UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
______________________________
Commission file number 1-7629
HOUSTON INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-1885573
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 Post Oak Park
4400 Post Oak Parkway
Houston, Texas 77027
(Address of principal executive offices) (Zip Code)
(713) 629-3000
(Registrant's telephone number, including area code)
______________________________
Commission file number 1-3187
HOUSTON LIGHTING & POWER COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-0694415
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
611 Walker Avenue
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 228-9211
(Registrant's telephone number, including area code)
______________________________
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 1995, Houston Industries Incorporated had 131,336,234 shares of
common stock outstanding, including 7,438,726 ESOP shares not deemed outstanding
for financial statement purposes. As of July 31, 1995, all 1,100 shares of
Houston Lighting & Power Company's common stock were held, directly or
indirectly, by Houston Industries Incorporated.
HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1995
This combined Form 10-Q is separately filed by Houston Industries Incorporated
and Houston Lighting & Power Company. Information contained herein relating to
Houston Lighting & Power Company is filed by Houston Industries Incorporated and
separately by Houston Lighting & Power Company on its own behalf. Houston
Lighting & Power Company makes no representation as to information relating to
Houston Industries Incorporated (except as it may relate to Houston Lighting &
Power Company) or to any other affiliate or subsidiary of Houston Industries
Incorporated.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Houston Industries Incorporated and Subsidiaries
Statements of Consolidated Income
Three Months and Six Months Ended
June 30, 1995 and 1994 ........................ 3
Consolidated Balance Sheets
June 30, 1995 and December 31, 1994 ........... 5
Statements of Consolidated Cash Flows
Six Months Ended June 30, 1995 and 1994 ....... 7
Statements of Consolidated Retained Earnings
Three Months and Six Months Ended
June 30, 1995 and 1994 ........................ 8
Notes to Consolidated Financial Statements .... 14
Houston Lighting & Power Company
Statements of Income
Three Months and Six Months Ended
June 30, 1995 and 1994 ........................ 9
Balance Sheets
June 30, 1995 and December 31, 1994 ........... 10
Statements of Cash Flows
Six Months Ended June 30, 1995 and 1994 ....... 12
Statements of Retained Earnings
Three Months and Six Months Ended
June 30, 1995 and 1994 ........................ 13
Notes to Financial Statements ................. 14
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations ................................ 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................... 33
Item 6. Exhibits and Reports on Form 8-K .......... 33
Signatures ......................................... 35
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(Restated) (Restated)
REVENUES.................................. $ 978,225 $1,004,906 $1,724,391 $1,826,487
---------- ---------- ---------- ----------
EXPENSES:
Fuel................................... 238,465 235,514 422,067 452,702
Purchased power........................ 50,822 103,906 116,410 202,455
Operation and maintenance.............. 217,650 204,089 416,179 397,940
Taxes other than income taxes.......... 64,616 62,959 135,566 126,071
Depreciation and amortization.......... 112,286 99,967 216,482 199,191
---------- ---------- ---------- ----------
Total................................ 683,839 706,435 1,306,704 1,378,359
---------- ---------- ---------- ----------
OPERATING INCOME.......................... 294,386 298,471 417,687 448,128
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Allowance for other funds used
during construction.................. 2,014 93 4,643 1,409
Other - net............................ (17,394) (6,349) (27,653) (13,429)
---------- ---------- ---------- ----------
Total................................ (15,380) (6,256) (23,010) (12,020)
---------- ---------- ---------- ----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt............. 64,042 66,356 129,258 133,001
Other interest......................... 9,678 6,623 18,677 13,035
Allowance for borrowed funds used
during construction.................. (1,133) (129) (2,938) (1,817)
Preferred dividends of subsidiary...... 7,450 8,403 16,435 16,676
---------- ---------- ---------- ----------
Total................................ 80,037 81,253 161,432 160,895
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING............................. 198,969 210,962 233,245 275,213
INCOME TAXES.............................. 65,709 76,654 76,136 99,306
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING................... 133,260 134,308 157,109 175,907
DISCONTINUED OPERATIONS:
Loss from discontinued cable
television operations (net of
applicable income taxes)............. (7,583) (15,084)
Tax benefit from discontinued cable
television operations................ 90,607
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS (NET OF INCOME TAXES OF
$4,415)................................ (8,200)
---------- ---------- ---------- ----------
NET INCOME................................ $ 133,260 $ 126,725 $ 247,716 $ 152,623
========== ========== ========== ==========
(continued)
-3-
EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING ......................... $ 1.08 $ 1.09 $ 1.27 $ 1.44
DISCONTINUED OPERATIONS:
Loss from discontinued cable
television operations............ (.06) (.12)
Tax benefit from discontinued
cable television operations...... .73
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS............................ (.07)
--------- --------- --------- ---------
EARNINGS PER COMMON SHARE............. $ 1.08 $ 1.03 $ 2.00 $ 1.25
========= ========= ========= =========
DIVIDENDS DECLARED PER COMMON
SHARE............................... $ .75 $ .75 $ 1.50 $ 1.50
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000)................... 123,769 122,508 123,684 122,465
See Notes to Consolidated Financial Statements.
-4-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
JUNE 30, DECEMBER 31,
1995 1994
------------- -------------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Plant in service.................................... $ 11,936,270 $ 11,743,070
Construction work in progress....................... 320,253 333,180
Nuclear fuel........................................ 215,399 212,795
Plant held for future use........................... 201,764 201,741
Electric plant acquisition adjustments................ 3,166 3,166
Other property........................................ 69,739 85,529
------------- -------------
Total........................................... 12,746,591 12,579,481
Less accumulated depreciation and amortization........ 3,697,205 3,527,598
------------- -------------
Property, plant and equipment - net............. 9,049,386 9,051,883
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents............................. 37,578 10,443
Special deposits...................................... 10 10
Accounts receivable - net............................. 55,745 22,149
Accrued unbilled revenues............................. 20,568 38,372
Fuel stock, at lifo cost.............................. 65,612 56,711
Materials and supplies, at average cost............... 148,866 148,007
Prepayments........................................... 11,790 14,398
------------- -------------
Total current assets............................ 340,169 290,090
------------- -------------
OTHER ASSETS:
Net assets of discontinued cable television
operations.......................................... 701,330 618,982
Deferred plant costs - net............................ 626,026 638,917
Deferred debits....................................... 303,216 281,204
Regulatory asset - net................................ 232,472 235,463
Unamortized debt expense and premium on
reacquired debt..................................... 157,915 161,885
Recoverable project costs - net....................... 89,216 98,954
Equity investment in foreign electric utility......... 26,286 25,699
------------- -------------
Total other assets.............................. 2,136,461 2,061,104
------------- -------------
Total........................................ $ 11,526,016 $ 11,403,077
============= =============
See Notes to Consolidated Financial Statements.
-5-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
JUNE 30, DECEMBER 31,
1995 1994
------------- -------------
CAPITALIZATION:
Common Stock Equity:
Common stock, no par value............................. $ 2,438,573 $ 2,437,638
Unearned ESOP shares................................... (278,217) (289,611)
Retained earnings...................................... 1,283,326 1,221,221
------------- -------------
Total common stock equity....................... 3,443,682 3,369,248
------------- -------------
Preference Stock, no par value, authorized
10,000,000 shares; none outstanding
Cumulative Preferred Stock of Subsidiary, no par value:
Not subject to mandatory redemption.................. 351,345 351,345
Subject to mandatory redemption...................... 51,055 121,910
------------- -------------
Total cumulative preferred stock................ 402,400 473,255
------------- -------------
Long-Term Debt:
Debentures............................................. 548,821 548,729
Long-term debt of subsidiaries:
First mortgage bonds................................. 2,851,822 3,020,400
Pollution control revenue bonds...................... 155,262 155,247
Other .............................................. 7,774 9,757
------------- -------------
Total long-term debt............................ 3,563,679 3,734,133
------------- -------------
Total capitalization.......................... 7,409,761 7,576,636
------------- -------------
CURRENT LIABILITIES:
Notes payable............................................ 698,165 423,291
Accounts payable......................................... 159,235 159,225
Taxes accrued............................................ 108,261 169,690
Interest accrued......................................... 83,130 73,527
Dividends accrued........................................ 98,502 98,469
Accrued liabilities to municipalities.................... 19,507 21,307
Customer deposits........................................ 63,305 64,905
Current portion of long-term debt and preferred stock.... 179,460 49,475
Other.................................................... 62,258 64,026
------------- -------------
Total current liabilities..................... 1,471,823 1,123,915
------------- -------------
DEFERRED CREDITS:
Accumulated deferred federal income taxes................ 1,711,196 1,763,230
Unamortized investment tax credit........................ 401,865 411,580
Fuel-related credits..................................... 154,168 242,912
Other ................................................... 377,203 284,804
------------- -------------
Total deferred credits........................ 2,644,432 2,702,526
------------- -------------
COMMITMENTS AND CONTINGENCIES
Total...................................... $ 11,526,016 $ 11,403,077
============= =============
See Notes to Consolidated Financial Statements.
-6-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30,
------------------------
1995 1994
---------- ----------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations.......................... $ 157,109 $ 175,907
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization........................... 216,482 199,191
Amortization of nuclear fuel............................ 13,912 5,421
Deferred income taxes................................... 38,573 28,265
Investment tax credit................................... (9,715) (9,695)
Allowance for other funds used during
construction ......................................... (4,643) (1,409)
Fuel cost (refund) and over/(under) recovery - net...... (83,337) 27,408
Net cash provided by discontinued cable television
operations............................................ 5,495 20,122
Changes in other assets and liabilities:
Accounts receivable and accrued unbilled revenues..... (15,792) (6,070)
Inventory............................................. (9,760) 548
Other current assets.................................. 2,608 12,304
Accounts payable...................................... 10 (41,769)
Interest and taxes accrued............................ (51,826) (62,300)
Other current liabilities............................. (5,165) 2,094
Other - net........................................... 90,115 72,304
---------- ----------
Net cash provided by operating activities......... 344,066 422,321
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital and nuclear fuel expenditures
(including allowance for borrowed funds used
during construction).................................... (133,151) (191,637)
Non-regulated electric power project expenditures.......... (12,378) (406)
Corporate headquarters expenditures (including
capitalized interest)................................... (56,899) (12,253)
Net cash used in discontinued cable television
operations.............................................. (47,045) (36,949)
Other - net................................................ (7,552) (16,269)
---------- ----------
Net cash used in investing activities............. (257,025) (257,514)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of matured bonds................................... (19,500)
Redemption of preferred stock.............................. (91,400) (20,000)
Payment of common stock dividends.......................... (185,581) (183,735)
Increase in notes payable - net............................ 274,874 58,415
Extinguishment of long-term debt........................... (20,273)
Net cash used in discontinued cable television
operations.............................................. (40,798) (10,384)
Other - net................................................ 3,272 3,611
---------- ----------
Net cash used in financing activities............. (59,906) (171,593)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 27,135 (6,786)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............. 10,443 14,884
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................... $ 37,578 $ 8,098
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized)................... $ 188,852 $ 186,935
Income taxes............................................ 30,525 65,090
See Notes to Consolidated Financial Statements.
-7-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
Balance at Beginning of Period............ $1,242,925 $1,125,253 $1,221,221 $1,191,230
Net Income for the Period................. 133,260 126,725 247,716 152,623
---------- ---------- ---------- ----------
Total.............................. 1,376,185 1,251,978 1,468,937 1,343,853
Common Stock Dividends.................... (92,859) (91,898) (185,611) (183,773)
---------- ---------- ---------- ----------
Balance at End of Period.................. $1,283,326 $1,160,080 $1,283,326 $1,160,080
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
-8-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
OPERATING REVENUES...................... $ 978,225 $ 1,004,906 $ 1,724,391 $ 1,826,487
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Fuel.................................. 238,465 235,514 422,067 452,702
Purchased power....................... 50,822 103,906 116,410 202,455
Operation............................. 153,606 141,835 294,926 274,802
Maintenance........................... 64,044 62,254 121,253 123,138
Depreciation and amortization......... 111,961 99,675 215,874 198,604
Income taxes.......................... 77,292 81,921 96,310 108,994
Other taxes........................... 64,616 62,959 135,566 126,071
----------- ----------- ----------- -----------
Total............................. 760,806 788,064 1,402,406 1,486,766
----------- ----------- ----------- -----------
OPERATING INCOME........................ 217,419 216,842 321,985 339,721
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Allowance for other funds used
during construction................. 2,014 93 4,643 1,409
Other - net........................... (9,055) (2,773) (10,508) (5,759)
----------- ----------- ----------- -----------
Total............................. (7,041) (2,680) (5,865) (4,350)
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES.......... 210,378 214,162 316,120 335,371
----------- ----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt............ 61,399 61,557 122,917 123,399
Other interest........................ 789 1,853 3,924 4,749
Allowance for borrowed funds used
during construction................. (1,133) (129) (2,938) (1,817)
----------- ----------- ----------- -----------
Total............................. 61,055 63,281 123,903 126,331
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING.................. 149,323 150,881 192,217 209,040
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS (NET OF INCOME TAXES OF
$4,415)............................... (8,200)
----------- ----------- ----------- -----------
NET INCOME.............................. 149,323 150,881 192,217 200,840
DIVIDENDS ON PREFERRED STOCK............ 7,450 8,403 16,435 16,676
----------- ----------- ----------- -----------
INCOME AFTER PREFERRED DIVIDENDS........ $ 141,873 $ 142,478 $ 175,782 $ 184,164
=========== =========== =========== ===========
See Notes to Financial Statements.
-9-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
JUNE 30, DECEMBER 31,
1995 1994
------------ --------------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant in service............................. $ 11,936,270 $ 11,743,070
Construction work in progress......................... 320,253 333,180
Nuclear fuel.......................................... 215,399 212,795
Plant held for future use............................. 201,764 201,741
Electric plant acquisition adjustments................ 3,166 3,166
------------ ------------
Total............................................. 12,676,852 12,493,952
Less accumulated depreciation and
amortization........................................ 3,687,185 3,517,923
------------ ------------
Property, plant and equipment - net............... 8,989,667 8,976,029
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents............................. 94,403 235,867
Special deposits...................................... 10 10
Accounts receivable:
Affiliated companies................................ 2,339 4,213
Others.............................................. 30,992 8,896
Accrued unbilled revenues............................. 20,568 38,372
Inventory:
Fuel stock, at lifo cost............................ 65,612 56,711
Materials and supplies, at average cost............. 148,449 147,922
Prepayments........................................... 8,833 9,665
------------ ------------
Total current assets.............................. 371,206 501,656
------------ ------------
OTHER ASSETS:
Deferred plant costs - net............................ 626,026 638,917
Deferred debits....................................... 254,333 241,611
Unamortized debt expense and premium on
reacquired debt..................................... 155,814 158,351
Regulatory asset - net................................ 232,472 235,463
Recoverable project costs - net....................... 89,216 98,954
------------ ------------
Total other assets................................ 1,357,861 1,373,296
------------ ------------
Total........................................... $ 10,718,734 $ 10,850,981
============ ============
See Notes to Financial Statements.
-10-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
JUNE 30, DECEMBER 31,
1995 1994
------------- -------------
CAPITALIZATION:
Common Stock Equity:
Common stock, class A; no par value..................... $ 1,524,949 $ 1,524,949
Common stock, class B; no par value..................... 150,978 150,978
Retained earnings....................................... 2,164,391 2,153,109
------------- -------------
Total common stock equity............................ 3,840,318 3,829,036
------------- -------------
Cumulative Preferred Stock:
Not subject to mandatory redemption.................... 351,345 351,345
Subject to mandatory redemption........................ 51,055 121,910
------------- -------------
Total cumulative preferred stock..................... 402,400 473,255
------------- -------------
Long-Term Debt:
First mortgage bonds................................... 2,851,822 3,020,400
Pollution control revenue bonds........................ 155,262 155,247
Other.................................................. 7,774 9,757
------------- -------------
Total long-term debt................................. 3,014,858 3,185,404
------------- -------------
Total capitalization............................... 7,257,576 7,487,695
------------- -------------
CURRENT LIABILITIES:
Accounts payable......................................... 146,272 148,042
Accounts payable to affiliated companies................. 6,731 10,936
Taxes accrued............................................ 132,616 181,043
Interest accrued......................................... 71,283 64,732
Accrued liabilities to municipalities.................... 19,507 21,307
Customer deposits........................................ 63,305 64,905
Current portion of long-term debt and preferred stock.... 179,460 49,475
Other.................................................... 57,899 59,912
------------- -------------
Total current liabilities.......................... 677,073 600,352
------------- -------------
DEFERRED CREDITS:
Accumulated deferred federal income taxes................ 1,917,233 1,876,300
Unamortized investment tax credit........................ 401,865 411,580
Fuel-related credits..................................... 154,168 242,912
Other.................................................... 310,819 232,142
------------- -------------
Total deferred credits............................. 2,784,085 2,762,934
------------- -------------
COMMITMENTS AND CONTINGENCIES
Total........................................... $ 10,718,734 $ 10,850,981
============= =============
See Notes to Financial Statements.
-11-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30,
--------------------------
1995 1994
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 192,217 $ 200,840
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization...................... 215,874 198,604
Amortization of nuclear fuel....................... 13,912 5,421
Deferred income taxes.............................. 40,933 36,588
Investment tax credits............................. (9,715) (9,695)
Allowance for other funds used during
construction..................................... (4,643) (1,409)
Fuel cost (refund) and over/(under) recovery
- net............................................ (83,337) 27,408
Cumulative effect of change in accounting for
postemployment benefits.......................... 8,200
Changes in other assets and liabilities:
Accounts receivable - net........................ (2,418) 1,731
Material and supplies............................ (527) 2,915
Fuel stock....................................... (8,901) (2,337)
Accounts payable................................. (5,975) (21,769)
Interest and taxes accrued....................... (41,876) (45,250)
Other current liabilities........................ (3,311) 3,547
Other - net...................................... 72,415 58,217
------------ -----------
Net cash provided by operating activities..... 374,648 463,011
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction).......................... (218,151) (191,637)
Other - net.......................................... (6,940) (6,355)
------------ -----------
Net cash used in investing activities......... (225,091) (197,992)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of matured bonds............................. (19,500)
Payment of dividends................................. (183,057) (181,885)
Decrease in notes payable............................ (57,600)
Redemption of preferred stock ....................... (91,400) (20,000)
Extinguishment of long-term debt..................... (20,273)
Other - net.......................................... 3,709 1,981
------------ -----------
Net cash used in financing activities......... (291,021) (277,004)
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............... (141,464) (11,985)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ 235,867 12,413
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 94,403 $ 428
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized).............. $ 123,563 $ 131,236
Income taxes....................................... 34,974 57,913
See Notes to Financial Statements.
-12-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
Balance at Beginning of
Period...................... $ 2,104,768 $ 1,990,614 $ 2,153,109 $ 2,028,924
Net Income for the Period...... 149,323 150,881 192,217 200,840
----------- ----------- ----------- -----------
Total....................... 2,254,091 2,141,495 2,345,326 2,229,764
----------- ----------- ----------- -----------
Deductions - Cash Dividends:
Preferred................... 7,450 8,403 16,435 16,676
Common...................... 82,250 84,499 164,500 164,495
----------- ----------- ----------- -----------
Total.................... 89,700 92,902 180,935 181,171
----------- ----------- ----------- -----------
Balance at End of Period....... $ 2,164,391 $ 2,048,593 $ 2,164,391 $ 2,048,593
=========== =========== =========== ===========
See Notes to Financial Statements.
-13-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
(a) DISCONTINUED OPERATIONS. On July 6, 1995, Houston Industries
Incorporated (Company) sold KBLCOM Incorporated, its cable television
subsidiary (KBLCOM), to Time Warner Inc. (Time Warner). For a
description of the sale, see Note 10 to these financial statements. The
Company's consolidated financial statements for the first and second
quarters of 1995 reflect KBLCOM as a discontinued operation. The
Company's consolidated financial statements and certain other financial
information contained in the Company's and Houston Lighting & Power
Company's (HL&P) Annual Report on Form 10-K for the year ended December
31, 1994 (1994 Combined Form 10-K), were restated for consistency to
reflect KBLCOM as a discontinued operation. See the Company's and HL&P's
Combined Form 8-K (File Nos. 1-7629 and 1-3187) dated May 12, 1995
(Combined Form 8-K). The sale of KBLCOM did not affect the financial
statements of HL&P.
(b) REGULATORY PROCEEDINGS AND LITIGATION. The information presented in the
following Notes in this Form 10-Q should be read in conjunction with the
Combined Form 8-K, including the Notes to the Company's Consolidated and
HL&P's Financial Statements. Notes 1(a), 1(f), 2, 3, 4 and 5 to the
Company's Consolidated and HL&P's Financial Statements in the Combined
Form 8-K, as updated by the description of developments in the
regulatory and litigation matters contained in the notes to these
financial statements, are incorporated herein by reference as they
relate to the Company and HL&P, respectively.
(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four co-owners)
of the South Texas Project Electric Generating Station (South Texas
Project), which consists of two 1,250 megawatt (MW) nuclear generating
units. HL&P has a 30.8 percent interest in the project and bears a
corresponding share of capital and operating costs associated with the
project. As of June 30, 1995, HL&P's investments (net of $414.2 million
accumulated plant depreciation and $127.8 million nuclear fuel
amortization) in the South Texas Project and in nuclear fuel, including
allowance for funds used during construction, were $2.1 billion and
$87.6 million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. HL&P removed both generating units at the South Texas
Project from service in February 1993 when a problem was encountered
with certain of the units' auxiliary feedwater pumps. The units were
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out of service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994. In
June 1993, the NRC placed the South Texas Project on its "watch list" of
plants with weaknesses that warrant increased attention after a review
of the South Texas Project operations. In February 1995, the NRC removed
the South Texas Project from its "watch list".
For a discussion concerning litigation by certain current and former
employees or contractors of HL&P asserting that their employment was
terminated or disrupted in retaliation for their having made
safety-related complaints to the NRC, see Note 2(b) of the notes to the
financial statements included in the Combined Form 8-K and Note 2(b) to
the financial statements included in the Company's and HL&P's Combined
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995
(Combined Form 10-Q).
While no prediction can be made at this time as to the ultimate outcome
of these matters, the Company and HL&P do not believe that they will
have a material adverse effect on the Company's or HL&P's financial
condition or results of operations.
(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 now pending in the 11th District Court of Harris County, Texas,
having recently been transferred from the 152nd District. It is not
currently anticipated that the trial will commence before March 1996.
Austin alleges that the outages at the South Texas Project from early
1993 to early 1994 were due to HL&P's failure to perform obligations it
owed to Austin under the Participation Agreement among the four
co-owners of the South Texas Project (Participation Agreement). Austin
also asserts that HL&P breached certain undertakings voluntarily assumed
by HL&P on behalf of the co-owners under the terms and conditions of the
NRC Operating Licenses and Technical Specifications relating to the
South Texas Project. Under its amended pleadings, Austin claims that
such failures have caused Austin damages of at least $150 million due to
the incurrence of increased operating and maintenance costs, the cost of
replacement power and lost profits on wholesale transactions that did
not occur.
In May 1994, the City of San Antonio (San Antonio), another co-owner of
the South Texas Project, intervened in the litigation filed by Austin
against HL&P and asserted claims similar to those asserted by Austin.
Although San Antonio has not specified the damages sought in its
complaint, expert reports filed in the litigation have indicated that
San Antonio's claims may be in excess of $275 million. HL&P 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 denied HL&P's motions to strike
San Antonio's intervention and to compel San Antonio to arbitrate its
claims against HL&P and in April 1995, the Court of Appeals of the First
District of Texas affirmed the trial court's decision. HL&P is seeking
further review of these decisions by the Texas Supreme Court.
For a discussion of a previous lawsuit relating to the South Texas
Project filed in 1983 by Austin against the Company and HL&P (in which
the Company and HL&P prevailed), of certain claims by San Antonio
against the Company and HL&P and the related arbitration thereof, and
of the
-15-
settlement entered into by the Company, HL&P and Central and South West
Corporation, see Note 2(c) of the notes to the financial statements
included in the Combined Form 8-K.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
(d) NUCLEAR INSURANCE. For a discussion of the nuclear property and nuclear
liability insurance maintained in connection with the South Texas
Project and potential assessments associated therewith, see Note 2(d) of
the notes to the financial statements included in the Combined Form 8-K.
(e) NUCLEAR DECOMMISSIONING. For a discussion of nuclear decommissioning
costs, the Company's decommissioning funding level and the accounting
for debt and equity securities held by the decommissioning trust, see
Note 2(e) of the notes to financial statements included in the Combined
Form 8-K.
(f) DEFERRED PLANT COSTS. For a discussion of deferred plant costs, see Note
1(f) of the notes to the financial statements included in the Combined
Form 8-K. The amortization of these deferrals totaled $6.4 million and
$12.9 million for the three and six months ended June 30, 1995,
respectively, and is included on the Company's Statements of
Consolidated Income and HL&P's Statements of Income in depreciation and
amortization expense.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Public Utility Commission of Texas (Utility
Commission) initiated a proceeding (Docket No. 12065) to determine whether
HL&P's existing rates are just and reasonable and to reconcile HL&P's fuel
costs from April 1, 1990 to July 31, 1994. The Utility Commission also
initiated a separate proceeding (Docket No. 13126) to review issues
regarding the prudence of operation of the South Texas Project from the date
of commercial operation through the present (a period including the outage
at the South Texas Project during 1993 and 1994).
In February 1995, all major parties to these proceedings signed an agreement
resolving the issues with respect to HL&P, including the prudence issues
related to operation of the South Texas Project (Proposed Settlement). In
July 1995, an Administrative Law Judge (ALJ) recommended that the Utility
Commission issue a final order consistent with the Proposed Settlement. A
decision is expected by the Utility Commission at a Final Order Meeting
scheduled for August 30, 1995.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January 1,
1995, and HL&P would be precluded from seeking rate increases for three
years, subject to certain conditions. Under the Proposed Settlement, HL&P
would amortize its remaining investment ($211 million as of June 30, 1995)
in the cancelled Malakoff Electric Generating Station (Malakoff) plant over
a period not to exceed
-16-
seven years. HL&P also would increase its decommissioning expense for the
South Texas Project by $9 million per year.
The Proposed Settlement also provides HL&P the option to write down a
portion of its investment in the South Texas Project during the five-year
period commencing January 1, 1995. The parties to the Proposed Settlement
agreed that up to $50 million per year of any write down would be treated as
a reasonable and necessary expense during routine reviews of HL&P's earnings
and any rate review proceeding initiated against HL&P. In the second quarter
of 1995, HL&P recorded a $7 million write down of its investment in the
South Texas Project pursuant to this provision of the Proposed Settlement,
which amount is included on the Company's Consolidated and HL&P's Statements
of Income in depreciation and amortization expense.
Until the approval of the Proposed Settlement by the Utility Commission,
HL&P's existing rates will continue in effect; however, HL&P's financial
statements for 1995 reflect the estimated effects of the Proposed
Settlement. In the second quarter and first six months of 1995, HL&P's
pre-tax earnings were reduced by approximately $39 million and $56 million,
respectively, which represent the estimated effects of the Proposed
Settlement on revenues and expenses. Included in these reductions are
charges of $7 million related to the South Texas Project investment as
discussed above and a one-time, pre-tax charge of $9 million incurred in
connection with certain mine-related costs which were not previously
recorded and are not recoverable under the terms of the Proposed Settlement.
(See Note 5 to these financial statements.) Deferred revenues are included
on the Company's Consolidated and HL&P's Balance Sheets in other deferred
credits subject to refund in the event the Proposed Settlement is approved.
Under the terms of the Proposed Settlement, HL&P previously agreed that
approximately $70 million of fuel expenditures and related interest incurred
during the fuel reconciliation period would not be recoverable from
ratepayers. This $70 million was recorded in December 1994 as a one-time,
pre-tax charge to reconcilable fuel revenues and will be refunded to
ratepayers in the event that the Proposed Settlement is approved by the
Utility Commission.
For additional information regarding Docket Nos. 12065 and 13126, see Note 3
to the financial statements included in the Combined Form 10-Q, which note
is incorporated herein by reference.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years, the
Utility Commission has granted HL&P rate increases to reflect in electric
rates HL&P's substantial investment in new plant construction, including the
South Texas Project. Although Utility Commission action on those
applications has been completed, judicial review of a number of the Utility
Commission orders is pending. In the event the courts ultimately reverse
actions of the Utility Commission in any of these proceedings, such matters
would be remanded to the Utility Commission for action in light of the
courts' orders. Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and HL&P
generally are not in a position at this time to predict the outcome of the
matters on appeal or the ultimate effect that adverse action by the courts
could have on the Company and HL&P.
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(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 to these financial statements).
The Utility Commission's order in Docket No. 9850 was affirmed on review
by a District Court, and the Court of Appeals for the 3rd District at
Austin (Austin Court of Appeals) affirmed that decision on procedural
grounds due to the failure of the Appellant to file the statement of
facts with the court in a timely manner. On review, the Texas Supreme
Court has remanded the case to the Austin Court of Appeals for
consideration of any asserted errors of law that may be evident from the
face of the Utility Commission's order. The Appellant has raised issues
regarding deferred accounting, the treatment of federal income tax
expense and certain other matters. As to federal tax issues, in an
appeal involving GTE-SW (to which HL&P was not a party), the Texas
Supreme Court held in April 1995 that the Utility Commission is not
required by the Public Utility Regulatory Act of 1975, as amended (PURA)
to take into account the tax effects of expenses disallowed for rate
making purposes in determining a utility's federal income tax expense
for rate making purposes, that the Utility Commission has discretion in
determining the utility's "fair share" of tax savings when a utility
pays federal income taxes as part of a consolidated group, and is not
required to reduce utility tax expense by savings resulting from
unregulated activities. The GTE-SW opinion clarified a 1987 Texas
Supreme Court decision in an HL&P case and rejected arguments that the
HL&P decision required utility tax expense to be calculated on the basis
of "actual taxes paid". Although no assurance can be given in this
matter, the Company believes that if the principles and rationale of the
GTE-SW decision discussed above were applied, the Utility Commission's
treatment of the tax issue in Docket No. 9850 should be upheld.
For a discussion of another recent Texas Supreme Court decision
upholding deferred accounting treatment, see Note 4(c) of the notes to
the financial statements included in the Combined Form 8-K.
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 Austin Court of Appeals concludes that the
Utility Commission's inclusion of deferred accounting costs in the
settlement was improper would be offset by that greater amount.
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. (See Note 4(d) to these
financial statements.)
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the Utility
Commission granted HL&P a $227 million increase in base revenues,
allowed a 12.92 percent return on common equity, authorized a qualified
phase-in for Unit No. 1 of the South Texas Project (including
-18-
approximately 72 percent of HL&P's investment in Unit No. 1 of the South
Texas Project in rate base) and authorized HL&P to use deferred
accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented by
HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with deductions
taken for expenses disallowed from cost of service. The court held that
the Utility Commission had failed to require that such tax savings be
passed on to ratepayers. Both HL&P and other parties sought review by
the Texas Supreme Court, which granted discretionary review as to the
issue of certain Malakoff plant expenditures treated as "Plant Held for
Future Use", and brought the entire case before it for consideration,
including the tax issue raised by HL&P. The case has been scheduled for
oral argument in September 1995 by the Texas Supreme Court.
Although no assurance can be given in this matter, the Company believes
that if the principles and rationale of the GTE-SW decision discussed in
Note 4(a) above were applied, the Utility Commission's treatment of the
tax issue in Docket No. 8425 should be upheld.
(c) DEFERRED ACCOUNTING. For information regarding deferred accounting
treatment granted for certain costs associated with the South Texas
Project, see Note 4(c) of the notes to the financial statements included
in the Combined Form 8-K and Note 2(f) to these financial statements.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant to
the Proposed Settlement, to withdraw and dismiss its appeal of the
Utility Commission's order granting deferred accounting 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. For a
discussion of the Utility Commission's inquiry into the prudence of the
planning, management and construction of the South Texas Project (Docket
No. 6668), see Note 4(d) of the notes to the financial statements
included in the Combined Form 8-K.
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 the City of Houston
shall also be entitled to maintain their appeals.
(5) MALAKOFF
For a discussion of the current and Proposed Settlement rate treatment of
HL&P's investment in Malakoff and related matters, see Note 3 of the notes
to these financial statements and Note 5 of the notes to the financial
statements included in the Combined Form 8-K.
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(6) COMMON STOCK
(a) COMPANY. At June 30, 1995 and December 31, 1994, the Company had
authorized 400,000,000 shares of common stock, of which 123,876,880 and
123,526,350 shares, respectively, were outstanding. Outstanding shares
exclude the unallocated Employee Stock Ownership Plan shares which as of
June 30, 1995 and December 31, 1994 were 7,459,354 and 7,770,313,
respectively.
(b) HL&P. All issued and outstanding Class A voting common stock of HL&P is
held by the Company and all issued and outstanding Class B non-voting
common stock of HL&P is held by Houston Industries (Delaware)
Incorporated (HI Delaware), a wholly-owned subsidiary of the Company.
(7) HL&P PREFERRED STOCK
At June 30, 1995, and December 31, 1994, HL&P had 10,000,000 shares of
preferred stock authorized, of which 4,318,397 and 5,232,397 shares,
respectively, were outstanding.
In April 1995, HL&P redeemed, at $100 per share, 514,000 shares of its
$9.375 cumulative preferred stock. The redemption included 257,000 shares in
satisfaction of mandatory sinking fund requirements, and an additional
257,000 shares as an optional retirement.
In June 1995, HL&P redeemed, at $100 per share, all 400,000 shares of its
$8.50 cumulative preferred stock. The redemption included 200,000 shares in
satisfaction of mandatory sinking fund requirements, and the remaining
200,000 shares as an optional retirement.
(8) HL&P LONG-TERM DEBT
In June 1995, HL&P purchased from a third party $19.0 million aggregate
principal amount of its 8 3/4% first mortgage bonds due 2022 for a total
purchase price of $20.7 million.
Reference is made to Note 12(b) to these financial statements with respect
to HL&P's redemption and refunding of $150,850,000 aggregate principal
amount of pollution control revenue bonds subsequent to June 30, 1995.
(9) EARNINGS PER COMMON SHARE
(a) COMPANY. Earnings per common share for the Company is computed by
dividing net income by the weighted average number of shares outstanding
during the respective period.
(b) HL&P. Earnings per share data for HL&P is not computed since all of its
common stock is held by the Company and HI Delaware.
-20-
(10) DISCONTINUED CABLE TELEVISION OPERATIONS
On July 6, 1995, the Company closed its sale of KBLCOM to Time Warner in a
tax-deferred, stock-for-stock merger valued at approximately $2.4 billion.
In anticipation of the sale, effective January 1, 1995, the operations of
KBLCOM have been accounted for as discontinued and prior periods were
restated for consistency in reflecting KBLCOM as a discontinued operation.
The Company recorded a $90.6 million tax benefit in the first quarter of
1995 in recognition of the deferred tax asset arising from the Company's
excess tax basis in KBLCOM stock. Based on a Time Warner common stock price
of $43.25 on July 6, 1995, the Company will recognize in the third quarter
of 1995 an additional after-tax gain estimated to be $690 million, which is
subject to post closing adjustments. For additional information regarding
the sale of KBLCOM, see the Company's Current Report on Form 8-K (File No.
1-7629) dated July 6, 1995, which is incorporated herein by reference. For
a presentation of the Company's financial statements for the years 1992
through 1994 which reflects KBLCOM on a discontinued operations basis,
reference is made to the Company's Consolidated Financial Statements
contained in the Combined Form 8-K.
Operating results from discontinued operations for the six months ended
June 30, 1995 and 1994 were as follows:
SIX MONTHS ENDED JUNE 30,
------------------------
1995 1994
--------- ---------
(Thousands of Dollars)
Revenues...................................................... $139,440 $ 122,274
Operating expenses (1)........................................ 84,487 78,150
-------- ---------
Gross operating margin (1).................................... 54,953 44,124
Depreciation, amortization, interest and other 75,063 63,652
Income tax benefit............................................ (4,174) (4,444)
Deferred loss (2)............................................. (15,936)
-------- ---------
Loss from discontinued operations (3)......................... $ 0 ($ 15,084)
======== =========
------------
(1) Exclusive of depreciation and amortization.
(2) The net loss from discontinued operations of KBLCOM for the six
months ended June 30, 1995 was deferred by the Company until the
sale is recognized in the third quarter of 1995. The deferred loss
is included on the Company's Consolidated Balance Sheets in net
assets of discontinued cable television operations.
(3) Loss from discontinued operations of KBLCOM excludes the effects of
corporate overhead charges and includes interest expense relating to
the amount of intercompany debt that Time Warner purchased from the
Company.
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Net assets of discontinued operations were as follows:
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
(Thousands of Dollars)
Assets:
Cable television property, net of accumulated
depreciation of $179,200 and $161,402 for
1995 and 1994, respectively................. $ 297,829 $ 276,624
Equity in cable television partnerships....... 185,368 160,363
Intangible assets............................. 1,007,243 1,029,440
Other assets.................................. 49,894 43,625
----------- -----------
Total assets................................ 1,540,334 1,510,052
Less:
Cable television debt......................... (463,782) (504,580)
Accumulated deferred income taxes............. (313,585) (316,241)
Other liabilities............................. (61,637) (70,249)
----------- -----------
Net assets.................................. $ 701,330 $ 618,982
=========== ===========
In March 1995, KBL Cable, Inc. (KBL Cable), a subsidiary of KBLCOM, made a
scheduled repayment of $15.8 million principal amount of its senior notes
and senior subordinated notes. In the first quarter of 1995, KBL Cable
repaid borrowings under its senior bank credit facility in the amount of
$25.0 million.
(11) CHANGE IN ACCOUNTING FOR THE COMPANY AND HL&P
The Company and HL&P recorded in the first quarter of 1994 a one-time,
after-tax charge to income of $8.2 million resulting from the Company's and
HL&P's adoption of Statement of Financial Accounting Standards (SFAS) No.
112, "Employer's Accounting for Postemployment Benefits", effective January
1, 1994. For additional information regarding SFAS No. 112, see Note 9 to
the financial statements included in the Combined Form 10-Q.
(12) SUBSEQUENT EVENTS
(a) COMPANY. The Company offered eligible employees (excluding officers)
of the Company, HL&P and Houston Industries Energy, Inc. (HI Energy)
who were 55 years of age or older and had at least 10 years of service
as of July 31, 1995 an incentive program to retire early. For
employees electing early retirement, the program would add five years
of service credit and five years in age up to 35 years of service and
age 65, respectively, in determining an employee's pension. Each
participating employee (under age 62) would also receive a
supplemental benefit to age 62. During July 1995, the early retirement
incentive was accepted by approximately 290 employees.
Pension benefits and supplemental benefits (if applicable) are being
paid out from the Houston Industries Incorporated Retirement Trust.
Upon adoption of the early retirement plan, the projected benefit
obligations pertaining to HL&P's retirement plan and supplemental
benefits
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will be increased by approximately $27 million and $5 million,
respectively. Pursuant to SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation", HL&P will defer the costs associated
with the increases in these benefit obligations and will amortize the
costs over a period which corresponds to the estimated period over
which savings will offset these additional costs.
(b) HL&P. During July 1995, the Brazos River Authority and the Matagorda
County Navigation District Number One issued on behalf of HL&P
$150,850,000 aggregate principal amount of revenue refunding bonds
collateralized by HL&P's first mortgage bonds. The new bonds bear an
initial interest rate of 5.8%, variable at HL&P's option after a
five-year no-call period, and mature in 2015. Proceeds from these
issuances will be used in 1995 to redeem, at 102% of their aggregate
principal amount, pollution control revenue bonds aggregating
$150,850,000 and bearing a weighted average interest rate of 9.9%.
(13) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative of results
expected for the year due to the seasonal nature of HL&P's business. In
the opinion of management, the interim information reflects all
adjustments (consisting only of normal recurring adjustments) necessary
for a full presentation of the results for the interim periods. Certain
amounts from the previous year have been reclassified to conform to the
1995 presentation of financial statements. Such reclassifications do not
affect earnings.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CURRENT ISSUES
HL&P
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 and to reconcile HL&P's
fuel costs from April 1, 1990 to July 31, 1994. The Utility Commission 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. 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 the operation of the South Texas
Project. In July 1995, an ALJ recommended that the Utility Commission issue a
final order consistent with the Proposed Settlement. A decision is expected by
the Utility Commission at a Final Order Meeting scheduled for August 30, 1995.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January 1, 1995,
and HL&P would be precluded from seeking rate increases for three years, subject
to certain conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment ($211 million as of June 30, 1995) in the cancelled
Malakoff plant, over a period not to exceed seven years. The Proposed Settlement
also provides HL&P the option to write down a portion of its investment in the
South Texas Project during the five-year period commencing January 1, 1995. The
parties to the Proposed Settlement agreed that up to $50 million per year of any
write down would be treated as a reasonable and necessary expense during routine
reviews of HL&P's earnings and any rate review proceeding initiated against
HL&P. Decommissioning expenses for the South Texas Project would increase by $9
million per year under the Proposed Settlement.
The estimated effects of the Proposed Settlement have been recorded on HL&P's
financial statements effective as of January 1, 1995. In the second quarter and
first six months of 1995, the Proposed Settlement reduced HL&P's pre-tax
earnings by approximately $39 million and $56 million, respectively. These
reductions reflect HL&P's decision in the second quarter to write off (i) $7
million of its investment in the South Texas Project discussed above and (ii)
the one-time, pre-tax charge of $9 million incurred in connection with certain
mine-related costs which were not previously recorded and are not recoverable
under the terms of the Proposed Settlement.
Under the terms of the Proposed Settlement, HL&P previously agreed that
approximately $70 million of fuel expenditures and related interest incurred
during the fuel reconciliation period would not be recoverable from ratepayers.
This $70 million was recorded in December 1994 as a one-time, pre-tax charge to
reconcilable fuel revenues and will be refunded to ratepayers in the event that
the Proposed Settlement is approved by the Utility Commission. For additional
information regarding the Proposed Settlement, see Note 3 to the Company's
Consolidated and HL&P's Financial Statements (Financial Statements) in Item 1 of
this Report.
-24-
COMPETITION. HL&P and other members of the electric utility industry, like other
regulated industries, continue to be subject to technological, regulatory and
economic pressures that are increasing competition and offer the possibility for
fundamental changes in the industry and its regulation.
In its 1995 session, pursuant to Sunset legislation, the Texas Legislature
considered the reenactment of PURA, the basic statute governing the regulation
of electric utilities in Texas. During that legislative debate, a number of
proposals were made by utilities and others to change various provisions of the
regulatory structure, particularly in response to developing competition in the
industry. Although a number of administrative and procedural changes were made
to PURA, the law as reenacted generally preserves the basic regulatory framework
that has existed with respect to electric utilities such as HL&P. However, new
provisions were added allowing for increased competition in connection with
wholesale sales, including the recognition of wholesale generators and
power marketers, who may engage in sales activities without regulation as
electric utilities. Provisions regarding access by non-utility generators to
transmission facilities were added, as were new provisions regarding rates
charged by utilities for transmission of power for themselves and for third
parties. The effect of these revisions likely will be an increase in competition
for wholesale sales in Texas, but HL&P's wholesale sales traditionally have
accounted for less than 1% of its total revenues.
For additional information regarding the impact of competition on HL&P's
business, see "Business of HL&P - Competition" and "Regulation of the Company -
Federal" in Part I of the 1994 Combined Form 10-K and Note 1(a) of the notes to
the financial statements included in the Combined Form 8-K, which information is
incorporated herein by reference.
DISCONTINUED CABLE TELEVISION OPERATIONS
On July 6, 1995, the Company closed its sale of KBLCOM to Time Warner in a
tax-deferred, stock-for-stock merger valued at approximately $2.4 billion. In
anticipation of the sale, effective January 1, 1995, the operations of KBLCOM
have been accounted for as discontinued and prior periods were restated for
consistency in reflecting KBLCOM as a discontinued operation. The Company
recorded a $90.6 million tax benefit in the first quarter of 1995 in recognition
of the deferred tax asset arising from the Company's excess tax basis in KBLCOM
stock. Based on a Time Warner common stock price of $43.25 on July 6, 1995, the
Company will recognize in the third quarter of 1995 an additional after-tax gain
estimated to be $690 million, which is subject to post closing adjustments. For
additional information regarding the sale of KBLCOM, see the Company's Current
Report on Form 8-K (File No. 1-7629) dated July 6, 1995, which is incorporated
herein by reference. For a presentation of the Company's financial statements
for the years 1992 through 1994 which reflects KBLCOM on a discontinued
operations basis, reference is made to the Company's Consolidated Financial
Statements contained in the Combined Form 8-K.
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RESULTS OF OPERATIONS
COMPANY
Summary of selected financial data for the Company and its subsidiaries is set
forth below:
THREE MONTHS ENDED JUNE 30,
--------------------------- PERCENT
1995 1994 CHANGE
------------ ------------ ------
(Restated)
(Thousands of Dollars)
Revenues......................... $ 978,225 $1,004,906 (3)
Operating Expenses............... 683,839 706,435 (3)
Operating Income................. 294,386 298,471 (1)
Interest and Other Charges....... 80,037 81,253 (1)
Income Taxes..................... 65,709 76,654 (14)
Discontinued Operations.......... (7,583) -
Net Income....................... 133,260 126,725 5
SIX MONTHS ENDED JUNE 30,
----------------------------- PERCENT
1995 1994 CHANGE
------------- ------------ ------
(Restated)
(Thousands of Dollars)
Revenues......................... $1,724,391 $1,826,487 (6)
Operating Expenses............... 1,306,704 1,378,359 (5)
Operating Income................. 417,687 448,128 (7)
Interest and Other Charges....... 161,432 160,895 -
Income Taxes..................... 76,136 99,306 (23)
Discontinued Operations.......... 90,607 (15,084) -
Net Income....................... 247,716 152,623 62
The Company had consolidated earnings per share of $1.08 for the second quarter
of 1995, compared to consolidated earnings per share of $1.03 for the second
quarter of 1994. Consolidated earnings per share for the six months ended June
30, 1995 was $2.00 per share, compared to $1.25 per share for the same period in
1994. The increase in earnings for the six months ended June 30, 1995 is due to
the recognition in the first quarter of 1995 of a $90.6 million tax benefit in
recognition of the deferred tax asset arising from the Company's excess tax
basis in KBLCOM stock, partially offset by the estimated effects of HL&P's
Proposed Settlement which reduced operating income as discussed below. The
Company's earnings per share for the six months ended June 30, 1995 would have
been $1.27 per share without the tax benefit.
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HL&P
Summary of selected financial data for HL&P is set forth below:
THREE MONTHS ENDED JUNE 30,
---------------------------- PERCENT
1995 1994 CHANGE
------------ ------------ ------
(Thousands of Dollars)
Revenues......................... $ 978,225 $1,004,906 (3)
Operating Expenses (1)........... 760,806 788,064 (3)
Operating Income (1)............. 217,419 216,842 -
Interest Charges................. 61,055 63,281 (4)
Income After Preferred Dividends. 141,873 142,478 -
SIX MONTHS ENDED JUNE 30,
----------------------------- PERCENT
1995 1994 CHANGE
------------- ------------ ------
(Thousands of Dollars)
Revenues......................... $1,724,391 $1,826,487 (6)
Operating Expenses (1)........... 1,402,406 1,486,766 (6)
Operating Income (1)............. 321,985 339,721 (5)
Interest Charges................. 123,903 126,331 (2)
Income After Preferred Dividends. 175,782 184,164 (5)
---------------
(1) Inclusive of income taxes
In the second quarter and first six months of 1995, HL&P's pre-tax earnings were
reduced by approximately $39 million and $56 million, respectively, which
represents the estimated effects of the Proposed Settlement on revenues and
expenses. For information regarding HL&P's current regulatory proceedings and
the Proposed Settlement, see "CURRENT ISSUES - HL&P - Rate Review, Fuel
Reconciliation and Other Proceedings" above and Note 3 to the Financial
Statements in Item 1 of this Report.
OPERATING REVENUES AND SALES
Operating revenues decreased $26.7 million for the second quarter of 1995 and
$102.1 million for the first six months of 1995, compared to the same periods in
1994. The decreases were primarily due to decreases in reconcilable fuel
revenues of $49.9 million and $114.9 million, respectively, and the effects of
the settlement-related rate reduction of $19.7 million and $33.6 million,
respectively, for these same comparative periods. These decreases were partially
offset by increases in kilowatt-hour (KWH) sales during the periods. For the
second quarter and first six months of 1995, residential KWH sales increased 8%
and 4%, respectively, compared to the same periods in 1994, while commercial KWH
sales increased 4% and 5%, respectively, for the same periods. The increases in
residential and commercial sales were due to growth in the number of customers
and usage within these classes. Additionally, warmer weather experienced in the
second quarter of 1995 compared to 1994 contributed to increased residential
sales. Firm
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industrial KWH sales decreased 4% and 3% for the second quarter and
first six months of 1995, respectively, compared to the same periods in 1994.
However, industrial base revenues for these periods were essentially flat due to
the expiration in December 1994 of HL&P's discounted economic development
tariff. Firm industrial sales exclude electricity sold at a reduced rate under
agreements which allow HL&P to interrupt service under some circumstances.
FUEL AND PURCHASED POWER EXPENSES
Fuel expenses, while relatively unchanged for the second quarter, decreased
$30.6 million for the first six months of 1995 compared to the same period of
1994. The decrease was primarily due to a decrease in the unit cost of gas and
an increase in nuclear generation which has a per unit fuel cost that is
substantially lower than HL&P's other fuel sources. The average cost of fuel for
the second quarter and first six months of 1995 was $1.66 per million British
Thermal Units (MMBtu) and $1.65 per MMBtu, respectively, compared to $1.63 per
MMBtu and $1.71 per MMBtu for the same periods in 1994. Purchased power expense
decreased $53.1 million and $86.0 million for the second quarter and first six
months of 1995 when compared to the same period in 1994 primarily due to the
expiration of firm purchased power contracts.
OPERATION AND MAINTENANCE, DEPRECIATION AND AMORTIZATION, AND OTHER
Operation and maintenance expense for the second quarter and first six months of
1995 increased $13.6 million and $18.2 million, respectively, compared to the
same periods in 1994. Substantially all of the increase in operation and
maintenance expense resulted from a lump sum wage increase under a union
contract and increased litigation expenses. Depreciation and amortization
expense for the second quarter and first six months of 1995 increased $12.3
million and $17.3 million, respectively, compared to 1994, primarily due to an
increase in depreciable property and increases recorded as a result of the
Proposed Settlement (see "CURRENT ISSUES - HL&P - Rate Review, Fuel
Reconciliation and Other Proceedings" above and Note 3 to the Financial
Statements in Item 1 of this Report). Other taxes increased $9.5 million in the
first six months of 1995 compared to the same period in 1994, primarily due to
increased state franchise tax obligations. Substantially all of the increase in
the loss attributable to other-net was the one-time, pre-tax charge of $9
million incurred in connection with certain mine-related costs which were not
previously recorded and are not recoverable under the terms of the Proposed
Settlement.
LIQUIDITY AND CAPITAL RESOURCES
COMPANY
GENERAL
The Company's cash requirements stem primarily from operating expenses, capital
expenditures, payment of common stock dividends, payment of preferred stock
dividends and interest and principal payments on debt. Net cash provided by
operating activities totaled $344.1 million for the six months ended June 30,
1995.
Net cash used in investing activities for the six months ended June 30, 1995,
totaled $257.0 million, primarily due to electric capital expenditures of $133.2
million (including allowance for borrowed
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funds used during construction), corporate headquarters expenditures (including
capitalized interest) of $56.9 million and discontinued cable television
operations expenditures of $47.0 million.
Financing activities for the first six months of 1995 resulted in a net cash
outflow of $59.9 million. The Company's primary financing activities were the
increase in short-term borrowings offset by the payment of dividends, the
redemption of preferred stock and the extinguishment and repayment of long-term
debt. For information with respect to these matters, reference is made to Notes
7, 8, and 10 to the Financial Statements in Item 1 of this Report.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
The Company has registered with the Securities and Exchange Commission (SEC)
$250 million of debt securities which remain unissued. Proceeds from any sales
of these securities are expected to be used for general corporate purposes
including investments in and loans to subsidiaries.
The Company also has registered with the SEC five million shares of its common
stock. Proceeds from the sale of these securities will be used for general
corporate purposes, including, but not limited to, the redemption, repayment or
retirement of outstanding indebtedness of the Company or the advance or
contribution of funds to one or more of the Company's subsidiaries to be used
for their general corporate purposes, including, without limitation, the
redemption, repayment or retirement of indebtedness or preferred stock.
The Company's outstanding commercial paper at June 30, 1995 was approximately
$698.2 million, which is supported by an $800 million bank credit facility.
On July 6, 1995, the Company closed its sale of KBLCOM to Time Warner in a
tax-deferred, stock-for-stock merger. In exchange for KBLCOM's common stock,
Time Warner issued to the Company one million shares of its common stock and 11
million shares of a newly-issued series of its convertible preferred stock. Such
securities were valued at approximately $1.1 billion based, in part, on the
closing price of Time Warner common stock on July 6 ($43.25 per share). In
addition, Time Warner purchased from the Company for cash approximately $621
million of KBLCOM's outstanding intercompany indebtedness and assumed
approximately $650 million of KBLCOM's external debt and other liabilities. The
preferred stock is convertible into approximately 22.9 million shares of Time
Warner common stock. Until the earlier of conversion or July 6, 1999, the terms
of the preferred stock provide for the payment of an annual dividend of at least
$3.75 per share. After four years, Time Warner will have the right to exchange
the preferred stock for common stock at the stated conversion rate. After five
years, Time Warner will have the right to redeem all or part of the preferred
stock at its liquidation preference of $100 per share, plus accrued and unpaid
dividends thereon to the date fixed for redemption. The Company believes that
the transaction will improve its liquidity by exchanging the Company's
investment in KBLCOM for cash and marketable securities. For more information
concerning the sale, see the Company's Current Report on Form 8-K dated July 6,
1995, which is incorporated herein by reference.
The Company recorded a $90.6 million tax benefit in the first quarter of 1995 in
recognition of the deferred tax asset arising from the Company's excess tax
basis in KBLCOM stock. Based, in part, on a Time Warner common stock price of
$43.25 on July 6, 1995, the Company will recognize in
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the third quarter of 1995 an additional after-tax gain estimated to be $690
million, which is subject to post closing adjustments.
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Time Warner stock will be classified as
"available-for-sale securities" and recorded by the Company at fair value.
Unrealized holding gains and losses will be excluded from earnings and reported
as a component of shareholders' equity until the securities are sold.
The $621 million of proceeds received in connection with the sale of KBLCOM has
initially been used to retire short-term indebtedness of the Company under its
commercial paper program. It is anticipated that the proceeds ultimately will 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 outstanding shares of the Company's common stock.
In June 1995, a subsidiary of HI Energy, the Company's non-regulated electric
power subsidiary, entered into an agreement to construct, own and operate a 160
MW cogeneration facility to be built adjacent to a steel plant in San Nicolas,
Argentina. The projected completion date for the project is October 15, 1997.
The plant is to be constructed by a consortium composed of GE Power Systems,
Inc. and an Argentine construction company. The construction contract provides,
subject to certain adjustments, for a contract price of approximately $65
million to be paid in installments during the construction of the project. Upon
completion, the project will sell steam to the steel plant and sell electricity
on the wholesale Argentina electricity market. The project is subject to the
satisfaction of certain conditions precedent, prior to September 15, 1995,
including the obtaining of required regulatory permits and an exemption from
certain Argentine customs duties.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratios of earnings to fixed charges for the six and twelve months
ended June 30, 1995 were 2.34 and 2.77, respectively. The Company believes that
the ratio for the six-month period is not necessarily indicative of the ratio
for a twelve-month period due to the seasonal nature of HL&P's business.
HL&P
GENERAL
HL&P's cash requirements stem primarily from operating expenses, capital
expenditures, payment of dividends and interest and principal payments on debt.
HL&P's net cash provided by operating activities for the first six months of
1995 totaled $374.6 million.
Net cash used in HL&P's investing activities for the first six months of 1995
totaled $225.1 million. HL&P's capital and nuclear fuel expenditures (excluding
allowance for funds used during construction) for the first six months of 1995
totaled $215.2 million out of the $449 million revised
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annual budget. HL&P expects to finance substantially all of its 1995 capital
expenditures through funds generated internally from operations.
HL&P's financing activities for the first six months of 1995 resulted in a net
cash outflow of approximately $291.0 million. Included in these activities were
the payment of dividends, the redemption of preferred stock, and the
extinguishment of long-term debt. For information with respect to these matters,
reference is made to Notes 7 and 8 to the Financial Statements in Item 1 of this
Report.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
HL&P has registered with the SEC $230 million aggregate liquidation value of
preferred stock and $580 million aggregate principal amount of debt securities
that may be issued as first mortgage bonds and/or as debt securities
collateralized by first mortgage bonds. Proceeds from any sale of these
securities are expected to be used for general corporate purposes including the
purchase, redemption (to the extent permitted by the terms of the outstanding
securities), repayment or retirement of outstanding indebtedness or preferred
stock of HL&P.
At June 30, 1995, HL&P had approximately $94 million in cash and cash
equivalents invested in short-term investments. In addition, HL&P has a
commercial paper program supported by a bank credit facility of $400 million.
HL&P had no commercial paper outstanding at June 30, 1995.
RATIOS OF EARNINGS TO FIXED CHARGES
HL&P's ratios of earnings to fixed charges for the six and twelve months ended
June 30, 1995 were 3.17 and 3.70, respectively. HL&P's ratios of earnings to
fixed charges and preferred dividends for the six and twelve months ended June
30, 1995, were 2.67 and 3.12, respectively. HL&P believes that the ratios for
the six-month period are not necessarily indicative of the ratios for a
twelve-month period due to the seasonal nature of its business.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1994, the Financial Accounting Standards Board (FASB) issued SFAS
No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," effective for fiscal years ending after December 15,
1994. SFAS No. 119 extends current disclosure practices set forth in SFAS
No. 105 "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk" and SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments." SFAS No. 119 requires companies to disclose information about
the amounts, nature and terms for all derivative financial instruments not
within the scope of SFAS No. 105. The Company and HL&P adopted SFAS No. 119
with no effect on the Company or HL&P's financial condition or results of
operations.
In March 1995, FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This accounting
standard, effective for fiscal years beginning after December 15, 1995, requires
companies to review certain assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable (such determination generally being made on the basis of whether net
cash
-31-
flows expected to result from such assets will recover the carrying amount of
the assets). If an impairment is found to exist, the impairment loss to be
recognized is the amount by which the carrying amount exceeds the fair value.
The Company and HL&P are currently reviewing the provisions of SFAS No. 121,
but, based on current estimates, the Company and HL&P do not expect the adoption
of SFAS No. 121 to have a material impact on the Company's or HL&P's financial
condition or results of operations.
-32-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company and its
subsidiaries, including HL&P, reference is made to the information set
forth in Item 3 of the 1994 Combined Form 10-K, Item 1 of Part II of the
Combined Form 10-Q, Notes 2, 3 and 4 to the Company's Consolidated and
HL&P's Financial Statements in the Combined Form 8-K and Notes 2(b) and
3 to the Company's Consolidated and HL&P's Financial Statements in the
Combined Form 10-Q, which information, as qualified and updated by the
description of developments in regulatory and litigation matters
contained in Notes 2, 3 and 4 of the Notes to the Financial Statements
included in Part I of this Report, is incorporated herein by reference.
GULF STATES UTILITIES CO. V. HOUSTON LIGHTING & POWER CO., ET AL.,
formerly pending in the United States District Court for the Southern
District of Texas, Houston Division, was dismissed upon joint
stipulation of all the parties in June 1995. Under the terms of the
Agreement of Compromise and Settlement, HL&P bears its own fees, costs
and expenses, but is not required to pay any other amounts.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
HOUSTON INDUSTRIES INCORPORATED:
Exhibit 10(a) - Sixth Amendment to the Houston Industries Incorporated
Executive Incentive Compensation Plan (As Amended and
Restated Effective January 1, 1991), Effective August 1,
1995.
Exhibit 10(b) - Sixth Amendment to the Houston Industries Incorporated
Deferred Compensation Plan (As Amended and Restated
Effective January 1, 1991), Effective August 1, 1995.
Exhibit 10(c) - Fifth Amendment to the Houston Industries Incorporated
Deferred Compensation Plan (As Amended and Restated
Effective January 1, 1989), Effective August 1, 1995.
Exhibit 10(d) - Fifth Amendment to the Houston Industries Incorporated
Deferred Compensation Plan (As Established Effective
September 1, 1985), Effective August 1, 1995.
Exhibit 10(e) - First Amendment to Houston Industries Incorporated Executive
Life Insurance Plan (Effective January 1, 1994), Executed
June 16, 1995.
Exhibit 11 - Computation of Earnings per Common Share and Common
Equivalent Share.
Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges.
Exhibit 27 - Financial Data Schedule.
-33-
Exhibit 99(a) - Notes 1(a), 1(f), 2, 3, 4 and 5 to the Company's
Consolidated Financial Statements included on pages 39
through 67 of the Combined Form 8-K.
Exhibit 99(b) - Notes 2, 3, and 4 to the Company's Consolidated and HL&P's
Financial Statements included on pages 71 through 81 of the
1994 Combined Form 10-K.
Exhibit 99(c) - Notes 2(b), 3 and 9 to the Company's Consolidated and HL&P's
Financial Statements included on pages 14 through 18 and 22
of the Combined Form 10-Q.
Exhibit 99(d) - Part I, Item 3 - Legal Proceedings included on pages 31
through 32 of the 1994 Combined Form 10-K.
Exhibit 99(e) - Part II, Item 1 - Legal Proceedings included on page 32 of
the Combined Form 10-Q.
Exhibit 99(f) - Part I, Item 1 - Business of HL&P - Competition and
Regulation of the Company - Federal included on pages 5
through 7 and 26 of the 1994 Combined Form 10-K.
Exhibit 99(g) - First Amendment to the Houston Industries Incorporated
Savings Plan (As Amended and Restated Effective July 1,
1995), Effective June 30, 1995.
HOUSTON LIGHTING & POWER COMPANY:
Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges and
Ratios of Earnings to Fixed Charges and Preferred Dividends.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a) - Notes 1(f), 2, 3, 4 and 5 to the Company's Consolidated
Financial Statements included on pages 39 through 50 of the
Combined Form 8-K.
Exhibit 99(b) - Notes 2, 3 and 4 to the Company's Consolidated and HL&P's
Financial Statements included on pages 71 through 81 of the
1994 Combined Form 10-K.
Exhibit 99(c) - Notes 2(b), 3 and 9 to the Company's Consolidated and HL&P's
Financial Statements included on pages 14 through 18 and 22
of the Combined Form 10-Q.
Exhibit 99(d) - Part I, Item 3 - Legal Proceedings included on pages 31
through 32 of the 1994 Combined Form 10-K.
Exhibit 99(e) - Part II, Item 1 - Legal Proceedings included on page 32 of
the Combined Form 10-Q.
Exhibit 99(f) - Part I, Item 1 - Business of HL&P - Competition and
Regulation of the Company - Federal included on pages 5
through 7 and 26 of the 1994 Combined Form 10-K.
(b) Reports on Form 8-K.
HOUSTON INDUSTRIES INCORPORATED:
Current Report on Form 8-K dated July 6, 1995 (Item 2. Acquisition or
Disposition of Assets).
HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY:
Current Report on Form 8-K dated May 12, 1995 (Item 5. Other Events).
-34-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSTON INDUSTRIES INCORPORATED
(Registrant)
/s/ MARY P. RICCIARDELLO
Mary P. Ricciardello
Comptroller and
Principal Accounting Officer
Date: August ___, 1995
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSTON LIGHTING & POWER COMPANY
(Registrant)
/s/ KEN W. NABORS
Ken W. Nabors
Vice President and Comptroller
and Principal Accounting Officer
Date: August ____, 1995
-36-
EXHIBIT 10(a)
HOUSTON INDUSTRIES INCORPORATED
EXECUTIVE INCENTIVE COMPENSATION PLAN
(As Amended and Restated Effective January 1, 1991)
SIXTH AMENDMENT
Houston Industries Incorporated, a Texas corporation (the
"Company"), having amended and restated the Houston Industries Incorporated
Executive Incentive Compensation Plan, effective January 1, 1991 (the "Plan"),
and having reserved the right under Section 18 thereof to amend the Plan, does
hereby amend Section 10 of the Plan by adding a new paragraph (H) thereto,
effective August 1, 1995, to read as follows:
"(H) TERMINATIONS UNDER 1995 PROGRAM. Notwithstanding anything
herein to the contrary, if a Participant fulfills the requirements for
the Voluntary Early Pension for 1995 Program participants under Section
9.7(a) of the Houston Industries Incorporated Retirement Plan, the
Participant shall be deemed to have completed the applicable Forfeiture
Period with respect to the contingent portion of his Annual Award
granted with respect to the 1991 Plan Year, if any. The Award vested
pursuant to this Paragraph shall be paid in a lump sum as soon as
practicable following January 1, 1996 (or the January 1 following actual
termination, if later) unless otherwise elected by the Participant
pursuant to Section 10.D. Such terminated Participants are not entitled
to any Long-Term Awards payable after June 30, 1995 under the Plan."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officer in a number of
copies, all of which shall
-1-
constitute one and the same instrument, which may be sufficiently evidenced by
any executed copy hereof, this 18th day of May, 1995, but effective as of the
date stated herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ D. D. SYKORA
D. D. Sykora
President and Chief
Operating Officer
ATTEST:
/s/ RICHARD B. DAUPHIN
Richard B. Dauphin
Assistant Corporate Secretary
-2-
EXHIBIT 10(b)
HOUSTON INDUSTRIES INCORPORATED
DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective January 1, 1991)
SIXTH AMENDMENT
Houston Industries Incorporated, a Texas corporation (the
"Company"), having amended and restated the Houston Industries Incorporated
Deferred Compensation Plan, effective January 1, 1991 (the "Plan"), and having
reserved the right under Section 7.1 thereof to amend the Plan, does hereby
amend Article V of the Plan by adding the following Section 5.8 thereto,
effective August 1, 1995:
"5.8 TERMINATIONS UNDER THE 1995 VOLUNTARY EARLY RETIREMENT
PROGRAM.
(a) PRIOR TO EARLY RETIREMENT DATE. Notwithstanding any
other provision of the Plan to the contrary, if the employment of
a Participant who fulfills the requirements for the Voluntary
Early Pension for 1995 Program participants under Section 9.7(a)
of the Houston Industries Incorporated Retirement Plan is
terminated prior to the first day of the month coincident with or
next following the date of the Participant's 60th birthday, a
Normal Retirement Distribution as described in Section 5.1 or a
distribution as described in Section 5.4 shall not be made, but
the Employer (x) shall pay the Participant the sum or sums of
Compensation actually deferred, with interest thereon, compounded
annually, at the applicable Interest Crediting Rate for each
Participation Year, from the Commencement Date through the date
of payment, minus any Early Distributions, (y) shall make a lump
sum distribution or 15 annual installment payments in accordance
with the Participant's election under Section 5.1(b) and, if
payable in a lump sum, in the January following the Participant's
termination of employment or, if payable in installments,
commencing the month following the month in which the Participant
terminates employment and payable thereafter in that same month
in each remaining year, and (z) shall not make any Early
Distributions to such Participant.
(b) AFTER EARLY RETIREMENT DATE. If the employment of a
Participant is terminated voluntarily as described in subsection
(a) above but after the first day of the month
-1-
coincident with or next following the date of the Participant's
60th birthday, distributions (including Early Distributions)
shall be made as otherwise provided in this Article V.
(c) COMMUTATION. Any installment payments hereunder may
be commuted as provided in Section 5.1(e)."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officer in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 18th day of May, 1995,
but effective as of the date stated herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ D. D. SYKORA
D. D. Sykora
President and Chief
Operating Officer
ATTEST:
/s/ RICHARD B. DAUPHIN
Richard B. Dauphin
Assistant Corporate Secretary
-2-
EXHIBIT 10(c)
HOUSTON INDUSTRIES INCORPORATED
DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective January 1, 1989)
FIFTH AMENDMENT
Houston Industries Incorporated, a Texas corporation (the
"Company"), having amended and restated the Houston Industries Incorporated
Deferred Compensation Plan, effective January 1, 1989 (the "Plan"), and having
reserved the right under Section 7.1 thereof to amend the Plan, does hereby
amend the Plan, effective August 1, 1995, as follows:
1. Section 5.1(f) of the Plan is hereby amended to read as
follows:
"(f) Any installment benefits, at the request of the Participant
and in the sole discretion of the Committee, may be commuted to a
lump-sum payment or may be paid over a shorter period of time, with
interest accrued to such date at the applicable Interest Crediting Rate."
2. Section 5.2(c) of the Plan is hereby amended to read as
follows:
"(c) Any installment death benefits, at the request of the
Beneficiary and in the sole discretion of the Committee, may be commuted
to a lump-sum payment or may be paid over a shorter period of time, with
interest accrued to such date at the applicable Interest Crediting Rate."
3. The second sentence of Section 5.3 of the Plan is hereby
amended to read as follows:
"The benefits payable to such Participant under the Plan shall be paid
in the amounts and at the times otherwise provided in Section 5.1, all
in accordance with the Participant's initial election under Section 3.3,
except that at the request of the Participant and in the sole discretion
of the Committee any such payments may be commuted to a lump-sum payment
or may be paid over a shorter period of time, with interest accrued to
such date at the applicable Interest Crediting Rate."
-1-
4. Article V of the Plan is hereby amended by adding the
following Section 5.8 thereto:
"5.8 TERMINATIONS UNDER THE 1995 VOLUNTARY EARLY RETIREMENT
PROGRAM.
(a) PRIOR TO EARLY RETIREMENT DATE. Notwithstanding any
other provision of the Plan to the contrary, if the employment of
a Participant who fulfills the requirements for the Voluntary
Early Pension for 1995 Program participants under Section 9.7(a)
of the Houston Industries Incorporated Retirement Plan is
terminated prior to the first day of the month coincident with or
next following the date of the Participant's 60th birthday, a
Normal Retirement Distribution as described in Section 5.1 or a
distribution as described in Section 5.4 shall not be made, but
the Employer (x) shall pay the Participant the sum or sums of
Compensation actually deferred, with interest thereon, compounded
annually, at the applicable Interest Crediting Rate for each
Participation Year, from the Commencement Date through the date of
payment, minus any Early Distributions, (y) shall make a lump-sum
distribution or 15 annual installment payments in accordance with
the Participant's election under Section 5.1(b) and, if payable in
a lump sum, in the January following the Participant's termination
of employment or, if payable in installments, commencing the month
following the month in which the Participant terminates employment
and payable thereafter in that same month in each remaining year,
and (z) shall not make any Early Distributions to such
Participant.
(b) AFTER EARLY RETIREMENT DATE. If the employment of a
Participant is terminated voluntarily as described in subsection
(a) above but after the first day of the month coincident with or
next following the date of the Participant's 60th birthday,
distributions (including Early Distributions) shall be made as
otherwise provided in this Article V.
(c) COMMUTATION. Any installment payments hereunder may be
commuted as provided in Section 5.1(e)."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officer in a number of
copies, all of which shall
-2-
constitute one and the same instrument, which may be sufficiently evidenced by
any executed copy hereof, this 18th day of May, 1995, but effective as of the
date stated herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ D. D. SYKORA
D. D. Sykora
President and Chief
Operating Officer
ATTEST:
/s/ RICHARD B. DAUPHIN
Richard B. Dauphin
Assistant Corporate Secretary
-3-
EXHIBIT 10(d)
HOUSTON INDUSTRIES INCORPORATED
DEFERRED COMPENSATION PLAN
(As Established September 1, 1985)
FIFTH AMENDMENT
Houston Industries Incorporated, a Texas corporation (the
"Company"), having established the Houston Industries Incorporated Deferred
Compensation Plan, effective September 1, 1985 (the "Plan"), and having reserved
the right under Section 7.1 thereof to amend the Plan, does hereby amend Article
Five of the Plan by adding the following Section 5.8 thereto, effective August
1, 1995:
"5.8 TERMINATIONS UNDER THE 1995 VOLUNTARY EARLY RETIREMENT
PROGRAM.
(a) PRIOR TO EARLY RETIREMENT DATE. Notwithstanding any
other provision of the Plan to the contrary, if the employment of
a Participant who fulfills the requirements for the Voluntary
Early Pension for 1995 Program participants under Section 9.7(a)
of the Houston Industries Incorporated Retirement Plan is
terminated prior to the first day of the month coincident with or
next following the date of the Participant's 60th birthday,
distribution shall not be made as described in Section 5.1(a)-(c),
but the Employer (x) shall pay the Participant the sum or sums of
Compensation actually deferred, with interest thereon, compounded
annually, at the applicable interest rate specified in the
Participant's Agreement for each Participation Year, from the
Commencement Date through the date of payment, (y) shall pay such
amount in 15 annual installment payments, commencing the first day
of the month following the month in which the Participant
terminates employment and payable thereafter in that same month in
each remaining year, and (z) shall not pay any equal annual
installments (as described in Section 5.1(a)-(b)) to such
Participant.
(b) AFTER EARLY RETIREMENT DATE. If the employment of a
Participant is terminated voluntarily as described in subsection
(a) above but after the Participant's Early Retirement Date,
distributions (including the equal annual installments) shall be
made as otherwise provided in this Article Five.
-1-
(c) COMMUTATION. Any installment payments hereunder may be
commuted as provided in Section 5.1(e)."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officer in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 18th day of May, 1995,
but effective as of the date stated herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ D. D. SYKORA
D. D. Sykora
President and Chief
Operating Officer
ATTEST:
/s/ RICHARD B. DAUPHIN
Richard B. Dauphin
Assistant Corporate Secretary
-2-
Exhibit 10(e)
HOUSTON INDUSTRIES INCORPORATED
EXECUTIVE LIFE INSURANCE PLAN
(Effective January 1, 1994)
FIRST AMENDMENT
The Benefits Committee of Houston Industries Incorporated, a Texas
corporation, having been delegated the right under Section 6.2 of the Houston
Industries Incorporated Executive Life Insurance Plan, effective January 1, 1994
(the "Plan"), to amend the Plan in certain respects, does hereby amend the Plan,
effective as of January 1, 1994, as follows:
1. Section 4.5 is hereby amended by adding the following sentence
at the end of that Section:
"Notwithstanding the foregoing, a Benefit Owner may irrevocably assign
its right to purchase all ownership rights in the Insurance Contract
pursuant to this Section 4.5 by a signed writing delivered to the
Committee prior to the termination of the Participant's employment with
the Company. The `signed writing' as contemplated in this paragraph shall
be in such form as may be prescribed by the Committee from time to time."
2. Section 8.1 is hereby amended to read in its entirety as
follows:
"8.1 Except as provided in Sections 4.4 and 4.5 of this Plan, no
benefit under the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge,
except by will, or the laws of descent and distribution, and any attempt
thereat shall be void. No such benefit shall, prior to receipt thereof,
be in any manner liable for or subject to the debts, contracts,
liabilities, engagements or torts of any Participant, Benefit Owner, or
Beneficiary."
IN WITNESS WHEREOF, the Benefits Committee of Houston Industries
Incorporated has caused these presents to be executed by its duly authorized
officer in a number of copies, all of which shall constitute one and the same
instrument, which may be
-1-
sufficiently evidenced by any executed copy hereof, this 16th day of June, 1995,
but effective as of January 1, 1994.
BENEFITS COMMITTEE OF HOUSTON
INDUSTRIES INCORPORATED
By /s/ D. D. SYKORA
D. D. Sykora
Chairman
ATTEST:
/s/ RICHARD B. DAUPHIN
Richard B. Dauphin
Assistant Corporate Secretary
-2-
Exhibit 11
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
Primary Earnings Per Share:
(1) Weighted average shares of
common stock outstanding........ 123,769,249 122,507,671 123,684,286 122,464,654
(2) Effect of issuance of shares
from assumed exercise of
stock options
(treasury stock method)......... (4,633) (66,344) (12,095) (42,705)
------------ ------------ ------------ ------------
(3) Weighted average shares......... 123,764,616 122,441,327 123,672,191 122,421,949
============ ============ ============ ============
(4) Net income...................... $ 133,260 $ 126,725 $ 247,716 $ 152,623
(5) Primary earnings per share
(line 4/line 3)................. $ 1.08 $ 1.03 $ 2.00 $ 1.25
Fully Diluted Earnings Per Share:
(6) Weighted average shares per
computation on line 3 above..... 123,764,616 122,441,327 123,672,191 122,421,949
(7) Shares applicable to options
included on line 2 above........ 4,633 66,344 12,095 42,705
(8) Dilutive effect of stock
options based on the average
price for the period or period-
end price, whichever is higher,
of $42.13 and $33.63 for the
second quarter of 1995 and 1994,
respectively, and $42.13 and
$37.06 for the first six months
of 1995 and 1994, respectively.
(treasury stock method)......... (1,364) (66,344) (1,364) (42,705)
------------ ------------ ------------ ------------
(9) Weighted average shares......... 123,767,885 122,441,327 123,682,922 122,421,949
============ ============ ============ ============
(10) Net income...................... $ 133,260 $ 126,725 $ 247,716 $ 152,623
(11) Fully diluted earnings per
share (line 10/line 9).......... $ 1.08 $ 1.03 $ 2.00 $ 1.25
Notes:
These calculations are submitted in accordance with Regulation S-K item 601(b)
(11) although it is not required for financial presentation disclosure per
footnote 2 to paragraph 14 of Accounting Principles Board (APB) Opinion No. 15
because it does not meet the 3% dilutive test.
The calculations for the quarters and six months ended June 30, 1995 and 1994
are submitted in accordance with Regulation S-K item 601(b) (11) although they
are contrary to paragraphs 30 and 40 of APB No. 15 because they produce
anti-dilutive results.
EXHIBIT 12
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
SIX TWELVE
MONTHS ENDED MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1995
------------------ ------------------
Fixed Charges as Defined:
(1) Interest on Long-Term Debt.......... $ 129,258 $ 261,751
(2) Other Interest...................... 18,677 30,718
(3) Preferred Dividends Factor
of Subsidiary.................... 24,324 50,346
(4) Interest Component of Rentals
Charged to Operating Expense..... 1,926 3,967
------------------ ------------------
(5) Total Fixed Charges................. $ 174,185 $ 346,782
================== ==================
Earnings as Defined:
(6) Income from Continuing Operations
Before Cumulative Effect of
Change in Accounting............. $ 157,109 $ 405,187
(7) Income Taxes for Continuing
Operations Before Cumulative
Effect of Change in Accounting... 76,136 207,254
(8) Total Fixed Charges (line 5)........ 174,185 346,782
------------------ ------------------
(9) Income from Continuing Operations
Before Cumulative Effect of
Change in Accounting, Income
Taxes and Fixed Charges.......... $ 407,430 $ 959,223
================== ==================
Preferred Dividends Factor of
Subsidiary:
(10) Preferred Stock Dividends of
Subsidiary....................... $ 16,435 $ 33,342
(11) Ratio of Pre-Tax Income from
Continuing Operations to Income
from Continuing Operations
(line 6 plus line 7 divided
by line 6)....................... 1.48 1.51
------------------ ------------------
(12) Preferred Dividends Factor of
Subsidiary (line 10 times
line 11)......................... $ 24,324 $ 50,346
================== ==================
Ratio of Earnings to Fixed Charges
(line 9 divided by line 5)............... 2.34 2.77
UT
0000202131
HOUSTON INDUSTRIES
1000
6-MOS
DEC-31-1995
JUN-30-1995
PER-BOOK
8,989,667
86,005
340,169
1,408,845
701,330
11,526,016
2,160,356
0
1,283,326
3,443,682
51,055
351,345
3,556,770
0
0
698,165
150,144
25,700
6,909
3,616
3,238,630
11,526,016
1,724,391
76,136
1,306,704
1,306,704
417,687
(23,010)
394,677
144,997
264,151
16,435
247,716
185,611
122,878
344,066
$2.00
$2.00
Total annual interest charges on all bonds for year-to-date 6/30/95.
EXHIBIT 99(a)
(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)
(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 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.
(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
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of assumptions would result in replacement fuel costs of less than $10
million for the 39 day periods identified by HL&P's consultant and
less than $100 million for the entire length of the outages. Any fuel
costs determined to have been unreasonably incurred would not be
recoverable from customers and would be charged against the Company's
earnings.
Although the Company and HL&P believe that the Proposed Settlement is
in the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility
Commission ultimately will approve the terms of the Proposed
Settlement or (ii) in the event the Proposed Settlement is not
approved and proceedings against HL&P resumed, that the outcome of
such proceedings would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years,
the Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant
construction, including the South Texas Project. Although Utility
Commission action on those applications has been completed, judicial
review of a number of the Utility Commission orders is pending. In
Texas, Utility Commission orders may be appealed to a District Court
in Travis County, and from that Court's decision an appeal may be
taken to the Court of Appeals for the 3rd District at Austin (Austin
Court of Appeals). Discretionary review by the Supreme Court of Texas
may be sought from decisions of the Austin Court of Appeals. The
pending appeals from the Utility Commission orders are in various
stages. In the event the courts ultimately reverse actions of the
Utility Commission in any of these proceedings, such matters would be
remanded to the Utility Commission for action in light of the courts'
orders. Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and HL&P
generally are not in a position at this time to predict the outcome of
the matters on appeal or the ultimate effect that adverse action by
the courts could have on the Company and HL&P. On remand, the Utility
Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the
Utility Commission approved a non-unanimous settlement agreement
providing for a $313 million increase in HL&P's base rates,
termination of deferrals granted with respect to Unit No. 2 of the
South Texas Project and of the qualified phase-in plan deferrals
granted with respect to Unit No. 1 of the South Texas Project, and
recovery of deferred plant costs. The settlement authorized a 12.55
percent return on common equity for HL&P. Rates contemplated by the
settlement agreement were implemented in May 1991 and remain in effect
(subject to the outcome of the current rate proceeding described in
Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on
review by a District Court, and the Austin Court of Appeals affirmed
that decision on procedural grounds due to the failure of the
appellant to file the record with the court in a timely manner. On
review, the Texas
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Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility
Commission's order, which include issues regarding deferred
accounting, the treatment of federal income tax expense and certain
other matters. As to federal tax issues, a recent decision of the
Austin Court of Appeals, in an appeal involving GTE-SW (and to which
HL&P was not a party), held that when a utility pays federal income
taxes as part of a consolidated group, the utility's ratepayers are
entitled to a fair share of the tax savings actually realized, which
can include savings resulting from unregulated activities. The Texas
Supreme Court has agreed to hear an appeal of that decision, but on
points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any
disallowance that might be required if the court's ruling in the GTE
decision were applied in Docket No. 9850 would be offset by that
greater amount. However, that amount may not be sufficient if the
Austin Court of Appeals also concludes that the Utility Commission's
inclusion of deferred accounting costs in the settlement was improper.
For a discussion of the Texas Supreme Court's decision on deferred
accounting treatment, see Note 4(c). Although HL&P believes that it
could demonstrate entitlement to rate relief equal to that agreed to
in the stipulation in Docket No. 9850, HL&P cannot rule out the
possibility that a remand and reopening of that settlement would be
required if decisions unfavorable to HL&P are rendered on both the
deferred accounting treatment and the calculation of tax expense for
rate making purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the
Utility Commission granted HL&P a $227 million increase in base
revenues, allowed a 12.92 percent return on common equity, authorized
a qualified phase-in plan for Unit No. 1 of the South Texas Project
(including approximately 72 percent of HL&P's investment in Unit No. 1
of the South Texas Project in rate base) and authorized HL&P to use
deferred accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented
by HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with
deductions taken for expenses disallowed in cost of service. The court
held that the Utility Commission had failed to require that such tax
savings be passed on to ratepayers, and ordered that the case be
remanded to the Utility Commission with instructions to adjust HL&P's
cost of service accordingly. Discretionary review is being sought from
the Texas Supreme Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing
its appeal in Docket No. 6668. A separate party to this appeal,
however, has not agreed to dismiss its appeal.
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(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized
by the Utility Commission in Docket No. 8230 and was extended in
Docket No. 9010. Similar deferred accounting treatment with respect to
Unit No. 2 of the South Texas Project was authorized in Docket No.
8425. For a discussion of the deferred accounting treatment granted,
see Note 1(f).
In June 1994, the Texas Supreme Court decided the appeal of Docket
Nos. 8230 and 9010, as well as all other pending deferred accounting
cases involving other utilities, upholding deferred accounting
treatment for both carrying costs and operation and maintenance
expenses as within the Utility Commission's statutory authority and
reversed the Austin Court of Appeals decision to the extent that the
Austin Court of Appeals had rejected deferred accounting treatment for
carrying charges. Because the lower appellate court had upheld
deferred accounting only as to operation and maintenance expenses, the
Texas Supreme Court remanded Docket Nos. 8230 and 9010 to the Austin
Court of Appeals to consider the points of error challenging the
granting of deferred accounting for carrying costs which it had not
reached in its earlier consideration of the case. The Texas Supreme
Court opinion did state, however, that when deferred costs are
considered for addition to the utility's rate base in an ensuing rate
case, the Utility Commission must then determine to what extent
inclusion of the deferred costs is necessary to preserve the utility's
financial integrity. Under the terms of the Proposed Settlement, South
Texas Project deferrals will continue to be amortized under the
schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant
to the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In
June 1990, the Utility Commission ruled in a separate docket (Docket
No. 6668) that had been created to review the prudence of HL&P's
planning and construction of the South Texas Project that $375.5
million out of HL&P's $2.8 billion investment in the two units of the
South Texas Project had been imprudently incurred. That ruling was
incorporated into HL&P's 1988 and 1991 rate cases and resulted in
HL&P's recording an after-tax charge of $15 million in 1990. Several
parties appealed the Utility Commission's decision, but a District
Court dismissed these appeals on procedural grounds. The Austin Court
of Appeals reversed and directed consideration of the appeals, and the
Texas Supreme Court denied discretionary review in 1994. At this time,
no action has been taken by the appellants to proceed with the
appeals. Unless the order in Docket No. 6668 is modified or reversed
on appeal, the amount found imprudent by the Utility Commission will
be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
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(5)MALAKOFF
The scheduled in-service dates for the Malakoff units were postponed
during the 1980's as expectations of continued strong load growth were
tempered. In 1987, all developmental work was stopped and AFUDC
accruals ceased. These units have been cancelled due to the
availability of other cost effective resource options.
In Docket No. 8425, the Utility Commission allowed recovery of certain
costs associated with the cancelled Malakoff units by amortizing those
costs over ten years for rate making purposes. Such recoverable costs
were not included in rate base and, as a result, no return on
investment is being earned during the recovery period. The remaining
balance at December 31, 1994 is $34 million with a recovery period of
66 months.
Also as a result of the final order in Docket No. 8425, the costs
associated with the engineering design work for the Malakoff units
were included in rate base and are earning a return. Subsequently, in
December 1992, HL&P determined that such costs would have no future
value and reclassified $84.1 million from plant held for future use to
recoverable project costs. In 1993, an additional $7 million was
reclassified to recoverable project costs. Amortization of these
amounts began in 1993. The balance at December 31, 1994 was $65
million with a remaining recovery period of 60 months. The
amortization amount is approximately equal to the amount currently
earning a cash return in rates. The Utility Commission's decision to
allow treatment of these costs as plant held for future use has been
challenged in the pending appeal of the Docket No. 8425 final order.
See Note 4(b) for a discussion of this proceeding.
In June 1990, HL&P purchased from its then fuel supply affiliate,
Utility Fuels, Inc. (Utility Fuels), all of Utility Fuels' interest in
the lignite reserves and lignite handling facilities for Malakoff. The
purchase price was $138.2 million, which represented the net book
value of Utility Fuels' investment in such reserves and facilities. As
part of the June 1990 rate order (Docket No. 8425), the Utility
Commission ordered that issues related to the prudence of the amounts
invested in the lignite reserves be considered in HL&P's next general
rate case which was filed in November 1990 (Docket No. 9850). However,
under the October 1991 Utility Commission order in Docket No. 9850,
this determination was postponed to a subsequent docket.
HL&P's remaining investment in Malakoff lignite reserves as of
December 31, 1994 of $153 million is included on the Company's
Consolidated and HL&P's Balance Sheets in plant held for future use.
HL&P anticipates that an additional $8 million of expenditures
relating to lignite reserves will be incurred in 1995 and 1996.
In Docket No. 12065, HL&P filed testimony in support of the
amortization of substantially all of its remaining investment in
Malakoff, including the portion of the engineering design costs for
which amortization had not previously been authorized and the amount
attributable to related lignite reserves which had not previously been
addressed by the Utility Commission. Under the Proposed Settlement of
Docket No. 12065, HL&P would amortize its investment in Malakoff over
a period not to exceed seven years such that the entire investment
will be written off no later than December 31, 2002. See Note 3. In
the event that the Utility Commission does not
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approve the Proposed Settlement, and if appropriate rate treatment of
these amounts is not ultimately received, HL&P could be required to
write off any unrecoverable portions of its Malakoff investment.
EXHIBIT 99(b)
(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four co-owners)
of the South Texas Project, which consists of two 1,250 megawatt nuclear
generating units. HL&P has a 30.8 percent interest in the project and
bears a corresponding share of capital and operating
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costs associated with the project. As of December 31, 1994, HL&P's
investments (net of accumulated depreciation and amortization) in the
South Texas Project and in nuclear fuel, including AFUDC, were $2.1
billion and $99 million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. Both generating units at the South Texas Project were out of
service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994.
HL&P removed the units from service in February 1993 when a problem was
encountered with certain of the units' auxiliary feedwater pumps.
In February 1995, the NRC removed the South Texas Project from its
"watch list" of plants with weaknesses that warranted increased NRC
attention. The NRC placed the South Texas Project on the "watch list" in
June 1993, following the issuance of a report by an NRC Diagnostic
Evaluation Team (DET) which conducted a review of the South Texas
Project operations.
Certain current and former employees of HL&P or contractors of HL&P have
asserted claims that their employment was terminated or disrupted in
retaliation for their having made safety-related complaints to the NRC.
Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P, and
the NRC has jurisdiction to take enforcement action against HL&P and/or
individual employees with respect to these matters. Based on its own
internal investigation, in October 1994 the NRC issued a notice of
violation and proposed a $100,000 civil penalty against HL&P in one such
case in which HL&P had terminated the site access of a former contractor
employee. In that action, the NRC also requested information relating to
possible further enforcement action in this matter against two HL&P
managers involved in such termination. HL&P strongly disagrees with the
NRC's conclusions, and has requested the NRC to give further
consideration of its notice. In February 1995, the NRC conducted an
enforcement conference with respect to that matter, but no result has
been received.
HL&P has provided documents and other assistance to a subcommittee of
the U. S. House of Representatives (Subcommittee) that is conducting an
inquiry related to the South Texas Project. Although the precise focus
and timing of the inquiry has not been identified by the Subcommittee,
it is anticipated that the Subcommittee will inquire into matters
related to HL&P's handling of employee concerns and to issues related to
the NRC's 1993 DET review of the South Texas Project. In connection with
that inquiry, HL&P has been advised that the U. S. General Accounting
Office (GAO) is conducting a review of the NRC's inspection process as
it relates to the South Texas Project and other plants, and HL&P is
cooperating with the GAO in its investigation and with the NRC in a
similar review it has initiated. While no prediction can be made at this
time as to the ultimate outcome of these matters, the Company and HL&P
do not believe that they will have a material adverse effect on the
Company's or HL&P's financial condition or results of operations.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February 1994,
the City of Austin (Austin), one of the four co-owners of the South
Texas Project, filed suit (Austin II Litigation) against HL&P. That suit
is pending in the 152nd District Court for Harris County, Texas, which
has set a trial date for October 1995. Austin alleges that the outages
at the South Texas
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Project from early 1993 to early 1994 were due to HL&P's failure to
perform obligations it owed to Austin under the Participation Agreement
among the four co-owners of the South Texas Project (Participation
Agreement). Austin also asserts that HL&P breached certain undertakings
voluntarily assumed by HL&P under the terms and conditions of the
Operating Licenses and Technical Specifications relating to the South
Texas Project. Austin claims that such failures have caused Austin
damages of at least $125 million due to the incurrence of increased
operating and maintenance costs, the cost of replacement power and lost
profits on wholesale transactions that did not occur. In May 1994, the
City of San Antonio (San Antonio), another co-owner of the South Texas
Project, intervened in the litigation filed by Austin against HL&P and
asserted claims similar to those asserted by Austin. San Antonio has not
identified the amount of damages it intends to seek from HL&P. HL&P is
contesting San Antonio's intervention and has called for arbitration of
San Antonio's claim under the arbitration provisions of the
Participation Agreement. The trial court has denied HL&P's requests, but
review of these decisions is currently pending before the 1st Court of
Appeals in Houston.
In a previous lawsuit (Austin I Litigation) filed in 1983 against the
Company and HL&P, Austin alleged that it had been fraudulently induced
to participate in the South Texas Project and that HL&P had failed to
perform properly its duties as project manager. In May 1993, the courts
entered a judgement in favor of the Company and HL&P, concluding, among
other things, that the Participation Agreement did not impose on HL&P a
duty to exercise reasonable skill and care as project manager. During
the course of the Austin I Litigation, San Antonio and Central Power and
Light Company (CPL), a subsidiary of Central and South West Corporation,
two of the co-owners in the South Texas Project, also asserted claims
for unspecified damages against HL&P as project manager of the South
Texas Project, alleging HL&P breached its duties and obligations. San
Antonio and CPL requested arbitration of their claims under the
Participation Agreement. In 1992, the Company and HL&P entered into a
settlement agreement with CPL (CPL Settlement) providing for CPL's
withdrawal of its demand for arbitration. San Antonio's claims for
arbitration remain pending. Under the Participation Agreement, San
Antonio's arbitration claims will be heard by a panel of five
arbitrators consisting of four arbitrators named by each co-owner and a
fifth arbitrator selected by the four appointed arbitrators.
Although the CPL Settlement did not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL reached certain
understandings in such agreement which contemplated that: (i) CPL's
previously appointed arbitrator would be replaced by CPL; (ii)
arbitrators approved by CPL or HL&P in any future arbitrations would be
mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL would
resolve any future disputes between them concerning the South Texas
Project without resorting to the arbitration provision of the
Participation Agreement. Austin and San Antonio have asserted in the
pending Austin II Litigation that such understandings have rendered the
arbitration provisions of the Participation Agreement void and that
neither Austin nor San Antonio should be required to participate in or
be bound by such proceedings.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
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(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas Project
maintain nuclear property and nuclear liability insurance coverage as
required by law and periodically review available limits and coverage
for additional protection. The owners of the South Texas Project
currently maintain the maximum amount of property damage insurance
currently available through the insurance industry, consisting of $500
million in primary property damage insurance and excess property
insurance in the amount of $2.25 billion. Under the excess property
insurance which became effective on March 1, 1995 and under portions of
the excess property insurance coverage in effect prior to March 1, 1995,
HL&P and the other owners of the South Texas Project are subject to
assessments, the maximum aggregate assessment under current policies
being $26.9 million during any one policy year. The application of the
proceeds of such property insurance is subject to the priorities
established by the NRC regulations relating to the safety of licensed
reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.0 billion to $8.92 billion effective in
November 1994. Owners are required under the Act to insure their
liability for nuclear incidents and protective evacuations by
maintaining the maximum amount of financial protection available from
private sources and by maintaining secondary financial protection
through an industry retrospective rating plan. The assessment of
deferred premiums provided by the plan for each nuclear incident is up
to $75.5 million per reactor subject to indexing for inflation, a
possible 5 percent surcharge (but no more than $10 million per reactor
per incident in any one year) and a 3 percent state premium tax. HL&P
and the other owners of the South Texas Project currently maintain the
required nuclear liability insurance and participate in the industry
retrospective rating plan.
There can be no assurance that all potential losses or liabilities will
be insurable, or that the amount of insurance will be sufficient to
cover them. Any substantial losses not covered by insurance would have a
material effect on HL&P's and the Company's financial condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South Texas
Project are required by the NRC to meet minimum decommissioning funding
requirements to pay the costs of decommissioning the South Texas
Project. Pursuant to the terms of the order of the Utility Commission in
Docket No. 9850, HL&P is currently funding decommissioning costs for the
South Texas Project with an independent trustee at an annual amount of
$6 million, which is recorded in depreciation and amortization expense.
HL&P's funding level is estimated to provide approximately $146 million,
in 1989 dollars, an amount which exceeds the current NRC minimum.
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective January 1, 1994. At December 31,
1994, the securities held in the Company's nuclear decommissioning trust
totaling $25.1 million (reflected on the Company's Consolidated and
HL&P's Balance Sheets in deferred debits and deferred credits) are
classified as available for sale. Such securities are reported on the
balance sheets at fair value, which at December 31, 1994 approximates
cost, and any unrealized gains or losses will be reported as a separate
component of common stock equity. Earnings, net of taxes and
administrative costs, are reinvested in the funds.
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In May 1994, an outside consultant estimated HL&P's portion of
decommissioning costs to be approximately $318 million, in 1994 dollars.
The consultant's calculation of decommissioning costs for financial
planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the
NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration
of their 40 year operating licenses. Under the terms of the Proposed
Settlement, HL&P would increase funding of decommissioning costs to an
annual amount of approximately $14.8 million consistent with such study.
While the current and projected funding levels presently exceed minimum
NRC requirements, no assurance can be given that the amounts held in
trust will be adequate to cover the actual decommissioning costs of the
South Texas Project or the assumptions used in estimating
decommissioning costs will ultimately prove to be correct.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Utility Commission initiated a proceeding (Docket
No. 12065) to determine whether HL&P's existing rates are just and
reasonable. Subsequently, the scope of the docket was expanded to
include reconciliation of HL&P's fuel costs from April 1, 1990 to July
31, 1994. The Utility Commission also initiated a separate proceeding
(Docket No. 13126) to review issues regarding the prudence of operation
of the South Texas Project from the date of commercial operation through
the present. That review would encompass the outage at the South Texas
Project during 1993 through 1994.
Hearings began in Docket No. 12065 in January 1995, and the Utility
Commission has retained a consultant to review the South Texas Project
for the purpose of providing testimony in Docket No. 13126 regarding the
prudence of HL&P's management of operation of the South Texas Project.
In February 1995, all major parties to these proceedings signed the
Proposed Settlement resolving the issues with respect to HL&P, including
the prudence issues related to operation of the South Texas Project.
Approval of the Proposed Settlement by the Utility Commission will be
required. To that end, the parties have established procedural dates for
a hearing on issues raised by the parties who are opposed to the
Proposed Settlement. A decision by the Utility Commission on the
Proposed Settlement is not anticipated before early summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and rates would be frozen for three years, subject to certain
conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment of $218 million in the cancelled Malakoff plant
over a period not to exceed seven years. HL&P also would increase its
decommissioning expense for the South Texas Project by $9 million per
year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This $70
million was recorded as a one-time, pre-tax charge to reconcilable fuel
revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately 17
percent below that currently in effect and would
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refund to customers the balance in its fuel over-recovery account,
estimated to be approximately $180 million after giving effect to the
amounts not recoverable from ratepayers.
HL&P recovers fuel costs incurred in electric generation through a fixed
fuel factor that is set by the Utility Commission. The difference
between fuel revenues billed pursuant to such factor and fuel expense
incurred is recorded as an addition to or a reduction of revenue, with a
corresponding entry to under- or over-recovered fuel, as appropriate.
Amounts collected pursuant to the fixed fuel factor must be reconciled
periodically against actual, reasonable costs as determined by the
Utility Commission. Currently, HL&P has an over-recovery fuel account
balance that will be refunded pursuant to the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the Utility
Commission, including issues related to the South Texas Project, Docket
No. 12065 will be remanded to an Administrative Law Judge (ALJ) to
resume detailed hearings in this docket. Prior to reaching agreement on
the terms of the Proposed Settlement, HL&P argued that its existing
rates were just and reasonable and should not be reduced. Other parties
argued that rate decreases in annual amounts ranging from $26 million to
$173 million were required and that additional decreases might be
justified following an examination of the prudence of the management of
the South Texas Project and the costs incurred in connection with the
outages at the South Texas Project. Testimony filed by the Utility
Commission staff included a recommendation to remove from rate base $515
million of HL&P's investment in the South Texas Project to reflect the
staff's view that such investment was not fully "used and useful" in
providing service, a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did not
result from imprudent management. HL&P also filed testimony analyzing
the extent to which regulatory issues extended the outages. In that
testimony an outside consultant retained by HL&P concluded that the
duration of the outages was controlled by both the resolution of NRC
regulatory issues as well as necessary equipment repairs unrelated to
NRC regulatory issues and that the incremental effect of NRC regulatory
issues on the duration of the outages was only 39 days per unit.
Estimates as to the cost of replacement power may vary significantly
based on a number of factors, including the capacity factor at which the
South Texas Project might be assumed to have operated had it not been
out of service due to the outages. However, HL&P believes that applying
a reasonable range of assumptions would result in replacement fuel costs
of less than $10 million for the 39 day periods identified by HL&P's
consultant and less than $100 million for the entire length of the
outages. Any fuel costs determined to have been unreasonably incurred
would not be recoverable from customers and would be charged against the
Company's earnings.
Although the Company and HL&P believe that the Proposed Settlement is in
the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility Commission
ultimately will approve the terms of the Proposed Settlement or
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(ii) in the event the Proposed Settlement is not approved and
proceedings against HL&P resumed, that the outcome of such proceedings
would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years, the
Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant construction,
including the South Texas Project. Although Utility Commission action on
those applications has been completed, judicial review of a number of
the Utility Commission orders is pending. In Texas, Utility Commission
orders may be appealed to a District Court in Travis County, and from
that Court's decision an appeal may be taken to the Court of Appeals for
the 3rd District at Austin (Austin Court of Appeals). Discretionary
review by the Supreme Court of Texas may be sought from decisions of the
Austin Court of Appeals. The pending appeals from the Utility Commission
orders are in various stages. In the event the courts ultimately reverse
actions of the Utility Commission in any of these proceedings, such
matters would be remanded to the Utility Commission for action in light
of the courts' orders. Because of the number of variables which can
affect the ultimate resolution of such matters on remand, the Company
and HL&P generally are not in a position at this time to predict the
outcome of the matters on appeal or the ultimate effect that adverse
action by the courts could have on the Company and HL&P. On remand, the
Utility Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the Utility
Commission approved a non-unanimous settlement agreement providing for a
$313 million increase in HL&P's base rates, termination of deferrals
granted with respect to Unit No. 2 of the South Texas Project and of the
qualified phase-in plan deferrals granted with respect to Unit No. 1 of
the South Texas Project, and recovery of deferred plant costs. The
settlement authorized a 12.55 percent return on common equity for HL&P.
Rates contemplated by the settlement agreement were implemented in May
1991 and remain in effect (subject to the outcome of the current rate
proceeding described in Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on review
by a District Court, and the Austin Court of Appeals affirmed that
decision on procedural grounds due to the failure of the appellant to
file the record with the court in a timely manner. On review, the Texas
Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility Commission's
order, which include issues regarding deferred accounting, the treatment
of federal income tax expense and certain other matters. As to federal
tax issues, a recent decision of the Austin Court of Appeals, in an
appeal involving GTE-SW (and to which HL&P was not a party), held that
when a utility pays federal income taxes as part of a consolidated
group, the utility's ratepayers are entitled to a fair share of the tax
savings actually realized, which can include savings resulting from
unregulated activities. The
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Texas Supreme Court has agreed to hear an appeal of that decision, but
on points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any disallowance
that might be required if the court's ruling in the GTE decision were
applied in Docket No. 9850 would be offset by that greater amount.
However, that amount may not be sufficient if the Austin Court of
Appeals also concludes that the Utility Commission's inclusion of
deferred accounting costs in the settlement was improper. For a
discussion of the Texas Supreme Court's decision on deferred accounting
treatment, see Note 4(c). Although HL&P believes that it could
demonstrate entitlement to rate relief equal to that agreed to in the
stipulation in Docket No. 9850, HL&P cannot rule out the possibility
that a remand and reopening of that settlement would be required if
decisions unfavorable to HL&P are rendered on both the deferred
accounting treatment and the calculation of tax expense for rate making
purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the Utility
Commission granted HL&P a $227 million increase in base revenues,
allowed a 12.92 percent return on common equity, authorized a qualified
phase-in plan for Unit No. 1 of the South Texas Project (including
approximately 72 percent of HL&P's investment in Unit No. 1 of the South
Texas Project in rate base) and authorized HL&P to use deferred
accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented by
HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with deductions
taken for expenses disallowed in cost of service. The court held that
the Utility Commission had failed to require that such tax savings be
passed on to ratepayers, and ordered that the case be remanded to the
Utility Commission with instructions to adjust HL&P's cost of service
accordingly. Discretionary review is being sought from the Texas Supreme
Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing its
appeal in Docket No. 6668. A separate party to this appeal, however, has
not agreed to dismiss its appeal.
(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized by
the Utility Commission in Docket No. 8230 and was extended in Docket No.
9010. Similar deferred accounting treatment with respect to Unit No. 2
of the South Texas Project was authorized in Docket No. 8425. For a
discussion of the deferred accounting treatment granted, see Note 1(f).
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In June 1994, the Texas Supreme Court decided the appeal of Docket Nos.
8230 and 9010, as well as all other pending deferred accounting cases
involving other utilities, upholding deferred accounting treatment for
both carrying costs and operation and maintenance expenses as within the
Utility Commission's statutory authority and reversed the Austin Court
of Appeals decision to the extent that the Austin Court of Appeals had
rejected deferred accounting treatment for carrying charges. Because the
lower appellate court had upheld deferred accounting only as to
operation and maintenance expenses, the Texas Supreme Court remanded
Docket Nos. 8230 and 9010 to the Austin Court of Appeals to consider the
points of error challenging the granting of deferred accounting for
carrying costs which it had not reached in its earlier consideration of
the case. The Texas Supreme Court opinion did state, however, that when
deferred costs are considered for addition to the utility's rate base in
an ensuing rate case, the Utility Commission must then determine to what
extent inclusion of the deferred costs is necessary to preserve the
utility's financial integrity. Under the terms of the Proposed
Settlement, South Texas Project deferrals will continue to be amortized
under the schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant to
the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In June
1990, the Utility Commission ruled in a separate docket (Docket No.
6668) that had been created to review the prudence of HL&P's planning
and construction of the South Texas Project that $375.5 million out of
HL&P's $2.8 billion investment in the two units of the South Texas
Project had been imprudently incurred. That ruling was incorporated into
HL&P's 1988 and 1991 rate cases and resulted in HL&P's recording an
after-tax charge of $15 million in 1990. Several parties appealed the
Utility Commission's decision, but a District Court dismissed these
appeals on procedural grounds. The Austin Court of Appeals reversed and
directed consideration of the appeals, and the Texas Supreme Court
denied discretionary review in 1994. At this time, no action has been
taken by the appellants to proceed with the appeals. Unless the order in
Docket No. 6668 is modified or reversed on appeal, the amount found
imprudent by the Utility Commission will be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
EXHIBIT 99(c)
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. HL&P removed both generating units at the South Texas
Project from service in February 1993 when a problem was encountered
with certain of the units' auxiliary feedwater pumps. The units were out
of service from February 1993 to February 1994, when Unit No. 1 was
returned to service.
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Unit No. 2 was returned to service in May 1994. In June 1993, the NRC
placed the South Texas Project on its "watch list" of plants with
weaknesses that warrant increased attention after a review of the South
Texas Project operations. In February 1995, the NRC removed the South
Texas Project from its "watch list".
Certain current and former employees or contractors of HL&P have
asserted claims that their employment was terminated or disrupted in
retaliation for their having made safety-related complaints to the NRC.
Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P, and
the NRC has jurisdiction to take enforcement action against HL&P and/or
individual employees with respect to these matters. On May 8, 1995, the
NRC announced that it was withdrawing a previously proposed Notice of
Violation and $100,000 civil penalty, as well as possible individual
enforcement action against two HL&P managers in connection with one such
case, involving a contractor employee whose site access was terminated.
Allegations of retaliation by that individual remain pending before an
Administrative Law Judge (ALJ) of the Department of Labor. In another
such case, involving two former HL&P employees who were terminated
during a reduction in force, another Department of Labor ALJ in April
1995 issued his recommended decision in favor of the former employees,
ordering reinstatement of one with back-pay and back-pay without
reinstatement to another. The ALJ ruled out ordering HL&P to pay
exemplary damages to the individuals, but indicated his intention to
hold a further hearing to consider whether additional compensatory
damages should be awarded. HL&P considers the ALJ's conclusions to be
erroneous and is asking the Secretary of Labor not to adopt the ALJ's
recommendation. If the recommendation is adopted by the Secretary of
Labor, HL&P could appeal that decision to the United States Court of
Appeals. Civil actions by these employees remain pending. For additional
information, see Note 2(b) of the notes to the financial statements
included in the Combined Form 8-K.
While no prediction can be made at this time as to the ultimate outcome
of these matters, the Company and HL&P do not believe that they will
have a material adverse effect on the Company's or HL&P's financial
condition or results of operations.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Public Utility Commission of Texas (Utility
Commission) initiated a proceeding (Docket No. 12065) to determine
whether HL&P's existing rates are just and reasonable. Subsequently, the
scope of the docket was expanded to include reconciliation of HL&P's
fuel costs from April 1, 1990 to July 31, 1994. The Utility Commission
also initiated a
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separate proceeding (Docket No. 13126) to review issues regarding the
prudence of operation of the South Texas Project from the date of
commercial operation through the present. That review would encompass
the outage at the South Texas Project during 1993 and 1994.
Hearings began in Docket No. 12065 in January 1995. In February 1995,
all major parties to these proceedings signed an agreement resolving the
issues with respect to HL&P, including the prudence issues related to
operation of the South Texas Project (Proposed Settlement). Approval of
the Proposed Settlement by the Utility Commission will be required.
Hearings on the Proposed Settlement are currently scheduled to begin in
early June 1995. A decision by the Utility Commission on the Proposed
Settlement is not anticipated before late summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and HL&P would be precluded from seeking rate increases for
three years, subject to certain conditions. Under the Proposed
Settlement, HL&P would amortize its remaining investment of $218 million
in the cancelled Malakoff Electric Generating Station (Malakoff) plant
over a period not to exceed seven years. HL&P also would increase its
decommissioning expense for the South Texas Project by $9 million per
year.
The Proposed Settlement also provides HL&P the option to write down up
to $50 million per year of its investment in the South Texas Project
during the five-year period commencing January 1, 1995. The parties to
the Proposed Settlement agreed that any write down would be treated as a
reasonable and necessary expense during routine reviews of HL&P's
earnings and any rate review proceeding initiated against HL&P.
Until the approval of the Proposed Settlement by the Utility Commission,
HL&P's existing rates will continue in effect; however, HL&P's financial
statements for the first quarter of 1995 reflect the estimated effects
of the Proposed Settlement. In the first quarter of 1995, HL&P's pre-tax
earnings were reduced by approximately $17 million in the aggregate as a
result of reflecting the estimated effects of the Proposed Settlement on
revenues and expenses for the quarter. Deferred revenues are included on
the Company's Consolidated and HL&P's Balance Sheets in other deferred
credits subject to refund when the Proposed Settlement is approved.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This $70
million was recorded in the fourth quarter of 1994 as a one-time,
pre-tax charge to reconcilable fuel revenues to reflect the anticipation
of approval of the Proposed Settlement. Under the Proposed Settlement,
HL&P would also establish a new fuel factor approximately 17 percent
below that currently in effect and would refund to customers the balance
in its fuel over-recovery account, estimated to be approximately $180
million after giving effect to the amounts not recoverable from
ratepayers. As contemplated by the Proposed Settlement and approved by
an ALJ, HL&P implemented a new fuel factor 17 percent lower than its
previous factor and refunded to customers approximately $110 million of
the approximately $180 million in fuel cost overrecoveries in April
1995. The remaining $70 million will be refunded if the Proposed
Settlement is approved by the Utility Commission.
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In the event the Proposed Settlement is not approved by the Utility
Commission, Docket No. 12065 would be remanded to an ALJ to resume
detailed hearings in this docket and with respect to issues related to
the South Texas Project. Prior to reaching agreement on the terms of the
Proposed Settlement, HL&P argued that its existing rates were just and
reasonable and should not be reduced. Other parties argued that rate
decreases in annual amounts ranging from $26 million to $173 million
were required and that additional decreases might be justified following
an examination of the prudence of the management of the South Texas
Project and the costs incurred in connection with the outages at the
South Texas Project. Testimony filed by the Utility Commission staff
included a recommendation to remove from rate base $515 million of
HL&P's investment in the South Texas Project to reflect the staff's view
that such investment was not fully "used and useful" in providing
service, a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 would be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. The Utility Commission has retained a consultant to
review the South Texas Project for the purpose of providing testimony in
Docket No. 13126 regarding the prudence of HL&P's management of
operation of the South Texas Project. HL&P filed testimony in Docket No.
13126, which testimony concluded that the outages at the South Texas
Project did not result from imprudent management. HL&P also filed
testimony analyzing the extent to which regulatory issues extended the
outages. In that testimony an outside consultant retained by HL&P
concluded that the duration of the outages was controlled by both the
resolution of NRC regulatory issues as well as necessary equipment
repairs unrelated to NRC regulatory issues and that the incremental
effect of NRC regulatory issues on the duration of the outages was only
39 days per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range of assumptions would
result in replacement fuel costs of less than $10 million for the 39 day
periods identified by HL&P's consultant and less than $100 million for
the entire length of the outages. Any fuel costs determined to have been
unreasonably incurred would not be recoverable from customers and would
be charged against the Company's earnings.
Although the Company and HL&P believe that the Proposed Settlement is in
the best interest of HL&P, its ratepayers, the Company and its
shareholders, no assurance can be given that (i) the Utility Commission
ultimately will approve the terms of the Proposed Settlement or (ii) in
the event the Proposed Settlement is not approved and proceedings
against HL&P are resumed, that the outcome of such proceedings would be
favorable to HL&P.
(9) CHANGE IN ACCOUNTING FOR THE COMPANY AND HL&P
The Company and HL&P adopted Statement of Financial Accounting Standards
(SFAS) No. 112, "Employer's Accounting for Postemployment Benefits",
effective January 1, 1994. SFAS No. 112 requires companies to recognize
the liability for benefits provided to former or inactive employees,
their beneficiaries and covered dependents after employment but before
retirement. Those benefits include, but are not limited to, salary
continuation, supplemental unemployment benefits, severance benefits,
disability-related benefits (including worker's compensation), job
training and counseling, and continuation of benefits such as health
care and life insurance. SFAS No. 112 requires the transition obligation
(liability from prior years) to be expensed upon adoption. As a result,
the Company and HL&P recorded in the first quarter of 1994 a one-time,
after-tax charge to income of $8.2 million.
EXHIBIT 99(d)
ITEM 3. LEGAL PROCEEDINGS.
For a description of certain legal and regulatory proceedings affecting
the Company and its subsidiaries (including (i) HL&P's rate cases, (ii) certain
environmental matters and (iii) litigation related to the South Texas Project),
see "Business - Regulatory Matters - Environmental Quality" in Item 1 of this
Report, "LIQUIDITY AND CAPITAL RESOURCES - HL&P - Environmental Expenditures" in
Item 7 of this Report and Notes 1(f) and 2 through 5 to the Financial Statements
in Item 8 of this Report, which sections and notes are incorporated herein by
reference.
HL&P is a defendant in litigation arising out of the environmental
remediation of a site in Corpus Christi, Texas. The site in question was
operated as a metals reclaiming operation for a number of years, and, though
HL&P neither operated nor had any ownership interest in the site, some
transformers and other equipment that HL&P sold as surplus allegedly were
delivered to that site, where the site operators subsequently disposed of the
materials in ways that caused environmental damage. In one case, DUMES, ET AL.
V. HL&P, ET AL., pending in the U.S. District Court for the Southern District of
Texas, Corpus Christi Division, a group of approximately 70 landowners near the
site are seeking damages primarily for lead contamination to their property.
They have pled damages of approximately $1 million each and also seek punitive
damages totaling $51 million. The Plaintiffs seek to impose responsibility on
HL&P and the other utility that undertook to clean up the property, neither of
which contributed more than an insignificant amount of lead to the site, on the
theory that lead was deposited on their properties during the site remediation
itself. In addition, Gulf States Utilities Company (Gulf States) filed suit
(GULF STATES UTILITIES CO. V. HOUSTON LIGHTING & POWER CO., ET AL.) in the
United States District Court for the Southern District of Texas, Houston
Division, against HL&P and two other utilities concerning a site in Houston,
Texas, which allegedly has been contaminated by polychlorinated biphenyls and
which Gulf States has undertaken to remediate pursuant to an EPA order. HL&P
does not believe, based on its records, that it contributed material to that
site and in October 1994, Gulf States dismissed its claims against HL&P. HL&P
remains in the case on cross-claims asserted by two co-defendants. The ultimate
outcome of these pending cases cannot be predicted at this time. Based on
information currently available, the Company and HL&P believe that none of these
cases will result in a material adverse effect on the Company's or HL&P's
financial condition or results of operations.
HL&P and the other owners of the South Texas Project filed suit in 1990
against Westinghouse Electric Corporation (Westinghouse) in the 23rd District
Court for Matagorda County, Texas (Cause No. 90-S-0684-C), alleging breach of
warranty and misrepresentation in connection with the steam generators supplied
by Westinghouse for the South Texas Project. In recent years, other utilities
have encountered stress corrosion cracking in steam generator tubes in
Westinghouse units similar to those supplied for the South Texas Project.
Failure of such tubes can result in a reduction of plant efficiency, and, in
some cases, utilities have replaced their steam generators. During an inspection
concluded in the fall of 1993, evidence was found of stress corrosion cracking
consistent with that encountered with Westinghouse steam generators at other
facilities, and a small number of tubes were found to require plugging. To date,
stress corrosion cracking has not had a significant impact on operation of
either unit; however, the owners of the South Texas Project have approved
remedial operating
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plans and have undertaken expenditures to minimize and delay further corrosion.
The litigation, which is in discovery, seeks appropriate damages and other
relief from Westinghouse and is currently scheduled for trial in July 1995. No
prediction can be made as to the ultimate outcome of this litigation.
In April 1994, two former employees of HL&P filed a class action and
shareholder derivative suit on behalf of all shareholders of the Company. This
lawsuit (PACE AND FUENTEZ V. HOUSTON INDUSTRIES INCORPORATED) alleges various
acts of mismanagement against certain officers and directors of the Company and
HL&P and, seeks unspecified actual and punitive damages for the benefit of
shareholders of the Company. The Company and HL&P believe that the suit is
without merit. The lawsuit is pending in the 122nd Judicial District of
Galveston County, Texas.
In June 1994, a former employee of HL&P filed a lawsuit (PACE,
INDIVIDUALLY AND AS A REPRESENTATIVE OF ALL OTHERS SIMILARLY SITUATED V. HOUSTON
LIGHTING & POWER COMPANY) in the 56th Judicial District Court of Galveston
County, Texas alleging that HL&P has been overcharging ratepayers and owes a
refund of more than $500 million. The claim was based on the argument that the
Utility Commission failed to allocate to ratepayers alleged tax benefits
accruing to the Company and HL&P because HL&P's federal income taxes are paid as
part of a consolidated group. The court has granted HL&P's motion for summary
judgment, which has now become final.
In July 1990, the Company paid approximately $104.5 million to the
Internal Revenue Service (IRS) in connection with an IRS audit of the Company's
1983 and 1984 federal income tax returns. In November 1991, the Company filed a
refund suit in the U.S. Court of Federal Claims seeking the return of $52.1
million of tax, $36.3 million of accrued interest, plus interest on both of
those amounts accruing after July 1990. The major contested issue in the refund
case involved the IRS's allegation that certain amounts related to the
over-recovery of fuel costs should have been included as taxable income in 1983
and 1984 even though HL&P had an obligation to refund the over-recoveries to its
ratepayers. In October 1994, the Court granted the Company's Motion for Partial
Summary Judgment on the fuel cost over-recovery issue. On February 21, 1995, the
Court entered partial judgment in favor of the Company for this issue. The U.S.
Government (Government) must file its notice of appeal on or before April 24,
1995. If the Government does not appeal or if the Government appeals but does
not prevail, the Company would be entitled to a refund of overpaid tax, interest
paid on the overpaid tax in July 1990 and interest on both of those amounts from
July 1990. Although, the Company would not be entitled to a refund until all
appeals are decided in its favor, the amount owed to the Company will continue
to accrue interest. If the Government appeals and prevails, the Company's
ultimate financial exposure should be immaterial because of offsetting tax
deductions to which the Company is entitled in the year the over-recovery was
refunded to ratepayers (and which the IRS has conceded).
EXHIBIT 99(e)
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company and its
subsidiaries, including HL&P, reference is made to the information set
forth in Item 3 of the Company's and HL&P's Annual Report on Form 10-K
for the year ended December 31, 1994 (1994 Combined Form 10-K) and
Notes 2, 3 and 4 to the Company's Consolidated and HL&P's Financial
Statements in the Combined Form 8-K, which information, as qualified
and updated by the description of developments in regulatory and
litigation matters contained in Notes 2, 3 and 4 of the Notes to the
Company's Consolidated and HL&P's Financial Statements included in
Part I of this Report, is incorporated herein by reference.
In April 1995, the government filed a notice of appeal with respect
to the judgment entered in favor of the Company in its refund suit
pending in the U.S. Court of Federal Claims. For additional information
regarding the Company's tax case, see Item 3 to the 1994 Combined
Form 10-K.
EXHIBIT 99(f)
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
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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 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 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 Public Utility Commission of Texas (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 (FERC) to order utilities to transmit power generated by both
regulated and unregulated entities to other wholesale customers, and efforts are
underway in 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 re-enactment to the
Public Utility Regulatory Act (PURA), which governs electric regulation in
Texas.
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Traditional utilities such as HL&P also face increased competition from
alternate energy sources, primarily natural gas. Gas suppliers increasingly are
seeking to supplant traditional electric loads with gas-powered equipment, such
as gas-powered chillers in air conditioning installations.
HL&P continues to maintain an aggressive approach in attempting to
preserve its existing customer base. HL&P has instituted various programs to
reduce its costs and has adopted aggressive marketing programs to identify and
respond to customer needs. One example is HL&P's development of the San Jacinto
Steam Electric Station, a rate-based cogeneration facility that will begin
service in 1995. In addition, in February 1995, the Utility Commission approved
a new tariff proposed by HL&P that will allow special pricing for industrial
customers who can demonstrate the ability to obtain electric service on terms
more favorable than HL&P's traditional tariff offerings. While such pricing may
retain such customers and minimize the prospect that HL&P would be left with
stranded investment whose costs might have to be borne by customers who have no
other alternatives, HL&P's revenues and earnings will be reduced from such
pricing tariffs.
In addition, HL&P and nine other Texas investor-owned utilities are
supporting a legislative proposal for amendment to the PURA. That proposal calls
for (i) a streamlined resource planning process, (ii) competitive bidding for
new generation capacity requirements, (iii) regulatory incentives that reward
efficiency and innovation and (iv) granting utilities pricing flexibility to
meet the changing needs of their customers. These changes, if adopted in the
form proposed by the utilities, would enhance the flexibility of regulated
entities to address competition, while also providing utility customers with the
benefits of more diverse energy supplies.
Under rules adopted by the Utility Commission and under interconnection
guidelines adopted by the Electric Reliability Council of Texas, Inc., through
which a number of utilities and unregulated suppliers are connected, HL&P and
other Texas utilities have provided for movement of power for both regulated and
unregulated power suppliers at compensatory rates. Unregulated power suppliers
continue to seek additional access and more favorable pricing provisions.
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.
REGULATION OF THE COMPANY
FEDERAL
The Company is a holding company as defined in the 1935 Act; however,
based upon the intrastate operations of HL&P and the exemptions applicable to
the affiliates of HI Energy, the Company is exempt from regulation as a
"registered" holding company under the 1935 Act except with respect to the
acquisition of voting securities of other domestic public utility companies and
holding companies. The Company has no present intention of entering into any
transaction which would cause it to become a registered holding company subject
to regulation by the Securities and Exchange Commission (SEC) under the 1935
Act. In November 1994, the SEC issued a Concept Release that called for comments
on a broad range of topics relevant to regulation of both registered and exempt
companies under the 1935 Act. In calling for comments, the SEC acknowledged that
significant changes are affecting the electric utility industry, and in
responding, some utilities have argued for repeal or substantial modification of
the 1935 Act and the regulation it provides. At this time, no prediction can be
made as to what changes, if any, will result from this review by the SEC, but
repeal or significant modification to the 1935 Act may have an effect on the
electric utility industry. In addition, it is possible that changes to the 1935
Act and its interpretation would eliminate some distinctions between exempt and
registered companies in their regulation under the 1935 Act, possibly in ways
that would increase the regulatory burdens on exempt companies such as the
Company.
EXHIBIT 99(g)
HOUSTON INDUSTRIES INCORPORATED
SAVINGS PLAN
(As Amended and Restated Effective July 1, 1995)
FIRST AMENDMENT
Houston Industries Incorporated, a Texas corporation (the
"Company"), established the Houston Industries Incorporated Savings Plan, as
amended and restated effective July 1, 1995 and thereafter amended (the "Plan"),
and reserved the right to amend the Plan to itself, and to the Benefits
Committee of the Company (the "Committee") with regard to modification of the
administrative provisions of the Plan, under Section 10.3 of the Plan.
By Agreement and Plan of Merger, dated as of January 26, 1995, by
and among the Company, KBLCOM INCORPORATED, a Delaware corporation ("KBLCOM"),
TIME WARNER INC., a Delaware corporation ("TW"), and TW KBLCOM ACQUISITION
CORP., a Delaware corporation and wholly owned subsidiary of TW, TW will acquire
by merger all of the issued and outstanding common stock of KBLCOM on or about
July 6, 1995 (the "Merger" herein). In connection with said Merger, and as
authorized by the related resolutions of the Special Meeting of the Board of
Directors of the Company dated January 25, 1995, the Company hereby amends the
Plan as set forth in Items 1-18 below, to reflect KBLCOM's termination of the
Plan with respect to its employees effective as of the close of business on June
30, 1995, such amendments to be contingent upon the consummation of the Merger
prior to August 1, 1995. Pursuant to its authority to make administrative
amendments to the Plan, the Committee hereby amends the Plan effective as of
June 30, 1995, as set forth in Item 19 below.
1. Section 1.2 of the Plan is amended by deleting the last
sentence thereof.
-1-
2. The second sentence of Section 1.11 of the Plan is amended to
read as follows:
"Compensation specifically includes salaries, wages, commissions,
overtime pay, benefits paid under the Houston Industries Incorporated
Executive Incentive Compensation Plan (including annual and long-term
awards) and the Houston Industries Energy, Inc. Annual Incentive
Compensation Plan, and any other payments of compensation which would be
subject to tax under Code Section 3101(a), without the dollar limitations
of Code Section 3121(a)(1)."
3. Section 1.13 of the Plan is hereby amended in its entirety to
read as follows:
"1.13 DEFINED BENEFIT PLAN: The Houston Industries Incorporated
Retirement Plan and/or any other defined benefit plan (as defined in
Section 415(k) of the Code) maintained by the Company or by any
Affiliate."
4. Section 1.16 of the Plan is hereby amended in its entirety to
read as follows:
"1.16 EMPLOYER: The Company (including its successors), Houston
Lighting & Power Company, Houston Industries Energy, Inc., Houston
Industries Products, Inc., and any other eligible organization that shall
adopt this Plan pursuant to the provisions of Article X, and the
successors, if any, to such organization."
5. Section 1.27 of the Plan is hereby amended in its entirety to
read as follows:
"1.27 HII PARTICIPANT: A Participant who is participating as an
employee of Houston Industries Incorporated or as an employee of any of
its subsidiaries or affiliates."
6. Section 1.30 is hereby amended in its entirety to read as
follows:
"1.30 KBLCOM PARTICIPANT: A Participant who was actively
participating in this Plan as an employee of KBLCOM Incorporated or as an
employee of any of KBLCOM Incorporated's subsidiaries prior to July 1,
1995."
-2-
7. Section 1.39 of the Plan is hereby amended in its entirety to
read as follows:
"1.39 RETIREMENT DATE: With respect to HII Participants employed
prior to January 1, 1988, the term `Retirement Date' shall mean the first
day of the calendar month coincident with or next following the 65th
birthday of a Participant; and, with respect to HII Participants hired on
or after January 1, 1988, such term shall mean the later of (i) the
Participant's attainment of age 65 or (ii) the fifth anniversary of the
Participant's commencement of participation in the Plan."
8. Section 3.1 of the Plan is amended by adding the following
sentence at the end thereof:
"The foregoing provisions of this Section 3.1 notwithstanding, no
Employee of KBLCOM shall be eligible to participate in the Plan after
June 30, 1995; provided, however, that a KBLCOM Participant with an
Account balance under the Plan as of June 30, 1995 which has not been
forfeited shall have those rights of participation granted to a former
Employee in Section 1.31."
9. The second paragraph of Section 4.1 of the Plan is hereby
amended in its entirety to read as follows:
"The Employer shall also make an Employer Matching Contribution
(subject to adjustments for forfeitures and limitations on annual
additions as elsewhere specified in the Plan) in the amount, if any,
necessary to result in a total allocation under Article V to each
Participant's Prior Plan and ESOP Accounts of not less than 70% of the
total of his Pre-Tax Basic Contribution and After-Tax Basic Contribution
for the Plan Year in the case of HII Participants. Further, the Employer
shall make an additional ESOP Contribution and/or Employer Matching
Contribution, if necessary, to make the allocation required under Section
5.3(d)(ii) with respect to dividends used to repay an Exempt Loan. The
above provisions of this Section 4.1 notwithstanding, KBLCOM shall make
no Employer Contributions to the Plan after June 30, 1995, except such
Employer Contributions due with respect to services performed by
Employees of KBLCOM on or before June 30, 1995."
10. The second sentence of Section 4.2 of the Plan is amended to
read as follows:
"In addition, each HII Participant may also elect to defer any whole
percent, up to a maximum of 10%, of his Compensation, as a Pre-Tax Excess
Contribution."
-3-
11. Section 4.2 of the Plan is amended by adding the following
sentence at the end thereof:
"The foregoing provisions of this Section 4.2 notwithstanding, no KBLCOM
Participant shall be allowed to make Pre-Tax Contributions to the Plan
with respect to employment with KBLCOM after June 30, 1995."
12. The last paragraph of Section 4.3 of the Plan is hereby
deleted.
13. The third sentence of Section 5.3(b) is amended to read as
follows:
"Allocations made pursuant to this Section 5.3(b) shall be made as soon
as practicable after the close of each payroll period in an amount not to
exceed 70% of the total of each HII Participant's Pre-Tax Basic
Contributions and After-Tax Basic Contributions."
14. The first paragraph of Section 6.1 of the Plan is amended by
adding the following sentence at the end thereof:
"The foregoing provisions of this Section 6.1 notwithstanding, each
KBLCOM Participant who was an active Employee at any time between January
1, 1995 and June 30, 1995, inclusive, and each KBLCOM Participant with an
Account balance under the Plan as of January 1, 1995 which was subject to
forfeiture as of such date, shall be fully vested in his Accounts as of
that date."
15. The last sentence of Section 6.5 is amended to read as
follows:
"Otherwise, except to the extent that distribution of a Participant's
Account is required prior to termination of employment under Section 6.10
hereof (in the case of a Participant whose required beginning date occurs
prior to his termination of employment) or under Section 10.5 hereof
relating to termination of the Plan, or at the election of the
Participant under Article VII hereof relating to certain withdrawals and
loans, no distribution or withdrawal of any benefits under the Plan shall
be permitted prior to the Participant's "separation from service, death
or disability" within the meaning of Code Section 401(k) and the
regulations thereunder other than a distribution authorized under the
Plan upon the occurrence of an event described in, and made in accordance
with, Code Section 401(k)(10) or any successor provision of the Code."
16. Section 6.8 of the Plan is amended by adding the following
sentence at the end thereof:
"The foregoing provisions of this Section 6.8 notwithstanding, (a)
eligible KBLCOM Participants shall be entitled to receive a final
distribution of their
-4-
Accounts in accordance with the provisions of Code Section 401(k)(10)
upon the closing of that certain Agreement and Plan of Merger among the
Company, KBLCOM, Time Warner Inc. and TW KBLCOM Acquisition Corp. dated
as of January 26, 1995 and (b) such KBLCOM Participants who made an
election on or before June 30, 1995 to receive a final distribution of
their Accounts shall receive a final distribution of their Accounts as
soon as practicable following such closing, valued in accordance with
Section 6.8 of the Prior Plan as though such KBLCOM Participants had
terminated employment on June 30, 1995."
17. Section 7.4 of the Plan is amended by adding the following
sentence at the end thereof:
"The foregoing provisions of this Section 7.4 notwithstanding, no KBLCOM
Participant shall be allowed to receive a new loan or maintain an
outstanding loan under the Plan after June 30, 1995 and prior to the
closing of that certain Agreement and Plan of Merger among the Company,
KBLCOM, Time Warner Inc. and TW KBLCOM Acquisition Corp. dated as of
January 26, 1995."
18. Article XII of the Plan is amended by adding the following
Section 12.9 at the end thereof:
"12.9 TRANSITION PERIOD: Notwithstanding any provision of the Plan
to the contrary, during the period of transition from the provisions of
the Prior Plan to this Plan, commencing July 1, 1995 and ending on or
about September 15, 1995 as determined by the Committee in its sole
discretion, the following restrictions shall apply: (i) Participants may
not change their investment directions with respect to future
contributions or existing Account balances; (ii) Participants may be
limited in their ability to make changes in the amount of their Pre-Tax
and After-Tax Contributions; and (iii) loans, withdrawals and
distributions otherwise available under the Plan may be temporarily
delayed, all in accordance with such administrative procedures as may be
decided by the Committee and communicated to Participants during said
transition."
-5-
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officers in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, on this 29th day of June,
1995, but effective as of the close of business on June 30, 1995, subject to the
consummation of the Merger on or before July 31, 1995.
HOUSTON INDUSTRIES INCORPORATED
By /s/ D. D. SYKORA
D. D. Sykora
President and Chief
Operating Officer
ATTEST:
/s/ RUFUS S. SCOTT
Rufus S. Scott
Assistant Corporate Secretary
IN WITNESS WHEREOF, the Benefits Committee of Houston Industries
Incorporated has caused these presents to be executed by its duly authorized
Chairman in a number of copies, all of which shall constitute one and the same
instrument, which may be sufficiently evidenced by any executed copy hereof, on
this 29th day of June, 1995, but effective as of June 30, 1995.
BENEFITS COMMITTEE OF HOUSTON
INDUSTRIES INCORPORATED
By /s/ D. D. SYKORA
D. D. Sykora, Chairman
ATTEST:
/s/ E. P. WEYLANDT
E. P. Weylandt
Secretary
-6-
EXHIBIT 12
HOUSTON LIGHTING & POWER COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(THOUSANDS OF DOLLARS)
SIX TWELVE
MONTHS ENDED MONTHS ENDED
JUNE 30,1995 JUNE 30, 1995
------------------ ------------------
Fixed Charges as Defined:
(1) Interest on Long-Term Debt........... $ 122,917 $ 246,051
(2) Other Interest....................... 3,924 7,668
(3) Amortization of (Premium)
Discount.......................... 4,247 8,489
(4) Interest Component of Rentals
Charged to Operating Expense......... 1,926 3,967
------------------ ------------------
(5) Total Fixed Charges............. $ 133,014 $ 266,175
================== ==================
Earnings as Defined:
(6) Net Income........................... $ 192,217 $ 478,140
------------------ ------------------
Federal Income Taxes:
(7) Current.............................. 61,609 165,957
(8) Deferred (Net)....................... 34,276 75,502
------------------ ------------------
(9) Total Federal Income Taxes........... 95,885 241,459
------------------ ------------------
(10) Total Fixed Charges (line 5)......... 133,014 266,175
------------------ ------------------
(11) Earnings Before Income Taxes and
Fixed Charges (line 6 plus
line 9 plus line 10).............. $ 421,116 $ 985,774
================== ==================
Ratio of Earnings to Fixed Charges
(line 11 divided by line 5)............... 3.17 3.70
Preferred Dividends Requirements:
(12) Preferred Dividends ................. $ 16,435 $ 33,342
(13) Less Tax Deduction for
Preferred Dividends............... 27 54
------------------ ------------------
(14) Total........................... 16,408 33,288
(15) Ratio of Pre-Tax Income to Net
Income (line 6 plus line 9
divided by line 6)................ 1.50 1.50
------------------ ------------------
(16) Line 14 times line 15................ 24,612 49,932
(17) Add Back Tax Deduction
(line 13)......................... 27 54
------------------ ------------------
(18) Preferred Dividends Factor........... $ 24,639 $ 49,986
================== ==================
(19) Total Fixed Charges (line 5)......... $ 133,014 $ 266,175
(20) Preferred Dividends Factor
(line 18)......................... 24,639 49,986
------------------ ------------------
(21) Total........................... $ 157,653 $ 316,161
================== ==================
Ratio of Earnings to Fixed Charges and
Preferred Dividends Requirements
(line 11 divided by line 21).............. 2.67 3.12
UT
0000048732
HOUSTON LIGHTING & POWER
1000
6-MOS
DEC-31-1995
JUN-30-1995
PER-BOOK
8,989,667
0
371,206
1,357,861
0
10,718,734
1,675,927
0
2,164,391
3,840,318
51,055
351,345
3,007,949
0
0
0
150,144
25,700
6,909
3,616
3,281,698
10,718,734
1,724,391
96,310
1,306,096
1,402,406
321,985
(5,865)
316,120
123,903
192,217
16,435
175,782
164,500
122,878
374,648
0
0
Total annual interest charges on all bonds for year-to-date 6/30/95.
EXHIBIT 99(a)
(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.
(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
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seven years. HL&P also would increase its decommissioning expense for
the South Texas Project by $9 million per year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This
$70 million was recorded as a one-time, pre-tax charge to reconcilable
fuel revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately
17 percent below that currently in effect and would refund to
customers the balance in its fuel over-recovery account, estimated to
be approximately $180 million after giving effect to the amounts not
recoverable from ratepayers.
HL&P recovers fuel costs incurred in electric generation through a
fixed fuel factor that is set by the Utility Commission. The
difference between fuel revenues billed pursuant to such factor and
fuel expense incurred is recorded as an addition to or a reduction of
revenue, with a corresponding entry to under- or over-recovered fuel,
as appropriate. Amounts collected pursuant to the fixed fuel factor
must be reconciled periodically against actual, reasonable costs as
determined by the Utility Commission. Currently, HL&P has an
over-recovery fuel account balance that will be refunded pursuant to
the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the
Utility Commission, including issues related to the South Texas
Project, Docket No. 12065 will be remanded to an Administrative Law
Judge (ALJ) to resume detailed hearings in this docket. Prior to
reaching agreement on the terms of the Proposed Settlement, HL&P
argued that its existing rates were just and reasonable and should not
be reduced. Other parties argued that rate decreases in annual amounts
ranging from $26 million to $173 million were required and that
additional decreases might be justified following an examination of
the prudence of the management of the South Texas Project and the
costs incurred in connection with the outages at the South Texas
Project. Testimony filed by the Utility Commission staff included a
recommendation to remove from rate base $515 million of HL&P's
investment in the South Texas Project to reflect the staff's view that
such investment was not fully "used and useful" in providing service,
a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did
not result from imprudent management. HL&P also filed testimony
analyzing the extent to which regulatory issues extended the outages.
In that testimony an outside consultant retained by HL&P concluded
that the duration of the outages was controlled by both the resolution
of NRC regulatory issues as well as necessary equipment repairs
unrelated to NRC regulatory issues and that the incremental effect of
NRC regulatory issues on the duration of the outages was only 39 days
per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range
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of assumptions would result in replacement fuel costs of less than $10
million for the 39 day periods identified by HL&P's consultant and
less than $100 million for the entire length of the outages. Any fuel
costs determined to have been unreasonably incurred would not be
recoverable from customers and would be charged against the Company's
earnings.
Although the Company and HL&P believe that the Proposed Settlement is
in the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility
Commission ultimately will approve the terms of the Proposed
Settlement or (ii) in the event the Proposed Settlement is not
approved and proceedings against HL&P resumed, that the outcome of
such proceedings would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years,
the Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant
construction, including the South Texas Project. Although Utility
Commission action on those applications has been completed, judicial
review of a number of the Utility Commission orders is pending. In
Texas, Utility Commission orders may be appealed to a District Court
in Travis County, and from that Court's decision an appeal may be
taken to the Court of Appeals for the 3rd District at Austin (Austin
Court of Appeals). Discretionary review by the Supreme Court of Texas
may be sought from decisions of the Austin Court of Appeals. The
pending appeals from the Utility Commission orders are in various
stages. In the event the courts ultimately reverse actions of the
Utility Commission in any of these proceedings, such matters would be
remanded to the Utility Commission for action in light of the courts'
orders. Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and HL&P
generally are not in a position at this time to predict the outcome of
the matters on appeal or the ultimate effect that adverse action by
the courts could have on the Company and HL&P. On remand, the Utility
Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the
Utility Commission approved a non-unanimous settlement agreement
providing for a $313 million increase in HL&P's base rates,
termination of deferrals granted with respect to Unit No. 2 of the
South Texas Project and of the qualified phase-in plan deferrals
granted with respect to Unit No. 1 of the South Texas Project, and
recovery of deferred plant costs. The settlement authorized a 12.55
percent return on common equity for HL&P. Rates contemplated by the
settlement agreement were implemented in May 1991 and remain in effect
(subject to the outcome of the current rate proceeding described in
Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on
review by a District Court, and the Austin Court of Appeals affirmed
that decision on procedural grounds due to the failure of the
appellant to file the record with the court in a timely manner. On
review, the Texas
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Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility
Commission's order, which include issues regarding deferred
accounting, the treatment of federal income tax expense and certain
other matters. As to federal tax issues, a recent decision of the
Austin Court of Appeals, in an appeal involving GTE-SW (and to which
HL&P was not a party), held that when a utility pays federal income
taxes as part of a consolidated group, the utility's ratepayers are
entitled to a fair share of the tax savings actually realized, which
can include savings resulting from unregulated activities. The Texas
Supreme Court has agreed to hear an appeal of that decision, but on
points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any
disallowance that might be required if the court's ruling in the GTE
decision were applied in Docket No. 9850 would be offset by that
greater amount. However, that amount may not be sufficient if the
Austin Court of Appeals also concludes that the Utility Commission's
inclusion of deferred accounting costs in the settlement was improper.
For a discussion of the Texas Supreme Court's decision on deferred
accounting treatment, see Note 4(c). Although HL&P believes that it
could demonstrate entitlement to rate relief equal to that agreed to
in the stipulation in Docket No. 9850, HL&P cannot rule out the
possibility that a remand and reopening of that settlement would be
required if decisions unfavorable to HL&P are rendered on both the
deferred accounting treatment and the calculation of tax expense for
rate making purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the
Utility Commission granted HL&P a $227 million increase in base
revenues, allowed a 12.92 percent return on common equity, authorized
a qualified phase-in plan for Unit No. 1 of the South Texas Project
(including approximately 72 percent of HL&P's investment in Unit No. 1
of the South Texas Project in rate base) and authorized HL&P to use
deferred accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented
by HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with
deductions taken for expenses disallowed in cost of service. The court
held that the Utility Commission had failed to require that such tax
savings be passed on to ratepayers, and ordered that the case be
remanded to the Utility Commission with instructions to adjust HL&P's
cost of service accordingly. Discretionary review is being sought from
the Texas Supreme Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing
its appeal in Docket No. 6668. A separate party to this appeal,
however, has not agreed to dismiss its appeal.
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(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized
by the Utility Commission in Docket No. 8230 and was extended in
Docket No. 9010. Similar deferred accounting treatment with respect to
Unit No. 2 of the South Texas Project was authorized in Docket No.
8425. For a discussion of the deferred accounting treatment granted,
see Note 1(f).
In June 1994, the Texas Supreme Court decided the appeal of Docket
Nos. 8230 and 9010, as well as all other pending deferred accounting
cases involving other utilities, upholding deferred accounting
treatment for both carrying costs and operation and maintenance
expenses as within the Utility Commission's statutory authority and
reversed the Austin Court of Appeals decision to the extent that the
Austin Court of Appeals had rejected deferred accounting treatment for
carrying charges. Because the lower appellate court had upheld
deferred accounting only as to operation and maintenance expenses, the
Texas Supreme Court remanded Docket Nos. 8230 and 9010 to the Austin
Court of Appeals to consider the points of error challenging the
granting of deferred accounting for carrying costs which it had not
reached in its earlier consideration of the case. The Texas Supreme
Court opinion did state, however, that when deferred costs are
considered for addition to the utility's rate base in an ensuing rate
case, the Utility Commission must then determine to what extent
inclusion of the deferred costs is necessary to preserve the utility's
financial integrity. Under the terms of the Proposed Settlement, South
Texas Project deferrals will continue to be amortized under the
schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant
to the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In
June 1990, the Utility Commission ruled in a separate docket (Docket
No. 6668) that had been created to review the prudence of HL&P's
planning and construction of the South Texas Project that $375.5
million out of HL&P's $2.8 billion investment in the two units of the
South Texas Project had been imprudently incurred. That ruling was
incorporated into HL&P's 1988 and 1991 rate cases and resulted in
HL&P's recording an after-tax charge of $15 million in 1990. Several
parties appealed the Utility Commission's decision, but a District
Court dismissed these appeals on procedural grounds. The Austin Court
of Appeals reversed and directed consideration of the appeals, and the
Texas Supreme Court denied discretionary review in 1994. At this time,
no action has been taken by the appellants to proceed with the
appeals. Unless the order in Docket No. 6668 is modified or reversed
on appeal, the amount found imprudent by the Utility Commission will
be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
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(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.
EXHIBIT 99(b)
(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four co-owners)
of the South Texas Project, which consists of two 1,250 megawatt nuclear
generating units. HL&P has a 30.8 percent interest in the project and
bears a corresponding share of capital and operating
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costs associated with the project. As of December 31, 1994, HL&P's
investments (net of accumulated depreciation and amortization) in the
South Texas Project and in nuclear fuel, including AFUDC, were $2.1
billion and $99 million, respectively.
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. Both generating units at the South Texas Project were out of
service from February 1993 to February 1994, when Unit No. 1 was
returned to service. Unit No. 2 was returned to service in May 1994.
HL&P removed the units from service in February 1993 when a problem was
encountered with certain of the units' auxiliary feedwater pumps.
In February 1995, the NRC removed the South Texas Project from its
"watch list" of plants with weaknesses that warranted increased NRC
attention. The NRC placed the South Texas Project on the "watch list" in
June 1993, following the issuance of a report by an NRC Diagnostic
Evaluation Team (DET) which conducted a review of the South Texas
Project operations.
Certain current and former employees of HL&P or contractors of HL&P have
asserted claims that their employment was terminated or disrupted in
retaliation for their having made safety-related complaints to the NRC.
Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P, and
the NRC has jurisdiction to take enforcement action against HL&P and/or
individual employees with respect to these matters. Based on its own
internal investigation, in October 1994 the NRC issued a notice of
violation and proposed a $100,000 civil penalty against HL&P in one such
case in which HL&P had terminated the site access of a former contractor
employee. In that action, the NRC also requested information relating to
possible further enforcement action in this matter against two HL&P
managers involved in such termination. HL&P strongly disagrees with the
NRC's conclusions, and has requested the NRC to give further
consideration of its notice. In February 1995, the NRC conducted an
enforcement conference with respect to that matter, but no result has
been received.
HL&P has provided documents and other assistance to a subcommittee of
the U. S. House of Representatives (Subcommittee) that is conducting an
inquiry related to the South Texas Project. Although the precise focus
and timing of the inquiry has not been identified by the Subcommittee,
it is anticipated that the Subcommittee will inquire into matters
related to HL&P's handling of employee concerns and to issues related to
the NRC's 1993 DET review of the South Texas Project. In connection with
that inquiry, HL&P has been advised that the U. S. General Accounting
Office (GAO) is conducting a review of the NRC's inspection process as
it relates to the South Texas Project and other plants, and HL&P is
cooperating with the GAO in its investigation and with the NRC in a
similar review it has initiated. While no prediction can be made at this
time as to the ultimate outcome of these matters, the Company and HL&P
do not believe that they will have a material adverse effect on the
Company's or HL&P's financial condition or results of operations.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February 1994,
the City of Austin (Austin), one of the four co-owners of the South
Texas Project, filed suit (Austin II Litigation) against HL&P. That suit
is pending in the 152nd District Court for Harris County, Texas, which
has set a trial date for October 1995. Austin alleges that the outages
at the South Texas
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Project from early 1993 to early 1994 were due to HL&P's failure to
perform obligations it owed to Austin under the Participation Agreement
among the four co-owners of the South Texas Project (Participation
Agreement). Austin also asserts that HL&P breached certain undertakings
voluntarily assumed by HL&P under the terms and conditions of the
Operating Licenses and Technical Specifications relating to the South
Texas Project. Austin claims that such failures have caused Austin
damages of at least $125 million due to the incurrence of increased
operating and maintenance costs, the cost of replacement power and lost
profits on wholesale transactions that did not occur. In May 1994, the
City of San Antonio (San Antonio), another co-owner of the South Texas
Project, intervened in the litigation filed by Austin against HL&P and
asserted claims similar to those asserted by Austin. San Antonio has not
identified the amount of damages it intends to seek from HL&P. HL&P is
contesting San Antonio's intervention and has called for arbitration of
San Antonio's claim under the arbitration provisions of the
Participation Agreement. The trial court has denied HL&P's requests, but
review of these decisions is currently pending before the 1st Court of
Appeals in Houston.
In a previous lawsuit (Austin I Litigation) filed in 1983 against the
Company and HL&P, Austin alleged that it had been fraudulently induced
to participate in the South Texas Project and that HL&P had failed to
perform properly its duties as project manager. In May 1993, the courts
entered a judgement in favor of the Company and HL&P, concluding, among
other things, that the Participation Agreement did not impose on HL&P a
duty to exercise reasonable skill and care as project manager. During
the course of the Austin I Litigation, San Antonio and Central Power and
Light Company (CPL), a subsidiary of Central and South West Corporation,
two of the co-owners in the South Texas Project, also asserted claims
for unspecified damages against HL&P as project manager of the South
Texas Project, alleging HL&P breached its duties and obligations. San
Antonio and CPL requested arbitration of their claims under the
Participation Agreement. In 1992, the Company and HL&P entered into a
settlement agreement with CPL (CPL Settlement) providing for CPL's
withdrawal of its demand for arbitration. San Antonio's claims for
arbitration remain pending. Under the Participation Agreement, San
Antonio's arbitration claims will be heard by a panel of five
arbitrators consisting of four arbitrators named by each co-owner and a
fifth arbitrator selected by the four appointed arbitrators.
Although the CPL Settlement did not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL reached certain
understandings in such agreement which contemplated that: (i) CPL's
previously appointed arbitrator would be replaced by CPL; (ii)
arbitrators approved by CPL or HL&P in any future arbitrations would be
mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL would
resolve any future disputes between them concerning the South Texas
Project without resorting to the arbitration provision of the
Participation Agreement. Austin and San Antonio have asserted in the
pending Austin II Litigation that such understandings have rendered the
arbitration provisions of the Participation Agreement void and that
neither Austin nor San Antonio should be required to participate in or
be bound by such proceedings.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
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(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas Project
maintain nuclear property and nuclear liability insurance coverage as
required by law and periodically review available limits and coverage
for additional protection. The owners of the South Texas Project
currently maintain the maximum amount of property damage insurance
currently available through the insurance industry, consisting of $500
million in primary property damage insurance and excess property
insurance in the amount of $2.25 billion. Under the excess property
insurance which became effective on March 1, 1995 and under portions of
the excess property insurance coverage in effect prior to March 1, 1995,
HL&P and the other owners of the South Texas Project are subject to
assessments, the maximum aggregate assessment under current policies
being $26.9 million during any one policy year. The application of the
proceeds of such property insurance is subject to the priorities
established by the NRC regulations relating to the safety of licensed
reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.0 billion to $8.92 billion effective in
November 1994. Owners are required under the Act to insure their
liability for nuclear incidents and protective evacuations by
maintaining the maximum amount of financial protection available from
private sources and by maintaining secondary financial protection
through an industry retrospective rating plan. The assessment of
deferred premiums provided by the plan for each nuclear incident is up
to $75.5 million per reactor subject to indexing for inflation, a
possible 5 percent surcharge (but no more than $10 million per reactor
per incident in any one year) and a 3 percent state premium tax. HL&P
and the other owners of the South Texas Project currently maintain the
required nuclear liability insurance and participate in the industry
retrospective rating plan.
There can be no assurance that all potential losses or liabilities will
be insurable, or that the amount of insurance will be sufficient to
cover them. Any substantial losses not covered by insurance would have a
material effect on HL&P's and the Company's financial condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the South Texas
Project are required by the NRC to meet minimum decommissioning funding
requirements to pay the costs of decommissioning the South Texas
Project. Pursuant to the terms of the order of the Utility Commission in
Docket No. 9850, HL&P is currently funding decommissioning costs for the
South Texas Project with an independent trustee at an annual amount of
$6 million, which is recorded in depreciation and amortization expense.
HL&P's funding level is estimated to provide approximately $146 million,
in 1989 dollars, an amount which exceeds the current NRC minimum.
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective January 1, 1994. At December 31,
1994, the securities held in the Company's nuclear decommissioning trust
totaling $25.1 million (reflected on the Company's Consolidated and
HL&P's Balance Sheets in deferred debits and deferred credits) are
classified as available for sale. Such securities are reported on the
balance sheets at fair value, which at December 31, 1994 approximates
cost, and any unrealized gains or losses will be reported as a separate
component of common stock equity. Earnings, net of taxes and
administrative costs, are reinvested in the funds.
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In May 1994, an outside consultant estimated HL&P's portion of
decommissioning costs to be approximately $318 million, in 1994 dollars.
The consultant's calculation of decommissioning costs for financial
planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the
NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration
of their 40 year operating licenses. Under the terms of the Proposed
Settlement, HL&P would increase funding of decommissioning costs to an
annual amount of approximately $14.8 million consistent with such study.
While the current and projected funding levels presently exceed minimum
NRC requirements, no assurance can be given that the amounts held in
trust will be adequate to cover the actual decommissioning costs of the
South Texas Project or the assumptions used in estimating
decommissioning costs will ultimately prove to be correct.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Utility Commission initiated a proceeding (Docket
No. 12065) to determine whether HL&P's existing rates are just and
reasonable. Subsequently, the scope of the docket was expanded to
include reconciliation of HL&P's fuel costs from April 1, 1990 to July
31, 1994. The Utility Commission also initiated a separate proceeding
(Docket No. 13126) to review issues regarding the prudence of operation
of the South Texas Project from the date of commercial operation through
the present. That review would encompass the outage at the South Texas
Project during 1993 through 1994.
Hearings began in Docket No. 12065 in January 1995, and the Utility
Commission has retained a consultant to review the South Texas Project
for the purpose of providing testimony in Docket No. 13126 regarding the
prudence of HL&P's management of operation of the South Texas Project.
In February 1995, all major parties to these proceedings signed the
Proposed Settlement resolving the issues with respect to HL&P, including
the prudence issues related to operation of the South Texas Project.
Approval of the Proposed Settlement by the Utility Commission will be
required. To that end, the parties have established procedural dates for
a hearing on issues raised by the parties who are opposed to the
Proposed Settlement. A decision by the Utility Commission on the
Proposed Settlement is not anticipated before early summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and rates would be frozen for three years, subject to certain
conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment of $218 million in the cancelled Malakoff plant
over a period not to exceed seven years. HL&P also would increase its
decommissioning expense for the South Texas Project by $9 million per
year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This $70
million was recorded as a one-time, pre-tax charge to reconcilable fuel
revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately 17
percent below that currently in effect and would
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refund to customers the balance in its fuel over-recovery account,
estimated to be approximately $180 million after giving effect to the
amounts not recoverable from ratepayers.
HL&P recovers fuel costs incurred in electric generation through a fixed
fuel factor that is set by the Utility Commission. The difference
between fuel revenues billed pursuant to such factor and fuel expense
incurred is recorded as an addition to or a reduction of revenue, with a
corresponding entry to under- or over-recovered fuel, as appropriate.
Amounts collected pursuant to the fixed fuel factor must be reconciled
periodically against actual, reasonable costs as determined by the
Utility Commission. Currently, HL&P has an over-recovery fuel account
balance that will be refunded pursuant to the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the Utility
Commission, including issues related to the South Texas Project, Docket
No. 12065 will be remanded to an Administrative Law Judge (ALJ) to
resume detailed hearings in this docket. Prior to reaching agreement on
the terms of the Proposed Settlement, HL&P argued that its existing
rates were just and reasonable and should not be reduced. Other parties
argued that rate decreases in annual amounts ranging from $26 million to
$173 million were required and that additional decreases might be
justified following an examination of the prudence of the management of
the South Texas Project and the costs incurred in connection with the
outages at the South Texas Project. Testimony filed by the Utility
Commission staff included a recommendation to remove from rate base $515
million of HL&P's investment in the South Texas Project to reflect the
staff's view that such investment was not fully "used and useful" in
providing service, a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did not
result from imprudent management. HL&P also filed testimony analyzing
the extent to which regulatory issues extended the outages. In that
testimony an outside consultant retained by HL&P concluded that the
duration of the outages was controlled by both the resolution of NRC
regulatory issues as well as necessary equipment repairs unrelated to
NRC regulatory issues and that the incremental effect of NRC regulatory
issues on the duration of the outages was only 39 days per unit.
Estimates as to the cost of replacement power may vary significantly
based on a number of factors, including the capacity factor at which the
South Texas Project might be assumed to have operated had it not been
out of service due to the outages. However, HL&P believes that applying
a reasonable range of assumptions would result in replacement fuel costs
of less than $10 million for the 39 day periods identified by HL&P's
consultant and less than $100 million for the entire length of the
outages. Any fuel costs determined to have been unreasonably incurred
would not be recoverable from customers and would be charged against the
Company's earnings.
Although the Company and HL&P believe that the Proposed Settlement is in
the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility Commission
ultimately will approve the terms of the Proposed Settlement or
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(ii) in the event the Proposed Settlement is not approved and
proceedings against HL&P resumed, that the outcome of such proceedings
would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
Pursuant to a series of applications filed by HL&P in recent years, the
Utility Commission has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant construction,
including the South Texas Project. Although Utility Commission action on
those applications has been completed, judicial review of a number of
the Utility Commission orders is pending. In Texas, Utility Commission
orders may be appealed to a District Court in Travis County, and from
that Court's decision an appeal may be taken to the Court of Appeals for
the 3rd District at Austin (Austin Court of Appeals). Discretionary
review by the Supreme Court of Texas may be sought from decisions of the
Austin Court of Appeals. The pending appeals from the Utility Commission
orders are in various stages. In the event the courts ultimately reverse
actions of the Utility Commission in any of these proceedings, such
matters would be remanded to the Utility Commission for action in light
of the courts' orders. Because of the number of variables which can
affect the ultimate resolution of such matters on remand, the Company
and HL&P generally are not in a position at this time to predict the
outcome of the matters on appeal or the ultimate effect that adverse
action by the courts could have on the Company and HL&P. On remand, the
Utility Commission's action could range from granting rate relief
substantially equal to the rates previously approved to a reduction in
the revenues to which HL&P was entitled during the time the applicable
rates were in effect, which could require a refund to customers of
amounts collected pursuant to such rates. Judicial review has been
concluded or currently is pending on the final orders of the Utility
Commission described below.
(a) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the Utility
Commission approved a non-unanimous settlement agreement providing for a
$313 million increase in HL&P's base rates, termination of deferrals
granted with respect to Unit No. 2 of the South Texas Project and of the
qualified phase-in plan deferrals granted with respect to Unit No. 1 of
the South Texas Project, and recovery of deferred plant costs. The
settlement authorized a 12.55 percent return on common equity for HL&P.
Rates contemplated by the settlement agreement were implemented in May
1991 and remain in effect (subject to the outcome of the current rate
proceeding described in Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on review
by a District Court, and the Austin Court of Appeals affirmed that
decision on procedural grounds due to the failure of the appellant to
file the record with the court in a timely manner. On review, the Texas
Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility Commission's
order, which include issues regarding deferred accounting, the treatment
of federal income tax expense and certain other matters. As to federal
tax issues, a recent decision of the Austin Court of Appeals, in an
appeal involving GTE-SW (and to which HL&P was not a party), held that
when a utility pays federal income taxes as part of a consolidated
group, the utility's ratepayers are entitled to a fair share of the tax
savings actually realized, which can include savings resulting from
unregulated activities. The
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Texas Supreme Court has agreed to hear an appeal of that decision, but
on points not involving the federal income tax issues, though tax issues
could be decided in such opinion.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any disallowance
that might be required if the court's ruling in the GTE decision were
applied in Docket No. 9850 would be offset by that greater amount.
However, that amount may not be sufficient if the Austin Court of
Appeals also concludes that the Utility Commission's inclusion of
deferred accounting costs in the settlement was improper. For a
discussion of the Texas Supreme Court's decision on deferred accounting
treatment, see Note 4(c). Although HL&P believes that it could
demonstrate entitlement to rate relief equal to that agreed to in the
stipulation in Docket No. 9850, HL&P cannot rule out the possibility
that a remand and reopening of that settlement would be required if
decisions unfavorable to HL&P are rendered on both the deferred
accounting treatment and the calculation of tax expense for rate making
purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the Utility
Commission granted HL&P a $227 million increase in base revenues,
allowed a 12.92 percent return on common equity, authorized a qualified
phase-in plan for Unit No. 1 of the South Texas Project (including
approximately 72 percent of HL&P's investment in Unit No. 1 of the South
Texas Project in rate base) and authorized HL&P to use deferred
accounting for Unit No. 2 of the South Texas Project. Rates
substantially corresponding to the increase granted were implemented by
HL&P in June 1989 and remained in effect until May 1991.
In August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with deductions
taken for expenses disallowed in cost of service. The court held that
the Utility Commission had failed to require that such tax savings be
passed on to ratepayers, and ordered that the case be remanded to the
Utility Commission with instructions to adjust HL&P's cost of service
accordingly. Discretionary review is being sought from the Texas Supreme
Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing its
appeal in Docket No. 6668. A separate party to this appeal, however, has
not agreed to dismiss its appeal.
(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with Unit No. 1 of the South Texas Project was authorized by
the Utility Commission in Docket No. 8230 and was extended in Docket No.
9010. Similar deferred accounting treatment with respect to Unit No. 2
of the South Texas Project was authorized in Docket No. 8425. For a
discussion of the deferred accounting treatment granted, see Note 1(f).
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In June 1994, the Texas Supreme Court decided the appeal of Docket Nos.
8230 and 9010, as well as all other pending deferred accounting cases
involving other utilities, upholding deferred accounting treatment for
both carrying costs and operation and maintenance expenses as within the
Utility Commission's statutory authority and reversed the Austin Court
of Appeals decision to the extent that the Austin Court of Appeals had
rejected deferred accounting treatment for carrying charges. Because the
lower appellate court had upheld deferred accounting only as to
operation and maintenance expenses, the Texas Supreme Court remanded
Docket Nos. 8230 and 9010 to the Austin Court of Appeals to consider the
points of error challenging the granting of deferred accounting for
carrying costs which it had not reached in its earlier consideration of
the case. The Texas Supreme Court opinion did state, however, that when
deferred costs are considered for addition to the utility's rate base in
an ensuing rate case, the Utility Commission must then determine to what
extent inclusion of the deferred costs is necessary to preserve the
utility's financial integrity. Under the terms of the Proposed
Settlement, South Texas Project deferrals will continue to be amortized
under the schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant to
the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In June
1990, the Utility Commission ruled in a separate docket (Docket No.
6668) that had been created to review the prudence of HL&P's planning
and construction of the South Texas Project that $375.5 million out of
HL&P's $2.8 billion investment in the two units of the South Texas
Project had been imprudently incurred. That ruling was incorporated into
HL&P's 1988 and 1991 rate cases and resulted in HL&P's recording an
after-tax charge of $15 million in 1990. Several parties appealed the
Utility Commission's decision, but a District Court dismissed these
appeals on procedural grounds. The Austin Court of Appeals reversed and
directed consideration of the appeals, and the Texas Supreme Court
denied discretionary review in 1994. At this time, no action has been
taken by the appellants to proceed with the appeals. Unless the order in
Docket No. 6668 is modified or reversed on appeal, the amount found
imprudent by the Utility Commission will be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
EXHIBIT 99(c)
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. HL&P removed both generating units at the South Texas
Project from service in February 1993 when a problem was encountered
with certain of the units' auxiliary feedwater pumps. The units were out
of service from February 1993 to February 1994, when Unit No. 1 was
returned to service.
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Unit No. 2 was returned to service in May 1994. In June 1993, the NRC
placed the South Texas Project on its "watch list" of plants with
weaknesses that warrant increased attention after a review of the South
Texas Project operations. In February 1995, the NRC removed the South
Texas Project from its "watch list".
Certain current and former employees or contractors of HL&P have
asserted claims that their employment was terminated or disrupted in
retaliation for their having made safety-related complaints to the NRC.
Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P, and
the NRC has jurisdiction to take enforcement action against HL&P and/or
individual employees with respect to these matters. On May 8, 1995, the
NRC announced that it was withdrawing a previously proposed Notice of
Violation and $100,000 civil penalty, as well as possible individual
enforcement action against two HL&P managers in connection with one such
case, involving a contractor employee whose site access was terminated.
Allegations of retaliation by that individual remain pending before an
Administrative Law Judge (ALJ) of the Department of Labor. In another
such case, involving two former HL&P employees who were terminated
during a reduction in force, another Department of Labor ALJ in April
1995 issued his recommended decision in favor of the former employees,
ordering reinstatement of one with back-pay and back-pay without
reinstatement to another. The ALJ ruled out ordering HL&P to pay
exemplary damages to the individuals, but indicated his intention to
hold a further hearing to consider whether additional compensatory
damages should be awarded. HL&P considers the ALJ's conclusions to be
erroneous and is asking the Secretary of Labor not to adopt the ALJ's
recommendation. If the recommendation is adopted by the Secretary of
Labor, HL&P could appeal that decision to the United States Court of
Appeals. Civil actions by these employees remain pending. For additional
information, see Note 2(b) of the notes to the financial statements
included in the Combined Form 8-K.
While no prediction can be made at this time as to the ultimate outcome
of these matters, the Company and HL&P do not believe that they will
have a material adverse effect on the Company's or HL&P's financial
condition or results of operations.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Public Utility Commission of Texas (Utility
Commission) initiated a proceeding (Docket No. 12065) to determine
whether HL&P's existing rates are just and reasonable. Subsequently, the
scope of the docket was expanded to include reconciliation of HL&P's
fuel costs from April 1, 1990 to July 31, 1994. The Utility Commission
also initiated a
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separate proceeding (Docket No. 13126) to review issues regarding the
prudence of operation of the South Texas Project from the date of
commercial operation through the present. That review would encompass
the outage at the South Texas Project during 1993 and 1994.
Hearings began in Docket No. 12065 in January 1995. In February 1995,
all major parties to these proceedings signed an agreement resolving the
issues with respect to HL&P, including the prudence issues related to
operation of the South Texas Project (Proposed Settlement). Approval of
the Proposed Settlement by the Utility Commission will be required.
Hearings on the Proposed Settlement are currently scheduled to begin in
early June 1995. A decision by the Utility Commission on the Proposed
Settlement is not anticipated before late summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and HL&P would be precluded from seeking rate increases for
three years, subject to certain conditions. Under the Proposed
Settlement, HL&P would amortize its remaining investment of $218 million
in the cancelled Malakoff Electric Generating Station (Malakoff) plant
over a period not to exceed seven years. HL&P also would increase its
decommissioning expense for the South Texas Project by $9 million per
year.
The Proposed Settlement also provides HL&P the option to write down up
to $50 million per year of its investment in the South Texas Project
during the five-year period commencing January 1, 1995. The parties to
the Proposed Settlement agreed that any write down would be treated as a
reasonable and necessary expense during routine reviews of HL&P's
earnings and any rate review proceeding initiated against HL&P.
Until the approval of the Proposed Settlement by the Utility Commission,
HL&P's existing rates will continue in effect; however, HL&P's financial
statements for the first quarter of 1995 reflect the estimated effects
of the Proposed Settlement. In the first quarter of 1995, HL&P's pre-tax
earnings were reduced by approximately $17 million in the aggregate as a
result of reflecting the estimated effects of the Proposed Settlement on
revenues and expenses for the quarter. Deferred revenues are included on
the Company's Consolidated and HL&P's Balance Sheets in other deferred
credits subject to refund when the Proposed Settlement is approved.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This $70
million was recorded in the fourth quarter of 1994 as a one-time,
pre-tax charge to reconcilable fuel revenues to reflect the anticipation
of approval of the Proposed Settlement. Under the Proposed Settlement,
HL&P would also establish a new fuel factor approximately 17 percent
below that currently in effect and would refund to customers the balance
in its fuel over-recovery account, estimated to be approximately $180
million after giving effect to the amounts not recoverable from
ratepayers. As contemplated by the Proposed Settlement and approved by
an ALJ, HL&P implemented a new fuel factor 17 percent lower than its
previous factor and refunded to customers approximately $110 million of
the approximately $180 million in fuel cost overrecoveries in April
1995. The remaining $70 million will be refunded if the Proposed
Settlement is approved by the Utility Commission.
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In the event the Proposed Settlement is not approved by the Utility
Commission, Docket No. 12065 would be remanded to an ALJ to resume
detailed hearings in this docket and with respect to issues related to
the South Texas Project. Prior to reaching agreement on the terms of the
Proposed Settlement, HL&P argued that its existing rates were just and
reasonable and should not be reduced. Other parties argued that rate
decreases in annual amounts ranging from $26 million to $173 million
were required and that additional decreases might be justified following
an examination of the prudence of the management of the South Texas
Project and the costs incurred in connection with the outages at the
South Texas Project. Testimony filed by the Utility Commission staff
included a recommendation to remove from rate base $515 million of
HL&P's investment in the South Texas Project to reflect the staff's view
that such investment was not fully "used and useful" in providing
service, a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 would be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. The Utility Commission has retained a consultant to
review the South Texas Project for the purpose of providing testimony in
Docket No. 13126 regarding the prudence of HL&P's management of
operation of the South Texas Project. HL&P filed testimony in Docket No.
13126, which testimony concluded that the outages at the South Texas
Project did not result from imprudent management. HL&P also filed
testimony analyzing the extent to which regulatory issues extended the
outages. In that testimony an outside consultant retained by HL&P
concluded that the duration of the outages was controlled by both the
resolution of NRC regulatory issues as well as necessary equipment
repairs unrelated to NRC regulatory issues and that the incremental
effect of NRC regulatory issues on the duration of the outages was only
39 days per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range of assumptions would
result in replacement fuel costs of less than $10 million for the 39 day
periods identified by HL&P's consultant and less than $100 million for
the entire length of the outages. Any fuel costs determined to have been
unreasonably incurred would not be recoverable from customers and would
be charged against the Company's earnings.
Although the Company and HL&P believe that the Proposed Settlement is in
the best interest of HL&P, its ratepayers, the Company and its
shareholders, no assurance can be given that (i) the Utility Commission
ultimately will approve the terms of the Proposed Settlement or (ii) in
the event the Proposed Settlement is not approved and proceedings
against HL&P are resumed, that the outcome of such proceedings would be
favorable to HL&P.
(9) CHANGE IN ACCOUNTING FOR THE COMPANY AND HL&P
The Company and HL&P adopted Statement of Financial Accounting Standards
(SFAS) No. 112, "Employer's Accounting for Postemployment Benefits",
effective January 1, 1994. SFAS No. 112 requires companies to recognize
the liability for benefits provided to former or inactive employees,
their beneficiaries and covered dependents after employment but before
retirement. Those benefits include, but are not limited to, salary
continuation, supplemental unemployment benefits, severance benefits,
disability-related benefits (including worker's compensation), job
training and counseling, and continuation of benefits such as health
care and life insurance. SFAS No. 112 requires the transition obligation
(liability from prior years) to be expensed upon adoption. As a result,
the Company and HL&P recorded in the first quarter of 1994 a one-time,
after-tax charge to income of $8.2 million.
EXHIBIT 99(d)
ITEM 3. LEGAL PROCEEDINGS.
For a description of certain legal and regulatory proceedings affecting
the Company and its subsidiaries (including (i) HL&P's rate cases, (ii) certain
environmental matters and (iii) litigation related to the South Texas Project),
see "Business - Regulatory Matters - Environmental Quality" in Item 1 of this
Report, "LIQUIDITY AND CAPITAL RESOURCES - HL&P - Environmental Expenditures" in
Item 7 of this Report and Notes 1(f) and 2 through 5 to the Financial Statements
in Item 8 of this Report, which sections and notes are incorporated herein by
reference.
HL&P is a defendant in litigation arising out of the environmental
remediation of a site in Corpus Christi, Texas. The site in question was
operated as a metals reclaiming operation for a number of years, and, though
HL&P neither operated nor had any ownership interest in the site, some
transformers and other equipment that HL&P sold as surplus allegedly were
delivered to that site, where the site operators subsequently disposed of the
materials in ways that caused environmental damage. In one case, DUMES, ET AL.
V. HL&P, ET AL., pending in the U.S. District Court for the Southern District of
Texas, Corpus Christi Division, a group of approximately 70 landowners near the
site are seeking damages primarily for lead contamination to their property.
They have pled damages of approximately $1 million each and also seek punitive
damages totaling $51 million. The Plaintiffs seek to impose responsibility on
HL&P and the other utility that undertook to clean up the property, neither of
which contributed more than an insignificant amount of lead to the site, on the
theory that lead was deposited on their properties during the site remediation
itself. In addition, Gulf States Utilities Company (Gulf States) filed suit
(GULF STATES UTILITIES CO. V. HOUSTON LIGHTING & POWER CO., ET AL.) in the
United States District Court for the Southern District of Texas, Houston
Division, against HL&P and two other utilities concerning a site in Houston,
Texas, which allegedly has been contaminated by polychlorinated biphenyls and
which Gulf States has undertaken to remediate pursuant to an EPA order. HL&P
does not believe, based on its records, that it contributed material to that
site and in October 1994, Gulf States dismissed its claims against HL&P. HL&P
remains in the case on cross-claims asserted by two co-defendants. The ultimate
outcome of these pending cases cannot be predicted at this time. Based on
information currently available, the Company and HL&P believe that none of these
cases will result in a material adverse effect on the Company's or HL&P's
financial condition or results of operations.
HL&P and the other owners of the South Texas Project filed suit in 1990
against Westinghouse Electric Corporation (Westinghouse) in the 23rd District
Court for Matagorda County, Texas (Cause No. 90-S-0684-C), alleging breach of
warranty and misrepresentation in connection with the steam generators supplied
by Westinghouse for the South Texas Project. In recent years, other utilities
have encountered stress corrosion cracking in steam generator tubes in
Westinghouse units similar to those supplied for the South Texas Project.
Failure of such tubes can result in a reduction of plant efficiency, and, in
some cases, utilities have replaced their steam generators. During an inspection
concluded in the fall of 1993, evidence was found of stress corrosion cracking
consistent with that encountered with Westinghouse steam generators at other
facilities, and a small number of tubes were found to require plugging. To date,
stress corrosion cracking has not had a significant impact on operation of
either unit; however, the owners of the South Texas Project have approved
remedial operating
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plans and have undertaken expenditures to minimize and delay further corrosion.
The litigation, which is in discovery, seeks appropriate damages and other
relief from Westinghouse and is currently scheduled for trial in July 1995. No
prediction can be made as to the ultimate outcome of this litigation.
In April 1994, two former employees of HL&P filed a class action and
shareholder derivative suit on behalf of all shareholders of the Company. This
lawsuit (PACE AND FUENTEZ V. HOUSTON INDUSTRIES INCORPORATED) alleges various
acts of mismanagement against certain officers and directors of the Company and
HL&P and, seeks unspecified actual and punitive damages for the benefit of
shareholders of the Company. The Company and HL&P believe that the suit is
without merit. The lawsuit is pending in the 122nd Judicial District of
Galveston County, Texas.
In June 1994, a former employee of HL&P filed a lawsuit (PACE,
INDIVIDUALLY AND AS A REPRESENTATIVE OF ALL OTHERS SIMILARLY SITUATED V. HOUSTON
LIGHTING & POWER COMPANY) in the 56th Judicial District Court of Galveston
County, Texas alleging that HL&P has been overcharging ratepayers and owes a
refund of more than $500 million. The claim was based on the argument that the
Utility Commission failed to allocate to ratepayers alleged tax benefits
accruing to the Company and HL&P because HL&P's federal income taxes are paid as
part of a consolidated group. The court has granted HL&P's motion for summary
judgment, which has now become final.
In July 1990, the Company paid approximately $104.5 million to the
Internal Revenue Service (IRS) in connection with an IRS audit of the Company's
1983 and 1984 federal income tax returns. In November 1991, the Company filed a
refund suit in the U.S. Court of Federal Claims seeking the return of $52.1
million of tax, $36.3 million of accrued interest, plus interest on both of
those amounts accruing after July 1990. The major contested issue in the refund
case involved the IRS's allegation that certain amounts related to the
over-recovery of fuel costs should have been included as taxable income in 1983
and 1984 even though HL&P had an obligation to refund the over-recoveries to its
ratepayers. In October 1994, the Court granted the Company's Motion for Partial
Summary Judgment on the fuel cost over-recovery issue. On February 21, 1995, the
Court entered partial judgment in favor of the Company for this issue. The U.S.
Government (Government) must file its notice of appeal on or before April 24,
1995. If the Government does not appeal or if the Government appeals but does
not prevail, the Company would be entitled to a refund of overpaid tax, interest
paid on the overpaid tax in July 1990 and interest on both of those amounts from
July 1990. Although, the Company would not be entitled to a refund until all
appeals are decided in its favor, the amount owed to the Company will continue
to accrue interest. If the Government appeals and prevails, the Company's
ultimate financial exposure should be immaterial because of offsetting tax
deductions to which the Company is entitled in the year the over-recovery was
refunded to ratepayers (and which the IRS has conceded).
EXHIBIT 99(e)
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company and its
subsidiaries, including HL&P, reference is made to the information set
forth in Item 3 of the Company's and HL&P's Annual Report on Form 10-K
for the year ended December 31, 1994 (1994 Combined Form 10-K) and
Notes 2, 3 and 4 to the Company's Consolidated and HL&P's Financial
Statements in the Combined Form 8-K, which information, as qualified
and updated by the description of developments in regulatory and
litigation matters contained in Notes 2, 3 and 4 of the Notes to the
Company's Consolidated and HL&P's Financial Statements included in
Part I of this Report, is incorporated herein by reference.
In April 1995, the government filed a notice of appeal with respect
to the judgment entered in favor of the Company in its refund suit
pending in the U.S. Court of Federal Claims. For additional information
regarding the Company's tax case, see Item 3 to the 1994 Combined
Form 10-K.
EXHIBIT 99(f)
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
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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 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 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 Public Utility Commission of Texas (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 (FERC) to order utilities to transmit power generated by both
regulated and unregulated entities to other wholesale customers, and efforts are
underway in 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 re-enactment to the
Public Utility Regulatory Act (PURA), which governs electric regulation in
Texas.
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Traditional utilities such as HL&P also face increased competition from
alternate energy sources, primarily natural gas. Gas suppliers increasingly are
seeking to supplant traditional electric loads with gas-powered equipment, such
as gas-powered chillers in air conditioning installations.
HL&P continues to maintain an aggressive approach in attempting to
preserve its existing customer base. HL&P has instituted various programs to
reduce its costs and has adopted aggressive marketing programs to identify and
respond to customer needs. One example is HL&P's development of the San Jacinto
Steam Electric Station, a rate-based cogeneration facility that will begin
service in 1995. In addition, in February 1995, the Utility Commission approved
a new tariff proposed by HL&P that will allow special pricing for industrial
customers who can demonstrate the ability to obtain electric service on terms
more favorable than HL&P's traditional tariff offerings. While such pricing may
retain such customers and minimize the prospect that HL&P would be left with
stranded investment whose costs might have to be borne by customers who have no
other alternatives, HL&P's revenues and earnings will be reduced from such
pricing tariffs.
In addition, HL&P and nine other Texas investor-owned utilities are
supporting a legislative proposal for amendment to the PURA. That proposal calls
for (i) a streamlined resource planning process, (ii) competitive bidding for
new generation capacity requirements, (iii) regulatory incentives that reward
efficiency and innovation and (iv) granting utilities pricing flexibility to
meet the changing needs of their customers. These changes, if adopted in the
form proposed by the utilities, would enhance the flexibility of regulated
entities to address competition, while also providing utility customers with the
benefits of more diverse energy supplies.
Under rules adopted by the Utility Commission and under interconnection
guidelines adopted by the Electric Reliability Council of Texas, Inc., through
which a number of utilities and unregulated suppliers are connected, HL&P and
other Texas utilities have provided for movement of power for both regulated and
unregulated power suppliers at compensatory rates. Unregulated power suppliers
continue to seek additional access and more favorable pricing provisions.
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.
REGULATION OF THE COMPANY
FEDERAL
The Company is a holding company as defined in the 1935 Act; however,
based upon the intrastate operations of HL&P and the exemptions applicable to
the affiliates of HI Energy, the Company is exempt from regulation as a
"registered" holding company under the 1935 Act except with respect to the
acquisition of voting securities of other domestic public utility companies and
holding companies. The Company has no present intention of entering into any
transaction which would cause it to become a registered holding company subject
to regulation by the Securities and Exchange Commission (SEC) under the 1935
Act. In November 1994, the SEC issued a Concept Release that called for comments
on a broad range of topics relevant to regulation of both registered and exempt
companies under the 1935 Act. In calling for comments, the SEC acknowledged that
significant changes are affecting the electric utility industry, and in
responding, some utilities have argued for repeal or substantial modification of
the 1935 Act and the regulation it provides. At this time, no prediction can be
made as to what changes, if any, will result from this review by the SEC, but
repeal or significant modification to the 1935 Act may have an effect on the
electric utility industry. In addition, it is possible that changes to the 1935
Act and its interpretation would eliminate some distinctions between exempt and
registered companies in their regulation under the 1935 Act, possibly in ways
that would increase the regulatory burdens on exempt companies such as the
Company.
