumed, that the outcome of
such proceedings would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years,
the Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant
construction, including the South Texas Project. Although Utility
Commission action on those applications has been completed, judicial
review of a number of the Utility Commission orders is pending. In
Texas, Utility Commission orders may be appealed to a District Court
in Travis County, and from that Court's decision an appeal may be
taken to the Court of Appeals for the 3rd District at Austin (Austin
Court of Appeals). Discretionary review by the Supreme Court of Texas
may be sought from decisions of the Austin Court of Appeals. The
pending appeals from the Utility Commission orders are in various
stages. In the event the courts ultimately reverse actions of the
Utility Commission in any of these proceedings, such matters would be
remanded to the Utility Commission for action in light of the courts'
orders. Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and HL&P
generally are not in a position at this time to predict the outcome of
the matters on appeal or the ultimate effect that adverse action by
the courts could have on the Company and HL&P. On remand, the Utility
Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the
Utility Commission approved a non-unanimous settlement agreement
providing for a $313 million increase in HL&P's base rates,
termination of deferrals granted with respect to Unit No. 2 of the
South Texas Project and of the qualified phase-in plan deferrals
granted with respect to Unit No. 1 of the South Texas Project, and
recovery of deferred plant costs. The settlement authorized a 12.55
percent return on common equity for HL&P. Rates contemplated by the
settlement agreement were implemented in May 1991 and remain in effect
(subject to the outcome of the current rate proceeding described in
Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on
review by a District Court, and the Austin Court of Appeals affirmed
that decision on procedural grounds due to the failure of the
appellant to file the record with the court in a timely manner. On
review, the Texas
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Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility
Commission's order, which include issues regarding deferred
accounting, the treatment of federal income tax expense and certain
other matters. As to federal tax issues, a recent decision of the
Austin Court of Appeals, in an appeal involving GTE-SW (and to which
HL&P was not a party), held that when a utility pays federal income
taxes as part of a consolidated group, the utility's ratepayers are
entitled to a fair share of the tax savings actually realized, which
can include savings resulting from unregulated activities. The Texas
Supreme Court has agreed to hear an appeal of that decision, but on
points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any
disallowance that might be required if the court's ruling in the GTE
decision were applied in Docket No. 9850 would be offset by that
greater amount. However, that amount may not be sufficient if the
Austin Court of Appeals also concludes that the Utility Commission's
inclusion of deferred accounting costs in the settlement was improper.
For a discussion of the Texas Supreme Court's decision on deferred
accounting treatment, see Note 4(c). Although HL&P believes that it
could demonstrate entitlement to rate relief equal to that agreed to
in the stipulation in Docket No. 9850, HL&P cannot rule out the
possibility that a remand and reopening of that settlement would be
required if decisions unfavorable to HL&P are rendered on both the
deferred accounting treatment and the calculation of tax expense for
rate making purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the
Utility Commission granted HL&P a $227 million increase in base
revenues, allowed a 12.92 percent return on common equity, authorized
a qualified phase-in plan for Unit No. 1 of the South Texas Project
(including approximately 72 percent of HL&P's investment in Unit No. 1
of the South Texas Project in rate base) and authorized HL&P to use
deferred accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented
by HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with
deductions taken for expenses disallowed in cost of service. The court
held that the Utility Commission had failed to require that such tax
savings be passed on to ratepayers, and ordered that the case be
remanded to the Utility Commission with instructions to adjust HL&P's
cost of service accordingly. Discretionary review is being sought from
the Texas Supreme Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing
its appeal in Docket No. 6668. A separate party to this appeal,
however, has not agreed to dismiss its appeal.
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(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized
by the Utility Commission in Docket No. 8230 and was extended in
Docket No. 9010. Similar deferred accounting treatment with respect to
Unit No. 2 of the South Texas Project was authorized in Docket No.
8425. For a discussion of the deferred accounting treatment granted,
see Note 1(f).
In June 1994, the Texas Supreme Court decided the appeal of Docket
Nos. 8230 and 9010, as well as all other pending deferred accounting
cases involving other utilities, upholding deferred accounting
treatment for both carrying costs and operation and maintenance
expenses as within the Utility Commission's statutory authority and
reversed the Austin Court of Appeals decision to the extent that the
Austin Court of Appeals had rejected deferred accounting treatment for
carrying charges. Because the lower appellate court had upheld
deferred accounting only as to operation and maintenance expenses, the
Texas Supreme Court remanded Docket Nos. 8230 and 9010 to the Austin
Court of Appeals to consider the points of error challenging the
granting of deferred accounting for carrying costs which it had not
reached in its earlier consideration of the case. The Texas Supreme
Court opinion did state, however, that when deferred costs are
considered for addition to the utility's rate base in an ensuing rate
case, the Utility Commission must then determine to what extent
inclusion of the deferred costs is necessary to preserve the utility's
financial integrity. Under the terms of the Proposed Settlement, South
Texas Project deferrals will continue to be amortized under the
schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant
to the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In
June 1990, the Utility Commission ruled in a separate docket (Docket
No. 6668) that had been created to review the prudence of HL&P's
planning and construction of the South Texas Project that $375.5
million out of HL&P's $2.8 billion investment in the two units of the
South Texas Project had been imprudently incurred. That ruling was
incorporated into HL&P's 1988 and 1991 rate cases and resulted in
HL&P's recording an after-tax charge of $15 million in 1990. Several
parties appealed the Utility Commission's decision, but a District
Court dismissed these appeals on procedural grounds. The Austin Court
of Appeals reversed and directed consideration of the appeals, and the
Texas Supreme Court denied discretionary review in 1994. At this time,
no action has been taken by the appellants to proceed with the
appeals. Unless the order in Docket No. 6668 is modified or reversed
on appeal, the amount found imprudent by the Utility Commission will
be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
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(5)MALAKOFF
The scheduled in-service dates for the Malakoff units were postponed
during the 1980's as expectations of continued strong load growth were
tempered. In 1987, all developmental work was stopped and AFUDC
accruals ceased. These units have been cancelled due to the
availability of other cost effective resource options.
In Docket No. 8425, the Utility Commission allowed recovery of certain
costs associated with the cancelled Malakoff units by amortizing those
costs over ten years for rate making purposes. Such recoverable costs
were not included in rate base and, as a result, no return on
investment is being earned during the recovery period. The remaining
balance at December 31, 1994 is $34 million with a recovery period of
66 months.
Also as a result of the final order in Docket No. 8425, the costs
associated with the engineering design work for the Malakoff units
were included in rate base and are earning a return. Subsequently, in
December 1992, HL&P determined that such costs would have no future
value and reclassified $84.1 million from plant held for future use to
recoverable project costs. In 1993, an additional $7 million was
reclassified to recoverable project costs. Amortization of these
amounts began in 1993. The balance at December 31, 1994 was $65
million with a remaining recovery period of 60 months. The
amortization amount is approximately equal to the amount currently
earning a cash return in rates. The Utility Commission's decision to
allow treatment of these costs as plant held for future use has been
challenged in the pending appeal of the Docket No. 8425 final order.
See Note 4(b) for a discussion of this proceeding.
In June 1990, HL&P purchased from its then fuel supply affiliate,
Utility Fuels, Inc. (Utility Fuels), all of Utility Fuels' interest in
the lignite reserves and lignite handling facilities for Malakoff. The
purchase price was $138.2 million, which represented the net book
value of Utility Fuels' investment in such reserves and facilities. As
part of the June 1990 rate order (Docket No. 8425), the Utility
Commission ordered that issues related to the prudence of the amounts
invested in the lignite reserves be considered in HL&P's next general
rate case which was filed in November 1990 (Docket No. 9850). However,
under the October 1991 Utility Commission order in Docket No. 9850,
this determination was postponed to a subsequent docket.
HL&P's remaining investment in Malakoff lignite reserves as of
December 31, 1994 of $153 million is included on the Company's
Consolidated and HL&P's Balance Sheets in plant held for future use.
HL&P anticipates that an additional $8 million of expenditures
relating to lignite reserves will be incurred in 1995 and 1996.
In Docket No. 12065, HL&P filed testimony in support of the
amortization of substantially all of its remaining investment in
Malakoff, including the portion of the engineering design costs for
which amortization had not previously been authorized and the amount
attributable to related lignite reserves which had not previously been
addressed by the Utility Commission. Under the Proposed Settlement of
Docket No. 12065, HL&P would amortize its investment in Malakoff over
a period not to exceed seven years such that the entire investment
will be written off no later than December 31, 2002. See Note 3. In
the event that the Utility Commission does not
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approve the Proposed Settlement, and if appropriate rate treatment of
these amounts is not ultimately received, HL&P could be required to
write off any unrecoverable portions of its Malakoff investment.
(6) CHANGE IN ACCOUNTING METHOD FOR REVENUES
During the fourth quarter of 1992, HL&P adopted a change in accounting
method for revenues from a cycle billing to a full accrual method,
effective January 1, 1992. Unbilled revenues represent the estimated
amount customers will be charged for service received, but not yet
billed, as of the end of each month. The accrual of unbilled revenues
results in a better matching of revenues and expenses. The cumulative
effect of this accounting change, less income taxes of $48.5 million,
amounted to $94.2 million, and was included in 1992 income.
(7) INVESTMENTS
(a) CABLE TELEVISION PARTNERSHIP. A KBLCOM subsidiary owns a 50 percent
interest in Paragon Communications (Paragon), a Colorado partnership
that owns cable television systems. The remaining interest in the
partnership is owned by American Television and Communications
Corporation (ATC), a subsidiary of Time Warner. The partnership
agreement provides that at any time after December 31, 1993 either
partner may elect to divide the assets of the partnership under
certain pre-defined procedures set forth in the agreement. Paragon is
party to a $225 million revolving credit agreement with a group of
banks. Paragon also has outstanding $50 million principal amount of
9.56% senior notes, due 1995. In each case, borrowings are
non-recourse to the Company and to ATC. Investment in Paragon is
reflected on the Company's Consolidated Balance Sheets as part of net
assets of discontinued cable television operations. For a discussion
of the pending disposition of KBLCOM, see Note 20(a).
(b) FOREIGN ELECTRIC UTILITY. Houston Argentina S.A. (Houston Argentina),
an indirect subsidiary of the Company, owns a 32.5 percent interest in
Compania de Inversiones en Electricidad S. A. (COINELEC), an Argentine
holding company which acquired, in December 1992, a 51 percent
interest in EDELAP, an electric utility company operating in La Plata,
Argentina and surrounding regions. Houston Argentina's share of the
purchase price was approximately $37.4 million. Subsequent to the
acquisition, the generating assets of EDELAP were transferred to
Central Dique S. A., an Argentine Corporation, 51 percent of the stock
of which is owned by COINELEC. See Note 20(b) for discussion of an
additional investment in Argentina in January 1995.
(8) COMMON STOCK
(a) DIVIDENDS. In 1993, the timing of the Company's Board of Directors'
declaration of dividends changed resulting in five quarterly dividend
declarations in 1993. The Company paid four regular quarterly
dividends in 1993 aggregating $3.00 per share on its common stock
pursuant to dividend declarations made in 1993. In December 1993, the
Company declared its regular quarterly dividend of $.75 per share to
be paid in March 1994. All dividends declared in 1993 have been
included in 1993 common stock dividends on the Company's Statements of
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Consolidated Retained Earnings and, with respect to the dividends
declared in December 1993, in dividends accrued at December 31, 1993
on the Company's Consolidated Balance Sheets.
(b) LONG-TERM INCENTIVE COMPENSATION PLANS (LICP). In May 1989, the
Company adopted, with shareholder approval, an LICP (1989 LICP Plan),
which provided for the issuance of certain stock incentives (including
performance-based restricted shares and stock options). A maximum of
500,000 shares of common stock may be issued under the 1989 LICP Plan.
Beginning one year after the grant date, the options become
exercisable in one-third increments each year.
The options expire ten years from the grant date.
In May 1993, the Company adopted, with shareholder approval, a new
LICP (1994 LICP Plan), providing for the issuance of certain stock
incentives (including performance-based restricted shares and stock
options) of the general nature provided by the 1989 LICP Plan. A
maximum of 2,000,000 shares of common stock may be issued under the
1994 LICP Plan. Beginning one year after the grant date, the options
will become exercisable in one-third increments each year. The options
expire ten years from the grant date.
Performance-based restricted shares issued were 50,262, 73,282 and 790
for 1994, 1993 and 1992, respectively. Stock option activity for the
years 1992 through 1994 is summarized below:
Option Price at
Number Date of Grant
of Shares or Exercise
-------- ---------
Non-statutory stock options:
Outstanding at December 31, 1991 ..............
Options Granted ............................. 67,984 $43.50
Options Exercised ...........................
Options Cancelled ........................... (2,113)
Outstanding at December 31, 1992 .............. 65,871
Options Granted ............................. 65,776 $46.25
Options Exercised ........................... (662) $43.50
Options Cancelled ........................... (5,036)
Outstanding at December 31, 1993 .............. 125,949
Options Granted ............................. 65,726 $46.50
Options Exercised ...........................
Options Cancelled ........................... (40,386)
Outstanding at December 31, 1994 .............. 151,289
Exercisable at:
December 31, 1994 ........................... 53,836 $43.50-$46.25
December 31, 1993 ........................... 21,430 $43.50
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(c) SHAREHOLDER RIGHTS PLAN. In July 1990, the Company adopted a
shareholder rights plan and declared a dividend of one right for each
outstanding share of the Company's common stock. The rights, which
under certain circumstances entitle their holders to purchase one one-
hundredth of a share of Series A Preference Stock for an exercise
price of $85, will expire on July 11, 2000. The rights will become
exercisable only if a person or entity acquires 20 percent or more of
the Company's outstanding common stock or if a person or entity
commences a tender offer or exchange offer for 20 percent or more of
the outstanding common stock. At any time after the occurrence of such
events, the Company may exchange unexercised rights at an exchange
ratio of one share of common stock, or equity securities of the
Company of equivalent value, per right. The rights are redeemable by
the Company for $.01 per right at any time prior to the date the
rights become exercisable.
When the rights become exercisable, each right will entitle the holder
to receive, in lieu of the right to purchase Series A Preference Stock,
upon the exercise of such right, a number of shares of the Company's
common stock (or under certain circumstances cash, property, other
equity securities or debt of the Company) having a current market price
(as defined in the plan) equal to twice the exercise price of the
right, except pursuant to an offer for all outstanding shares of common
stock which a majority of the independent directors of the Company
determines to be a price which is in the best interests of the Company
and its shareholders (Permitted Offer).
In the event that the Company is a party to a merger or other business
combination (other than a merger that follows a Permitted Offer),
rights holders will be entitled to receive, upon the exercise of a
right, a number of shares of common stock of the acquiring company
having a current market price (as defined in the plan) equal to twice
the exercise price of the right.
(d) ESOP. In October 1990, the Company amended its savings plan to add an
ESOP component. The ESOP component of the plan allows the Company to
satisfy a portion of its obligation to make matching contributions
under the plan. For additional information with respect to the ESOP
component of the plan, see Note 12(b).
(e) INVESTOR'S CHOICE PLAN. Effective December 1994, the Company registered
with the Securities and Exchange Commission four million shares of its
common stock for purchase through the new Investor's Choice Plan, which
is an amendment to the existing dividend reinvestment plan.
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(9) PREFERRED STOCK OF HL&P
At December 31, 1994, HL&P's cumulative preferred stock could be
redeemed at the following per share prices, plus any unpaid accrued
dividends to the date of redemption:
Redemption
Series Price Per Share
------ ---------------
Not Subject to Mandatory Redemption:
$4.00...................................... $105.00
$6.72...................................... 102.51
$7.52...................................... 102.35
$8.12...................................... 102.25
Variable Term Preferred A (a).............. 100.00
Variable Term Preferred B (a).............. 100.00
Variable Term Preferred C (a).............. 100.00
Variable Term Preferred D (a).............. 100.00
Subject to Mandatory Redemption:
$8.50 (b).................................. $100.00
$9.375 (c)................................. --
(a) Rates for Variable Term Preferred stock as of December 31, 1994
were as follows:
Series Rate
------------------------- -----
Variable Term Preferred A 4.69%
Variable Term Preferred B 4.62%
Variable Term Preferred C 5.15%
Variable Term Preferred D 4.58%
(b) HL&P is required to redeem 200,000 shares of this series
annually beginning June 1, 1994.
(c) HL&P is required to redeem 257,000 shares annually beginning
April 1, 1995. This series is redeemable at the option of HL&P
at $100 per share beginning April 1, 1997.
In June 1994 and June 1993, HL&P redeemed 200,000 and 400,000 shares,
respectively, of its $8.50 cumulative preferred stock at $100 per
share pursuant to sinking fund provisions. Annual mandatory
redemptions of HL&P's preferred stock are $45.7 million in 1995 and
1996, and $25.7 million for 1997, 1998 and 1999.
(10) LONG-TERM DEBT
(a) HL&P. Sinking or improvement fund requirements of HL&P's first
mortgage bonds outstanding will be approximately $36 million for each
of the years 1995 through 1999. Of such requirements, approximately
$34 million for each of the years 1995 through 1999 may be satisfied
by certification of property additions at 100 percent of the
requirements, and the remainder through certification of such property
additions at 166 2/3 percent of the requirements. Sinking or
improvement fund requirements for 1994 and prior years have been
satisfied by certification of property additions.
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HL&P has agreed to expend an amount each year for replacements and
improvements in respect of its depreciable mortgaged utility property
equal to $1,450,000 plus 2 1/2 percent of net additions to such
mortgaged property made after March 31, 1948 and before July 1 of the
preceding year. Such requirement may be met with cash, first mortgage
bonds, gross property additions or expenditures for repairs or
replacements, or by taking credit for property additions at 100
percent of the requirements. At the option of HL&P, but only with
respect to first mortgage bonds of a series subject to special
redemption, deposited cash may be used to redeem first mortgage bonds
of such series at the applicable special redemption price. The
replacement fund requirement to be satisfied in 1995 is approximately
$288 million.
The amount of HL&P's first mortgage bonds is unlimited as to issuance,
but limited by property, earnings, and other provisions of the
Mortgage and Deed of Trust dated as of November 1, 1944, between HL&P
and South Texas Commercial National Bank of Houston (Texas Commerce
Bank National Association, as Successor Trustee) and the supplemental
indentures thereto. Substantially all properties of HL&P are subject
to liens securing HL&P's long-term debt under the mortgage.
In January 1994, HL&P repaid at maturity $19.5 million principal
amount of Series A collateralized medium-term notes. HL&P's annual
maturities of long-term debt and minimum capital lease payments are
approximately $4 million in 1995, $154 million in 1996, $228 million
in 1997, $40 million in 1998, and $171 million in 1999.
(b) KBLCOM AND SUBSIDIARIES - DISCONTINUED OPERATIONS. KBL Cable, Inc.
(KBL Cable), a subsidiary of KBLCOM, is a party to a $475.2 million
revolving credit and letter of credit facility agreement with annual
mandatory commitment reductions (which may require principal
payments). At December 31, 1994, KBL Cable had $76 million available
under such credit facility. The credit facility has scheduled
reductions in March of each year until it is terminated in March 1999.
Loans have generally borne interest at an interest rate of London
Interbank Offered Rate plus an applicable margin. The margin was .75%
and .625% at December 31, 1994 and 1993, respectively. The credit
facility includes restrictions on dividends, sales of assets and
limitations on total indebtedness. The amount of indebtedness
outstanding at December 31, 1994 and 1993 was $364 million. Commitment
fees are required on the unused capacity of the credit facility.
In October 1989, KBL Cable entered into interest rate swaps to
effectively fix the interest rate on $375 million of loans under the
bank credit facility. The objective of the swaps was to reduce the
financial exposure to increases in interest rates. Interest rate swaps
aggregating $75 million and $150 million terminated in October 1992
and October 1994, respectively. As of December 31, 1994, KBL Cable had
one remaining interest rate swap terminating in 1996 which effectively
fixes the rate on $50 million of debt under the bank credit facility
at 8.88% plus the applicable margin. As of December 31, 1994 and 1993,
the effective interest rate on such debt was approximately 9.63%. The
differential to be paid or received under the swaps is accrued and is
recognized as interest expense or income over the term of the swap.
KBL Cable is exposed to risk of nonperformance by the other party to
the swap. However, KBL Cable does not anticipate nonperformance by the
other party.
As of December 31, 1994, KBL Cable had outstanding $62.5 million of
10.95% senior notes and $78.1 million of 11.30% senior subordinated
notes. Both series mature in 1999 with annual
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principal payments which began in 1992. The agreement under which the
notes were issued contains restrictions and covenants similar to those
contained in the KBL Cable credit facility. KBLCOM's long-term debt is
reflected on the Company's Consolidated Balance Sheets as part of net
assets of discontinued cable television operations.
For a discussion of the pending disposition of KBLCOM, see Note 20(a).
(c) COMPANY. Consolidated annual maturities of long-term debt and minimum
capital lease payments from continuing operations for the Company are
approximately $4 million in 1995, $354 million in 1996, $228 million
in 1997, $40 million in 1998 and $171 million in 1999. Long-term debt
from discontinued operations is approximately $16 million in 1995, $76
million in 1996, $130 million in 1997, $141 million in 1998 and $142
million in 1999.
(11) SHORT-TERM FINANCING
The interim financing requirements of the Company's operating
subsidiaries are met through short-term bank loans, the issuance of
commercial paper and short-term advances from the Company. The Company
and its subsidiaries had bank credit facilities aggregating $1 billion
at December 31, 1994 and $750 million at December 31, 1993, under
which borrowings are classified as short-term indebtedness. In March
1995, the facilities aggregated $1.2 billion as a result of a $200
million increase in the Company's bank credit facility. These bank
facilities limit total short-term borrowings and provide for interest
at rates generally less than the prime rate. The Company's weighted
average short-term borrowing rates for commercial paper for the year
ended December 31, 1994 and 1993 were 4.35% and 3.45%, respectively.
Outstanding commercial paper was $423 million at December 31, 1994 and
$591 million at December 31, 1993. Facility fees are required on the
credit facilities. For a description of the bank credit facility of
KBL Cable, borrowings under which are classified as long-term debt or
current maturities of long-term debt, see Note 10(b).
(12) RETIREMENT PLANS
(a) PENSION. The Company has noncontributory retirement plans covering
substantially all employees. The plans provide retirement benefits
based on years of service and compensation. The Company's funding
policy is to contribute amounts annually in accordance with applicable
regulations in order to achieve adequate funding of projected benefit
obligations. The assets of the plans consist principally of common
stocks and high quality, interest-bearing obligations.
Net pension cost for the Company attributable to continuing operations
includes the following components:
Year Ended December 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(Restated) (Restated) (Restated)
(Thousands of Dollars)
Service cost - benefits earned
during the period ..................... $ 21,977 $ 25,282 $ 23,681
Interest cost on projected benefit
obligation ............................ 46,091 51,062 45,312
Actual (return) loss on plan assets ..... 5,357 (39,237) (26,774)
Net amortization and deferrals .......... (51,491) (558) (11,739)
-------- -------- --------
Net pension cost ........................ $ 21,934 $ 36,549 $ 30,480
======== ======== ========
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The funded status of the Company's retirement plans attributable to
continuing operations was as follows:
December 31,
------------------------
1994 1993
--------- ---------
(Restated) (Restated)
(Thousands of Dollars)
Actuarial present value of:
Vested benefit obligation ...................... $ 439,668 $ 444,300
========= =========
Accumulated benefit obligation ................. $ 471,987 $ 503,120
========= =========
Plan assets at fair value ........................ $ 496,365 $ 488,763
Projected benefit obligation ..................... 632,546 651,079
--------- ---------
Assets less than projected benefit obligation .... (136,181) (162,316)
Unrecognized transitional asset .................. (15,340) (17,260)
Unrecognized prior service cost .................. 21,456 23,380
Unrecognized net loss ............................ 71,191 81,322
--------- ---------
Accrued pension cost ............................. $ (58,874) $ (74,874)
========= =========
Net pension cost and funding attributable to discontinued operations
was not material.
The projected benefit obligation was determined using an assumed
discount rate of 8.0 percent in 1994 and 7.25 percent in 1993. A
long-term rate of compensation increase ranging from 4.5 percent to
6.5 percent was assumed for 1994 and ranging from 3.9 percent to 6
percent was assumed for 1993. The assumed long-term rate of return on
plan assets was 9.5 percent in 1994 and 1993. The transitional asset
at January 1, 1986, is being recognized over approximately 17 years,
and the prior service cost is being recognized over approximately 15
years.
(b) SAVINGS PLAN. The Company has an employee savings plan that qualifies
as cash or deferred arrangements under Section 401(k) of the Internal
Revenue Code of 1986, as amended (IRC). Under the plan, participating
employees may contribute a portion of their compensation, pre-tax or
after-tax, up to a maximum of 16 percent of compensation limited by an
annual deferral limit ($9,240 for calendar year 1994) prescribed by
IRC Section 402(g) and the IRC Section 415 annual additions limits.
The Company matches 70 percent of the first 6 percent of each
employee's compensation contributed, subject to a vesting schedule
which entitles the employee to a percentage of the matching
contributions depending on years of service. Substantially all of the
Company's match is invested in the Company's common stock.
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.
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 SOP 93-6 which
requires that the Company recognize benefit expense for the ESOP equal
to fair value of the ESOP shares committed to
-56-
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 was 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 restatement was permitted for prior
periods. At the time of adoption of SOP 93-6 in the third quarter of
1994, earnings were reduced by $12.8 million. For a discussion of the
impact of SOP 93-6 on the earnings per common share calculation, see
Note 1(i).
The Company's savings plan benefit expense attributable to continuing
operations was $17.0 million, $17.3 million and $20.0 million in 1994,
1993 and 1992, respectively. HL&P's portion of the savings plan
expense was $16.5 million, $15.9 million and $15.4 million in 1994,
1993 and 1992, respectively. Savings plan benefit expense attributable
to discontinued operations was not material. The ESOP shares were as
follows:
December 31,
----------------------------
1994 1993
--------- ---------
Allocated Shares................. 1,575,543 1,031,187
Unallocated Shares............... 7,770,313 8,317,649
--------- ---------
Total ESOP Shares............. 9,345,856 9,348,836
========= =========
Fair value of unallocated
ESOP shares .................... $276,817,401 $396,128,034
(c) POSTRETIREMENT BENEFITS. The Company and HL&P adopted SFAS No. 106,
"Employer's Accounting for Postretirement Benefits Other Than
Pensions," effective January 1, 1993. SFAS No. 106 requires companies
to recognize the liability for postretirement benefit plans other than
pensions, primarily health care. The Company and HL&P previously
expensed the cost of these benefits as claims were incurred. SFAS No.
106 allows recognition of the transition obligation (liability for
prior years' service) in the year of adoption or to be amortized over
the plan participants' future service period. The Company and HL&P
have elected to amortize the estimated transition obligation of
approximately $213 million (including $211 million for HL&P) over 22
years. In March 1993, the Utility Commission adopted a rule governing
the rate making treatment of postretirement benefits other than
pensions. This rule provides for recovery in rate making proceedings
(which, in HL&P's case, has not occurred) of the cost of
postretirement benefits calculated in accordance with SFAS No. 106
including amortization of the transition obligation. The Proposed
Settlement of HL&P's pending rate proceeding would require HL&P to
fund during each year in an irrevocable external trust the amount of
postretirement benefit costs included in rates, a total of
approximately $22 million.
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The net postretirement benefit cost for the Company includes the
following components:
Year Ended December 31,
-----------------------
1994 1993
----------- ---------
(Thousands of Dollars)
Service cost - benefits earned during the period ....... $ 9,131 $ 9,453
Interest cost on projected benefit obligation .......... 10,265 18,354
Actual return on plan assets ........................... -- --
Net amortization and deferrals ......................... 7,868 9,773
------- -------
Net postretirement benefit cost ........................ $27,264 $37,580
======= =======
The funded status of the Company's postretirement benefit costs was as
follows:
December 31,
-----------------------
1994 1993
--------- ---------
(Thousands of Dollars)
Accumulated benefit obligation:
Retirees ....................................... $ (98,828) $(130,336)
Fully eligible active plan participants ........ (22,251) (22,913)
Other active plan participants ................. (23,378) (20,810)
--------- ---------
Total ........................................ (144,457) (174,059)
Plan assets at fair value .......................... -- --
--------- ---------
Assets less than accumulated benefit obligation .... (144,457) (174,059)
Unrecognized transitional obligation ............... 193,500 203,273
Unrecognized net gain .............................. (91,477) (55,682)
--------- ---------
Accrued postretirement benefit cost ................ $ (42,434) $ (26,468)
========= =========
For 1992, the Company recognized postretirement benefit costs other
than pensions on a "pay-as-you-go" basis. The Company made
postretirement benefit payments in 1992 of $8.6 million.
The assumed health care cost trend rates used in measuring the
accumulated postretirement benefit obligation in 1994 are as follows:
Medical - under 65 9.0%
Medical - 65 and over 10.0%
Dental 9.0%
The assumed health care rates gradually decline to 5.4 percent for both
medical categories and 3.7 percent for dental by the year 2001. The
accumulated postretirement benefit obligation was determined using an
assumed discount rate of 8.0 percent for 1994 and 7.25 percent for
1993.
If the health care cost trend rate assumptions were increased by 1
percent, the accumulated postretirement benefit obligation as of
December 31, 1994 would be increased by approximately 8 percent. The
annual effect of the 1 percent increase on the total of the service and
interest costs would be an increase of approximately 11 percent.
(d) POSTEMPLOYMENT BENEFITS. The Company and HL&P adopted SFAS No. 112,
"Employer's Accounting for Postemployment Benefits," effective January
1, 1994. SFAS No. 112 requires
-58-
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 were not material.
(13) INCOME TAXES
The Company and HL&P record income taxes under SFAS No. 109, which
among other things, (i) requires the liability method be used in
computing deferred taxes on all temporary differences between book and
tax bases of assets other than nondeductible goodwill; (ii) requires
that deferred tax liabilities and assets be adjusted for an enacted
change in tax laws or rates; and (iii) prohibits net-of-tax accounting
and reporting. SFAS No. 109 requires that regulated enterprises
recognize such adjustments as regulatory assets or liabilities if it is
probable that such amounts will be recovered from or returned to
customers in future rates. KBLCOM has significant temporary differences
related to its 1986 and 1989 acquisitions of cable television systems,
the tax effects of which were recognized when SFAS No. 109 was adopted.
During 1993, federal tax legislation was enacted that changed the
income tax consequences for the Company and HL&P. The principal
provision of the new law which affected the Company and HL&P was the
change in the corporate income tax rate from 34 percent to 35 percent.
A net regulatory asset and the related deferred federal income tax
liability of $71.3 million were recorded by HL&P in 1993. The effect of
the new law, which decreased the Company's net income by $14.3 million
(approximately half of which was attributable to discontinued
operations), was recognized as a component of income tax expense in
1993. The effect on the Company's deferred taxes, primarily
attributable to discontinued operations, as a result of the change in
the new law was $10.9 million in 1993.
The Company's current and deferred components of income tax expense
from continuing operations are as follows:
Year Ended December 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(Restated) (Restated) (Restated)
(Thousands of Dollars)
Current ................................. $144,604 $109,078 $139,762
Deferred ................................ 85,820 119,785 37,514
-------- -------- --------
Income taxes for continuing
operations before cumulative
effect of change in accounting ..... $230,424 $228,863 $177,276
======== ======== ========
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The Company's effective income tax rates are lower than statutory
corporate rates for each year as follows:
Year Ended December 31,
-----------------------------------
1994 1993 1992
--------- --------- ---------
(Restated) (Restated) (Restated)
(Thousands of Dollars)
Income from continuing operations before
income taxes and cumulative effect of
change in accounting ................ $ 654,409 $ 669,394 $ 547,307
Preferred dividends of subsidiary ........ 33,583 34,473 39,327
--------- --------- ---------
Total ............................ 687,992 703,867 586,634
Statutory rate ........................... 35% 35% 34%
--------- --------- ---------
Income taxes at statutory rate ........... 240,797 246,353 199,456
--------- --------- ---------
Net reduction in taxes resulting from:
AFUDC - other included in income ..... 1,440 1,229 2,097
Amortization of investment tax credit 19,416 19,797 19,926
Excess deferred taxes ................ 3,537 9,625 17,403
Difference between book and tax
depreciation for which deferred
taxes have not been normalized ... (15,455) (12,976) (13,466)
Other - net .......................... 1,435 (185) (3,780)
--------- --------- ---------
Total ............................ 10,373 17,490 22,180
--------- --------- ---------
Income taxes before cumulative effect
of change in accounting ............. $ 230,424 $ 228,863 $ 177,276
========= ========= =========
Effective rate ........................... 33.5% 32.5% 30.2%
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Following are the Company's tax effects of temporary differences
attributable to continuing operations resulting in deferred tax assets
and liabilities:
December 31,
------------------------
1994 1993
---------- ----------
(Restated) (Restated)
(Thousands of Dollars)
Deferred Tax Assets:
Alternative minimum tax ..................... $ 59,093 $ 118,737
IRS audit assessment ........................ 74,966 74,966
Disallowed plant cost - net ................. 23,496 24,304
Other ....................................... 83,740 68,503
---------- ----------
Total deferred tax assets - net ........... 241,295 286,510
---------- ----------
Deferred Tax Liabilities:
Depreciation ................................ 1,336,035 1,210,900
Deferred plant costs - net .................. 207,746 215,472
Regulatory assets - net ..................... 235,463 246,763
Capitalized taxes, employee
benefits and removal costs ................ 111,660 111,408
Other ....................................... 121,235 191,679
---------- ----------
Total deferred tax liabilities ............ 2,012,139 1,976,222
---------- ----------
Accumulated deferred income taxes - net $1,770,844 $1,689,712
========== ==========
See Note 20(a) for a discussion of income taxes related to
discontinued operations.
(14) 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 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 $169 million in 1995, $174 million in 1996 and $177
million in 1997. In addition, the minimum obligations under the lignite
mining and lease agreements will be approximately $19 million in 1995
and 1996 and $16 million in 1997. 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 $55.0 million in 1995, $56.6 million in 1996 and
$38.2 million in 1997. Collectively, the gas supply contracts included
in these figures could amount to 11 percent 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.
-61-
HL&P has commitments to purchase firm capacity from cogenerators of
approximately $32 million in 1995, and $22 million in 1996 and 1997.
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
two principal firm capacity contracts contain provisions allowing HL&P
to suspend or reduce payments and seek repayment for amounts
disallowed.
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.
(b) KBLCOM COMMITMENTS AND OBLIGATIONS UNDER CABLE FRANCHISE AGREEMENTS.
KBLCOM and its subsidiaries presently have certain cable franchises
containing provisions for construction of cable plant and service to
customers within the franchise area. In connection with certain
obligations under existing franchise agreements, KBLCOM and its
subsidiaries obtain surety bonds and letters of credit guaranteeing
performance to municipalities and public utilities. Payment is required
only in the event of non-performance. KBLCOM and its subsidiaries have
fulfilled all of their obligations such that no payments have been
required. These commitments will be assumed by Time Warner in the
pending sale described further in Note 20(a).
-62-
(15) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of the Company's financial
instruments are as follows:
December 31,
----------------------------------------------
1994 1993
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(Thousands of Dollars)
Financial assets:
Cash and short-term investments ...... $ 10,443 $ 10,443 $ 14,884 $ 14,884
Note receivable from ESOP (a) ........ 332,489 421,468
Financial liabilities:
Short-term notes payable ............. 423,291 423,291 591,385 591,385
Cumulative preferred stock
(subject to mandatory redemption) ... 167,610 173,355 187,236 207,489
Debentures ........................... 548,729 549,532 548,544 616,672
Long-term debt of subsidiaries:
Electric:
First mortgage bonds .......... 3,020,400 2,980,028 3,039,343 3,360,442
Pollution control revenue bonds 155,247 163,736 155,218 174,094
Other notes payable ........... 1,129 1,129 2,410 2,410
Discontinued operations:
Senior bank debt .............. 364,000 364,000 364,000 364,000
Senior and senior subordinated
notes ...................... 140,580 154,654 150,964 180,890
Unrecognized financial instruments:
Interest rate swaps - discontinued
operations:
Net payable position ............. 1,019 13,604
(a) As a result of the Company adopting SOP 93-6 in 1994, a new
contra-equity account (unearned ESOP shares) has replaced the note
receivable from ESOP. See Note 12(b).
The fair values of cash and short-term investments, short-term and
other notes payable and bank debt are estimated to be equivalent to
the carrying amounts.
The fair values of the ESOP loan, the Company's debentures, HL&P's
cumulative preferred stock subject to mandatory redemption, HL&P's
first mortgage bonds, pollution control revenue bonds issued on behalf
of HL&P and senior and senior subordinated notes are estimated using
rates currently available for securities with similar terms and
remaining maturities.
The fair value of interest rate swaps is the estimated amount that the
swap counterparties would receive or pay to terminate the swap
agreements, taking into account current interest rates and the current
creditworthiness of the swap counterparties.
-63-
(16) RESTRUCTURING
HL&P recorded a one-time, pre-tax charge of $86.4 million in the first
quarter of 1992 to reflect the implementation of the STEP program, a
restructuring of its operations. This charge includes $42 million
related to the acceptance of an early retirement plan by 468 employees
of HL&P, $31 million for severance benefits related to the elimination
of an additional 1,100 positions and $13 million in other costs
associated with the restructuring.
(17) CABLE TELEVISION ACQUISITION - DISCONTINUED OPERATIONS
In July 1994, KBLCOM acquired the stock of three cable companies then
serving approximately 48,000 customers in the Minneapolis area in
exchange for 587,646 shares of common stock of the Company valued at
approximately $20.1 million. The total purchase price of approximately
$80 million included the assumption of approximately $60 million in
liabilities. Notes were repaid in connection with the acquisition in
the amount of $57.7 million.
(18) RAILROAD SETTLEMENT PAYMENTS
In July 1994, HL&P contributed as equity its rights to receive certain
railroad settlement payments to HL&P Receivables, Inc. (HLPR), a
wholly-owned subsidiary of HL&P. HLPR transferred the receivables to a
trust. A bank purchased certificates evidencing a senior interest in
the trust and HLPR holds a certificate evidencing a subordinate
interest in the trust. HL&P received as a dividend from HLPR
approximately $66.1 million, an amount equal to HLPR's proceeds from
the sale. Consistent with the manner in which HL&P recorded receipts
of the settlement payments, HL&P recorded the transaction as a $66.1
million reduction to reconcilable fuel expense in July 1994. The
reduction to reconcilable fuel expense had no effect on earnings.
(19) UNAUDITED QUARTERLY INFORMATION
The following unaudited quarterly financial information includes, in
the opinion of management, all adjustments (which comprise only normal
recurring accruals) necessary for a fair presentation. Quarterly
results are not necessarily indicative of a full year's operations
because of seasonality and other factors, including rate increases and
variations in operating expense patterns.
Year Ended December 31, 1993
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- ----------- ----------- ---------
(Restated) (Restated) (Restated) (Restated)
(Thousands of Dollars)
Revenues ........................... $ 805,685 $ 1,005,149 $ 1,355,339 $ 913,690
Operating income ................... 123,807 241,470 508,746 130,565
Income from continuing operations .. 33,115 103,146 270,288 33,982
Loss from discontinued operations .. (6,060) (2,937) (9,879) (5,619)
Net income ......................... 27,055 100,209 260,409 28,363
Earnings per common share (a):
Income from continuing operations $ .26 $ .79 $ 2.08 $ .26
Net income ...................... .21 .77 2.00 .22
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Year Ended December 31, 1994
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- ----------- ----------- ---------
(Restated) (Restated) (Restated) (Restated)
(Thousands of Dollars)
Revenues ................................. $ 821,581 $ 1,004,906 $ 1,150,946 $768,652
Operating income ......................... 149,657 298,471 459,964 88,726
Income from continuing operations (b) .... 41,599 134,308 242,239 5,839
Income (loss) from discontinued operations (7,501) (7,583) (6,271) 4,831
Net income ............................... 25,898 126,725 235,968 10,670
Earnings per common share (a):
Income from continuing operations (b) . $ .34 $ 1.09 $ 1.97 $ .05
Net income ............................ .21 1.03 1.92 .09
(a) Quarterly earnings per common share are based on the weighted
average number of shares outstanding during the quarter, and the
sum of the quarters may not equal annual earnings per common
share.
(b) Information for the first quarter of 1994 is before the
cumulative effect of a change in accounting for postemployment
benefits of $8.2 million or $.07 per share.
(20) SUBSEQUENT EVENTS
(a) KBLCOM. On January 26, 1995, Time Warner and the Company reached an
agreement in which Time Warner would acquire KBLCOM in a tax-deferred,
stock-for-stock merger with a subsidiary of Time Warner for a sales
price of approximately $2.2 billion, subject to closing adjustments.
Time Warner will issue one million shares of Time Warner common stock
and 11 million shares of a newly-issued series of its convertible
preferred stock, which will have a liquidation value of $100 per
share, to the Company. The preferred stock will be convertible into
approximately 22.9 million shares of Time Warner common stock and,
until the earlier of conversion or the fourth anniversary of its
issuance, pays an annual dividend of $3.75 per share. After four
years, Time Warner will have the right to exchange the Time Warner
preferred stock for Time Warner common stock at the stated conversion
rate. In addition, at the closing Time Warner will purchase for cash
certain intercompany debt of KBLCOM from the Company for approximately
$600 million subject to adjustment for changes in or levels of
specified indebtedness and liabilities, working capital, capital
expenditures and related items. Closing of this transaction, which is
subject to, among other things, (i) the parties obtaining necessary
consents of certain franchise authorities and other governmental
entities, (ii) the absence of any change that might have a material
adverse effect on KBLCOM or Time Warner, (iii) the absence of any
material litigation and (iv) the expiration or termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvement Act
of 1976, as amended, is expected to take place in the second half of
1995.
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Operating results from discontinued operations for years ended
December 31, 1994, 1993 and 1992 were as follows:
Year Ended December 31,
-----------------------------------
1994 1993 1992
--------- --------- ---------
(Thousands of Dollars)
Revenues ................................ $ 255,772 $ 244,067 $ 235,258
Operating expenses (a) .................. 156,084 148,325 140,242
--------- --------- ---------
Gross operating margin (a) .............. 99,688 95,742 95,016
Depreciation, amortization,
interest and other .................... 128,023 117,982 137,227
Income taxes (benefit) .................. (11,811) 2,255 (12,667)
--------- --------- ---------
Loss from discontinued operations ....... $ (16,524) $ (24,495) $ (29,544)
========= ========= =========
(a)Exclusive of depreciation and amortization.
Loss from discontinued operations of KBLCOM excludes the effects of
corporate overhead charges and includes interest expense relating to
the amount of intercompany debt that Time Warner is purchasing from
the Company.
Net assets of discontinued operations were as follows:
December 31, 1994 December 31, 1993
----------------- -----------------
(Thousands of Dollars)
Assets:
Cable television property, net of
accumulated depreciation of
$161,402 and $151,671 for
1994 and 1993, respectively ........ $ 276,624 $ 220,507
Equity in cable television
partnerships ........................ 160,363 122,531
Intangible assets ..................... 1,029,440 984,032
Other assets .......................... 43,625 35,526
----------- -----------
Total assets ....................... 1,510,052 1,362,596
Less:
Cable television debt ................. (488,783) (504,580)
Accumulated deferred income taxes ..... (308,627) (297,624)
Other liabilities ..................... (43,510) (19,169)
----------- -----------
Net assets ......................... $ 669,132 $ 541,223
=========== ===========
At December 31, 1994 pursuant to the acquisition of cable systems,
KBLCOM has unutilized Separate Return Limitation Year (SRLY) net
operating loss tax benefits of approximately $22.1 million and
unutilized SRLY investment tax credits of approximately $14.0 million
which expire in the years 1995 through 2008, and 1995 through 2003,
respectively. In addition, KBLCOM has unutilized restricted state loss
tax benefits of $20.0 million, which expire in the years 1995 through
2009, and unutilized minimum tax credits of $1.8 million. The Company
does not anticipate full utilization of these losses and tax credits
and, therefore, has established a valuation allowance. Utilization of
preacquisition carryforwards in the future would not affect income of
the Company and KBLCOM, but would be applied to reduce the carrying
value of
-66-
cable television franchises and intangible assets. These tax benefits
and credits will inure to the benefit of Time Warner upon closing of
the pending sale.
Based on a Time Warner common stock price of $35.50 and assuming the
closing occurs on September 30, 1995, the Company estimates that it
will recognize an after-tax gain of approximately $650 million. The
Company anticipates that it will record a portion of this gain
(estimated to be approximately $100 million) in the first quarter of
1995 in recognition of the deferred tax asset arising from the
Company's excess tax basis in KBLCOM stock. The remainder of the gain
will be recognized at closing.
(b) HOUSTON INDUSTRIES ENERGY, INC. (HI ENERGY). In January 1995, HI
Energy, a subsidiary of the Company, acquired for $15.7 million a 90
percent equity interest in an electric utility operating company in
the province of Santiago del Estero, a rural province in the north
central part of Argentina. The utility system serves approximately
100,000 customers in an area of 136,000 square kilometers.
-67-
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
Except as modified below, the Notes to the Company's Consolidated Financial
Statements are incorporated herein by reference insofar as they relate to HL&P:
(1) Summary of Significant Accounting Policies, (2) Jointly-Owned Nuclear Plant,
(3) Pending Rate Proceedings, (4) Appeals of Prior Utility Commission Rate
Orders, (5) Malakoff, (6) Change in Accounting Method for Revenues, (9)
Preferred Stock of HL&P, (10) Long-Term Debt, (12) Retirement Plans, (13) Income
Taxes, (14) Commitments and Contingencies, (15) Estimated Fair Value of
Financial Instruments, (16) Restructuring, and (18) Railroad Settlement
Payments.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(i) EARNINGS PER COMMON SHARE. All issued and outstanding Class A voting
common stock of HL&P is held by the Company and all issued and
outstanding Class B non-voting common stock of HL&P is held by Houston
Industries (Delaware) Incorporated, a wholly owned subsidiary of the
Company. Accordingly, earnings per share is not computed.
(j) STATEMENTS OF CASH FLOWS. At December 31, 1994, HL&P had affiliate
investments (considered to be cash equivalents) of $227.6 million. At
December 31, 1993, HL&P did not have any investments with affiliated
companies. At December 31, 1992, HL&P had affiliate investments of $2.1
million.
(11) SHORT-TERM FINANCING
In 1993 and 1994, the interim financing requirements of HL&P were
primarily met through the issuance of commercial paper. HL&P had bank
credit facilities of $400 million and $250 million at December 31, 1994
and 1993, respectively, which limited total short-term borrowings and
provided for interest at rates generally less than the prime rate.
HL&P's weighted average short-term borrowing rates for commercial paper
for the year ended December 31, 1994 and 1993 were 3.71% and 3.31%,
respectively. HL&P had no commercial paper outstanding at December 31,
1994, and had approximately $171 million outstanding at December 31,
1993. Facility fees are required on HL&P's bank credit facility.
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(12) RETIREMENT PLANS
(a) PENSION. Net pension cost for HL&P includes the following components:
Year Ended December 31,
------------------------------------
1994 1993 1992
-------- -------- --------
(Thousands of Dollars)
Service cost - benefits earned
during the period ................... $ 21,335 $ 24,640 $ 23,211
Interest cost on projected benefit
obligation .......................... 45,064 49,950 44,580
Actual (return) loss on plan assets .. 4,737 (38,668) (26,334)
Net amortization and deferrals ....... (50,012) (683) (11,605)
-------- -------- --------
Net pension cost ..................... $ 21,124 $ 35,239 $ 29,852
======== ======== ========
The funded status of HL&P's retirement plan was as follows:
December 31,
------------------------
1994 1993
--------- ---------
(Thousands of Dollars)
Actuarial present value of:
Vested benefit obligation .................... $ 429,279 $ 434,797
========= =========
Accumulated benefit obligation ............... $ 460,760 $ 492,301
========= =========
Plan assets at fair value ........................ $ 486,100 $ 478,515
Projected benefit obligation ..................... 617,690 636,724
--------- ---------
Assets less than projected benefit obligation .... (131,590) (158,209)
Unrecognized transitional asset .................. (15,157) (17,062)
Unrecognized prior service cost .................. 21,275 23,183
Unrecognized net loss ............................ 67,093 77,937
--------- ---------
Accrued pension cost ............................. $ (58,379) $ (74,151)
========= =========
(c) POSTRETIREMENT BENEFITS. The net postretirement benefit cost for HL&P
includes the following components:
Year Ended December 31,
------------------------
1994 1993
----------- --------
(Thousands of Dollars)
Service cost - benefits earned during the period ..... $ 8,904 $ 9,297
Interest cost on projected benefit obligation ........ 9,946 18,134
Actual return on plan assets ......................... -- --
Net amortization and deferrals ....................... 7,757 9,658
------- -------
Net postretirement benefit cost ...................... $26,607 $37,089
======= =======
-69-
The funded status of HL&P's postretirement benefit costs was as
follows:
December 31,
------------------------
1994 1993
--------- ---------
(Thousands of Dollars)
Accumulated benefit obligation:
Retirees ...................................... $ (97,200) $(128,122)
Fully eligible active plan participants ....... (20,126) (22,691)
Other active plan participants ................ (22,706) (20,576)
--------- ---------
Total ..................................... (140,032) (171,389)
Plan assets at fair value ........................ -- --
--------- ---------
Assets less than accumulated benefit obligation .. (140,032) (171,389)
Unrecognized transitional obligation ............. 191,225 200,883
Unrecognized net gain ............................ (92,786) (55,577)
--------- ---------
Accrued postretirement benefit cost .............. $ (41,593) $ (26,083)
========= =========
For 1992, HL&P recognized postretirement benefit costs on a
"pay-as-you-go" basis and made payments of $8.6 million.
(13) INCOME TAXES
HL&P records income taxes under SFAS No. 109. During 1993, federal tax
legislation was enacted that changed the income tax consequences for
HL&P. The principal provision of the new law which affected HL&P was
the change in the corporate income tax rate from 34 percent to 35
percent. A net regulatory asset and the related deferred income tax
liability of $71.3 million were recorded by HL&P in 1993. The effect
of the new law, which decreased HL&P's net income by $8.0 million, was
recognized as a component of income tax expense in 1993. The effect on
HL&P's deferred taxes as a result of the change in the new law was
$4.5 million in 1993.
HL&P's current and deferred components of income tax expense are as
follows:
Year Ended December 31,
---------------------------------------
1994 1993 1992
--------- --------- ---------
(Thousands of Dollars)
Current ........................... $ 184,669 $ 115,745 $ 134,514
Deferred .......................... 70,324 123,719 40,217
--------- --------- ---------
Federal income tax expense ........ 254,993 239,464 174,731
Federal income taxes charged
to other income .................. (836) (2,993) (1,062)
--------- --------- ---------
Income taxes before cumulative
effect of change in accounting ... $ 254,157 $ 236,471 $ 173,669
========= ========= =========
-70-
HL&P's effective income tax rates are lower than statutory corporate
rates for each year as follows:
Year Ended December 31,
-----------------------------------
1994 1993 1992
--------- --------- ---------
(Thousands of Dollars)
Income before income taxes, preferred
dividends and cumulative effect of
change in accounting .................. $ 749,121 $ 720,694 $ 588,951
Statutory rate .......................... 35% 35% 34%
--------- --------- ---------
Income taxes at statutory rate .......... 262,192 252,243 200,243
--------- --------- ---------
Net reduction in taxes resulting from:
AFUDC - other included in income ...... 1,440 1,229 2,097
Amortization of investment tax credit . 19,416 19,797 19,926
Difference between book and tax
depreciation for which deferred taxes
have not been normalized ............ (15,455) (12,976) (13,466)
Excess deferred taxes ................. 3,537 9,625 17,403
Other - net ........................... (903) (1,903) 614
--------- --------- ---------
Total ............................... 8,035 15,772 26,574
--------- --------- ---------
Income taxes before cumulative effect
of change in accounting ............. $ 254,157 $ 236,471 $ 173,669
========= ========= =========
Effective rate .......................... 33.9% 32.8% 29.5%
Following are HL&P's tax effects of temporary differences resulting in
deferred tax assets and liabilities:
December 31,
-------------------------
1994 1993
---------- ----------
(Thousands of Dollars)
Deferred Tax Assets:
Alternative minimum tax ........................ $51,506
IRS audit assessment ........................... $ 48,513 48,513
Disallowed plant cost - net .................... 23,496 24,304
Other .......................................... 60,174 47,906
---------- ----------
Total deferred tax assets .................... 132,183 172,229
---------- ----------
Deferred Tax Liabilities:
Depreciation ................................... 1,335,265 1,210,410
Regulatory assets - net ........................ 235,463 246,763
Deferred plant costs - net ..................... 207,746 215,472
Capitalized taxes, employee benefits,
and removal costs ............................ 111,681 111,333
Other .......................................... 118,328 187,227
---------- ----------
Total deferred tax liabilities ............. 2,008,483 1,971,205
---------- ----------
Accumulated deferred income taxes - net ........ $1,876,300 $1,798,976
========== ==========
-71-
(15) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of additional HL&P
financial instruments are as follows:
December 31,
------------------------------------------
1994 1993
-------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- ------- -------
(Thousands of Dollars)
Financial assets:
Cash and short-term investments $235,867 $235,867 $12,413 $12,413
Financial liabilities:
Short-term notes payable ...... 171,100 171,100
(19) UNAUDITED QUARTERLY INFORMATION
The following unaudited quarterly financial information includes, in
the opinion of management, all adjustments (which comprise only normal
recurring accruals) necessary for a fair presentation. Quarterly
results are not necessarily indicative of a full year's operations
because of seasonality and other factors, including rate increases and
variations in operating expense patterns.
Income After
Operating Preferred
Quarter Ended Revenues Income Dividends
------------- -------- --------- ------------
(Thousands of Dollars)
1993
----
March 31 .................. $ 805,685 $113,160 $ 31,574
June 30 ................... 1,005,149 189,066 105,765
September 30 .............. 1,355,339 355,221 271,594
December 31 ............... 913,690 108,839 40,817
1994
----
March 31 .................. $ 821,581 $122,879 $ 41,686
June 30 ................... 1,004,906 216,842 142,478
September 30 .............. 1,150,946 320,859 251,092
December 31 ............... 768,652 82,302 17,925
-72-
(21) PRINCIPAL AFFILIATE TRANSACTIONS
Year Ended December 31,
--------------------------------------
Affiliated
Company Description 1994 1993 1992
---------- ------------------- --------- --------- ---------
(Thousands of Dollars)
Houston Dividends $ 328,996 $ 342,982 $ 345,748
Industries Service Fees (a) 26,913 21,864 18,215
Money Fund Income (b) 6,025 2,748 930
Houston
Industries
Finance Discount Expenses (a) 21,053
(a) Included in Operating Expenses
(b) Included in Other Income (Expense)
During 1992, Houston Industries Finance purchased accounts receivable
of HL&P. In January 1993, Houston Industries Finance sold the
receivables back to HL&P and ceased operations. HL&P is now selling
its accounts receivable and most of its accrued unbilled revenues to
an unaffiliated third party.
-73-
INDEPENDENT AUDITORS' REPORT
HOUSTON INDUSTRIES INCORPORATED:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capitalization of Houston Industries Incorporated and
its subsidiaries as of December 31, 1994 and 1993, and the related statements of
consolidated income, consolidated retained earnings and consolidated cash flows
for each of the three years in the period ended December 31, 1994. Our audits
also included the Company's financial statement schedule as shown on page 76.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company and its
subsidiaries at December 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in Notes 6, 12(b), and 12(d), respectively, to the
consolidated financial statements, the Company changed its method of accounting
for (i) revenues in 1992, (ii) the Employee Stock Ownership Plan to conform to
AICPA Statement of Position 93-6 in 1994, and (iii) postemployment benefits to
conform with Statement of Financial Accounting Standards No. 112 in 1994. As
discussed in Note 1(k) to the consolidated financial statements, the Company's
consolidated financial statements have been restated for consistency in
reflecting discontinued cable television operations.
DELOITTE & TOUCHE LLP
Houston, Texas
February 23, 1995 (April 28, 1995 as to the presentation of discontinued cable
television operations described in Note 1(k))
- 74 -
INDEPENDENT AUDITORS' REPORT
HOUSTON LIGHTING & POWER COMPANY:
We have audited the accompanying balance sheets and the statements of
capitalization of Houston Lighting & Power Company (HL&P) as of December 31,
1994 and 1993, and the related statements of income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1994. Our
audits also included the financial statement schedule of HL&P shown on page 77.
These financial statements and financial statement schedule are the
responsibility of HL&P's management. Our responsibility is to express an opinion
on these financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of HL&P at December 31, 1994 and 1993,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1994 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Notes 6 and 12(d), respectively, to the financial
statements, HL&P changed its method of accounting for (i) revenues in 1992, and
(ii) postemployment benefits to conform with Statement of Financial Accounting
Standards No. 112 in 1994.
DELOITTE & TOUCHE LLP
Houston, Texas
February 23, 1995
- 75 -
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
SCHEDULE VIII - RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(RESTATED)
(THOUSANDS OF DOLLARS)
===================================================================================================================================
Col. A Col. B Col. C Col. D Col. E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
------------------------
Balance at Charged Charged Deductions Balance at
Beginning to to Other from End
Description of Period Income Accounts Reserves of Period
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994:
Accumulated provisions deducted from
related assets on balance sheet:
Net assets of discontinued
cable television operations ............. $ 243,400 $44,319 $1,799 $ 6,560 $ 282,958
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ........................ (2,891) 2,187 2,764 (3,468)
Injuries and damages ...................... 2,891 3,099 3,749 2,241
Year Ended December 31, 1993:
Accumulated provisions deducted
from related assets on balance
sheet:
Uncollectible accounts .................... $ 7,194 $ 7,194
Net assets of discontinued
cable television operations ............. 205,739 $43,004 $ 91 5,434 $ 243,400
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ........................ (2,821) 2,187 2,257 (2,891)
Injuries and damages ...................... 3,911 4,685 5,705 2,891
Year Ended December 31, 1992:
Accumulated provisions deducted
from related assets on balance
sheet:
Uncollectible accounts .................... $ 9,611 $15,780 $18,197 $ 7,194
Net assets of discontinued
cable television operations ............. 167,472 39,029 762 205,739
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ........................ (4,645) 2,187 363 (2,821)
Injuries and damages ...................... 5,847 4,154 6,090 3,911
- ------------
Notes:
(A) Deductions from reserves represent losses or expenses for which the
respective reserves were created. In the case of the uncollectible
accounts reserve, such deductions are net of recoveries of amounts
previously written off.
(B) During 1992, Houston Industries Finance purchased accounts receivable of
HL&P and of certain KBLCOM subsidiaries. In January 1993, Houston
Industries Finance sold the receivables back to the respective
subsidiaries and ceased operations. HL&P is now selling its accounts
receivable and most of its accrued unbilled revenues to a third party.
-76-
HOUSTON LIGHTING & POWER COMPANY
SCHEDULE VIII - RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
===================================================================================================================================
Col. A Col. B Col. C Col. D Col. E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
------------------------
Balance at Charged Charged Deductions Balance at
Beginning to to Other from End
Description of Period Income Accounts Reserves of Period
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994:
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ..................... $(2,891) $2,187 $2,764 $(3,468)
Injuries and damages ................... 2,891 3,099 3,749 2,241
Year Ended December 31, 1993:
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ..................... $(2,821) $2,187 $2,257 $(2,891)
Injuries and damages ................... 3,911 4,685 5,705 2,891
Year Ended December 31, 1992:
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ..................... $(4,645) $2,187 $ 363 $(2,821)
Injuries and damages ................... 5,847 4,154 6,090 3,911
- ------------
Notes:
(A) Deductions from reserves represent losses or expenses for which the
respective reserves were created.
(B) HL&P has no reserves for uncollectible accounts due to sales of accounts
receivable.
-77-
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: May 12, 1995
-78-
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: May 12, 1995
-79-
ITEM 7. EXHIBITS
HOUSTON INDUSTRIES INCORPORATED:
Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges.
Exhibit 23 - Consent of Independent Auditors.
Exhibit 27 - Financial Data Schedule.
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 23 - Consent of Independent Auditors.
Exhibit 27 - Financial Data Schedule.
EXHIBIT 12
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
Twelve Months Ended December 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- -------- ---------- ----------
(Restated) (Restated) (Restated) (Restated) (Restated)
Fixed Charges as Defined:
(1) Interest on Long-Term Debt ...................... $ 265,494 $ 304,462 $338,771 $ 340,810 $ 317,454
(2) Other Interest .................................. 25,076 15,145 23,323 42,353 48,872
(3) Preferred Dividends Factor of Subsidiary
(line 12) ..................................... 51,718 52,399 58,204 67,433 71,152
(4) Interest Component of Rentals Charged to
Operating Expense ............................. 3,951 4,449 5,116 5,943 5,628
---------- ---------- -------- ---------- ----------
(5) Total Fixed Charges ............................. $ 346,239 $ 376,455 $425,414 $ 456,539 $ 443,106
========== ========== ======== ========== ==========
Earnings as Defined:
(6) Income from Continuing Operations
Before Cumulative Effect of
Change in Accounting .......................... $ 423,985 $ 440,531 $370,031 $ 484,275 $ 417,422
(7) Income Taxes for Continuing Operations
Before Cumulative Effect of
Change in Accounting .......................... 230,424 228,863 177,276 224,215 202,501
(8) Fixed Charges (line 5) .......................... 346,239 376,455 425,414 456,539 443,106
---------- ---------- -------- ---------- ----------
(9) Earnings from Continuing Operations
Before Cumulative Effect of Change
in Accounting, Income Taxes and Fixed
Charges ....................................... $1,000,648 $1,045,849 $972,721 $1,165,029 $1,063,029
========== ========== ======== ========== ==========
Preferred Dividends Factor of Subsidiary:
(10) Preferred Stock Dividends of Subsidiary ......... $ 33,583 $ 34,473 $ 39,327 $ 46,187 $ 47,753
(11) Ratio of Pre-Tax Income from Continuing
Operations to Income from Continuing
Operations(line 6 plus line 7 divided
by line 6) .................................... 1.54 1.52 1.48 1.46 1.49
---------- ---------- -------- ---------- ----------
(12) Preferred Dividends Factor of Subsidiary
(line 10 times line 11) ....................... $ 51,718 $ 52,399 $ 58,204 $ 67,433 $ 71,152
========== ========== ======== ========== ==========
Ratio of Earnings from Continuing Operations
to Fixed Charges Before Cumulative
Effect of Change in Accounting
(line 9 divided by line 5) ......................... 2.89 2.78 2.29 2.55 2.40
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
HOUSTON INDUSTRIES INCORPORATED:
We consent to the incorporation by reference in (i) Registration
Statements on Form S-3 Nos. 33-34446, 33-39921, 33-60756, 33-51431, 33-52207 and
33-55445, (ii) Post-Effective Amendment No. 2 to Registration Statement No.
33-12439 on Form S-8, and (iii) Registration Statements on Form S-8 Nos.
33-37493, 33-50629, 33-52279, 33-55391 and 33-56855 of our report dated February
23, 1995 (April 28, 1995 as to the presentation of discontinued operations
described in Note 1(k)) appearing in this Form 8-K of Houston Industries
Incorporated dated May 12, 1995.
DELOITTE & TOUCHE LLP
HOUSTON, TEXAS
MAY 12, 1995
UT
0000202131
HOUSTON INDUSTRIES INCORPORATED
12-MOS
DEC-31-1995
DEC-31-1994
PER-BOOK
8,976,029
111,303
290,090
1,406,673
669,132
11,453,227
2,148,027
0
1,221,221
3,369,248
121,910
351,345
3,725,341
0
0
423,291
164
45,700
8,792
3,611
3,403,825
11,453,227
3,746,085
230,424
2,749,267
2,749,267
996,818
(23,810)
973,008
285,016
432,844
33,583
399,261
369,270
246,227
1,197,104
3.25
3.25
Includes reductions to income for the loss from discontinued cable
television operations of $16,524 and the cumulative effect of change in
accounting for postemployment benefits of $8,200.
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 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)
Twelve Months Ended December 31,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ----------- -------- ---------- ----------
Fixed Charges as Defined:
(1) Interest on Long-Term Debt ......................... $ 246,533 $ 276,049 $311,208 $ 326,722 $ 319,713
(2) Other Interest ..................................... 8,493 12,317 19,548 41,216 36,006
(3) Amortization of (Premium) Discount ................. 8,484 7,234 5,346 4,209 4,764
(4) Interest Component of Rentals Charged
to Operating Expense .............................. 3,951 4,449 5,116 5,943 5,628
---------- ----------- -------- ---------- ----------
(5) Total Fixed Charges ................................ $ 267,461 $ 300,049 $341,218 $ 378,090 $ 366,111
========== =========== ======== ========== ==========
Earnings as Defined:
(6) Net Income ......................................... $ 486,764 $ 484,223 $509,462 $ 518,899 $ 476,962
(7) Cumulative Effect of Change in Accounting .......... 8,200 (94,180)
---------- ----------- -------- ---------- ----------
(8) Income Before Cumulative Effect of Change
in Accounting ..................................... 494,964 484,223 415,282 518,899 476,962
---------- ----------- -------- ---------- ----------
Income Taxes:
(9) Current ............................................ 181,109 113,394 129,611 143,054 143,653
(10) Deferred (Net) ..................................... 68,633 123,077 92,575 83,991 56,031
(11) Cumulative Effect of Change in Accounting .......... 4,415 (48,517)
---------- ----------- -------- ---------- ----------
(12) Total Income Taxes Before Cumulative
Effect of Change in Accounting .................... 254,157 236,471 173,669 227,045 199,684
---------- ----------- -------- ---------- ----------
(13) Total Fixed Charges (line 5) ....................... 267,461 300,049 341,218 378,090 366,111
---------- ----------- -------- ---------- ----------
(14) Earnings Before Income Taxes and Fixed
Charges (line 8 plus line 12 plus line 13) ........ $1,016,582 $ 1,020,743 $930,169 $1,124,034 $1,042,757
========== =========== ======== ========== ==========
Ratio of Earnings to Fixed Charges
(line 14 divided by line 5) ........................... 3.80 3.40 2.73 2.97 2.85
Preferred Dividend Requirements:
(15) Preferred Dividends ................................ $ 33,583 $ 34,473 $ 39,327 $ 46,187 $ 47,753
(16) Less Tax Deduction for Preferred Dividends ......... 54 54 56 56 56
---------- ----------- -------- ---------- ----------
(17) Total .............................................. 33,529 34,419 39,271 46,131 47,697
(18) Ratio of Pre-Tax Income to Net Income
(line 8 plus line 12 divided by line 8) ........... 1.51 1.49 1.42 1.44 1.42
---------- ----------- -------- ---------- ----------
(19) Line 17 times line 18 .............................. 50,629 51,284 55,765 66,429 67,730
(20) Add Back Tax Deduction (line 16) ................... 54 54 56 56 56
---------- ----------- -------- ---------- ----------
(21) Preferred Dividends Factor ......................... $ 50,683 $ 51,338 $ 55,821 $ 66,485 $ 67,786
========== =========== ======== ========== ==========
(22) Total Fixed Charges (line 5) ....................... $ 267,461 $ 300,049 $341,218 $ 378,090 $ 366,111
(23) Preferred Dividends Factor (line 21) ............... 50,683 51,338 55,821 66,485 67,786
---------- ----------- -------- ---------- ----------
(24) Total .............................................. $ 318,144 $ 351,387 $397,039 $ 444,575 $ 433,897
========== =========== ======== ========== ==========
Ratio of Earnings to Fixed Charges and
Preferred Dividends Requirements
(line 14 divided by line 24) ...................... 3.20 2.90 2.34 2.53 2.40
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
HOUSTON LIGHTING & POWER COMPANY:
We consent to the incorporation by reference in Registration Statements
on Form S-3 Nos. 33-46368 and 33-54228 and in Post-Effective Amendment No. 1 to
Registration Statement No. 33-51417 on Form S-3 of our report dated February 23,
1995 appearing in this Form 8-K of Houston Lighting & Power Company dated May
12, 1995.
DELOITTE & TOUCHE LLP
HOUSTON, TEXAS
MAY 12, 1995
UT
0000048732
HOUSTON LIGHTING & POWER COMPANY
12-MOS
DEC-31-1995
DEC-31-1994
PER-BOOK
8,976,029
0
501,656
1,373,296
0
10,850,981
1,675,927
0
2,153,109
3,829,036
121,910
351,345
3,176,612
0
0
0
164
45,700
8,792
3,611
3,313,811
10,850,981
3,746,085
254,993
2,748,210
3,003,203
742,882
1,554
744,436
249,472
486,764
33,583
453,181
328,996
246,227
1,226,911
0
0
Includes reduction to net income for the cumulative effect of change in
accounting for postemployment benefits of $8,200.
