ML20056D887
| ML20056D887 | |
| Person / Time | |
|---|---|
| Site: | South Texas  |
| Issue date: | 12/31/1992 |
| From: | Jordan D HOUSTON INDUSTRIES, INC. |
| To: | |
| Shared Package | |
| ML20056D884 | List: |
| References | |
| NUDOCS 9308180219 | |
| Download: ML20056D887 (178) | |
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Paparing for the future is seldom casy. Choices made today-even -
3 thoughtful, forward-looking choices-are often unpopular when 2 judged by today's conventional wisdom. And, in some cases,it may :
take years for those decisions to prove their merits.
Throughout its history, however, our company has grown and
~q profited by anticipating the shape of things to come and' aggressive-
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ly pursuing its vision. Our actions have not always been popular, ,
but they have prepared us to meet the realities of today's world. ,
-i We are not yet finished-nor will we ever be, Tomorrow will -
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tions from customers and investors. We are pmparing today for that ';4 H
future by continuing to develop our people, our systems and our 1 senices, while making the tough decisions that will lead to tomor-row'S success. .
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l TABLE DF CDNTENTS 1
2 CORPOR ATE HIGHLIGHTS 3 CORPOR ATE FROFILE 4 _ _
4 CH AIPM AN'S LETTER 'g
)
Houston Industries Incorporated and its subsidiaries are striving to be
.f . ;
(
performance leaders in their respective industries. The companies are i building competitive advantage through a combination of reliable senice, ,
, reasonable prices and attention to customer needs.
?
7 FIN ANCI AL REVtEW , $F l p;)r i
- Acco mting changes and other one-time items had the net effect of i boosting earnings. Operating earnings declined, as mild weather l y _ ,
depressed electricity sales, but KBLCOM's financial performance .
continued to strengthen. l
]
i !
11 EXPL ANATION OF TERMS USED IN THIS REPORT f l>
13 HOUSTON LIGHTING & POWER COMPANY g ( j
~~
liL&P operates in one of the nation's most competitive markets for [
- ,1y" q. ._
electricity generation. Even so, the company continues to build its
( .r {." f ? Q g .; '
^
j t
- commercial and industrial customer base. A recent performance improve- ;
ment program should further solidify HL&P's competitive advantage. ,
n -
?
]
UFI continues to efficiently supply HL&P's needs for coal and lignite. .
j UFI is now marketing a variety of consulting, transportation and materials !
r
' ~ "
handling services in the U.S. and internationally. !
23 KELCOM INCORPDR ATED ' :l. ~7' '
hd j '
g -'
}
KBLCOM continued to improve its operating performance, thanks * ,
i m.o .
to new senice offerings and continuing cost contral efforts. 2+.L .- + .
,g ,
F 5
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CDRPORATE HisHLICHTS ;
(DOLLARS IN WOUSANDs, EXCEPT PER SHARE AMoUT!5) 1992* 1991"' 1990'" % Change (91-92) ;
(YE AR ENDED DECEMBER 31) '
Operating Revenues S 4,5 %,388 S 4,443,739 5 4,178,576 3.4 Operating Expenses S 3,653,974 S 3,417,783 $ 3,231,897 6.9 Income Before Cumulative Effect {
of AccountingChange S 340.487 S 416,754 S 342,789 (18.3) ,
Cumulative Effect of Accounting Change S 94,180 S (219,718)
Net Income S 434,667 S 416,754 S 123,071 4.3 l 799,908 651,807 Cash Flow from Operations .__ _
S
$ 869,884_ _ S_ _ __ _ (8.0) .
l Return on Average Common Equity 13.4 % 12.7 % 3.6 % i Earnings Per Share Before Cumulative . [
Effect of Accounting Change S 2.63 $ 3.24 S 2.70 (18.8) :'
Cumulative Effect of Accounting Change S .73 $ (1.73)
Earnings Per Common Share 5 3.36 S 324 S 0.97 3.7 [
Dividends Per Common Share S 2.98 S 2.96 S 2.96 0.7
( AT YE AR END)
Book Value Per Share S 25.36 $ 24.96 S 26.76 1.6 .{
Market Value Per Share S 45.88 $ 44.25 $ 36.75 3.7 :
Market to Book Value 181 % 177 % 131 % i
- Price to Earnings Ratio 13.7 13.7 - . - . -
N/M+ _ _ - -
Total Assets 5 12,417,501 S 12,165,164 S 12,044,755 2.1 !
Long-Term Debt a S 4,756.956' S 5,074,431 S 4,746,924 (6.3) !
Shareholders' Equity S 3,284,713 S 3,232,217 S 3,430,374 1.6 i
. Preferred Stock n' S 578,188 S 459,612 S 568,320 25.8 Capitalization m S 8.619,857 S 8,766,260 $ 8,745,618 (1.7) -
Common Shares Outstanding (000) 129,514 129,514 128,171 0.0 Number of Common Shareholders 72,504 72,825 74,943 (0.4) ;
Number of Employees. . . . . . 11,576 13,289 13,084 (12.9)
~ - - . - - . - - - . - . . _ - . . . . -
'" The 131 and 19% data has leert restated to nilect the cffects of the adopt!'n m IN2, wnh wstatement to January 1,19%), of Statement of <
lma"icial Accountmg Standards No.109. 'Accountmg for income Taxes " The cumulative effect of all years pnar to I9# are nilected in 19% net income.
- The 1N2 cur Marive cliect relates to the change in accounting for rewnues includes current matunties
- Not meanindul due to restatement for >
accountmg change PERCibi 0F Attii8 FIRCINT Bf RIVikBI8
"4 3 5 IIIAP ,
B KIILCOM* I ei E UM [
E Other ,
I
- KilLCOM revenues do not include Paragon Communications, a cable ;
television partnetship. !
B4 23 11 E3 5 12 2 [
i I
.l CDRPDRATE PROFILE l Houston Industries incorporated is a diversified holding company involved in the electric utility, cable television and utility senices industries. .
, Houston Lighting & Power Company is the nation's eighth largest elec- ,
,. Through its electric utility tric utility in terms of kilowatt-hour sales. HL&P provides electric senice to I and cable television sub-a 5,000 square-mile area including riouston, the nation's fourth largest city.
sidiaries. Houston industries With more than 1,000,000 customers, KHLCOM Incorporated is one of - ;
serves some of the natian's :
largest inerropohtan areas. the nation's 20 largest cable television operators. KBLCOM directly senes j approximately 577,000 customers in four states I and owns a 50 percent interest in Paragon ,
Communications, a cable television partnership ;
i sening about 901,000 customers. [
Utility Fuels, Inc. provides coal supply, transporta- l tion and handling sen ices for six HL&P generating units !
as well as full-senice railcar leasing, power plant testing and training for nonaffiliated companies. UFI manages f
a fleet of 3,000 railcars, the second largest private fleet of I Hil-P !
provides electrie e al-carrying railcars in the ration.
l senrice to the Ilouston-Gulf Coast area, I tchile KBLCOM provides cable servias in San I$810N 8T ATEMENI Antonio and Laredo, Texas:
Orange County, Cahfornia; The mission of Houston Industries Incorporated is to maximize share-Portland, Oregon and . i holder value and satisfy ,ts i customers' needs, while provid.mgits employees :
hfinneapolis. h1innesota. i
] y, a rewarding and productive work ernironment and conducting its affairs -
, l
? hah w c=*sm= r responsibly in the community.
- , e name,c.w sm -
] Houston Industries will accomplish this mission by creating a corpomte -
) vision of successful growth, by carefully managing its assets and by integrat- l ing its businesses through effective planning and allocation of resources.
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10 OUR INVESTORS i llouston Industries took a number of steps in 1992 Results at KBLCOM wen stronger than expected.
to further strengthen its long-term performance out- KHLCOM's net loss fell from 557 million in 1991 l
! look. These actions ranged from renegotiation of fuel to $21 million in 1992. Basic subscriber growth was contmets and refinancing of securities to development slightly above 3 percent, and KHLCOM continued of new products and senices. Some of these efforts to develop nontraditional revenue sources such as advertising sales and digital audio service.
fo 'j 7< _
, KBLCOM also benefited from reduced interest 1
! expense and improved profitability at Paragon 1
l Communications, its cable television pannership.
l KHLCOM's income tax expense was reduced in both years due to the 1992 adoption of an accounting change.110 wever, a change in state franchise taxes largely offset this tax benefit in 1991.
Paragon Communications, which was our original 1986 venture into cable television, became profitable proved to have an immediate benefit in 1992. A in 1991. We expect KBLCOM to become profitable program aimed at achieving sustained excellence in in 1994 and to be a significant earnings contributor in HL&P's operating performance helped to counteract the years ahead.
the effects of milder than normal weather and sharply 1 am pleased with our company's progress. We are rising property taxes. Cost controls at KBLCOM building a strong competitive advantage in our core contributed to improving gross margins despite a businesses through a combination of reliable senice, sluggish economy. reasonable prices and attention to customer needs.
Houston Industries earned $435 million, or $3.36 We also have achieved productivity improvements per share, in 1992. compared to $417 million, or $3.24 without compromising the reliability and high-quality per share,in 1991. Cash flow from operating activities customer senice for u hich we are known.
declined RO percent to 5800 million in 1992. Return IIL&P already 6 a long and successful operating on equity was 13A percent. compared to 12.7 percent record in one of'1e nation's most competitive markets the presious year. The 1992 numbers reflect several for electricity p neration. We are prepared for compe-nonrecurring items. some negative and some positive. tition in our cah!c business as well. We've continued flowever, the net effect is that reported earnings are to upgmde our cable transmission system. Our systems somewhat higher than our operating results. These provide an unequalled combination of senice, quality nonrecurring items are fully explained in the financial review section.
4
1 l
programming and price. We also believe that the We will be faced with new issues this year as infrastructurc we have built is superior to ahernative Congress grapples with such matters as the national technologies for providing tomorrow's high-quality, debt, health care and energy taxes. At the state level, high-speed entertainment and communications. the Texas legislature will review and possibly revamp In 1992, Houston Industries also made its first the structure of the regulatory system under which international utility investment, when a consortium Texas electric utilities operate. We will closely monitor ;
including our company was the successful bidder progress on these issues and aggressively fight to e on an electric distribution system in Argentina. We defeat legislation or trgulatory changes which will believe we can apply our utility operating expertise to harm our customers or shareholders.
international opportunities to achieve faster growth I remain confident that we will continue to build and higher returns than are currently possible in the value for our investors, while meeting the needs of domestic utility industry. our customers, our employees and the communities Performance improvement and strategic invest- we serve. Our past actions have demonstrated that, ments are aimed at one central objective-to be a through visior and hard work, we can both overcome leader in the industries in which we operate. That difficult obstacles and capitalize on opportunities. I does not necessarily mean we are striving to be the appreciate the commitment of the people of Houston largest company in those industries, since size alone Industries, who have made our past successes possi-does not guarantee success or profitability. However, ble, and the support of you, the shareholder. We we want to be among the top performers in our will continue to strive to merit your confidence in industries, both operationally and financially. Houston Industries.
To be successful. it has become critical that we maintain a high-profile, proactive presence in the public policy arenas. Over the past two years, for example, we led a determined fight against an over- Ovv -
whelming force of special interests to defeat portions Don D. }ordan of the National Energy Policy Act. As originally pro- Chairman, President and Chief Executive Officer posed, several provisions of the legislation threatened both our industry and our customers.The Act became Houston, Texas law in October 1992, and due to the combined efforts March 1,1993 of Houston Industries, the Edison Electric Institute and the Electric Reliability Coalition, the final version provided a number of consumer protections that otherwise would not have been included.
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I FINANClAL REVIEW 'I Houston!ndustries was Houston Industries reported e _,nings of $434.7 million, or $3.36 per share, formedin 1976 to provide in 1992, compared to $416.8 million, or $3.24 per share, in 1991. Results greaterfinancialand for 1992 reflected sevemi one-time items, which had the combined effect operationalflexibility of increasing reported earnings. Cash flow from operations declined $70.0 and to allow for selective million to $799.9 million. Return on common equ:ty was 13.4 percent in ~ diversification where 1992, compared to 12.7 percent in 1991. opportunities arise. - As growth in the U.S. electric utilityindustry has DU8 TON INDUSTRIES ADOPTS ACCOUNTING STAND ARD slowed, this flexibility and diversity has proven to be Financial results for the years 1990 and 1991 have been restated to reflect a strength for Houston lil's adoption of Statement of Financial Accounting Standards (SFAS) No. Industries. As a result, 109, which requires that deferred txes be recorded to reflect the future tax consequences of differences that exist between the book and tax bases of HIenvisions a future of above-average growth and assets (other than goodwill) and liabilities. rising returns. Adoption of SFAS No.109 resulted in a $219.7 million charge to 1990 earnings and an equivalent decrease in shareholders' equity, but it had no effect on cash flow. Most of the charge stemmed from KBLCOM's 1986 and 1989 acquisitions of cable television systems. Since the n lated tax liability will already have been recognized, KBLCOM's projected annual carnings , per share will be 5 to 6 cents higher than previously anticipated. ; ONRECURRING ITEMS IMPACT 1992 EARNINCE Houston Lighting & Power earned S441.9 million, or $3.41 per share, in 1992, compared to 5448.3 million, or $3.48 per share,in 1991. HL&P's
- 1992 carnings were negatively impacted by a one-time, S57.0 million after-tax change resulting from the company's restructurir:g of opemtions. :
However, a change in the way HL&P accounts for electricity sales boosted its 1992 earnings by $94.2 million, more than offsetting the impact of that one-time charge. HL&P now records revenues at the time electricity i 7
i l "To serve our customers best, we must be an bjective of maintaining a consistent dhidend policy which balances the l attractive investment.
, To be attractive, we needs of shareholders with the corporation's need for financial flexibility.
l t - , must offer investors an HI has paid uninterrupted quarterly dhidends since 1921. Dhidends
- opportunity for growth." paid in 1992 totaled $2.98 per share, which provided common shareholders a yield of 6.7 percent, based on the stock price at year-end 1991. This com- i l Don D. Jordan l Chairman, President and pared to an average yield of 5.9 pen'ent for companies in the Dow Jones Chief Executive Officer Utih.ty Avemge.
flouston Industries
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President and Treasurer
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, William A. Cropper awans .
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- the start of tradmg on the -
b New York Stock lichange. . liouston industries is listed - - R 1 Ahw ' on the NYSE under the sym. f ' l , l bol110U. Dividends paid on b HI common stock closed at $45.88 per share on December 31,1992, ! l common stoch gh compared to S44.25 at year-end 1991. HI's shareholders realized a total I" #2 I 1
~ p. return (dividends plus price appreciation) of 10.8 percent during 1992
# A.
l totaled and an annual compound return of 18.4 percent for the five years ending December 31,1992. This compares to total returns of 7.6 percent and 15.9 l py,3g, I which provided shareholders percent for the S&P 500 for the same periods. The Dow Jones Utility a yield of 6.7 percent. Average realized a total return of 4.1 percent in 1992 and a five-year annual l compound total return of 12.4 percent. All of these total return numbers omarmas ruicommos se assume quarterly reinvestrnent of dividends. l l vaun l [ l 1 & 1 q sm s a :q a q l l
, a !j 'l j j DUSTON INDUSTRIES INVEST 8 IN ARGENTINA q; gdlI !l I
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.1 i $100 j i j i [j HI continues to assess opportunities for expansion in selective areas where i , a -
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- ? (1 '{ it can apply its operating expertise to achieve a competitive advantage and
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,' i above-average growth. In 1992, H1 investigated a number of international l
l 1 dl n l opportunities as foreign governments privatized electric utility operations. l i; s i $l l1l 3 j NM 1%4 1% !W1 1492 9 ! l l l
1 l 1 FINANCIAL REVIEW Houston Industries was liouston Industries reported eamings of $434.7 million, or $3.36 per share, formed in 1976 to provide in 1992, compared to $416.8 million, or $3.24 per share, in 1991. Results greaterfinancialand for 1992 reflected several one-time items, which had the combined effect operationalflexibility ofincreasing reported eamings. Cash flow from operations declined $70.0 j and to allowfor selective million to $799.9 million. Return on common equity was 13.4 percent in diversification where 1992, compared to 12.7 percent in 1991. opportunities arise. As growth in the U.S. , electric utilityindustry has GUSTON INDU4TRIES ADDPTS ACCOUNTING STANDARD slowed, Ihis flexibilityand diversity has proven to be Financial results for the years 1990 and 1991 have been restated to reflect a strength for Houston HI's adoption of Statement of Financial Accounting Standards (SFAS) No. , Industries. As a result, 109, which requires that deferred taxes be recorded to reflect the future tax consequences of differences that exist between the book and tax bases of , HIenvisions a future of above-average growth and assets (other than goodwill) and liabilities. rising returns. Adoption of SFAS No.109 resulted in a $219.7 million charge to 1990 camings and an equivalent decrease in shareholders' equity, but it had no effect on cash flow. Most of the charge stemmed from KBLCOM's 1986 and 1989 acquisitions of cable television systems. Since the related tax liability will already have been recognized, IGLCOM's projected annual earnings per share will be 5 to 6 cents higher than previously anticipated. ONRECURRING ITEMS IMPACT 1992 EARNINGS Houston Lighting & Power camed $441.9 million, or $3.41 per share, in 1992, compared to $448.3 million, or S3.48 per share, in 1991. HL&P's 1992 camings were negatively impacted by a one-time, $57.0 million after- i tax charge resulting from the company's restructuring of operations. However, a change in the way HL&P accounts for electricity sales boosted its 1992 earnings by $94.2 million, more than offsetting the impact j of that one-time charge. HL&P now records revenues at the time electricity ( i 7
+
is consumed rather than at the time the customer is billed. This change, l. { which provides a better matching of revenues with associated expenses, had no effect on cash flow from opemtions. i ! i : Without these one-time items, H L&P's carnings would have been S404.7 Results for1992 reflected sev. crat one-timeitems, rehich million, or S3.13 per share. Weather contributed to HL& P's compamtively had thecombinedelfect of lower 1992 operating earnings. HL&P dmates that milder than normal increasing reported earnings. i weather reduced its base revenues by nearly $100 million compared to 1991, j inaddition 1990carnings an abnormally hot year.T..is was partially offset by the addition of approxi- have been restated to reflect f mately 22.000 customers in 1992. the cumulative ef/cct of ' ] HL&P's residential kilowatt. hour (KWH) sales decreased 3.6 percent adopting as No.109. , compared to the previous year. Commercial and firm industrial KWH sales { were almost unchanged from 1991. However, on a weather-adjusted basis, - m mag l residential. commercial and firm industrial sales grew 3.0 percent,2.3 per- usuan. .t son,r. : cent and 0.8 percent. respectively. ,,
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{ KELCOM lost $21.2 million, or S.16 per share, in 1992, compared g um to $37.4 million, or S.45 per share, in 1991. KBLCOM's results improved I _ 53m - r due to increased revenues, improved operating margins, reduced interest expense and increased camings from its cable television partnership, s2m . f Paragon Communications. ;
.stoo KBLCOM's revenues increased $12.0 million in 1992, while operating .l expenses remained constant due to continued cost control programs. The - - -
l 1988 1989 1990 IWI 1942 .p' gross operating margin increased to 40.1 percent in 1992, compared to 37.6 percent the previous year. ; ransess PER SHARE I KBLCOM's interest expense decreased $18.1 million, or 20.5 percent, l due to lower interest rates and lower debt balances resulting from the con- um - , ' E version, in March 1992, of $117 million ofintercompany loans to equity. , f This conversion, which affected loans from Hi to KBLCOM, had no impact - s3 m
)
on consolidated earnings or capital structure. s2m Utility Fuels reported earnings of $27.4 million, or S.21 per share,in I 1992. compared to $23.9 million, or S.19 per share, in 1991. ' sim _ i _ _ L-1988 1989 1990 1WI 1942 BOARD RAISEE DIVIDEND g ,, ,, accumting cinanges j In July, H1's Board of Directors voted to raise the quarterly dividend on ;'"*,",',,%, '"'""'"$,", j,,,, common stock by one cent per share, bringing the effective annual dividend
**Larnmg1 pershave before cumulatne rate to S3.00. The Board reviews the dividend rate annually with the c aotou-uurmtaa ,wm:27o ,
i in J9 Wand s263 m lW2 ) 8 :
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"To serve our customers
- ; best, we must be an bjective of maintaining a consistent dividend policy which balances the attractive investment.
To be attractive, we needs of shareholders with the corporation's need for financial flexibility. H1 has paid uninterrupted quarterly dividends since 1921. Dividends - j must offer investors an , opportunity for growth.'. paid in 1992 totaled $2.98 per share, which provided common shareholders l a yield of 6.7 percent, based on the stock price at year-end 1991. This com.. l Don D. fordan l Chairman, President and pared to an average yield of 5.9 percent for companies in the Dow Jones l l l Chief Executive Officer l llouston industries Y '#E'*
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._ 1 l l President and Treasurer ,
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J William A. Cropperawaits
- the start of trading on the . .
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New York Stock Exchange. flouston industries is hsted K j on the NYSE under the sym-l bol110U. Dividends paid on ! l common H1 common stock closed at S45.88 per share r,n December 31,1992, I
,(gj stock compared to $44.25 at year-end 1991. HI's shareholders realized a total i ; in m2 h; A 3 return (dividends plus price appreciation) of 10.8 percent during 1992
- l ,ogages a- .ez j j .M and an annual compound retum of 18.4 percent for the five years ending
~'
,g, December 31,1992. This compares to total returns of 7.6 percent and 15.9 l
l which provided shareholders percent for the S&P 500 for the same periods. The Dow Jones Utility a yield o/ 6.7 percent. Average realized a total return of 4.1 percent in 1992 and a five-year annual l j j compound total return of 12.4 percent. All of these total return numbers l
) DMDENDS PfA COWON EMARE assume quarterly reinvestment of dividends.
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j s L U h j i h s2.00 j HI continues to assess opportunities for expansion in selective areas where j p. s it can apply its operating expertise to achieve a competitive advantage and 0 ; ; above-average growth. In 1992, HI investigated a number ofinternational 1 <
- 1 ,
opportunities as foreign governments privatized electric utility operations. ] 4 i _ 1._. L j l - - - - > - i l
t I in November, a consortium including H1 was the successful bidder on l l an electric distribution system privatized by the government of Argentina. Located approximately 20 miles south of the city of Buenos Aires, the La i P'ata system serves a population of 710,000 in a 2,260 square-mile area. H1's t _r
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ppt-rr 3 Y ' flouston industries made {lffhQ
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- consortium including 111 was tt n bn: ? O ..
I the sucwssful bidder on an
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a n . . Argentina. portion of the purchase price was approximately $38 million. Mi recognizes F that international operations bear certain risks, such as currency fluctua- , tions and potential political instabilities. and has factored those risks into i
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its acquisition analysis. ! W P l00STON INDUSTRIES ACTIVE IN REflN ANCING
! u i .
In 1992 capital expenditures were met through funds generated interaally f from operations. Excluding AFUDC. refinancings and maturities of long-term debt. capital expenditures for i11 and its subsidiaries totaled $382 million in 19C. compared to 903 million in 199L Projected capital requirements for 1993.1944 and 19+3 are 5449 million, $550 million and 5528 million. respectis ely. r Although capital needs were modest by historical standards, Hi and j 111,&P continued to take advantage of low interest rates to reduce their j cost of capital. During 1992, HL&P strategically combined tender offers f with redemptions to refund existing obligations with lower-cost debt or pre-ferred stock. Refinancing efforts by i11 and its subsidiaries during 1992 reduced interest and preferred dividend expense $21.8 million annually. ) Financing activity for 1992 is fully discussed in the liquidity section of Management's Discussion & Analysis. 10
w E X P L' A N A T l O N DF TERMS U S E D' IN THl8 REPORT t i Allowance forfunds used The cost of financing constmetion projects. Financing costs are added during construc+ ion (AFUDC): to direct construction costs for recovery after new facilities are placed in service. During construction, AFUDC increases income but'does not .- increase cash flow. Capacity factor The amount of elect 2icity produced by a generating unit expressed as a percentage of the maximum amount that could be produced if the unit . operated continuously at 100 percent power. Cash flow- Cash revenues less cash expenses-specifically excluding noncash expenses, - such as depreciation. Deferred accounting: An accounting treatment which allows a utility to defer operating and - depreciation costs associated with new facilitier and continue accruing . canying charges while awaiting approval of rates which reflect these costs. Use of deferred accounting provides an opportunity to recover these costs at a later date and prevents a drain on earnings during the regulatory process. Earnings per common share: Net income earned for the reporting period dhided by the average number of common shares outstanding for the period. Firm sales: Electricity sales, excluding spot sales to other utilities (off-system sales) and industrial sales which can be curtailed under certain circumstances'- (interruptible sales). Megawatt: One thousand kilowatts. . Net income or earnings: Earnings available to common shareholders after all expenses, financing costs and taxes are paid. Pay-per-view- Special attractions, such as concerts or sporting events, which are not - included in rnonthly fees for basic or premium cable service but are available for viewers to order. peak demand: The highest hourly demand for electricity in a given time period, excluding demand which is int .ruptible. Retained earnings: The portion of net income which is retained for reinvestment in the business . mther than paid to shareholders in dividends. Return on average common equity: The rate of return earned on shareholders' equity. It is calculated by dhiding net income by average shareholders' equity. Sharei;olders' equity: The book value of common shareholders' investment in a company. It is the amount paid in by shareholders for common shares plus retained earnings. , Totalreturn: The increase in the value of a shareholder's investment, considering both - dividends and changes in the share price. Yield: The return provided to shareholders in dividends. It is calculated by dhiding the annual dhidend per share by the stock price. t I
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HOUSTON LICHilNG & P0WER COMPANY , I Years before the energy In late 1991, HL&P launched a program designed to identify ways to crisis of the 1970s disrupt- improve its long-term operating performance without compromising the; ed fuct supplies and sent company's high customer senice standards. The program was based on f prices soaring,11LGP was systematic analysis rather than across-the-board cost reductions. Months planning to diversifyits of study invohing all levels of management and staff produced over 3,400 fuel sources. In the years ideas, which ranged from increasing plant manager responsibility and that followed. HLGP's authority to consolidating the company's bill payment centers. Nearly - average cost of gas rose 3,200 of these ideas were accepted, and most were implemented in 1992.~ rapidly, climbing from 20 Undoubtedly, the most difficult aspect of this program was eliminating cents per million Btu in approximately 1,600 positions. With the company's lag:e-scale power plant - . 1970 to $152 per million constmetion complete for the foreseeable future, HL&P needed to realign Btu in 1982 Naturalgas its work force to match its operating requirements. HL&P's management l prices havefallen consid- team took great care to make the work force reduction process equitable crably sincepeaking in the and provided terminated employees a fair severance package. ' early 19S0's, but rcnewed Total savings imm the ideas implemented in 1992 are estimated . , price r olatility makes it at $100 million annually, although a portion of these savings is being offset - clear that fueldiversifica- by increases in other, noncontrollable costs. For example, property taxes tion has been a prudent have accelerated rapidly as Texas wrestles with ways to best fund its public 4 means to protect cus- school system. tomers from overdepen- One of the primary objectives of HL&P's performance improvement dence on a single fuel. drive is to avoid the need to increase electric rates as taxes and other non-HLGP remains one of controllable expenses inevitably increase. The regulatory process associated the nation's largest pur- with rate increases is lengthy, expensive and carries an uncertain outcome. chasers of naturalgas, but In addition, the company believes its competitive position will be strength-the use of ahemative fuels ened ifit can maintain its current rate structure while the price of alternative helps to shield customers power sources continues to rise. against the shock of rapid Another key to maintaining competitive rates is the company's ongoing i swingsin naturalgas effort to control fuel costs. Fuel is the largest single expense the company l prices. incurs to serve its customeis. In 1992, HL&P's continued efforts to obtain long-term natural gas contracts resulted in three fixed-price, five-year agree-ments for a total of 50 billion Btu of gas per day, or approximately ; 7 percent of HL&P's forecasted gas demand.To enhanca the security of supply in the volatile gas market, HL&P obtained an additional five-year contract for gas at market prices, with significant flexibility in delivery rates. 13 ' f
I 1 1 , HL& P's average cost r9 fuel in 1992 was $1.85 per million Btu, a 5.7 per- I cent increase from $1.75 in 1991, but signiF.cantly less than the $3.37 paid in 1982. i l
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hY DMPETITION- AN OLD G AME FOR HL&P - 4 l : MMy/ j For more than a decade, HL&P has operated in one of the nation's most NF l competitive markets for electricity. HL&P's largest industrial customets are . j/ predominantly petroleum refiners and petrochemical producers whose man- ;
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l payment and service loca-ufacturing processes typically require large amounts of steam. In some cases, tions into one at its new l the system used to make steam also generates electricity-a process known Personal service center. The ' as cogeneration. r new centerpmvides more
- HL&P works aggressively to retain these customers. The company has ; contement Parkmg and bus
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- some of the most attractive industrial rates in the country and its power
' I at the other locations, as well . 2 consultants provide customers with extensive information about the avail-as more representatives on i i ability and cost of electric service as well as computer modeling software hand to assist customers. which helps analyze the economics of self-generation. In addition, HL&P The building being leased can provide information on industrial conservation as well as assistance . for the new center is arrmxi-
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l on energy-efficiency audits. , remodeled at very low cost by the company's architecture 1 and facihtscs management }
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i "The companics that will succeed in this new order will be those who k,q{h, operate rheir business as the low-cost producer... k$$ E ATHER HtIRTS ELECTRICITY S ALES who listen to customers.- Firm kilow att-hour sales of electricity declined 1.3 percent in 1992. and who respond to the Residential sales declined 3.6 percent primarily because temperatures were
- world of competition milder than in 1991. Commercial and firm industrial sales were relativel.v flat
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by newing it as an compared to the prior year. opportunity. "
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Hetm's weather in 1992 included massive flooding early in the year I Don a sykora and November storms that spawned tornadoes packing winds in excess President and Chic / Operating O//icer of 250 miles per hour. The storms that visited Houston in 1992 snapped Houston Lighting & power lines and destroyed transmission towen,. but overall damage to l Power
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f l Wallace meet with scott ; [ . . Hw! pas of Philbps M to I d:scuss ricctr city needs at ^ HL& P's transmission system was minor. Financially, the company was Philli;'s' imcu muuttmu hurt more severely by the mild temperatures through much of the year, j llouston COST Cf RECirJClif* Chemwal (cm NH which reduced base revenues by nearly 5100 million compared to 1991. 6 Com;>!cx in The mild weather also limited the summer's peak demand in 1992. , Pasadem ., qs The system peak of 10,783 megawatts was reached on July 30, though the Nf" d"- ] ,, maximum temperature on that day was only 95 degrees. This year's demand riectncin'
] :k was slightly below last year's peak of 10,908 megawatts, and it was well
. .! d below the 11,150 megawatt record set in 1990 when temperatures reached
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[ :y 104 degrees. Including interruptible demand, the 19c2 peak actually sen ed optens.
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thev werc was 11,638 megawatts, slightly higher than the 11,001 megawatts in 1991,
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,1 aNc to rre- -? d.-o HL&P expects annual growth in firm electricity sales and fimi peak demand 1
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f s remained the best source to Houston economy. While the oil industry has continued to downsize, i ' meet Phill;rs' petrochemical manufacturers have suffered only slight declines in demand elCctriciff TVyulVCr!W?l!L l I .a
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for their products. Local chemical producers have outperformed the indus-try due to timely plant start-ups and strong market positions. Area petrole-um refiners also have increased electricity consumption as they have For HL&P, caring for the brought on equipment to produce cleaner-burning gasoline and additives environment is a standard which reduce auto emissions. business practice that pre-dates many of the environ-mentalregulations that E800RCE PL ANNING EXAMINES M ANY OPTIONS exist today. E The company was one liL&P currently has adequate generating capaciti to meet the electricity of the first utilities to con- needs of its service area. As growth continues, however, the company will duct extensive studies to need to develop new sources of electricity and find additional ways to detennine thec//ccts of a manage the amount of electricity customers need or " demand" so that generating plant or cdja- existing generating resources are better utilized. cent bays and estuaries. Its Electricity demand can be managed by reducing the amount of electricity Cedar Bayou plant, built consumed through energy-efficient products or by shifting electricity use in the early 1970s, incor- away from peak periods. liL&P has implemented a broad range of demand-parated environmental side management programs. factors into the design of For example, llL&P's " Good Cents" new home program and retrofit its cooling water system. programs for existing homes promote the construction of energy-efficient Men management homes and the installation of energy-saving heating and cooling equipment. determined the need to in October, liL&P launched " Energy Partners," a system-wide program diversify HLGP's fuel designed to cycle residential air conditioners and heat pumps off for short sources, it obtained a periods during peak demand hours. The company's commercial efficiency long-term supply oflow- improvement program provides commercial customers with technical assis-sulfur coalandincluded tance and incentives to promote energy-efficient heating, ventilation and air scrubbers in the design of conditioning systems, lighting. structural design and motors. " Commercial its lignite units. Thanks to Cool Storage" encourages beneficial load shifting through a carefully con-this 1oresight. HL&P structed package ofincentives. already complies with the 11L&P's demand-side management program should reduce demand most recently enacted by 225 megawatts, or 1.8 percent, in 1995 compared to what otherwise restrictions on sulfur diox- would have been required. Making more energy available through improved ' ide emissions. energy efficiency helps control long-term energy costs and illustrates HL& P's commitment to meeting demand for electricity in an environmen-tally responsible way. 17
I i l < I On the supply side, purchased power is ene of the options HL&P is : l considering. HL&P is one of the nation's largest purchasers of cogenetuted -l 1
- power. The company currently purchases about 17 percent of its electricity 1
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from cogenerators and has four long-term capacity contracts which total , _,g h ) 945 megawatts. As part of its continuing efforts to reduce customer costs, 8 'N "- ! HL&P has negotiated increasingly favorable purchased power contracts. j l A new agreement signed in December, will provide an additional 50 - ccmtrolled switch to the i megawatts of power at a contract price ofless than 3 cents per kilowatt-hour. . *"' Side u"i' ol'hci'"i' co"- . ~i ditioners or heat pumps. In !
.The company's resource plan also m. eludes other supply options such 3 hot summer months, lil&P as construction of advanced gas *urbine generators. One innovative project, . can transmit a radio signal now awaiting approval by the Public Utility Commission of Texas (PUC). - which cycles the unit off for j would produce steam as well as electricity, using revenue from the sale of short periods on weekdars. <
i steam to reduce electricity production costs. Incrgr Partners is the largest l 1 program ofits typein Texas. i l ! - PEAK DtMAND urmwara ttutusen tmenuput+ semans> l ' ' L ANT PERFORM ANCE EXCEPil0N AL g , _ y 1 j 3 g g 2 -56 mmo HI,&P's existing plants performed well in 1992. In November, Unit 3 of the ; toum j company's Webster Generating Station completed 626 days of continuous i 3.000 , operation, a post-World War 11 record for a large U.S. fossil fuel generating 6.000 statian. This outstanding performance proved the effectiveness of technical { j 4.000 enhancements which HL&P had made to the unit. i
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"We want our cus-l l
tomers, our regulators and our community lead. Unit 1 of the South Texas Project (STP), which was shut down for refuel-f
- ers to recognize that we ing in September, also set a performance record. STP Unit 1 generated 14.5 are a company commit- billion kilowatt-hours of electricity during the 533 days between refueling I red to energy e//iciency. outages, the most energy ever produced by a Westinghouse reactor during We want them to recog- a single fuel cycle.
l l' nize that we are a com-Both STP Units performed well in 1992. Prior to its refueling, STP l l pany committed to hold-Unit I had achieved a 93 percent capacity factor. For the full year, it ing down the cost of elec-j achieved a 66.1 percent capacity factor. STP Unit 2 generated 10.3 billion 'l \ tricity through efficis nt i kilowatt-hours of electncity m 1992, mak.mg it one of the nation's top pro-i management of our ! ducing nuclear generating stations. Unit 2, which was not refueled in 1992, , resources. " i achieved an annual capacity factor of 94.1 percent. The average capacity j j Don D. Sykora factor for nuclear plants in 1991, the most recent year for which information
- President and Chief
- Operating O//icer is available, was 70.8 percent.
Houston Lighting G STP also is performing well from a cost standpoint. Its production costs ! Eower i have been declining, and on a cost per kilowatt-hour basis, STP ranks i l l , ' f ; ; ? " *tWileMr /,g , .hy ; l V f. . WQ . .i 9 ,,_ _ Y. . L' '4' n w.,my, 9.. i ..:. . J ;. ; ,
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i - STP Unit 1 shut down W for refueling m .Septernber, , but not before setting a " -
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world record for the unost energy everproduced by a s Westinghouse reactor dunng . .
. y a single fuelcycle. During -y~
s ) 4 the 533 days between refuel- g ; ing outages, STP Umt i gen-erated 14 5 bilhon !.ilowat!- among the lowest-cost nuclear facilities. STP s 1992 station production cons l l hours of electricay. the were 1.41 cents per kilowatt-hour, compared to an industry average of 2.16 energy ec;uivalent of a cents in 1991, the most recent year for which information is available. l t 9 rnilhon tons of coat or ! 25 rnillion barrels of oil in early 1993, STP experienced technical and procedural problems which j I led to the shutdown of both units. Although the Nuclear Regulatory I i . , Commission has found that overall plant performance has been good, it is 4 j concerned about a decline in performance in some areas. As a result, STP 1 has been scheduled for a Diagnostic Evaluation Team inspection during the i 1 , 19 ,
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4 JL&P actitely supports ,
,& 'l .Q cnvironmentalresearch on
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y issues ranging from electro-l % ^' l . magnetic fields to
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4 #"'"P"'"' ? '?$ x ,i . Yltl,h e ofclean-coal spring of 1993. HL&P will work closely with this team to identify and cor-
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i n conjunction with scientists . rect the root cause of those problems. ] at Texas A&M University-1 Galveston HlbPis } l researching ghg y5g L- -- 'w; I 1 TP LEG AL ISSUES MOVE FORW ARD ofcoal f. N
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t combus- . HL&P also made significant progress in resolving STP-related legal issues in ' tion by-l j 1992. In October, after almost two years of consideration, the Dallas Ct it products to construct 1 of Appeals affirmed the 1989 jury verdict and judgment that rejected the , jf
"'"liCI"' j City of Austin's claims of STP mismanagement, fraud and deceptive trade
{ q reefs to I,g}g'k r ip
,h i pmetices. Austin had sued HL&P regarding the company's hand'ing of STP I support in its role as project manager. Austin has appealed to the Tens Supreme marine hie.
) Court. Earlier in the year, HL&P reached a settlement that resolved a related dispute with Central Power and Light, another STP owner. l l The Austin Court of Appeals also ruled on a PUC order that granted l HL&P deferred accounting treatment for certain costs associated with l l STP Unit 1. Based on a similar case invohing another utility, the court a 1 upheld the PUC's orders to use deferred accounting treatment for the unit's i j operating and maintenance costs, taxes and depreciation incurred after 1 ! it began operations in August of 1988. As in the case invohirm the other
- utility, the court reversed the PUC's decision to grant rate-base treatment
! for deferred carr3i ng costs associated with STP Unit 1 during the same period. However, in the similar case, the court noted the PUC could allow the utility to recover deferred carrying costs over time. The court's decision l is subject to appeal. At this time, HL&P cannot predict how the ruling l would actually be applied or its financial impact. t i 20 i I
i I "We are strongly posi-l l ; tioned to benefit ,hom i .
. . UTILITY FDEL8, INC.
l mcreasmg demand for low-sulfur Western coal, l l and are diversifying in i j other areas that fit our Sales of coa; and lignite f HL&P totaled 16.6 million tons in 1992, a i j . overallexpertise and 2 percent decrease from 1991. Since HL&P has no plans to build new offersignificant growth coal-fueled generating plants in the next ten years, growth opportunities < potential'" l related to business with HL&P are limited. UFI's resporise to this low-j F. Ken Smith growth scenario has focused on reducing costs and enhancing the efficien-
- President and Chief l Executive Officer cy of current operations, while pursuing other customers that can provide ,
Utility Tucls additionalgrowth and profits. I 1 4 .*qw g
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l HL&P, LTIalso is pursuing _' a expanded business with non- * , l l attiliated companies. UITs ; I investme<.Jn a radcar main- Like HL&P, Utility Fuels implemented an efficiency-impiovement effort : l l tenance joint-venture, for in 1992. UFrs program was desgned to systematically review its operations ; l cxample, helps the comp- and to climimte activities and senices which were not adding va!ue. The i t provide complete and com-program Ivsuhed in substantial productivity improvements ranging from
,' pet:trelv priced leasing l t..e reorganization of departments to the consolidation of payrolls, <
services for railcars to The company also is continuing efforts to expand its customer base carry coaland other bulk { l commodnics. beyond HL&P. UFrs expertise and growing knowledge ofinternational i j markets is positioning the company to take advsntage of opportunities l l created by trends toward privatization of national energy industries. UFl i i began targeting international markets in the late 1980s by offering training l l l and technical senices to coal supply and power generation entities in l i- , l Southeast Aria, Mexico and Central ar d South America. The company } i is currently focusing marketing efforts on the nearby Mexican market. ! i in addition to expertise in mining and materials handling, UFl provides 1 i domestic and international customers a variety of power plant senices, i such as testing and analyris to improve boiler and turbine operations. t 2I f i . l-4
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g . KBLCDM INCDRP0 RATED When Houston Industrics Despite a weak economy that slowed growth in basic subscribers, KELCOM acquiredits wholly-owned continued to strengthen its financial and opemting performance in 1992. cable television systems in Falling interest rates and ongoing efforts to control costs contributed to this 1989, 'nanagement recog- improvement, and KBLCOM continued to build revenues from new services. nized that the acquired At year-end 1992, KBLCOM directly served approximately 577,000 - systems were stronglyposi. customers in San Antonio and Laredo, Texas; Orange County, California; tioned to tap new revenue Portland, Oregon and Minneapolis, Minnesota. The cable business has sourecs with substantial Proven to be less recession proof than once believed. Annual growth in growth potential KBLCOM's basic subscribers, which averaged nearly 5 percent in 1990, has Capitalizing on the averaged less than 3 percent over the last two years. KBLCOM adapted to systems' state-of-the-art the .; lower-growth emironment by implementing programs aimed at improv. - technology and metropoli- ing the perceived value ofits senices, while carefully controlling costs. , tan locations. KBLCO3f KBLCOM's operating expenses remained relatively constant in 1992 , has establisheditscif as due to a number of cost control measures. These actions included some . an industry Icaderin pay. staff cuts, an emphasis on reducing bad debt expense, improved operating per-view and advertising efficiencies through quality improvements and less frequent use of outside revenue and has begun y contractors. The company also discontinued promotions which pmvided tap the commercial mar- free installations. This strategy has significantly reduced expenses related to - het for cable. churn, or frequent senice connections followed quickly by disconnections. As anticipated, these Price-value perceptions vary uidely among consumers. While some nontraditionaluses of customers see exceptional value in an entertainment package that includes cable technology have a broad range of senices, other customers want a more limited cable senice ! proven to be some of that is lower priced. KBLCOM has addressed these differences by develop-KBLCOAf's most prof _ ing an expanded range of senice and pricing options. itable and rapidly growing Efforts to improve customer satisfaction also included continued techni- - activities. cal enhancements and commitments to meet the senice standards devel - l oped by the National Cable Television Association. These goals establish response times for answering telephones, installing new senices and restor-- ing interrupted senice. In 1992, KBLCOM added over 200 miles of fiber optic cable to its 3 distribution system. By linking fiber optics to its existing coaxial cable, , KBLCOM is able to improve both the quality and reliability ofits signal transmissions, while expanding capacity to carry additional senices.
]
23
E i REMlUM AND PAY-PER-VIEW REVENUES DECLINE , l ! To revitalize premium services such as HBO and Showtime, KBLCOM l 1 I l began multiplexing in some markets. Multiplexing offers HBO and Showtime l on more than one channel, with programming staggered to proside an I additional siewing option at any given time. The customer receives the l additional screens of Showtime or HBO at no extra charge. Early results I l J s-f ,
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1 .._ . l customers an additional ( show a strong positive impact. And, while revenue from premium senices '"i"8 P'i " "' ""# f"*" l time. The customer esser:tial-3 I i continued to decline in 1992, KELCOM experienced growth in the number ' i ly receives two screens of ! of premium subscriptions throughout the second half of the year. ; 33gy,jme ,7 339,, no l Pay-per-view senices, which had presiously been one of KBLCOM's extra charge. Multipicxing ; fastest-growing revenue sources, also declined in 1992, primarily due to a as the strategyis called. ; j ungmres the ! lack of special event programming. A revitalized heavy-weight boxing dhi-i perceived tcalue l sion should boost pay-per-view revenues in 1993. KBLCOM remains an ofpremium j industry leader in pay-per-siew sales. Its monthly revenue totaled $3.34 for p,g7,,y. l each pay-per-view capable home in 1992-twice the indastry average. ming f' l l /*' . -
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,D E ALES CONTINUE TO GROW r 3 ,
i ! KBLCOM is one of the nation's few cable television operators with an f'; " i t l independent advertising sales subsidiary. Known as KBL-TV, this separate entity manages advertising sales for other cable operators as well as ; l KBLCOM's wholly-owned systems. A number of other cable operators i 24 i
"KatcOst is much I
rnore technologically rely on KBL-TV for this senice because of its established advertising
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advanced than the ar>cr-age cable operator. 77tc sales expertise. use of high technology Advertising sales revenues continued to grow rapidly under KBI TV's throughout our systems is direction, rising 28.3 percent in 1992. KBL-TV competes aggressively with increasing the calue of network broadcasters for advertising dollars, combining attractive pricing our businesses and with significant audience reach. putting our company in a stronger position for future growth." UDIO SERVICE DR AWE LISTENERS Gary G. tt'eik President and chic / KBLCOM also was one of the first cable operators in the nation to affer Operating Officer KBLCOAf a premium audio senice. Digital Music Express (DMX) uses cable to transmit about 30 channels of compact disc-quality music directly into a customer's home stereo for a monthly fee of about $10. Mf #) , l 1
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? Star Response. an interactive advemsmg service recently ; \
, introduced by KBLCOAf, ?A enables viewers to respond to .
televised oliers by pushmg buttons on Initial response to DMX has been encouraging. Even though DMX their telmi-was not introduced in KBLCOM's largest system until March, the service Sio!J's rcTCole *-
- already has more than 11,000 subscribers company wide. Customers who contwL --
--- subscribe to DMX indicate they are extremely satisfied with the senice. The H72cn the sen, ice was I- senice also is being marketed to restaurants, hotels and other businesses as used to an alternative to Muzak, the traditional supplier of background music for retail and commercial establishments.
Digital Music Lxpress. g KBl[OM's cable audio ser. h rice. it generated twicc the h BLCOM ENTERS COMMERCIAL TELECOMMUNICATIONS t! response of a toll free num- " ber that a;>peared i , the same FIBRCOM, KBLCOM's newest division, was created in January 1992
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to market the video and data transfer capabilities of KBLCOM's fiber optic I lines. KBLCOM has almost 300 miles of fiber optic cable which it uses 25
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4 to transmit cable telesision signals. Additional capacity on those hnes can : be used to provide high-quality, digital communications for businesses in x Q\ f I, ff[9:. i l l KBLCOM's sersice areas. A g \}' ' Through its Paragon Business Systems division, KBLCOM also markets ; KBLCOM )*
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1 cable video, commercial audio and data transfer services to retail and other . l . wd. lprovide 70 , business establishments. Over 60 percent of KBLCOM's commercial cus- comera cables, tomets sign contr4 cts of three years or longer, and commercial customers - closed-circuir facili- l ' rics with more than generate higher monthly revenues than residential customers. :
' 500 television sets ,
and event telephones. ~ '* 1 Q
$ Theproject will be one i s i AR AGON COMMUNIC ATIONS !
of the first major apphcations f d of digitaltelephone service [ a In addition to its wholly-owned systems, KBLCOM owns 50 percent of ; offered over cable television 12"cS-Paragon Communications, a partnership with Time Warner Cable. The pannership serves approximately 901,000 customers in the Tampa Bay area j 2 of Florida; the Northeastern U.S., including Upper Manhattan in New York l i i
- City; Texas and A:izona. ;
Paragon's revenues grew 11 percent in 1992, while basic subscribers l l grew 4 percent. Improving profit margins and reduced interest expense ., resuhed in higher earnings for the partnership in 1992. KELCOM's interest in the pre-tax earnings of Paragon was $24.9 million in 1992, compared to S10.3 million in 1991. d 6
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26 l
1892 F I N A N'C I A L 8 i HoUSfoN INDUSTR!ls lNCoRPoR ATE D gND sLBsIDI ARIES Eleven-Year Comparison of Selected Data 28 Management's Discussion and Analysis 30 Statements of Consolidated Income 38 Statements of Consolidated Retained Earnings 39 Consolidated Balance Sheets 40 Consolidated Statements of Capitalization 42 Statements of Consolidated Cash Flows 44 l Notes to Consolidated Fmancial Statements 46 Independent Auditori Report 61 ; Operating Statistits of HL&P 62 l Directors and Officers 63 l i i
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ELEVEN-YEAR COMPARISON OF SELECTED DATA not sTos tNDt stim s1Nconokuru ANDst estD!uals j The fo!iowing table sets forth selected financial data with respect to the Corrpan3's consohdated fmancial condition and consolidated results of rgwrations and should be read in conjunction with the Consolidated Financial Statements and the related notes included elseu here herein. tTHot's ANDS 01 not L Aies ITcr ri N f< su Ala utot Nis) 1992* 1991* 1990+ Revenues S 4,596,388 S 4,443.739 5 4,178,576 Income before cumulative effect of accounting change S 340,487 $ 416,754 5 342,789 Cumulative effect of accounting change 94,180 (219,718) Net income S 434f47 5 416.754 5 123.071 Earnings per share before cumulative effect of accounting change S 2.63 5 3.24 5 2.70 Cumulativeeffect of accountingchange .73 (1.73) Earnings per share S 3.36 5 3.24 S .97 Cash dividends declared per common share 5 2.98 5 2.96 5 2.96 l Return on average common equity 13.4 % 12.7 % 3.6% Ratio of earnings to fhed charges
- Including AFUDC+ 2.06 2.14 1.91 Excluding AFUDC+ 2.03 1.99 1.66 unumu Book value per common share S 25.36 5 24.96 S 26.76 Market price per common share S 45.88 S 44.25 36.75 Market price as a percent of book value 181"o 177 % 137 %
ouumn Total assets S12,417,501 512,165,164 S12.044,755 Long-term obligations (including current maturities)+ S 4,983,790 S 5,301,063 $ 4.973.925 Capitalization: Common stock equity 38 % 37 % 39 % Cumulative preferred stock of H L&P (including current maturities) 7% 5% 7"h Long-term debt (including current maturities) 55 % 58 % 54"; tunuu mnntas Construction and nuclear fuel expenditures (excluding AFUDC) S 336,035 5 375.520 5 358.455 Cable television investment S 44,306 5 26.624 5 31,186 m ar si u cn o o ut Percent of construction expenditures financed internally from operations 139% 130% 84 % Ratio of earnings to fixed charges
- Including AFUDC+ 2.68 2.95 2 80 Excluding AFUDC* 2.64 2.71 2.40 Ratio of earnings to fixed charges and preferred dividend requiremenisi 2.29 2.50 2.34 AFUDC as a percent of net income " 3% 14 % 25 %
The IN2 cumulath e effect relates to the chang m accounting for tes erwes See also Note H to the Consondated financial Statements
= The la41 and INO data has been restated to reflect the effects of the adoption in 1;N2. uith restatement to Januar31 1940 of SFAS No.109.
Atcountir g for income Taxes
- The cumulative effect of all years prior to 1940 are reflected in 1940 net income See also Note N to the Cong:hdated fmancial Statements
' Defore cumulain e effect of accountmg change ARDC mciudes HL& Ps deferred carrying costs and deferred return m 1W1.1990 and 1M ' includes CamAthe Preferred Stock subject to mandatory redemphon 26
YfAR E NDLD DE CEM01 R 31. 1959 1988 1987 1986 1985 1984 1983 1982 $ 3,789,780 S 3,540,918 $3,514,226 $3,430,592 53,951,427 S4,110,974 S3,920,557 $ 3,784,860 $ 413,452 5 395.254 S 434,958 $ 424,935 S 434,126 S 351,146 S 299,857 $ 116,629 5 413.452 5 395.254 5 434,958 5 424.935 S 434,126 $ 351,146 S 299,857 $ 116.629 5 3.32 S 3.34 5 3.74 5 3.81 5 4.13 S 3.69 5 3.50 $ 1.50 $ 3.32 5 3.34 5 3.74 S 3.81 5 4.13 5 3.69 5 3.50 $ 1.50 S 2.96 5 2.94 S 2.86 5 2.76 S 2.60 5 2.44 5 2.28 5 2.16 11.7'e 11.8 % 13.6 % 14.5 % 16.7 % 15.7 % 15.6 % 6.4% 2.19 2.36 2.78 2.69 2.88 2.77 2.90 1.79 1.81 1.82 2.09 1.96 2.18 2.33 2.68 1.47 5 29.05 $ 28.75 S 28.33 S 27.19 5 25.88 5 24.31 5 23.27 5 22.23 5 35.00 5 28.00 S 30.00 S 34.75 5 28.00 $ 22.50 S 19.38 5 20.00 1209h 97S6 106Sb 128S6 108Sb 9396 839b 9036 511.681,925 S10,186 '52 $9,704.1M $9,005,258 $ 8,590,780 57,486,153 56,543,716 S5,662,498 $ 4,987,801 5 3.597,253 $ 3.234,094 S3,208,938 $2,954,383 $ 2,684,911 52,275,942 $2,058,299 41 % 46";, 48% 47 % 46 % 45 % 46 % 44 % 6", 6% 6% 5% 6% 5% 5% u% 53 % 48"o 46 % 48 % 48 % 50 % 49% 50 % S 388,653 $ 543.862 S 662,055 5 755.273 5 893,053 5 997,982 5 913,825 5 754,965 S 1,339.680 $ 1.130 $ 49,701 5 26,249 76"o 37"o 29 % 35% 39% 37 % 42% 55 % 3.11 2.76 3.35 3.36 3.76 3.55 3.50 2.29 2.49 2 06 2.41 2.42 2.84 2.99 3.24 1.95 2.60 2.39 2.87 2.95 3.26 3.05 3.01 1.94 32 % 49 % 51 % 52"6 45% 31% 17 % 52 % - C 29
- - - . = _ -
MANAGEMENT'S D I S C U S S 101f AND ANSLYSIS OF FINANCIAL CONDjil0N AND RESULTS OF 0PERAil0NS , HorsToN INDL:ST Rits 1NCoRPOR ATED AND SL TstDI AR:Es IIIst1TSof onMiloNs [ 0; m a Consolidated net income of Houston Industries lacorporated (Company) for 1992 was $4343 million, as compared to $416.8 million and 5123.1 million for 1991 and 1990 respectively Consolidated earnings per share were 53.36 for 1992 as compared to $3.24 per , share in 1991 and 5.97 per share in 1990. , Houston Lighting & Power Company (HL&P). the Company's electric utility subsidiaq. contributed $3 41 to the 1992 consoli- [ dated earnings per share on income of $441.9 million after preferred dividends. Utility Fuels.1nc. (Utility Fuels), the Companyt coal supply subsidiary, contributed 5.21 per share on earnings of $27.4 million. KBLCOM Incorporated (KBLCOM), the Company s cable ; television subsidiary, posted a loss of 521.2 million or S.16 per share.The Company and its other subsidiaries posted a combined loss . ! of S.10 per share. I The increase in the Company's earnings in 1992 compared to 1991 was principally due to improved results at KBLCOM, partially [ offset by a slight decrease in earnings at HL& P. in each case for the reasons described below. The Company adopted Statement of Financial Accounting Star.dards (SFAS) No.109
- Accounting for Income Taxes'in the ;
fourth quarter of 1992, with restatement to January 1,1990. The new standard requires that deferred taxes be recorded to reflect the i future tax consequences of differences that exist between the book and tax bases of assets other than goodwill. The cumulative effect ! of SFAS No.109 adoption, as of January 1,1990, was a charge to earnings of $219.7 million in 1990, stemming primarily from acqui-sitions of cable telesision systems by KBLCOM.The primary impact was on 1990 earnings which. along with 1991 earnings, have , been restated.The effects on 1991 and 1992 results were not material HibP ; Gcnnal HL& P had income after preferred dhidends of $441.9 million for 1992. a decrease of 56.4 million from 1991 and an j increase of 550.5 million over 1990. HL&P's 1992 net income was positively impacted by 594.2 million associated with the adoption. ! in the fourth quarter of 1992. of a change in accounting principle which reflects a change in the timing of recognition of revenue from l electricity sales (unbilled revenues) effective January 1,1992. Unbilled revenues represent the estimated amount customers will be a charged for service received, but not yet billed, as of the end of each month.The accrual of unbilled revenues results in a better - [
- matching of revenues and expenses. The change in the method of recording electnuty sales from cycle billing to a full accrual method j' j impacts the pattern o' revenue recognition,which has the effect ofincreasing revenues and earnings in the second and third quarters tperiods of higher usag e) and decreasing revenues and earnings in the first and fourth quart (rs (periods of lower usage) Earnings were negatively impact td by an SS6 mdhon one-time pre-tax charge in the first quarter of 1992 related to the restructuring of opera-tions as a result of the inplementation of the Success Through Excellence in Performance (STEP) program discussed below. r j
Earnings were also i egatively im pacted by a decrease in kilowatt-hour (KWH) sales, due to substantially milder weather than in 1991 This weather impact was partially offset by Ihe addition of approximately 22,000 customers during 1992. The increase in j income for 1991 when compared to 1990 was due to higher KWH sales in 1991 and a $313 million increase in base rates imple-l mented in May 1991. while 1940 carnings were decreased by a write-off of disallowed costs of approximately $29 million. During the years 1990 to 1942, HL& Pi resuhs of operations were significantly affected by decisions of the Public Utility Commis- [ i sion of Texas (Utility Commissioni in connection with rate increase applications filed by H L& P relating to, among other things, the ! 4 commercial operation for the South Texas Proicct Electric Generating Station (South Texas Project). These decisions are discussed in ;
- Notes 10 and 11 to the Consolidated Financial Statements. which are incorporated herein by reference.
i 0;vratm Ihenw and saln Electric operating revenue for 1992 increased 41% over 1991 due to a rate increase effective May : 1991.which reflected recovery of costs pretiously deferred. partially offset by a decrease in fuel revenue and lower KWH sales. Elec- ! tric operating revenue for 1991 increased 5.9% orcr 1990 due to the May 1991 rate increase. higher KWH sales, and an increase in ! fuel revenue. Residential KWH sales in 1992 decreased approximately 3 6% from 1991 due to substantially milder weather, while , 1991 KWH sales increased 1 A over 1990 due to a 1.7% increase in the number of customers Commercial and firm industrial sales in 1992 were almost unchanged compared to 1991, while 1991 commercial and firm industrial sales increased 2.6% and 18% i i respectfully. compared to 1990 The mild weather in 1992, following a warm 1991, resuhed in 1992 base revenue being approximately 5100 million lower than in 1991 . HL& P expects compound annual growth in firm electricity sales to average 2.3% over the next 10 years. Despite the loss of some j industrial sales to self generation. HL& P expects to gain new customers as a resuh of industrial expansion in the area ; I l 30 i
Incl and Pu rc hased Iwcr Expense. Fuel expense for 1992 increased $27.8 million over the prior year, primarily due to the higher unit cost of fuel resulting from higher natural gas prices, which was partially offset by the lower unit cost of coal and increased gener-ation from nuclear and coal units. Fuel expense for 1991 decreased S27.1 million from 1990 primarily d ue to a lower unit cost of fuel resulting from lower natural gas prices which was partially offset by the higher unit cost of coal and lignite. The average cost of fuel used by H L& P during 1992 was 51.85 per million Btu, compared to 51.75 and $1.79 per million Btu in 1991 and 1990, respectively The combined cost of fuel used by HL& P and the fuel portion of purchased power was 1.95 cents per KWH in 1992, up from 1.86 cents per KWH in 1991 and 1.92 cents per KWH in 1990. Purchased power expense increased 542.4 million and $10.2 million in 1992 and 1991, respectively due to increased usage and escalating capacity charges paid to cogenerators. I STEP Program in October 1991, HL& P launched its STEP program, an internal effort to identify performance improvement opport u nities that could be made while maintaining the high level of customer satisfaction that H L& P has achieved in the past. Now that H L& P's major construction program has been completed and growth in the senice area has become more stable, the STEP pro-gram intensified HL& Pi focus on meeting customer requirements at the lowest possible cost in order to maintain the current level of base electric rates for an extended period of time. In January 1992, H L& P offered certain employees a voluntary early retirement plan and announced a se erance plan for those employees affected by recommended changes to HL& P's workforce. Approximately 500 employees accepted the early retirement offer, and an additional 1,100 positions were eliminated. Affected employees were released and offered the so erance package. H L& P recorded a one-time, pre-tax charge of $86 million in the first quarter of 1992 to reflect the restructuring of its operations As a result of the STEP program. HL& P operations and maintenance expenses for 1992 were substan-tially below the amounts originally budgeted for the year. Various le'g al proceedings, u hich the Company and HL& P believe to be immaterial and without merit, hase been filed by some former employees of H L& P under federal and state laws seeking damages alleged to have been caused by the STEP program.Tbere can be no assurance that additional proceedings asserting labor related claims will not be filed. The Company and H L& P believe that the resolution of such proceedings u ill not have a material adverse impact on the Company's or H L& Pt financial position. Opuanow:d Maintenance Expenses Depreciation and Amorn:ation. Other 7 axes and Interest. Electric operation expensesin 1992 decreased 52&8 million from 1991 primarily due to savirgs resulting from the restructuring of operations discussed above, u hile maintenance expenses increased $25 4 milhon primarily due to increases in production, transmission and distribution mainte-nance expenses. In 1991. operation and maintaance expenses increased 545.6 rnillion over 1990 primarily due to increases in administratice and general, production maintenance and distribution maintenance expenses.The increase in administrative and general expense was primarily attributable to a 59.4 million increase in employee benefits expense related to higher medical and pen- i sion expenses In addition, workers compensation increased 56.6 million over 1990 as a result of higher premiums and a one time I adjustment to recognize these costs on an accrual basis. l Depreciation and amortiration expenses increased 521.9 million in 1992 over 1991, while such expenses in 1991 were 523.7 mil-lion higher than in 1990 The 1992 increase is primarily attributable to the increase in depreciable property and to the amortization of deferred plant costs related to the South Texas Project which commenced when new rates were implemented in May 1991,while the 1491 increase is primarily attributable to the amortization of the South Texas Project deferred plant costs. Other taxes increased
$37.7 milHon in 1992 which reficcts an increase in state franchise tax due to a new required method of calculating franchise taxes,the positive effects of a state franchise tax refund in 1991 and higher property taxes in 1992 due toincreased rates and assessments.
Other taxes increased 52 5 million in 1991. reflecting the effects of a state franchise tax refund of $10.5 million in 1991 and a change in the franchise tax calculation methodology, offset by a change in the franchise tax privilege period and by higher property taxes due to new tax rates. Interest income m 1992 decreased $11 1 million largely because interest was received in 1991 on a refund of prior years' income taxes interest on long term debt in 1992 decreased $14.5 million, primarily due to refinancing activities and reduction of debt. Other interest expense decreased S19 2 million due to the reduction ofinterest on commercial paper and on fuel cost over-recoveries L 1992, and because interest was paid in 1991 on a payment of prior years' income taxes. Ynur1Stascs Nucl car Rcgulatory Corimstion (NRC) Diamostic Era!uation olthe South Texas Pro ltct in February 1993,the NRC advised H L& P that the NRC will conduct a diagnostic evaluation of the South Texas Project in the spring of 1993. The NRC's report on its diagnostic evaluation is not expected until the summer of 1993. For further discussion of the NRC diagnostic evalu-ation of the South Texas Project, see Note 9(f) to the Consolidated Financial Statements, which is incorporated herein by reference. 31
l i Utibty Facts l Utility Fuels had earnings of $27.4 million. S23.9 million and $51.4 million in 1992,1991 and 1990, respectively The increase in 1992 l carnings when compared to 1991 was primaiily i.he result of the recording. in 1991, of deferred taxes associated with the enactment ) of a Texas corporate franchise tax, which is partially based on taxable income, and lower interest costs, partially offset by decreased I returns on assets under contract with HL&P The decrease in 1991 carnings when compared to 1990 was primarily due to the record- l ing in 1990 of the cumulative tax benefit resulting from the adoption of SFAS No.109. KBLCOM Geneml KBLCOM experienced a net loss of $21.2 million in 1992 compared to net losses of $57.4 million in 1991 and $303.0 mil- j lion in 1990. Cable telnision systems owned by KBL Cable. Inc. (KBL Cable), which are located in four states, served approximately 5T ,wd 559.000 and 550,000 basic subscribers at December 31,1992,1991 and 1990, respectively For business segment informa-tion, reference is made to Note 16 to the Consolidated Financial Statements, which is incorporated herein by reference. , KELCOM's financial results for the years ended December 31,1991 and 1990 have been restated to reflect the adoption of SFAS , No.109 retroactive to January 1,1990.The cumulative effect of the adoption of SFAS No.109 increased 1990 s net loss by $241.1 , million. In addition, this accounting change had the following effects on KBLCOMt 1992,1991 and 1990 depreciation expense, ) income tax expense and netloss: iTHoLSODs oF DoLLAEs, YLAR L*.DED Dr cLMM R 3L 1M2 IW1 1990 Depreciation Expense $ 3,ti51 $ 3,851 5 3,851 IncomeTax Expense (10,889) (1,694) (13.839) Increase (Reduction) to Net Loss S (7,038) $ 2.157 5 (9.988) The positive impact of SFAS No.109 on tax expense in 1991 was offset by recording cumulative deferred taxes associated with the enactment of a Texas corporate franchise tax which is partially based on taxable income. The effect of such change under SFAS No. 109 was to increase 1991 income tax expense by $10 3 million. For information regarding the effect of the adoption of SFAS No.109, see Note 14 to the Consolidated Financial Statements, which is incorporated herein by reference. KBLCOM's future earnings outlook is dependent, to a large degree, on the success of its marketing programs to increase basic subscribers and premium programming senices,its success in marketing other senices such as advertising and pay-peraiew, and the , general economic conditions in the areas it scn es. In addition, the cabic television industry in general. including KBLCOM is faced with various uncertainties including the impact of recent reregulation of basic senice rates by municipalities, the potential entry of j telephone companies into the cable business and increased competition from other entities. Recent changes to the legislative and reg- , ulatory emironment in which the cable television ind ustry operates could limit KBLCOM's ability to increase prices charged for [ cable teloision senices in the future. In October 1o92 the Cable Telnision Consumer Protection and Competition Act of 1992 (1992 Cable Act) became law The 1992 Cable Act significantly raised various provisions of the Cable Communications Policy Act of 1984.The 1992 Cable Act provides that i the Federal Communications Commission (FCC) will set guidelines for retail prices on basic cable senice, which includes network broadcast stations and educational, public and governmental access channels Local governments will regulate retail prices for basic service based on the FCCi guidelines The FCC is required to issue new rules and regulations in 1993.The 1992 Cable Act also , requires cable programmers to license their senices on a fair basis to cable competitors, such as direct broadcast satellite and wireless [ distribution system in addition, at the option of the broadcasters. cable operators will be required to obtain the permission of, and potentially pay a charge to. local broadcast teloision affiliates to retransmit their programming to cable customers The full impact of [ the 1992 Cable Act cannot be determined at this time. Because the Paragon Communications (Paragon) partnership is accounted for under the equity method of accounting, the follow-ing discussion of operating revenues and sales, and depreciation and interest expense relates only to KBL Cable and its u holly- 7 owned subsidiaries. Operating Revenues and SaIcx In 1992 revenues were $236.8 million, an increase of 5 4% over 1991. Revenues increased 12.4 % in 1991 as compared to 1990. Gross operating margin (revenues less operating expenses, exclusive of depreciation and amortization) ; grew tc S95 million in 1992, an increase of 12.4% over 1991. Gross operating margin increased 15 6% in 1991 over the prior year. Operating margins were 40.1 % for 1992, compared to 37.6% for 1991 and 36.6% for 1990. Cable tele ision revenues were favorably impacted by the addition of approximately 18.000 basic subscribers in 1992. an increase of 3 2%. and by the addition of approxi- t mately 9.000 basic subscribers in 1991, an increase of approximately 16% Basic senice revenues increased $10 6 million or 7.2% and $17.9 million or 13 8% in 1992 and 1991, respectively, as compared to the prior years. Basic service revenue increases are due primarily to additional customers and increased rates i 32
Ancillary enice revenues increased significantlyin 1992 and 1991. Advertising revenues and installation fees increased $6.2 mil-lion or 27% in 1992 from the prior year. In 1991, these same revenue categories increased 57.1 million or 45.3% over the previous year The increases in both years are due primarily to increased advertising sales and higher installation and other related transaction j fees. Pay-peraiew revenues declined in 1992 by $1.2 million or 10.5% This decrease was primarily due to the lack of major pay-per-siew sporting events In 1991, pay-peraiew revenues increased by $3.0 million or 34.8% from the prior year This increase was due to increased prices, sales and an increased number of major pay-peraicw sporting events. , Following a trend in the cable television industry, premium senice revenaes for 1992 were down $3.5 million or 8.3% compared to 1991 due to a decline in unit prices. Premium sen ice revenues in 1991 decreased $3.1 million or 6 9% from 1990 due to a decline j in both the number of premium units and unit prices. l Depreciation amilnrercsr Opensc. Depreciation and amortization increased $5.1 million or 7.3% in 1992 over 1991 and $2.8 mil-lion or 41 % in 1991 over 1990 The increases in both years were due primarily to asset additions. Interest expense decreased S18.1 I million or 20.5% in 1992 when compared to the prior year due to lower interest rates and lower debt balances resulting from the con-version,in March 1992 of $117 million ofintercompany loans to common stock equity This debt conversion, which accounted for
$5.4 million of the decrease in interest expense, does not affeet consolidated earnings. Interest expense decreased $6.6 million or 6.9% in 1991 when compared to 1990, primarily due to lower interest rates.
The Company intends to recapitalize KBLCOM to reduce the amount of debt in its capital structure. As part of this restructuring, the Company plans to contribute to KBLCOM S167 million of equity which will be used to reduce KBLCOMiindebtedness. This restructuring will increase KBLCOM's equity capitalization, reduce the fmancial risks associated with indebtedness of KBLCOM and increase KBLCOM's financialflexibility 1 Parapm Partnership A subsidiary of KBLCOM owns a 50% interest in Paragon, a Colorado partnership, which,in turn, owns cable I television systems that served approximately 901,000. 665,000 and 829,000 basic cable customers in seven states as of December 31, 1992,1991 and 1990. respectively Paragon's revenues were favorably impacted in 1992 and 1991 by the addition of approximately 36.000 basic subscribers each year. This represents an increase in subscribers of 4.2% and 4.3% for 1992 and 1991, respectively KBLCOM's 1992 equity interest in the pre-tax earnings of Paragon was $24.9 million compared to $10.3 million for the year 1991 and a loss of 5 7 million for the year 1990 The increase in both of these years was due toincreased revenue, improved operating margins and reduced interest expense at Paragon. IlQt'lDIM WD c O'rT41 Riso1TcI% Oxrriac The Company's cash requirements stem primarily from operating expenses. capital expenditures, payment of common stock diti- i dends. payment of preferred stock dividends, and interest and principal payments on debt. Net cash provided by operating activities ; totaled $799.9 million in 1992. f' Net cash used in investing activities in 1992 totaled $397.9 million primarily due to electric and coal handling capital expendi-i tures of $342.2 million and cable telesision additions of $44.3 million. Financing activities for 1992 resulted in a net cash outflow of $360.4 million.The Company's primary financing activities were the ! payment and extinguishment oflong-term debt and payment of dividends partially offset by the issuance of long-term debt and pre-ferred stock. The liquidity and capital requirements of the Company and its subsidiaries are affected primarily by capital programs and debt . , senice requirements The capital requirements for 1992, and as estimated for 1993 through 1995,are as follows- r MfLLloNS of DOLL Af6 IW IM 144 IWS Utility construction and nuclear fuel (excluding Allowance for Funds Used During I Construction ( AFUDC))" S331 S344 $498 5462 Coal handling facilities and lignite mining and handling facilities 5 11 12 12 . Cable television additions 44 46 10 54 Other cable related investments . 12 l Investment in foreign electric utility 2 36 > Maturities oflong-term debt, preferred stock and minimum capital lease payments 208 336 55 66 Total 5590 $785 $605 $594 l
' These amounts do not include expenditures on projects for which HL& P expat< to be remtbursed by customers or other parties. l l
For a discussion of the Companis conut.itments for capital expenditares see Note 8 to the Consolidated Financial Statements. which n incorporated herein b3 reference. I 33 l
. _ - -~ - c- - - , . .,
The company Gencrd TheCompanyhasconsolidateditt w mies in order to provide a coordinated, cost-effective method of meeting < short and long-term capital requirements. As p ,,nsolidated financing program the Company has established a ' money j fund' through which its subsidiaries can borrow ati m on a short-term basis. The funding requirements of individual subsidiaries [ are aggregated and bonowing or investing is conduu by the Company based on the net cash position. Net funding requirements are met with borrowings under the Company's commercial paper program except that H L&P's borrowing requirements are generally i met with HL& P's commercial paper program. As of December 31,1992, the Company maintained bank lines aggregating $500 mil-lion (exclusive of bank lines maintained by subsidiaries of the Company) which are used to support its commercial paper program. At December 31,1992, the Company had approximately 5285 million of commercial paper outstanding Rates paid by the Company on l its short-term borrowings are generally lower than the prime rate. ! i BO!? In October 1990, the Company amended its existing Sasings Plan (Plan) to add an Employee Stock Ownership Plan (ESOP) ! component to the Plan The ESOP component of the Plan allows the Company to satisfy a portion of its obligations to make match-ing contributions under the Plan. The ESOP trustee purchased shares of the Company's common stock in open market transactions l with funds prmided by loans from the Company and completed the purchase of stock under the ESOP in December 1991 after pur- j chasing 9.381,092 shares at a cost of $350 million. As the ESOP loans are repaid by the ESOP trustee over a period of up to 20 years, the common stock purchased for the Plan willbe allocated to the participants' accounts The loans will be repaid from dhidends on the common stock in, and Company contributions to, the Plan.The loans to the Plan were funded initially by the Company from short-term borrowings which have been refinanced with long-term debt At December 31,1992,the balance of the ESOPloans was ; approximately 5332 million. ! insmmg A m ma in July 1992, the Company issued $100 million aggregate principal amount ofits debentures. 7% series due : 2002. Proceeds were used to repay a portion of the Company's short-term indebtedness, including amounts incurred in connection I with loans to the Company's ESOP The Company has registered with the Securities and Exchange Commission (SEC) S150 million i principal amount of debt securities which remain unissued. Proceeds from the sale of these debt securities are expected to be used for ! general corporate purposes including investments in and loans to subsidiaries. In February 1992 and December 1992, the Company purchased from third parties $19 million and 59.9 million principal amount, , respectively. of KBL Cable's 10.95% Senior Notes due 1999 and 523.75 million and 512.3 million principal amount, respectively, of , KBL Cable's 11.30% Senior Subordinated Notes due 1999 The notes were purchased at a weighted average price of approximately j 109% and 112"o of their principal amount in February 1992 and December 1992, respectively The purchases were made to reduce ; interest expense on a consolidated basis.The notes are being held by the Company I I in December 1492, the Company established a new bank facility which replaced the Company's existing facilities and increased - the Company's bank lines supporting its commercial paper program from $400 million to 5500 million. The Company intends to sell commercial paper supported by the facility in order to contribute funds to KBLCOM as equity for the prepayment of approximately l' S167 million of KBLCOWs borrowings under its Senior Bank Facility during the first quarter of 1993. l Hou m hu nmm Houston Argentina S A. Olouston Argentina).a subsidiary of the Company, owns a 32.5% interest in an ! Argentine holding company which acquired. in December 1992. a 51% interest in Edelap S. A, an electric utility company operating in La Plata, Argentina and surrounding regions. Houston Argentina's share of the purchase price was approximately 537.6 million, of l w hich 516 million was paid in December 1992 with the remainder to be paid in March 1993. , b llL&Pmn!L h:n hwi GemmL Utility construction and nuclear fuel expenditures for the 1993-1995 period represent estimated costs of HL& P's construc-tion program. The estimated expenditures for coal handling facilities and lignite mining and handling facilities are expected to be j incurred by HL& P and Utihty Fuels primarily in connection with HL& P's existing plants. Utility Fuels expects to finance its capital ; program primarily through internally generated funds. ! HL&Ps cash requirements stem primarily from operating expenses, capital expenditures, payment of common stock dividends, i payment of preferred stock dividends, and interest and principal payments on debt. HL&P's net cash provided by operating aethities l for the year ended December 31,1992 totaled approximately 5817.7 million. ! Net cash used in HL& P's investing activities for the twelve months ended December 31.1992 totaled S348.0 million. l' HL& Ps financing activities for the twelve months ended December 31,1992 resulted in a net cash outflow of approximately
$476.9 million. Included in these aethities were the payment of dhidends and the payment and extinguishment oflong-term debt, i partially offset by the issuance of long-term debt and preferred stock. For information with respect to these matters, reference is made {
to Notes 3 and 4 to the Consolidated Financial Statements, which Notes are incorporated herein by reference. ! l 1 1 l l 34
. . - . ._- . . ~
i CapitalPropam. HL&P's construction and nuclear fuel expenditures (excluding AFUDC) for 1992 totaled $331 million which was below the authorized budgeted level of $395 million. Estimated expenditures for 1993,1994 and 1995 are $344 million, S498 million and 5462 raillion, respectively.These amounts do not include expenditures on projects for u hich H L& P expects to be reimbursed by customers or other parties. Maturities of long-term debt and preferred stock uith mandatory redemption provisions for this same period include $159 million in 1993. S41 million in 1994 and $46 million in 1995. While over half of H L& P's construction program for the next three years is expected to relate to cos:s for transmission, distribu-tion, and general plant, HL&P expects to begin construction of the E.1. du Pont de Nemours Company (Du Pont) project in 1993 in order to prmide generating capacity in 1995. The Du Pont project is based on a contractual agreement between HL&P and Du Pont, whereby H L& P will construct, own, and operate two 80 megawatt pas turbine units to be located at Du Pont's chemical plant. The ; project will supply Du Pont with process stea m while all electrical energy will be used in the H L& P system. Expenditures for addi-l tional generating capacity are planned to begin in 1994. H L& P's capital program is subject to periodic resiew and portions may be i resised from time to time d ue to changes in load forecasts. changing regulatory and emironmental standards and other factors j l Ema vmg M rn diu in January 1992, HL& P repaid at maturity 5132 million aggregate principal amount ofits 9%% first mort- I gage bonds. In February 1992, H L& P issued $100 million aggregate liquidation value of variable term perpetual preferred stock. Proceeds , from the sale were used to reduce short-term indebtedness. including indebtedness from the preferred stock redemptions that i occurred in November 1991. In March 1992. HL& P issued $100 million principal amount of 8.15% medium-term notes due 2002. In March 1992, HL&P also ! issued $150 million principal amoant of 7VL first mortgage bonds due 1997 and $100 million principal amount of 8%% first mort- [ gage bonds due 2022. Proceeds were used to proside funds for the purchases and redemptions of HL&Ph first mortgage bonds i described in the following paragraph and for general corporate purposes. including the repayment of short-term indebtedness of i HL&P In April 1992, HL& P purchased, at 101% of their principal amount,556,633,000 aggregate principal amount ofits 9%% first ! mortgage bonds due 2008. pursuant to its tender offer for any and all bonds of such series. In May 1992, HL& P redeemed all of the : remaining 543,367,000 aggregate principal amount ofits 9%% first mortgage bonds at 100% of their principal amount. all 5125 mil- l , lion aggregate principal amount of its 876 first mortgage bonds due 2008 at 100% of their principal amount and $82,753,000 aggre- l 4 gate principal amount ofits 8% first mortgage bonds due 2005 at 100.64% of their principal amount. l In April 1992, H L&P purchased. at a premium over the principal amount, portions of seven series of pollution control revenue j I bonds issued on behalf of HL&P by the Brazos River Authority (BRA) and the Matagorda County Nasigation District Number One ! (MCND) Funds were obtained from the April 1992 issuance of $99,915.000 of 6.7% revenue refunding bonds collateralized by I HL& P's first mortgage bonds. Of this amount, S56.095.000 principal amount of bonds were issued on behalf of HL&P by the MCND l and mature 2027. The remainder mature in 2017 and were issued on behalf of HL& P by the BRA.The refunded bonds bore interest j at rates ranging from 9% to 10% Premiums aggregating $16.9 million were paid in connection with the purchases of the l . refunded bonds. l In August 1992, H L& P repaid at maturity $25 million aggregate principal amount of its 4 W% first mortgage bonds. . In October 1992 HL&P purchased at 109.125% of their principal amount, S212.533,000 aggregate principal amount ofits 10n% l first mortgage bonds due 2019 pursuant to a tender offer for any and all bonds of such series. ! In October 1992, the BRA and the Gulf Coast Waste Disposal Authority (GCWDA) issued on behalf of HL&P S45 6 million ! aggregate principal amount of 6% revenue refunding bonds collateralized by HL& P's first mortgage bonds due 2012. Proceeds - ~ j- were used to redeem, at 103% of their aggregate principal amount, S45 6 million principal amount of three series of pollution control revenue bonds previously issued on behalf of HL&P bythe BRA and GCWDA. , in October 1992, H L& P issued $120 million aggregate liquidation value of variable term perpetual preferred stock. Proceeds from the sale were used til to redeem all shares of HL& P's adjustable rate cumulative preferred stock, series A and series B, hasing an aggregate liquidation value of $100 million at a redemption price of S103 per share; (ii) to redeem S12,467,000 aggregate principal : amount of 10v e first mortgage bonds due 2019 at 108.47% of their principal amount; t.nd (iii) for general corporate purposes. In January 1993, H L& P repaid at maturity $136 million aggregate principal amount ofits 9%% first mortgage bonds. , . .l
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l i Sourecs of Capital Resou rces a nd Liquidity H L& P expects to finance its capital program for the period 1993-1995 with funds l generated internally from operations, j H L& P has registered with the SEC S230 million aggregate liquidation value of preferred stock and S250 million aggregate princi- , pal amount of first mortgage bonds in addition, HL&P has registered S800 million aggregate principal amount of debt securities that ! may be issued as first mortgage bonds and/or as securities collateralized by first mortgage bonds. Proceeds from the sale of these j 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 t H L& P's in'terim financing requirements are met through the issuance of short-term debt. primarily commercial paper, supported l by a bank line of credit. At December 31,1992. a $250 million line was maintained. Commercial paper outstanding at December 31, f
! l992 was 5139 million. HL& P's capitalization ratios at December 31,1992 consisted of 46% long-term debt,8% preferred stock and 46% common equity 1 Enrironmental Expendnurcs in November 1990, the Clean Air Act was extensively am .ded by Congress. HL& P has already made ! a substantial investment in pollution control facilities. and all of its generating facilities currently comply in all material respects with sulfur dioxide emission standards established by the legislation. Protisions of the Clean Air Act dealing with urban air pollution ! require establishing new emission limitations for nitrogen oxides (NOJ from existing sources. These limitations are expected to be ; finalized in mid-1993. The cost of modifications necessary to reduce NO, emissions from existing sources has been estimated, based j upon anticipated regulations, at S62 million in 1994 and $18 million in 1995. The necessary modifications may cause secondary l impacts to generating unit capacity ratings, and cost estimates could change suWantially upon analysis of the impact of the final ! rules. In addition. continuous emission monitoring regulations are anticipated to require expenditures of $12 million in 1993 and $14 - i million in 1994. Capital expenditures are estimated to total $140 million for the years 1993 through 1995. The United States Emironmental Protection Agency (EPA) has identified HL&P as a potentially responsible party" for the costs j
- of remediation of a Comprehensive Emironmental Response, Compensation and Liability Act (CERCLA) site located adjacent to l
) one of HL&P's transmission lines in Harris Count Although HL& P did not contribute waste to or operate the site, the party pri- ] j marily responsible for contributing waste to the sit t and possibly other potentially responsible parties have alleged that waste dis- ; posal pits dug by the site operator encroach onto HL&P's property and therefore HL& P is responsible as a site owner H L&P denies f ) that it ever owned the strip of land containing the pits but admits that it owns the adjacent strip of land onto which substances from 3 the site appear to have migrated. In October 1992, the EPA issued an Administrative Order to HL&P and several other companies purporting to require those parties to implement the management of migration remediation at the site. A related Administrative Order had been issued in June 1990. HL& P if necessary, will remove substances which have migrated onto its property, but HL& P l denies that it has other responsibility for the remediation actisities. HL& P understands that the other respondents to the Administra- , tive Orders, through the 510TCO Trust Grou p. have complied with the first order, and that they ultimately will assume responsibility ! for completion of the management of migration remediation. HL& P is not a member of the 510TCO Trust Group. Neither the EPA nor any other responsible party has presented HL& P with a claim for a share of costs for the management of the migration remedia- l tion design or operation. However, in the event H L& P were ultimately held to be a responsible party for the remediation of this site ; and if other responsible parties do not complete the management of migration remediation, CERCLA provides for substantial reme- 'l dies that could be pursued by the United States including substantial fines, punitive damages and treble damages for costs incurred , by the United States in completing such remediation. The aggregate potential clean-up costs for the entire site are presently estimated to be approximately $80 million. Although no prediction can be made at this time as to the ultimate outcome of this matter,in light of j all the circumstances. the Company and H L& P do not believe that any costs that HL& P incurs in this matter will have a material adverse effect on the Company or HL&P , 4 ! J i l l b u I f 36 i
KBLCOSI KBLCOMh net cash provided by operating activities was $40 million and $1.1 million in 1992 and 1991, respectively. compared to net cash used in operating activities of $5.7 million in 1990. The improvements in 1992 and 1991 over the prioryears were primarily
)
attributable to increased revenues, improved operating margins and reduced interest expense. During 1992. KBLCOM's primary financing or investing activities were a $5 million reduction in outstanding bank indebtedness. principal payments on other third party indebtedness of $2.7 million capital expenditures of approximately $44.3 million for cable telesision additions, which includes the acquisition of a small cable system for S3.7 million These amounts were financed principally through internally generated funds and intercompany advances. A substantial portion of KBLCOMt 1993-1995 capital requirements I is expected to be met through internally generated funds. It is expected that any shortfall will be met through intercompany borrow- I ings. The net cash used in investing activities decreased approximately $5.8 million in 1991 as compared to 1990 primarily due to reductions in construction expenditures and equipment purchases. t KBLCOM's net cash prosided by financing activities decreased 513 million for 1991, as compared to 1990, primarily due to less ; borrowing from the Company and reductions in long-term debt. In the first quarter of 1991, the Company advanced KBLCOM $24 i million. and additional funds were drawn by KBLCOM under its bank facility Io repay a portion of the outstanding bank indebted-ness of KBL Cable and to make interest payments. KBLCOM expects to satisfy its cash requirements for 1993 through internally generated funds. intercompany borrowings and ; contributions. and borrowings under KBL Cable's bank facility. KBL Cable's ability to borrow additional funds under its bank facility j is currently limited by certain financial covenants which require KBL Cable to maintain and satisfy certain debt to cash flow ratios and other financial tests KBL Cable is in compliance with all financial cos enants contained in its bank facility.
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Houston in:!usines Imance During 1992. Houston Industries Finance. Inc. (Houston Industries Finance) purchased accounts receivable of HL&P and of certain ! KBLCOM subsidiaries. As of January 12.1993, Houston Industries Finance ceased operations and the $300 million bank revolving a credit facility and related commercial paper program were terminated At December 31,1992, Houston Industries Finance had S139 9 million of commercial paper outstanding. ; vw Acc ots1tsc rnosutseisit s1s In December 1990.the Financial Accounting Standards Board issued SFAS No.106/ Employers' Accounting for Postretirement Benefits Other Than Pensions" This accounting standerd, effective for fiscal years beginning after December 15,1992, requires com- i panies to recognize the liability for postretirement benefit plans other than pensions, primarily medical and dental benefits. The ; Company will adopt SFAS No 106 in 1993.The transition obligation.or accumulated postretirement benefit obligation. of approxi- : mately S213 million will be amortired over approximately 22 years as permitted by SFAS No.106. The Company estimates that adop- l tion will increase benefit costs by approximately 524 million over the expected " pay-as-you-go" amount in 1993 The Utility i Commission has published a proposed rule which. if adopted, would govern the ratemaking treatment for postretirement benefits other than pensions. This rule (i) will allow for recovery of the current postretirement benefits expense on an accrual basis provided ; that all amounts recovered in rates are placed in an external trust fund, and (ii) will not allow recovery of the transition obligation. HL& P is opposing the portion of the rule which would preclade it from recovering the transition obligation in rates. i 9
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l t 37
l 8iATEMENTS Of CONSOLIDATED INCOME { HOUSTON INDUS1RIESINCORPOR ATED AND SUBSIDMRILS } (THOUS ANDS OF D01 LARS) YI AR ENDED DECEMBER 31, 1992 1991 1990 (RLST ATLD) (REs1 ATED) RtTINlls: Electric S3,826.841 $3.674,543 53,468,682 i Coal andlignite 532,787 544A68 510,001 Cable telesision 236,760 224,728 199,893 Total 4.596 388 4.443,739 4,178,576 l 12 PIN 515: Electric: Fuel 987,918 960,091 987,168 l Purchased power 486,414 444,040 - 433,862 Operation and maintenance 802.194 805,564 759,933 l Taxes other than income taxes 228,238 190,526 187,987 , Deferred expenses (22,973) (101,187) , Restructuring 86,431 . Cost of coal andlignite sold 455,954 461,444 426.030 = -; Cable telesision operating expenses 141,744 140.223 126,764 , Depreciation and amortization 465,081 438,868 411,340 f Total 3.653,974 3,417,783 3,231,897 : OPLR A11NG INCOME 942,4i4 1,025,956 946.679 I OTutRINCoMI(n tin 51): Allowance for other funds used during construction 6.169 - 5,749 3,841 Deferred return under phase-in plan 38,758 -35269-Disallowed plant costs and regulatory adjustment 14,483 (35,573) i Equity in income (loss) of cable telesision partnerships 24,871 10,672 (214) Interest income 1,745 21,144 2,488 - Other-net (20,687) (13.515) (13.001). Total 12,098 77,291 (7,190) 1717 D CH ARGIS: Interest on long-term debt 396 323 429,900 435,748 i Otherinterest 19,957 42,970 48,872- l Allowance for borrowed funds used during construction (6.191) (10,049) (9,465) Deferred carrying costs (30,695). (91,152) Preferred dividends of subsidiary 39.327 46,187 47,753 : Total 449,416 478,313 431,756 INCoMI 1:01 ORI INCOMt 1 AXLS AND COMUI.ATIVE IIIICT OF , AcCot3 TING nMNGt 505,096 624,934 507,733 , INCOMt T Aw 154,609 208,180 164,944 WCOME BIIORI COMLT.ATRI . t Iriic1Or ACcotsinG OMSGt 340,487 416,754 342,789 CUMet ATni u1TCT 01 onNGE IN l ACCOLTTING FOR INCOME TAtl5 (219,718) I COMLTAinT 1ITICT Ol' OMNGE N ' ACCOLTTING IOR RIMNL15 (NIT OF INCOME T A AI S OF 53.517) 94,180 . ; ~
.Nrf nCOur S 434.667 -S 416,754 S 123,071
-l LARNlNGS PER COMMON 5tMRI LEIORL COMC1.ATIVE UTIC1 OF ACCOUNTING Cll ANGI $ 2.63 $ 3.24 5 2.70 (TMULATnT IT11CT of CinNCI IN 3 ACCOUNTING TOR INCOME TAKi$ (1,73) - .j CLMULATnT [ITICT OF Cli ANGl IN ,
ACCOUNTING IOR REVI NLT 5 .73 j LARNINGS PLR COMMON SIMRt S 3.36 S 3.24 5 .97 f M11GitTID A\TRAGE COMMON ; Sil ARIS OLTSI ANDING s0M4 129,514 128,802 127,254 ; See Notes to Consolidated Financial Statements. l l 38 -i
5iATEMENTS OF CON 80LIDATED RETAINED EARNINGS HOUSiON INDt'5TRlf 51NCORPOR ATI D AND $LBS!DI ARIES (THOU54NDb Of DOLLARS. YL AR LNDE D DLCLMBER 31, 1992 1991 1990 (RLST ATED) (KLSTATFD) Balance at Beginning of Year $1202.125 $1,165,786 $1419.248 Add-Net income 434.667 416,754 123,071 Total 1,636,792 1,582,540 1,542.319 Common Shk Dividends: 1992, S2.98; 1991, $2.96.1990, $2.96; (per share) (385,952) (381,117) (376.533) Tax Benefit of ESOP Dividends 8,944 4.862 Redemption of HL&P Preferred Stock (5.200) (4,160) Balance at End of Year S1,254,584 $1,202,125 $1,165,786 See %tes to Consolidated Financial Statements I i l 39
l CONSOLIDATED BALANCE SHEETS HoUsioN INDUSTRIES lNCORPOR ATED AND SUBsIDI ARIts 'THorSANDS or Dol L 4RS) DECEMBER 3L Assns 1992 1991 (RLSTATED) j PHoPIRTY PLANT 4ND l inunim - ar cosI: Electric plant. Produetion S 6,853,263 5 6,724,735 ! Transmission 818,584 801,049 i Distribution 2,394,226 2,302,657 General 737,675 690,246 Construction workin progress 201,165 239,159 , Nuclear fuel 202,013 181,853 i Plant held for future use 200,865 275,719 Electric plant acquisition adjustments 3,166 3,166 Coal handling equipment and mining property 537,772 536,728 l Cable television property 320,661 278,052 4 Other property 12,197 12,159 Total 12,281,587 12,045,523 Less accumulated depreciation and amortization 3,091,152 2,746,451 Property, plant and equipment-net 9,190,455 9.299.072 ct areT <ssns- Cash and cash equivalents 69,317 27,669 Specialdeposits 2,071 1,417 Accounts receivable: Customers (less allowance for doubtful accounts of
$10,439 and $12,585 at December 31,1992 and 1991, respectively) 135,072 130,666 ,
Others 19,611 36,274 J Accrued unbilled revenues 190,897 Fuel stock, at lifo cost: Oiland gas 23,703 25,443 Coalandlignite 44,861 41,611 Materials and supplies, at average cost 167,438 178,298 Prepayments 14,765 18,304 Total current assets 667,735 459.682 OTHIR AssMs Cable television franchises and intangible assets (less accumulated amortization of $145,856 and $107,681 at . December 31,1992 and 1991, respectively) 1,021,934 1,058,570 < Deferred plant costs 690,482 716,264 l Deferred debits 273,750 247,852 Unamortized debt expense and premium on reacquired debt 137.395 93,665 Equity investment in cable television partnerships 90,220 65,025 Equity investment in foreign electric utility 37,2. Regulatory asset-net 177,426 165,246 Recoverable project costs 130,550 59,752 Total other assets 2,559,311 2,406,410 [ Total $12.417,501 512,165,164 I See Notes to Consobdated Financial Statements. i I b 40
l OHol'5%D5 of DOLLAR $i DE Cf.Mlli R 31. l c41'ITill?tito% WDI14f;IUTilS 1992 1991 (RI.ST ATED.: capi 1411ZA1 IONt $14TIVINTS . ouou owlsc r4ct sr Common Stock Equity S 3.284,713 $ 3.232.217 Preference Stock, no par; authorized 10,000,000 shares; i none outstand!ng l Cumulative Preferred Stock of Subsidiary: l Not subject to mandatory redemption 351,354 232,980 l Subject to mandatory redemption 206,834 226,632 i Total cumulative preferred stock 558,188 459,612 Long-Term Debt 4.441,205 4.866.923 Total capitalization 8,284,106 8,558,752 crua x1 o ununts- Notes payable 564,249 330.294 Accounts payable 249,397 238,407 Taxes accrued 187.484 190,675 Interest accrued 101.054 116,826 Accrued liabilities to municipalities 20,947 21,510 Cus.omer deposits 69,940 65.224 Current portion oflong-term debt and preferred stock 335,751 207,508 Fuel refund, including interest 62,993 Other 75,483 49.454 Total current liabil.ities 1,604,307 1.282,891 on nau n cu on s- Accumulated deferred income taxes 1,789,820 1,703,468 Unamortized investment tax credit 454,782 474,732 Other 284,486 145.321 Totaldeferred credits 2,529,088 2.323,521 ( oMM:TMI N1s OD con 11NU.Nc!L5 Total $12.417,501 512.165.164 See Notes to Consolidated Fmancial Statements 41
CONSOLIDATED STATEMENTS Of CAPITAllZAil0N Ho0SToN INDL'ST RIES lNCoEroR ATED AND stBstD14RIE S DECEM ELR 31, (THOUSANDS of DOLLARS) 1992 1991 (ktsT4TI D) couuos sTocu ot:nt Common stock, no par; authorized,200,000.000 shares; outstanding,129,514,483 and 129,513,620 shares at December 31,1992 and 1991, respectively $2,362,618 $2,362,581 Note receivable from ESOP (332,489) (332,489) Retained earnings 1,254,584 1,202.125 Total common stock equity 3,284,713 3.232,217 l No par; authorized,10,000.000 shares; outstanding,5,832,397 i ct uturn t reuinas D sToch os put sTos ucimsc
- and 4.632,397 shares at December 31,1992 and 1991,
"""C"""* respectively (entitled upon liquidation to $100 per share)
Not subject to mandatory tedemption: 54.00 series. - 97,397 shares 9,740 9,740 56.72 series, 250,000 shares 25.115 25,115
$7.52 series, 500.000 shares 50,226 50,226 58.12 series, 500,000 shares 50,098 50,098 Series A-1984,500,000 shares 48,810 Series B-1984,500,000 shares 48,991 Series A-1992,500,000 shares 49,098 Series B-1992,500.000 shares 49,109 Series C-1992,600,000 shares 58.984 Series D-1992,600,000 shares 58,984 Total 351.354 232,980 Subject 1o mandatory redemption:
$8.50 series,1,000.000 shares 99,195 98,993 59.375 series.1.285,000 shares 127,639 127.639 Less current redemptions 20.000 Total 206,834 226,632 Total cumulative preferred stock 558,188 459,612 Losc.ru:u Du:T. Debentures:
7%% series, due 1996 200,000 200,000 9%% series. due 2001 250,000 250,000 7%% series.due 2002 100,000 Unamortized discount (1,641) (1,003) Total debentures 548.359 448,997 Houston Lighting & Power Company: First mortgage bonds: 4%% series, due 1992 25,000 9",% series, dce 1992 132,000 99% series, due 1993 136,000 136,000 5%% series, due 1996 40.000 40,000 5%% series,due 1997 40,000 40,000 6%% series, due 1997 35,000 35,000 7%% series, due 1997 150,000 6% series, due 1998 35,000 35,000 7% series, due 1999 30,000 30,000 7% eries.due2001 50,000 50.000 7h% series,due 2001 50,000 50,000 88.% series. due 2004 100,000 100,000 8% series, due 2005 42,247 125,000 8% series, due 2006 125,000 125.000 8% series, due 2007 125,000 125,000 81,% series. due 2008 125.000 9%% series, due 2008 100,000 9 % series,due2017 390,519 390,519 10n% series.due 2019 225.000 l 42 t _ _ _ _ _ _ _ . . . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ _ _ _ _ _ _ _ _ _ _ _ _ _.
GHOUsWD5 of DO!1ARS) pg_cg ggg g 3t 1992 1991 mlSTVflD) 915% series. due 2021 5 160,000 5 160,000 8 % % series.due2022 100.000 7 % pollution control series. due 2008 19.200 19,200 6 N " pollution control series due 2012 33.470 6 % "i pollution control series, due 2012 12,100 7 % % pollution cont H series.due2015 68.700 68.700 8 % % pollutica control series. due 2015 90.000 90,000 7 % "o pollution control series. due 2016 68.000 68,000 6.70% pollution control series, due 2017 43.820 7 7 % pollution control series. due 2018 50,000 50,000 7.20% pollution control series. due 2018 175,000 175,000 8 % % pollution control series, due 2019 100.000 100,000 810% pollution control series, due 2014 100.000 100.000 7 5 % pollution control series. due 2019 29,685 29.685 7 60"o pollution control series, due 2019 70,315 70,315 7.70% pollution control series, due 2019 75.000 75.000 7 % % pollution control series, due 2019 100,000 100,000 , 7 b % pollution control series, due 2019 100,000 100,000 6.70% pollution control series, due 2027 56.095 N1edium-term notes series A. 9.79%-9.85";, due 1994-1999 200,000 200,000 N1edium-term notes series B,8%%, due 1996 100.000 100.000 N1edium-term notes series B. 8.15%. due 2002 100.000 Total first mortgage bonds 3.200.151 3.394,419 Pollution control revenue bonds: G ulf Coast 1980-T series. floating rate, due 1998 5.000 5,000 Brazos Ris er 1983 series.10%, due 2003 17.935 25,000 Gulf Coast 1974 series. 7%%, due 2004 16,950 17,300 Brazos River 1985 A2 series. 9%, due 2005 4.265 10.000 Gu!f Coast 1982 series. 97%, due 2012 12,100 Brazos River 1982 series,9 7%, due 2012 42,800 Brazos River 1983 series.10 h%. due 2013 65.630 75,000 Brazos River 1985 Al series,9 %, due 2015 67.680 100.000 N1atagorda County 1985 series.10%, due 2015 58.905 115,000 Total pollution control res enue bonds 256.365 402.200 Unamortized premium (discount)-net (12.118) (11,826) Capitalized lease obligations 2.492 3,190 Notes payable 3.153 3,187 Total 3,450.043 3,791,170 KBLCON1 Incorporated and Subsidiaries: KBL Cable,Inc. senior bank debt 415.000 420.000 KBLCON1 Incorporated senior bank debt 167,349 167,349 KEL Cable,Inc. senior notes 69.935 100,000 KBL Cable, Inc. senior subordinated notes 87.419 125,000 Capitalized lease obligations 750 854 Total 740.453 813,203 Utility Fuels. Inc.: Other notes payable 1,003 1,064 Capitalized lease obligations, average discount rate 6.4 % 17.098 19,997 Total 18.101 21,061 Total 4,756.956 5,074,431 Less current maturities 315.751 207.508 Totallong-term debt 4,441.205 4.866,923 Total capitalization 58.284,106 58.558,752 43 See %tes to Conschdated Financial Statements -- L. .,
~ ' STATEMENTS DF C O N S O L I D A T E D' C A S li FLDOS i INCREASE (D E C R E A S E ) IN C A S il AND C A S it EQUIVALENTS HoUSToNINDLsTRitslNCoRPORATLD AND sCBstDI AElls
! - miorswDs or DOLLARS) )T AR ENDED DECLMIiLR 3 L 1992 1991 1990 i 1 i (RLSTATED) (RLS1ATID) , cash llows IkoM oPIR ATING Actnmr5 Netincome S434,667 5416,754 S123,071 Adjustments to reconcile net income to net cash , provided by operating activities: ' Depreciation and amortization 465,081 438,868 411,340 Amortiration of nuclear fuel 29,237 23,145 19,931 I Deferredincome taxes 61,670 110,243 270,564-Investment tax credits (19,950) (19,903) (25,130) , Allowance for other funds used during construction (6,169) (5,749) (3,841) ! Deferred plant costs (53,668) (192,339) i Payment of disputed income taxes and related i interest (52,817) (104,534) Deferred return under phase-in plan (38,758) (14,483) (35.269)
'35,573
[ Disallowed plant costs and regulatoryadjustment ; Disallowed expenses 13,124 20,950 ! Fuel cost (refund) and over recovery-net (81,072) (7,061) 46,424 -[ Restructuring 86,431 ! Cumulative effect of change in accounting for i revenues (94,180) ! Regulatory asset-net (12.180) (21,614) (143,632) j Equity in (income) loss of cable television i partnerships (24,871) (10.672) 214 i Cumulative effect of change in accounting for ! income taxes 219,718 i Changes in other assets and liabilities: ; Accounts receivable-net 8.627 6,959 23,770 i' Inventory 9,350 (7,182) - (20,037) Other current assets 2,885 7,989 (5,770) _ [ Accounts payable 10,990 11,821 (27,572) r Interest and taxes accrued (18 963) 52,889 (8,114) ! Other currentliabilities (53,520) (40,225) 8,554 j Other-net 57,692- 7,407 37,936 Net cash provided by operating activities 799S08 869,884 651,807 cash ilousIROM 1%v!S11NG ACTumts. Electric and coal handling capital expenditures t (including allowance for borrowed funds used during construction) (342,226) (385,569) (367,920) ! Cable telesision additions (44,306) (26,624) (31,186) l Other-net (11,333) (8,153) 8,417 i i ! Net cash used in investing activities (397.865) (420,346) (390.689) r
.f
.I i
i 44
'l i
(THorsODS of DO! L ARs) YEAR ENDED DECEMBER 31, 1992 1991 1990 (RESTATED) (RESTATED) C A** 'it.ows TI:OM I (MNc!NG unmis- Proceeds from common stock S 50.620 S 55,674 Increase in note receivable from ESOP (285,116) (47,373) Proceeds from preferred stock $216,700 Proceeds from first mortgagebonds 488,760 258,141 Proceeds from seniorbank debt 23,504 29,148 Proceeds from debentures 99,216 448,935 Purchase of senior and subordinated notes (71,419) Reacquisition of debentures (205.220) Payment of matured first mortgage bonds (157,000) (132,000) Payment of senior bank debt (5,000) (40,000) (40,000) Payment of common stock dividends (385,952) (381,117) (376,533) Redemption of preferred stock (103,000) (112,500) Increase (decrease)in notes payable 233,955 (34,318) 128,229 Extinguishment oflong-term debt (717.912) (35,757) (909) . Other-net 41,257 ' 14.305 (1,997) Net cash used in financing activities (360,395) (430,523) (253,761) N1T INcRIME IN C ash AND c4sn turnwLtNTs 41,648 19,015 7,357 C 4sH WD c ASH f QL IulINTs AT rin ciNNiNc or itAn 27.669 8,654 1.297 casa wD c4sH tornu LNis u iND or i to S 69,317 S 27,669 S 8.654 st ITLIMINT AI DisclostIlf of cssa n ow monM 4noN. Cash Payrnents: i Interest (net of amounts capitalized or deferred) 5474,655 S395,822 5384,195 I Income taxes 172,053 85,202 141,313 See Notes to Consolidated Financial Statements l I l 45
NOTES TO CONS 0LIDATED FINA2CIAL STATEMERTS ioRTHE TH REE i E ARs E NDED DE cf MBER 31.1992 HotJSTON INDUSTRii s INCOEl'OR ATLD AND stBSIDI ARILS
- 1. sLTf s1 ARY ol SHAlllC4YT AcCot' Nil %G pot 1clis (a) System ol Actounts The accounting records of Houston Lighting & Power Company (HL& P) the principal subsidiary of Houston Industries Incorpo-rated (Company). are maintained in accordance with the Federal Energy Regulatory Commission's Uniform System of Accounts as adopted by the Public Utility Commission of Texas (Utility Commission).
(b)Ihncipics olConsohda:wn The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Coal and lignite sales and related cost of coal and lignite sold generally represent intercompany sales to HL& P and are not climi-nated because of the distinction for regulatory purposes between utility and non-utility operations. For this same reason, the pur-chases of accounts receivable from HL& P by Houston Industries Finance. Inc. (Houston Industries Finance) also are not eliminated. All other significant intercompany transactions and balances are eliminated in consolidation. Investments in affiliates in which the Company has a 20% to 50% interest, which includes the investment in Paragon Communi-cations (Paragon), are recorded using the equity method of accounting. See Note 17. (c) Licctric Plant Additions to electric plant, betterments to existing property and replacements of units of property are capitalized at cost. Cost includes the original cost of contracted senices, direct laborand material, indirect charges for engineering supervision and similar overhead items and an Allowance for Funds Used During Construction (AFUDC) Customer advances for construction reduce addi-tions to electric plant. HL& P computes depreciation using the straight-line method.The depreciation provision as a percentage of the depreciable cost of plant was 3.0% for 1992. 3.1% for 1991 and 3 2% for 1990. (dI Cable R!cr:swn Pmpent The Company records additions to property at cost which includes amounts for material, labor, overhead and interest. Depreciation is computed by the straight-line method. The depreciation provision as a percentage of the depreciable cost of property was 12.1% for 1992.113% for 1991, and 12.5% for 1990. Expenditures for maintenance and repairs are expensed as incurred.
!c) CaNc Iclmsion I?cm h:ses and intmpblc A ssc:s The Company has recorded the acquisition cost in excess of the fair market value of the tangible assets and liabilities of RCA Cable-systems Holding Co. (Cablesystems)in cable telesision franchises and intangible assets. Such amount is being amortized over periods ranging from 8-403 ears on a straight-line basis.
W Albrmcc fur Timds Used Dimnp Cons:rucnon HL& P accrues AFUDC on construction projects and nuclear fuel payments, except for amounts included in the rate base by regula-j I tory authorities. The accrual rates were 835% in 1992 and 1991 and 9.25% in 1990. igi Pncnues Effective January 1.1992. HL& P changed its method of recording electricity sales from cycle billing to a full accrual method, w hereby unbilled electricity sales are estimated and recorded each month in order to better match revenues with expenses. Prior to January 1,1992. electric revenues were recognized as bills were rendered (see Note 19). - The Utility Commission provides for the recovery of certain fuel and purchased power costs through an energy component of base electric rates. Coal and lignite revenues are recognized as fuel is consumed Cable telesision revenues are recognized as the senices are provided to subscribers, and advertising revenues are recorded when earned. dn income lares The Company follows a policy of comprehensive interperiod income tax allocation. Investment tax credits are deferred and amor- ) tized over the estimated lives of the related property In 1992.the Campany adopted Statement of Financial Accounting Standards j (SFAS) No.109, " Accounting for Income Taxes," with restatement to January 1,1990 (see Note 14). Under current tax laws, the Com-l pany may realize tax savings by deducting for tax purposes Gidends on the Company's common stock that are used to pay debt ser-vice on the Employee Stock Ownership Plan (ESOP) loans (see Note 2J. ni Lan:mps Its Co nr wn Share Earnings per common share is computed by dividing net income by the weighted average number of shares outstanding during the respective periods. H6tatements ol Consohda:cd Casb [:v:n for purposes of reporting cash flows. cash equivalents are considered to be short-term, highly liquid investments readily convertible to cash. 46
= _ _ -
nostwas sioch in October 1990, the Company amended its Sasings Plan (Sasings Plan) to add an ESOP component.The ESOP component of the Sasings Plan allows the Company to satisfy a portion of its obligations to make matching contributions under the Savings Plan. The ESOP trustee purchased shares of the Company's common stock in open-market transactions u ith funds prodded by loans from the Company and completed the purchase of stock under the ESOP in December 1991, after purchasing 9.381.092 shares at a cost of 5350 million At December 31,1992, the balance of the ESOPloans was approximately S332 million The loans from the Company to the ESOP are shown on the Company's Consolidated Balance Sheets as a reduction in common stock equity Principal and interest ^ on the loans will be paid with disidends on the common stock in, and Company contributions to, the ESOP Repayment of the loan is scheduled to occur over a 20-year period with the first mandatory repayment in 1997. The loans to th( ESOP were funded initially by the Company from short-term borrowings u hic h have been refmanced with long-term debt. Interest e(pense on Company borrow-ings to f und loans to the ESOP has been reduced by interest income on the loans to the ESOP in May 1989. the Company adopted. with shareholder approval, a long-term incentive compensa; ion plan.which includes an incentive s'ock option component. In January 1992. non-statutory stock options for approximateh 68.000 shares of the Company's stock were granted to key employees of the Company and its subsidiaries at an option price of 543 50 per share. Beginning one year after the grant date, the options become exercisable in one-third increments each year. No shares were exercisable on December 31, 1992. The options expire ten years from the grant date. In lu!y 1990, the Company adopted a shareholders rights plan and declared a dividend of one right for each outstanding share of the Companfs common stock. The rights, which under certain circumstances entitle their holders to purchase one one-hundredth of a share of Series A Preference Stock for an exercise price of 585.will expire on July 11,2000. The rights will become exercisable only if a person or entity acquires 20% or more of the Company's outstanding common stock or if a person or entity commences a tender offer or exchangt offer for 20% or more of the outstanding common stock.The rights are redeemable by the Company for 5 01 per right at any time prior to the date the rights become exercisable. When the rights become exercisable. each right will entitie the holder to receive, upon the exercise of such right a number of shares of the Companis common stock having a current market prict tas defined in the plan) equal to twice the exercise price of the right, except pursuant to an offer for all outstanding shares of common stock which a majority of the independent directors of the Company determines to be at a price u hich is in the best interests of the Company and its shareholders (Permitted Offer)- In tne event that the Company is a party to a merger or other business combination (other than a merger that follows a Permitted Offer). rights holders will be entitled to receive, upon the exercise of a right. a number of shares of common stock of the acquiring company having a current market price (as defined in the plan) equal to twice the exercise price of the right. l l 1 i eFillImt n s10ck of 4 stINDIm ! HL& P's cumulative preferred stock may be redeemed at the following per share prices, plus any unpaid accrued dividends to the date of redemption: siLHS M DLMrTioN liifr TE E sH ut clTia NT FLTL RL EWGF iHoM 70 W1 si N!11la M eMrWY LI of Mr1MN
$4 00 5105.00 5105.00 5105 00 56 72 102.51 102.51 102,51 57.52 102.35 102.35 102.35 SK12 102.25 102.25 102.25 VariableTerm Preferred A+ 100.00 100 00 100.00 Wriable Term Preferred B- 100.00 100.00 100 00 Variable Term Preferred C- 100 00 100.00 100 00 Variable Term Preferred D- 100.00 100.00 100 00 st ta cT to u oncon u oi unoN 58 50 m 5104.25 S102.13 5100.00 59 375- -
100 00 100.00
- Rates for Variable Term Preferred stock as of December 31,1942. were as follow s:
1 U'.L Variable Term Preferred A 3 460% Variable Term Preferred B 3.345*. Variable Term Preferred C 3 240 % Variable Term Preferred D 2.800 %
" H L& P is required to redeem 200.000 shares of this series annually beginning June 1,1993 l " HL& P is required to redeem 257,000 shares annually beginning April 1,1995. This series is redeemable at 5100 per share af ter April 1.1997 Annual mandatory redemptions of HL& P's preferred stock are S20 million in 1993 and 19% and 545.7 million for each of the years 19951997.
47
- 4. IoNG TIRM DIliT 3 i
Sinking or improvement fund requirements of liL& Vs first mortgage bonds outstanding will be approximately $51 million for each of the years 1993 through 1997. Of such requirements, approximately 532 million for each of the years 1993 through 1997 may be satisfied by certification of property additions at 100% of the requirements, and the remainder through certification of such property additions at 166% of the requirements Sinking or improvement fund requirements for 1992 and prior years ha,e been satisfied by certification of property additions. IIL&P has agreed to expend an amount each year for replacements and improvements in respect of its depreciable mortgaged utility property equal to 51450.000 plus 2n% of net additions to such mortgaged property made after March 31,1948 and before July 1 of the preceding year Such requirement may be met with cash, first mortgage bonds, gross property additions or expenditures for repairs or replacements, or by taking credit for property additions at 100% of the requirements. At the option of liL& P but only with respect to first mortgage bonds of a series subject to special redemption, deposited cash may be used to redeem first mortgage l bonds of such series at the applicable special redemption price.The replacement fund requirement to be satisfied in 1993 is approxi-mately $263 million ; The amount of liL& Ps first mortgage bonds is unlimited as to issuance, but limited by property. earnings, and other provisions j of the Mortgage and Deed of Trust dated as of November 1,1944, between llL& P and South Texas Commercial National Bank of ; liouston (Te.xas Commerce Bank National Association, as Successor Trustee) and the supelemental indentures thereto. Substantially all properties of liL& P are subject to liens securing if L& P's long-term debt. A portion of the funds for the acquisition of Cablesystems was obtained by KBL Cable,Inc. (KBL Cable) and its corporate parent l KBLCOM incorporated (K BLCOM) under the terms of several financing agreements:
% liBL CaNc Senior Bank Creda lbcihty KBL Cable is a party to a 55319 million revoking credit and letter of credit facility agreement with mandatory commitment reductions (w hich may requ re principal payments) w hich began in 1992. The final maturity for loans under this facility is 1999.
Loans have generally borne interest at an interest rate of LiBOR plus an ' applicable margin " The margin was .875% at Decem-ber 31.1992. The bank credit agreement also contains certain restrictions, including restrictions on dividends, sales of assets and , limitations on total indebtedness. The amount of indebtedness outstanding at December 31,1992 and 1991 was $415 million , and $420 million, reoctively Based on annualized cash flow for the feurth quarter of 1992, the amount of additional borrow-ings under this agreement would have been limited. 1 in Octobs r 1989. KBL Cable entered into interest rate sw up agreements w ith four banks which effectively fixed the rates on [ 5375 million of dcht under the KBL Cable senior bank credit f acility at approximately 9% plus the applictble margin. As of December 31,1992 and 1991, the effective interest rates on such debt were approximately 9.875% and 10%, respectively Inter-est rate swaps aggregating $100 million and 575 million terminated in October 1991 and 1992. respectively The remaining inter- ! est rate swaps terminate in 19a
- snd 1996. The differential to be paid or received under the interest rate swap agreements is accrued as interest rates chanp d is recognized os er the life of the agreement. KBL Cable is exposed to risk of nonperform- ;
ance by the other parties to the interest rate swap agreements. However. KBL Cable does not anticipate nonperformance by the parties. Commitment fees are required on the unused capacity of the KBL Cable bank credit facilities. i!n KBILOU 5emor Ilmk lim!ay KBLCOM has <.ntered into a $300 million letter of credit and term loan facility under which $100 million was borrowed upon the closing of the acquisition. This $100 million Tranche A borrowing matures in 1996 but is expected to be prepaid in 1993 and has been reclassified to current maturities of long-term debt The purpose of the remaining S200 million under the facility was to proside bank letters of credit (i) to support KBL Cable's debt service obligations on its senior subordinated notes up to $132.7 million (Exclusive Letters of Credit) and (ii) to proside funds to KBLCOM and KBL Cable for certain specified purposes, including reimbursement of KBL Cable's capital expenditures (Non-Exclusive Letters of Creditt Drawings under these Letters of Credit (~Iranche B borrowings) totaled approximately 567.3 milhon as of December 31,1992 and 1991, all of which related to the NoniExclusive Letters of Credit.resulting in no remaining capaeny on the Non- Exclusive Letters of Credit at December 31,1992. These borrowings an. expected tc ce prepaid in 1993 and have been reclassified 1o current maturities of long-term debt. There have been no draws on the Excluwve Letters of Credit, l resuhing in remaining capacity of 5132.7 million at December 31,1992.Tranche B borroaings muK oc repaid over five years beginning in 1995. The interest rate on the Tranche B borrowings is L1BOR plus a margin that inweases in several steps from the current .75% to 1.25% in 1996. Borrowings under the KBLCOM bank facility are recourse ine Company ;
~
i Prepayments of the Tranche A and Tranche B borrowings in 1993 are expected to be funded with proceeds from the sale of commercial paper by the Company. with the Company's contribution to KBLCOM taking the form of an equity investment. Commitment fees are required on that portion of the KBLCOM facility relating to Exclusive Letters of Credit. , w KRI C d!r Natn ' KBL Cable has outstanding $98.8 million of 10.95"o senior notes and $123 5 million of 1130% senior subordinated notes. Both series mature in 1999 with annual principal payments which began in 1992. The agreement under w hich the notes were issued contains restnctions and covenants similar to those contained in the KBL Cable senior bank facility As of December 31,1992, the Company ou ned 528 9 million principal amount of the senior notes and $36 05 million principal amount of the senior ~ subordinated notes. Consolidated annual matunties of long-term debt prepayment of KELCOM Tranche A and Tranche B borrowings, and minimum capitallease payments for the Company are approximately 5316 rmilion in 1993. 535 million in 1994,520 million in 1995, S376 mdlion in 1996 and 5273 million m 1997. 48 J
- . - - - - - - - . - - - - ~. .. -
?
I S. SHo8ti T1 RM TWOCING - i The interim financing requirements of the Companyt operating subsidiaries are met through short-term bank loans,the issuance - ! of commercial paper and short-term advance from the Company The Company and its subsidiaries had bank lines of credit aggre- i gating $1.05 billion at December 31,1992 and 5950 million at December 31,1991, under which borrcmings are classified as short- I term indebtedness Such bank lines limit the Company) total shcrt-term borrowings and provide for interest at rates generally less j than the prime rate. Outstanding commercial paper was $564 million at December 31,1992 and $330 million at December 31,1991. Commitment fees are required on the bank facilities. For a description of bank credit facilities of KBLCOM and KBL Cable, borrow- ! ings under which are classified as long-term debt or current maturities oflong-term debt, see Note 4. ; usuurito um vun of mocist nsrat'ursts j in December 1991, the Financial Accounting Standards Board (FASB) issued SFAS No.107," Disclosures about Fair Value of Finan- . cial Instruments.# This accounting standard, which the Company adopted in 1992, requires companies to disclose the fair value of ! certain financial instruments, as well as the methods and assumptions used to estimate the fair value. ; The carrying amount and estimated fair value of the Cor . anyt financial instruments at December 31,1992 are as follows: l CARRYING FAIB (THotsWD5 or DoLLARsl AMOUNT \AttE
- Financial assets:
Cash and short-term investments S 69,317 5 69,31/ i Note receivable from ESOP 332.489 395,202 .( Financialliabilities: 'f , Short term notes payable 5f4,249 564,249 , l Cumulative preferred stock (subject to mandatory redemption) 226,834 242.2#9 : Debentures 548,359 586,405 i Long-term debt of subsidiaries: i Electric: ) Firs mortgage bonds 3.188,694 3,407,236 : Pollution controlrevenue x as 255.704 286.813 l Cable telesision: l Senior bank debt 582,349 582.349 l Senior and subordinated notes 157,354 184,044 Other 4,156 4,747
.I Unrecognized financial instruments: !
Interest rate swaps: ! In a net payable position 17,162 i The fair values of cash and short-term investments, short-term notes payable and bank debt are equivalent to the carrying amounts. The fair values of the ESOP loan, the Companyt debentures. HL&Ps cumulative preferred stock subject to mandatory redemp-tion HL& P's first mortgaga bonds, pollution control revenue bonds issued on behalf or HL& P KEL Cable senior and senior l subordinated notes and other long-term debt are estimated using rates currently available for securities with similar terms and remaining maturities. ! The fair value of interest rate swaps is the estimated amount that the swap counterparties would receive or pay to terminate the ! swap agreements. taking into account current interest rates and the current creditworthiness of the swap counterparties. ! l 5 j 7. RillREMENT FLMS { The Company has noncontributory retirement plans covering substartially all employees The plans provide retirement benefits based on years of service and compensation. The Company's funding policy is to contribute amounts annually in accordance with applicable regulations in order to achieve adequate funding of proiected benefit obligations.The assets of the plans consist , principally of common stocks and high quality, interest bearing obligations. j Net pension cost includes the following components: rrnoesons or pott Ans, u Antsato orci e ts n : s 1942 IW1 lWD 3 Service cost-benefits earned during the period $24,282 $22,132 521,146 Interest cost on projected benefit obligation 45,585 38,564 35,091 Actual return on plan assets (26,934) (61,582) (8.553) Net amortization and deferrals (11,749) 30,413 (21,938) : Net pension cost $31,lS4 $29.527 S25.746 ; i 49 l I
The funded status of the retirement plans was as follows: (THoUbWDs of DoLLAksn Dic LVI LR 3L , 1992 W01 Actuarial present value of: Vested benefit obligation 5360.714 5278.990 Accumulated benefit obligation $396 751 $310.556 f Plan assets at fairvalue $444,511 $399,400 l Projected benefit obligation 598,677 522.962 l Assets less than proiccted beneht obligation (154,166) (123.562) Unrecognized transitional asset (19,179) (21,098) Unrecognized prior senice cost 12.129 14.590 Unrecognized net loss 86,084 86,426 ' Accrued pension cost 5(75.132) S (43.644) - i The projected benefit obligation was deDrmined using an assumed discount rate of 8.5% in 1992 and 1991. A long-term rate of com- , pensation increase ranging from 6 9% to 9 0% was assumed in 1992 and 1991 The assumed long-term rate of return on plan assets , was 9.5% in 1992 and 1991. The transitional asset at January 1,1956,is being recognized over rpproximately 17 years, and the prior service cost is being recognized over approx?nately 15 years. In December 1990, the FASB issued SFAS No.106.
- Employers' Accounting for Postretirerrent aenefits Other Than Pensions."
This accounting standard. effective for fiscal years beginning after December 15,1992. requires c0mpanies to recognize the liability for postretirement benefit plans other than pensions primarily medical and dental benefits. The f umpany will adopt SFAS No.106 in 1993 The transition obligation. or accumulated postretirement benefit obligation, of approxin ately $213 million wih be amortized over approximately 22 years as permitted by SFAS No.106 The Company estimates that adoptior. willincrease benefit costs by l approximately $24 million over the expected
- pay-as-you-go' amount in 1993. The Utility Commis: ion has published a proposed rule >
u hich, if adopted. would govern the ratemaking treatment for postretirement benefits other than per.sions. This rule (i) will allow Ior recovery of the current postretirement benefits expense on an accrual basis provided that all amounts recovered in rates are placed in f an external trust fund, and (ii) will not allow recovery of the transition obligation HL&P is opposing the portion of the rule which would preclude it from recovering the transition obligation in rates l 8 comtrnu ns no cosmcacus W HL&P Comitments HL& P has various commitments for capital expenditures, fuel, purchased power. cooling water and operating leases. Commitments in connection with HL& P's capital program are generally rewcable by H L& P subject to reimbursement to manufacturers for expen-ditures incurred or other cancellation penalties. HL& P's other commitments have various quantity requiremente and durations. However,if these requirements could not be met. various alternatives are available to mitigate the cost associated with the contracts' , commitments- l HL& P's capital program (exclusive of AFUDC) is presently estimated to cost 5344 million in 1993,5498 million in 1994 and 5462 million in 1995. These amounts do not include expenditures on projects for w bich H L&P expects to be reimbursed by customers or other parties. H L& P has entered into several long-term coal, lignite and natural gas contracts which have various quantity requinments and durations. Wnimum obligations for coal and transportation agreements are approximately 5167 million in 1993, and $165 mi!! ion in each of 1994 and 1995 The coal and lignite coraracts include provisions permitting HL&P to defer delivery at HL&Pi discretion ! and force majeure provisions HL& P has entered into several gas purchase agreements containing contract terms in excess of one year which provide for specified purchase and delivery obligations. Minimum obligations for gas purchase contracts are approxi-mately 543 6 milnon in 1993,545 0 million in 1994 and 546.5 million in 1995 Collectively,these c ontracts could amount to 51% of , HI %P s annual natural gas requirements. The Utility Commissioni rules provide for recovery of the coal, lignite and natural gas costs det cribed above thraugh the energy component of HL& Pi electric rates. Nuclear fuel costs are also included in the energy compo- i nent of HL& Pi ek ctric rates based on the cost of nuclear fuel consumed in the reactor. , HL& P has commitments to purchase firm capacity from cogenerators of approximately $206 million in 1993A144 million in ; 1994 and 519 million i^ 1995. The Utility Commissioni rules allow recovery of these costs through H L&Pi base rates for electric ! senice and additionalb uthorize HL& P to charge or credit customers for any variation in actual purchased power cost from the ; cost utilized to determine its base rates. In the event that the Utility Commission, at some f uture date, does not allow recovery ! through rates of any amount of purchased power payments.the three principal firm capacity contracts contain prosisions allowing HL&P to suspend or reduce payments and seek repayrnent for amounts disallowed. l The Energy Act, w hich became law in October 1992, includes a provision that assesses a fee upon domestic utilities having pur- l chased enrichment senices from the Department of Energy This feeis to cover a portion of the cost to decontaminate and decom. mission the facilities used to perform the enrichmeat it is currently estimated that the assessment to the South Texas Project Electric Generating Station (South Texas Project) will be approximately $18 million per year (subject to escalation for inflation). of which ; HL& Pi share is 30.8%. This assessment will continue until the earlier of 15 years or when 52.25 billion (adjusted for inflation) has l been collected from domestic utilities 50
~ ~ -
HL&P's service area is heavily dependent on oil. gas, refined products. petrochemica!s and related business. Significant adverse i events affecting these industries would negatively impact the revenues of the Company and HL&P
. Ibl KBLCOAf Comrmtments and ObhytionWnder Cab!c Eranchise Agreements .
KBLCOMi capital requirements are estimated to be 546 million in 1993, $40 million in 1994 and $54 million in 1995. KBLCOM and ! its subsidiaries presently have certain cable franchises containing prosisions for construction of cable plant and ser ice to customers j within the franchise area. In connection with certain obligations under existing franchise agreements. KBLCOM and its subsidiaries ; obtain surety bonds and letters of credit guaranteeing performance to municipalities and public utilities. Payment is required only in the event of non-performance. KELCOM and its subsidiaries have fulfilled all of their obligations such that no payments have been ( required. l (cj Ec;uipment Expenditures- L tilityIbcis Utility Fuels. Inc/s (Utility Fuels) expenditures for coal handling facilities and lienite mining and handling facilities are estimated to be 511 million in 1993, and $12 million in each of 1994 and 1995. f L 9 lolNTli oWNID NL'CLI AR PLANT tal Hlf,P Imntment. HL& P is project manager and one of four co-owners in the South Texas Project, which consists of two 1,250 megawatt nuclear gener- ! ating units. Unit Nos. I and 2 of the South Texas Project achieved commercial operation in August 1988 and June 1989, respectively , Each co-owner funds its own share of capital and operating costs associated with the plant, with H L& Pb interest in the project being [ 30 8% H L& P1 share of the operatio, and maintenance expenses is included in the corresponding operating expense amounts on t the Company's Statements of Consolidated Income. i As of December 31,1992. HL&P1 investments (net of accumulated depreciation and amortization) in the South Texas Project { and in nuclear fuel, including AFUDC, were 52.2 billion and $112 million, respectively
- lbi City ol A ustur ingation l 8
In July 1989, judgment was entered in f avor of HL& P and the Company in a 1983 suit filed in state district court by the City of Austin (Austint one of the four co-owners in the South Texas Project. Austin alleged that it was fraudulently induced to participate in the i South Texas Project and that HL& P failed to perform properly its duties as project manager. Although the amount of alleged damages ! varied, at trial Austin claimed actual damages of at least $419 million, with all or some portion alleged to be subject to trebling under the Texas Deceptive Trade Practices- Consumer Protection Act. in October 1992, the Court of Appeals for the Fifth District of Texas , at Dallas affirmed the trial courti judgment in favor of the Company and HL& P Austin has filed an application for writ of error to i the Supreme Court of Texas. but the Supreme Court has not yet acted. In its application Austin seeks a new trial on its breach of [ contract claim, but is not pursuing its fraud in the inducement or its Deceptive Trade Practices Act claims.The Company and HL& P , continue to regard the claim of Austin to be without merit. (O A rbitn.twn tritn Co oners : 3 During the course of the Austin litigation, the City of San Antonio (San Antonio) and Central Power and Light Company (CPL),the j other two co-owners in the South Texas Project. asserted claims for unspecified damages against HL&P as project manager of the South Texas Project. alleging HL& P breached its duties and obligations. San Antonio and CPL requested arbitration of their claims under the Participation Agreement among the owners of the South Texas Project (Participation Agreement).This matter was severed from the Austin litigation and is pending before the 101st District Court in Dallas County. Texas. The 101st District Court ruled that the demand for arbitration is valid and enforceable under the Participation Agreement, and that ruling has been upheld by appellate courts. Arbitrators were appointed by HL&P and each of the other co-owners in connection with the District Court's ruling The Participation Agreement provides that the four party arbitrators will appoint a fifth arbitrator, but that action has not yet occurred. 3 In May 1092, the Company and HL&P entered into a settlement with CPL and its parent company Central and South West Cor-poration (CbW).with respect to various matters including the arbitration and related legal proceedings Pursuant to the settlement, l CPL withdrew its demand for arbitration under the Participation Agreement. and the Compsnv HL& P CSW and CPL dismissed liti- ' gation associated with the dispute on December 30,1992 Under the terms of the settlement, HL& P reimbursed CPL for certain costs and expenses incurred in pursuing the arbitration and litigation.The settlement also resolved other disputes between the parties concerning various transmission agreements and related billing disputes. In addition, the parties also agreed to support, and to I seek consent of the other owners of the South Texas Project to, certain amendments to the Participation Agreement, including changes in the management structure of the South Texas Project through which HL&P would be replaced as project manager by an , independent entity ! Although settlement with CPL does not directly affect San Antoniot pending demand for arbitration HL&P and CPL have ; reached certain other understandings which contemplate that: (i) CPLi arbitrator previously appointed for that proceeding would be replaced by CPL; (ii) arbitrators approved by CPL and HL& P for any future arbitrations will be mutually acceptable to HL&P and CPL: and (iii) H L& P and CPL will resolve any future disputes between them concerning the South Texas Project without resoning to the arbitration provision of the Participation Agreement. The settlement with CPL did not have a material adverse effect on the Companyi or H L& P's financial position and results of operations. i HL& Pand the Company continue to regard Austint claims and those asserted by San Antoria to be without merit. From time [ to time HL& P and other parties to these proceedings have held discussions with a view toward settling their differences on these matters. j - r 51 i
While HL& P and the Company cannot give definitive assurance regarding the ultimate resolutions of the City of Austin litigation and the arbitration, they presently do not believe such resolutions will have a material adverse impact on H L&P's or the Companyt financial position and results of operations. (di Nuckarinsurance H L& P and the other owners of the South Texas Project maintain nuclear property and nuclear liability insurance coverages as required by law and periodically resiew available limits and coverage for additional protection The owners of the South Texas Project currendy maintain $500 million in primary property damage insurance from American Nuclear Insurers (ANI). Effective January 1, 1993, the r: 1ximum amounts of excess property insurance available through the insurance industry increased from $2.015 billion to $2.125 billion. This $2.125 billion of excess property insurance coverage includes 5800 million of excess insurance from ANI and $1.325 billion of excess property insurance coverage through participation in the Nuclear Electric insurance Limited (NEIL) 11 pro-gram. The owners of the South Texas Project have approved the purchase of the additional available excess property insurance cover-age. Under NEll11. HL& P and the other owners of the South Texas Project are subject to a maximum assessment,in the aggregate, of approximately $15.3 million in any one policy year.The application of the proceeds of such property insurance is subject to the priorities establisht d by the United States Nuclear Regulatory Commission (NRC) regulations relating to the safety of licensed , reactors and decontamination operations. Pursuam to the Price- Anderson Act (Act). public liability for owners of nuclear power plants, such as the South Texas Project,is limited to approximately S19 billion. 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 second-ary financial protection through an industry retrospective rating plan. This plan provides for assessment of deferred premiums for each nuclear incident up to 563 million per reactor subject to indexing for inflation and a possible 5% surcharge (but no more than $10 million per reactor per incident in any one year) 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& Ps and the Company's financial condition. k) Nuc! car Decommmwmnx 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 Commis-sion in Docket No. 9850. H L& P is currently funding decommissioning costs ior the South Texas Project with an independent trustee at an annual amount of 56 million. As of December 31,1992, the trustee held approximately $11.9 million for decommissioning, for which the asset and liability are reflected in the Companyi Consolidated Balance Sheet in deferred debits and deferred credits, respectively. HL& Pi funding level is estimated to prmide approximately $146 million in 1989 d ollars. an amount which exceeds the NRC minimum. There is, however, no assurance that the amounts held in trust will be adequate to cover the decommissioning costs. W NRC Diapwstic Duluatiort in February 1993, the NRC advised HL&P that the NRC will conduct a diagnostic evaluation of the South Texas Project in the spring of 1993. Conducted infrequently. NRC diagnostic evaluations are broad-based evaluations of overall plant operations and are intended to rniew the strengths and weaknesses of the licenseei performance and to identify the root cause of performance prob-lems. Similar reviews have been conducted at other plants in recent years, and in some cases, based on the evaluation results, those plants have received increased regulatory emphasis or have been required to take actions to improve plant operations, maintenance or condition. In its notification, the NRC cited no specific reason for initiating the diagnostic evaluation. However, during 1992, a number of personnel induced. equipment-related problems were experienced Most recently,in February 1993, HL&P shut down i both units at the South Texas Project when a problem was encountered with a turbine-driven auxiliary feedwater pump. A similar i problem had been encountered pre iously, and HL&P determined that the units would not be restarted until HL&P had determined the root cause of the difficulty and had briefed the NRC on its corrective action The NRC formalized that commitment and sent an Augmented Inspection Team to the South Texas Project to review the matter. Resolution of that matteris underway Unit No. 2 of the South Texas Project began its scheduled refueling outage during the shutdown, and Unit No.1 of the South Texas Project is expected to resume operation in early March 1993. The NRC's report on its diagnostic evaluation is not expected until the summer of 1993. The most recent Systematic Assessment of Licensee Performance rating for the South Texas Project, issued in October 1992, declined somewhat from the prior rating. though ratings in all areas were ' acceptable" or better, and two areas of NRC concern that were identified during 1992 are still pending enforcement conferences and could result in the assessment of civil penalties by the NRC.
- 10. APPI ALS rom LTILITY Commission DEDIRs 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 H L& P's substantial investment in new plant construction, including the South Texas Project. Although Utility Com-mission 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 courth decision an appeal may be taken to the Court of Appeals for the 3rd District at Austin (Austin Court of Appeals) Disvetionary review by the Supreme Court of has may be sought from decisiont of the Austin Court of Appeals The pending appeals from the Utility Commission orders are in vanous stages In the event the courts ultimately reverse actions of the Utility Commission in any of these proceedings, such matters 52
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 H L& P generally are not in a position at this time to pre-dict 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 currentry is pending on the following final orders of the Utility Commission. (a) Docket Nos 6765. 6M and 5779 The appeals of HL& P s 1986 rate case (Docket Nos. 6765 and 6766) and its 1984 rate case (Docket No 5779) are pending before the Austin Court of Appeals. Oral argument has been presented to the court in both cases. In its final order in Docket Nos. 6765 and 6766, the Utility Commission granted H L& P a general rate increase which included in rate base approximately 5678 million of Construction Work in Progress (CWIP). In December 1991, a District Court of Trasis County. Texas. in considering an appeal from that Utility Commission order, ruled that the inclusion of CWIP in rate base did not comply with the requirements of the applicable Texas statute on the grounds that a threshold showing of *cxceptional circumstances" which the court found to be required by the statute had not been met, despite the Utihty Commission's determination that H L&P's financial integrity required inclusion of CWIP at the level granted. R:.tes pursuant to that final order u ere implemented in December 1986 and remained in effect until June 1989. A different result was reached by another District Court of Trasis County, Texas. in considering a challenge to the inclusion of CWIPin rate base in an appeal of the Utility Commissioni final orderin Docket No. 5779. In February 1992, that District Court affirmed the Utility Commissioni final order,in u hich HL&P was authorized to include CWIP in rate base at a level of $948 million. When that District Court's decision was appealed to the Austin Court of Appeals, the issue of CWIPin rate base was not appealed. That appeal, concerning the Utility Commission's treatment of certain taxes in Docket No. 5779, remains pending. A motion to vol- i untarily dismiss the appeal was filed on February 22,1993. but has not yet been acted upon by the court. Rates ordered in Docket No. 5779 were implemented in January 1985 and remained in effect until December 1986. (b)DocktNo M25 l In October 1992. a District Court in Travis County Texas affirmed the Utility Commission's order in HL&P's 1988 rate case (Docket ] No 8425). An appeal to the Austin Court of Appeals is pending in its final order in that docket. the Utility Commission granted ; HL&P a 5227 million inrease in base revenues, allowed a 12.92% return on common equity authorized a qualified phase-in plan for ! Unit No.1 of the South Texas Project (including approximately 72% of H L& P's investment in Unit No.1 of the South Texas Project in l rate base) and authorized H L&P to use deferred accounting for Unit No. 2 of the South Texas Project. Rates substantially corre-sponding to the increase granted were implemented by HL& P in June 1989 and remained in effect until May 1991. In the appeal of the Utility Commission's order, certain parties have challenged the Utility Commission's decision regarding , deferred accounting, treatment of federalincome tax expense and certain other matters A recent decision of the Austin Court of Appeals,in an appeal invohing another utility (and to which HL& P was not a party). adopted some of the arguments being advanced by parties challenging the Utility Commission's order in Docket No. 8425. The Texas Supreme Court declined to review that decision in December 1992, but motions for rehearing are pending In that case,Publie Utihty Commission of Rxas is G7E-SH,'the Austin Court of Appeals ruled that when a utility pays federal income taxes as part of a consolidated group, the utilityi ratepayers are enti-tied to a fair share of the tax sasings actually realized, u hich can include savings resulting from unregulated activities. In its final order in Docket No 8425, the Utility Commission did not reduce HL&Pt tax expense by any of the tax sasings result-ing from the Company's filing of a consolidated tax return. Although the GTE decision was not legally dispositive of the tax issues presented in the appeal of docket No. 8425. it is possible that the Austin Court of Appeals could utilize the reasoning in GTE in addressing similarissues in the appeal of Docket No. 8425. However,in February 1993 the Austin Court of Appeals, considering an appeal invohing another telephone utility, upheld Utility Commission findings that the tax expense for the utility included the utility s fair share of the tax savings resulting from a consolidated tax return, even though the utility's fair share of the tax savings was deter-mined to be zero. H L&P believes that the Utility Commission findings in Docket No 8425 and in Docket No. 9850 (see Note 10(c)) should be upheld on the same principle, but no assurance can be made as to the ultimate outcome of this matter. The Utility Commission's order in Docket No 8425 may be affected also by the ultimate resolution of appeals conctrning the Utility Commission's treatment of deferred accounting. For a discussion of appeals of the Utility Commissioni orders on deferred accounting. see Notes 10(c) and 11. (c) Dockt No. 9850 in August 1992, a district court in Travis County affirmed the Utility Commissioni final order in Docket No. 9850 HL& Pt 1991 rate case.That decision has been appealed by certain parties to the Austin Court of Appeals, raising issues concerning the Utility Com-mission s approval of a non-unanimous settlement in that docket,the Utility Commission's calculation of federalincome tax expense and the allowance of deferred accounting reflected in the settlement. In Docket No. 9850, the Utility Commission approved a settle-ment agreement reached with most parties That settlement agreement provided for a 5313 million increase in HL&Ps base rates, termination of d(ferrals 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 h 1 of the South Texas Project, and recovery of deferred plant costs. The settlem at authorized a 12 55% return on common equity for HL&P and H L&P agreed not to request additional increases in base re s that would be imple-mented prior to May 1,1993 Rates contemplated by that settlement agreement were implemented in May 1r /1 and remain in effect. The Utihty Commission 5 order in Docket No. 9850 found that HL& P would have been entitled to more ate relief than the $313 million agreed to in the settlement, but certain recent actions of the Austin Coun of Appeals could,if ultimately upheld and applied to the appeal of Docket No. 9850. *equire a remand of that settlement to the Utility Commission HL& P believes that the amount 53
- . . ~ . - - - .. , _ . . . . . ~ . . , .-. - .a .
which the Utility Commission found liL&P was entitled to would exceed any disallowance that would have been required under the ;
. Austin Court of Appeals' ruling regarding deferred accounting (see Netes 10(e) and 11) or any adverse effect on the calculation of tax i expense if the court's ruling in the GTE decision were applied to that settlement (see Note 10(b) above). However, the amount of rate j relief to which the Utility Commission found HL&P to be entitled in excess of the 5313 million agreed to in the settlement may not be j sufficient if the reasoning in both the GTE decision and the ruling on deferred accounting were to be applied to the settlement agree-ment in Docket No. 9850. Although HL& P believes that it should be entitled to demonstrate entitlement to rate relief equal to that !
agreed to in the stipulation in Docket No. 9850, HL& P cannot rule out the possibility that a remand and reopening of that settlement I would be required if decisions unfavorable to liL&P are rendered on both the deferred accounting treatment and the calculation of , tax expense for ratemaking purposes. ! Id)DocketNo W6 in June 1990, the Utility Commission issued the final order in Docket No. 6668, the Utility Commission's inquiry into the prudence of ! the planning, management and construction of the South Texas Project. The Utility Commission's findings and order in Docket No. l 6668 were incorporated in Docket No. 8425.11L&P's 1988 general rate case. Pursuant to the findings in Docket No. 6668, the Utility i Commission found imprudent 5375.5 million out of HL&P's 52.8 billion investment in the two units of the South Texas Project. f The Util'ty Commission's findings did not reflect S207 million in benefits received in a settlement oflitigation with the former j architect-engineer of the South Texas Project or the c ffects of federal income taxes, investment tax credits or certain deferrals. In addi- [ tion, accounting standards require that the equity portion of AFUDC accrued for regulatory purposes under deferred accounting } orders be utilized to determine the cost disallowance for financial reporting purposes After taking all of these items into account. f H L& P recorded an af ter. tax charge of 515 million in 1990 and cominued to reduce such loss with the equity portion of deferrals in f 1991 related to Unit No 2 of the South Texas Project.Tne findings in Docket No 6668 represent the Utility Commission's final deter- i mination regarding the prudence of expenditures associated with the planning and construction of the South Texas Project. Unless j the order is modified or rn ersed on appeal. H L& P uill be precluded from recovering in rate proceedings the amount found impru- ! dent by the Utility Commission. . . l } Appeals by HL& P and other parties of the Utility Commission's order in Docket No 6668 were dismissed by a District Court in I Travis County in May 1991. However. in December 1992 the Austin Court of Appeah reversed the District Court's dismissals on pro- } cedural grounds. It is unknown whether any parties will seek further te iew of the Austin Court of Appeals' order by the Texas i Supreme Court, but unless that order is modified on further re iew, H L& P anticipates that the appeals of the parties will be rein-stated and that the ments of issues raised in those appeals of Docket No. 6668 will be considered by the District Court, with the pos-sibility of subsequent judicial re iew once the District Court has acted on those appeals. In addition, separate appeals are pending from Utility Commission orders in Dockets Nos. 8425 and 9850,in which the findmgs of the order in Docket No. 6668 are reflected
- in rates. See Notes 10(b) and 10(c).
fri Docket Nos S230and 9310 Deferred accounting treatment for Unit No.1 of the South Texas Project was authorized by the Utility Commission in Docket No. ; 8230 and was extended in Docket No. 9010 Similar deferred accounting treatment with respect to Unit No. 2 of the South Texas > Project was authorized in Docket No 8425. For a discussion of the deferrt r accounting treatment granted, see Note 11. In Septem-ber 1992, the Austin Court of Appeals. in considering the appeal of the D Commission's final orderin Docket Nos 8230 and i 9010, upheld the Utility Commission's action in granting deferred accou: treatment for operation and maintenance expenses but i rejected such treatment for the carrying costs associated with the im estm m Unit No.1 of the South Texas Project.That ruling ! followed the Austin Court of Appeah decision rendered in August 1992, on a motion for rehearing. invohing another utility which j , had been granted similar deferred accounting treatment for another nuclear plant. In its August decision the court ruled that Texas i law did not permit the Utility Commission to allow the utility to place the carr3 ngi costs associated with the investment in the utility's
}
rate base. though the court observed that the Utility Commission could allow amortization of such costs. HL&P and other parties to i the appeal of Doc ket Nos 8230 and 9010 have sought discretionary roiew by the Supreme Court of Texas by filing applications for writ of error with the Supreme Court. Similar review is being sought by parties to the other utility's appeal The Supreme Court has ; not acted on any of those applications i . b i 11 DLIIRRLD PL61 costs t Deferred plant costs u ere authorized for the South Texas Project b3 the Utihty Commission in two contexts. In the first context, or
-deferred accounting ' the Utility Commission orders permitted HL&it for regulatory purposes. to continue to accrue carrying costs }
in the form of AFUDC (at a 10" rate) on its investment in the tu o units of the South Texas Project until costs of such units were i reflected in rates (u hich was luly 1990 for approximately 72 % of Unit No 1.and May 1991 for the remainder of Unit No.1 and 100% I of Unit No 2) and to defer and capitalize depreciation. operation and maintenance, insurance and tax expenses associated with such [ units during the deferral penod. Accounting standards do not permit the accrual of the equity portion of.AFUDC for Snancial report- ! ing purposes under these circumstances. Howe er, in accordance with accounting standards.such amounts were utilized to deter- , mine the amount of plant cost disallow;mcc for financial reporting purposes t The deferred expenses and the debt portion of the carrying costs associated with the South Texas Project are included on the i Company's Statements of Consolidated Income in deferred expenses and deferred carrying costs, respect;tely Beginning with the June 1990 order in Docket No 8425. deferrals were permitted in a second context, a " qualified phase-in plan * , for Unit No. I of the South Texas Project. Ac counting standards require allow able costs deferred for future recovery under a qualified j phase-in plan to be capitalized as a deferred charge if certain criteria are met.The qualified phase-in plan as approved by the Utility ; Commission meets these criteria. : During the period June 1990 through May 15.1491. H L& P deferred depreciation and property taxes related to the 28".. ofits ( investment in Unit No.1 of the South Texas Project not reflecteo in the Docket No. 8425 rates and recorded a deferred return on that l
.I 4
54 {
investment as part of the qualified phase-in plan. Deferred return represents the financing costs (equity and debt) associated with the qualified phase-in plan. The deferred expenses and deferred return related to the qualified phase-in plan areincluded on the Company's Statements of Consolidated Income in deferred expenses and deferred return under phase-in plan, respectively Under t the phase-in plan, these accumulated deferrals will be recoverable within ten years of the June 1990 order. ; On May 16,1991. HL& P implemented under bond. in Docket No. 9850, a $313 million base rate increase consistent with the j terms of the settlement. Accordingly HL& P ceased all cost deferrals related to the South Texas Project and began the recovery of such amounts These deferrals are being amortized on a straight-line basis as allowed by the final order in Docket No. 9850.The i amortization of these deferrals totaled $25.8 million and $16.1 million for 1992 and 1991, respectively, and is included on the Compan> t Statements of Consolidated Income in depreciation and amortization expense. See also Notes 10(b),10(c) and 10(e). The following table shows the original balance of the deferrals and the unamortszed balance at December 31,1992. l lMLANc0 Al ORIGINAL M cLMfiLR 3L [ THOUSANDS of DoLLARsi IMLANel IW2 Deferred Accounting?
- Deferred Expenses $250,151 $239,745 Deferred Carrl ing Costs on Plant Investment 399.972 383,333
, Total 650,123 623,078 I Qualified Phase-In Plan:* 82,254 67,404 , Total Deferred Plant Cost $732.377 $690.482 ,
- Amortized over the estimated depreciable life of the South Texas Project.
- Amortized over nine years beginning in May 1991. '
As of December 31.1992, deferred income taxes of $200.5 million with respect to deferred accounting and $16.3 million with [ respect to the deferrals associated with the qualified phase-in plan have been recorded. ( i
- 12. M tL ARol f I Lt CTRIC GENI R 4 TING sitiloN ,
The scheduled in-scr ice dates for the Malakoff Electric Generating Station (Malakoff) units have been indefinitely deferred due to l the availability of other cost effective resource options. In 1987, all developmental work was stopped and AFUDC accruals ceased. l Due to the indefinite postponement of the in-service date for Malakoff, the engineering design work is no longer considered via- t ble. The costs associated with this engineering design work are currently included in rate base and are earning a return per the Utility Commission's final order in Docket No. 8425. Pursuant to HL&P's determination that such costs will have no future value, $84 mil- '! lion has been reclassified from plant held for future use to recoverable project costs as of December 31,1992, and will be amortized ' beginning in January 1993. Amortization amounts will correspond to the amounts being earned as a result of the inclusion of such ! costs in rate base. The Utility Commissioni action in allowing treatment of those costs as plant held for future use has been ; challenged in the pending appeal of the Utility Commissioni final order in Docket No. 8425. See Note 10(b) for a discussion of that appeal. In June 1990, H L&P purchased from its fuel supply affiliate, Utility Fuels, all of Utility Fuels
- interest in the lignite reserves and lignite handling facilities for Malakoff. The purchase price was $138.2 million, which represented the net book value of Utility Fuels' investment in such reserves and facilities. As part of the June 1990 rate order (Docket No. 8425), the Uti!ity Commission ordered that ;
issues related to the prudence of the amounts invested in the lignite reserns be considered in HL& P) 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&Ph remaining investment in Malakoff through December 31,1992 of $172 miUion, consisting primarily oflignite reserves and land,is included on the Companyt Consolidated Balance Sheets in plant held for future use. For the 1993-1995 period. HL&P anticipates $14 million of expenditures relating to lignite reserves, primarily to keep lignite leases and other related agreements in effect. i 1 11 RICoV! RAllti PRollCT 0o515 The Utility Commission has allowed recovery of certain costs over a period of time by amortizing those costs for rate making pur. poses. However, recoverable project costs have not been included in rate base and, as a result, no return on investment is being earned during the recovery period Malakoffis the only remaining project with an unrecovered amount of $130 million at December 31,1992, with remaining recovery periods of 78 months ($84 million) and 90 months ($46 million).The Allens Creek project was i fully recovered at December 31,1992. 14 INCoMI TAXLS I In February 1992, the FASB issued SFAS No.109 which amends SFAS No. 96, ' Accounting for Income Taxes? The Company adopted SFAS No.109 in 1992, with restatement to January 1,1990. SFAS No.109, among other things, (i) requires the liability method be used in computing deferred taxes on all temporary differences between book and tax bases of assets (other than goodwill) and liabilities; (ii) requires that deferred tax liabilities and assets be adjusted for an enacted change in tax laws or rates; and (iii) prohibits 55
y net-of-tax accounting and reporting. SFAS No.109 requires that regulated enterprises recognize such adjustments as regulatory j assets or liabilities if it is probable that such amounts will be recovered from or returned to customers in future rates. KELCOM has significant temporary differences related to its 1986 and 1989 acquisitions of cable television systems, the tax effect of which were i recognized when SFAS No.109 was adopted. The cumulative effect of the change in accounting principle as of January 1,1990 was , approximately $220 million and is included on the Company's Statement of Consolidated income as a cumulative effect of change in j accounting forincome taxes. . The adoption of S FAS No.109 did not have an effect on revenues; however, net income for the years 1991 and 1990 were affected l and have been restated. A reconciliation of net income and related per share amounts for the years 1991 and 1990 is pmsented below: ; {THotSWDS of DOLLAR 5 ExCEFi rf k sH ARE. AMOUNTS) YEAR ENDED DECEMBER 31. 1991 1990 i Net Income (As Previously Reported) $417,383 5 3.24 S339,454 $ 2.67 t Depreciation (3,851) (.03) (3,851) 1.03) ]i State FranchiseTaxes (18,366) (.14) State and FederalIncome Taxes 21,588 .17 7,186 .06 ' l Cumulative Effect of Prior Years (219,718) (1.73) 'j Net income (As Restated) $416.754 S 3.24 $123.071 $ .97 : The current and deferred components ofincome tax expense are as follows: i t l [ THOUSANDS of DoLEAks# YEAR ENDED DECEMBEll 31_ l 19u2 1991 3090 l (REs1ATED) (RESlATED) I Current: , U.S. 5130,360 $138,195 5121,855 - l Deferred: i Liberalized depreciation 79,489 84,763 94,457: j Investment tax credit (20,387) (19,911) (37,979)
' Alternative minimum tax (438) 10,391 (33,246)- -
Excess deferred taxes (17.403) (17,532) (12,295) . Deferred plant costs (6.671) 22,828 83,725 l 1RS 1983-84 audit assessment (2,446) (34.916) ? Other-net (341) (8.108) (16.657) Income taxes before cumulative effect of accounting change $164.609 . $208.180 $164.944 Effective income tax rates are lower than statutory corporate rates for each year as follows: : i!
't (1HoUs%Ds of DOLLAksi YEAR ENDED DECEMI>ER 31 1992 1994 1990 j GEs1ATED) (RESTATED) ;
income before income taxes and cumulative effect of [ accounting change $505,0% $624,934 5507,733 , Preferred dividends of subsidiary 39,327 46.187 47,753 ! Total 544,423 671,121 555,486 Statutory rate 34 % 34 % 34 % . Incometaxes at statutory rate 185.104 228,181 188.865 f Reduction in taxes resulting from: ! AFUDC-otherincluded in income 2,097 6.658 4,902 : Amortization ofinvestment tax credit 20,359 20,298 41,319 i Amortization ofintangible assets (4,264) (4.264) (4,265) ! Exass deferred taxes 17,403 17,532 12.295 Difference between book and tax depreciation for which deferred taxes } have not been normalized (13.466) (14.437) (17,482) Disallowed plant costs-net 1,699 (11,973) i Other-net (1,634) (7,485) (875) i lotal 20,495 20.001 23.921 Income taxes before cumulative eifect of accounting change $164,609 $208.180 $164,944 g Effective rate ' 30.2 % 31.0 % 29.7 % , a 56 ; i
- ~ . . . - .. . - . .- --
i Following are the tax effects of temporary differences resulting in deferred tax assets and liabilities:- ! ancesssos or nottAmsi otetusta 31. 1M2 - 1991 f Deferred Tax Assets: , I Alternative minimum tax $ 108287 $ 115,945 [ Disallowed plant cost 67,728 69,909 ; 1RS audit assessment 74,966 48,513 .! Unbilled revenues 51,881 i Loss and ITC carryforwards 54,799 54,978 -
]
Other 68.999 40201 > Total deferred tax assets 374,779 -381,427 f t Less valuation allowance 56.638 - 56.817 l Totaldeferred tax assets-net 318,141 - 324,610-Deferred Tax Liabilities: Depreciation . 1,146,970 1,062,947 f
)
Identifiable intangibles 238,778 245,415 i Deferred plant costs 216,813 ' 227,255 f Regulatory assets-net 177,426 . 165246 : Capitalired taxes, employee benefits and removal costs 122,268 122,735 - [ Other 205,706 204,480 i Total deferred tax liabilities 2,107,961 2,028,078 '[ Accumulated deferred income taxes- net $1.789,820 $1,703.468 i i l
- 15. stTP11MENTARY I.XPLNSE INF oRM ArloN l Taxes, other than inecme taxes, were charged to expense as follows: [
I GHoUs4NDS of DOLLARS) TEAR ENDED DECIMP.ER 31, h r IM2 1991 IMO- , Electric: j Ad valorem $135,872 $117,298 .$ 99,375 ! State gross receipts 42,662 40,876, 39,091 -j Payroll 21,582 23.515 22265 l PUC assessment 6,163 6,001 5,713 : State franchise tax (net of refunds) 21,065- 2.017 21,054- ., Miscellaneous 894 819 489 ] Total 228,238 190,526 187,987 f t Taxes included in cable television operating expenses 9,481 9,260 8,646 Taxes included in cost of coal and lignite sold 7,242 5,475 l 4.945 Total $244.961 $205261 $201,578 j Research and development costs charged to expense $ 15,963 5 15,548 5 15.392 i i f l
-l 3
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I
- 16. 8t'5INESS SIGMETI NORM GloN The Company operates principally in two business segments: electric utility and cable television. The electric utility business segment encompasses the operations of HL& P and Utility Fuels. HL& P prosides electric service in and around Houston, while Utility Fuels
- supplies coal, lignite and transportation senices to certain of HL&P's electric generating facilities. Financial information by business segmentis summarized as follows: ,
'^F (THors%DS of DoLLGs) YLM LSDED DecD*BtR 31.
1992 1991 1990 atsraton weswto) { Revenues: . Electricutility* 5 4,359,628 S 4,219,011 $ 3,978,683 l Cable television
- 236,760 224,728 - 199,893- j Totalrevenues S 4.596 188 5 4.443,739 $ 4,178,576 _
Operating 1ncome (Expense): Electric utilitym . $ 923,931 $ 1,013.542 S 943,283
- Cable teloision* 19,394 14,009 5,460 ;
Other operations (911) (1,595) (2,064) l Total operatingincome 942,414 1,025,956 946,679- [ Otherincome (expense) 12,098 77,291 (7,190) .; Fixed charges (449,416)' (478,313) (431,756) ! Income beforeincome taxes 5 505.096 $ 624.934 5 507,733 l Depreciationand Amortin. tion: , Electric utility S 388.548 $ 366,777 $ 341,608 l Cable television
- 75,622 70,496 67,668 j Other operations 911 1,595 2,064
}
Total depreciation and amortization S 465,081 $ 438.868 5 - 411.340 ;f Identifiable Assets (end of period): j Electric utility $10,823,268 $10.662,099 $10,552,407 Cable telesision 1.386,927 1.391,526 1,429,768 -; Other operations 328,268- 221,160 241,444 ! Adjustments and eliminations (120,962) (109.621) (178,864) 16tal assets $12,417,501 $12.165,164 $12,044,755 5 Capital Expenditures: 3 Electric utility 5 336,035 $ 375,520 $ 358,455 Cable telesision* 44,306 26,624 31,186 l Other 1,625 Total capital expenditures $ 381,966 5 402,144 5 389.641
- Electric utility revenues include sales of 5529 million.5542 million and 5510 million for 1942,1991 and 1990, respectively, between HL& P and i Utility Fuels These sales are not eliminated in consolidation because of the disthetion ior regulatory purposes between utility and non-utility operations.
'" Amounts do not include amounts attributable to Paragon, which is accounted for under the equity method. t
< 1992 amounts include the effect of a charge of 586 milhon which relates to HL&P's restructuring of operations as a result of the implementation of .j the STEPprogram (see Note 18) ;
\
i I 58
I?. INVLsTMENTs (a) Cane TelerhionItmacrship A KBLCOM subsidiary owns a 50% interest in Paragon, a Colorado partnership that owns cable television systems.The remaining interest in the partnership is owned by American Television and Communications Corporation (ATC), a subsidiary of Time Warner Inc.The partnership agreement provides that at any time after December 31,1993 either partner may elect to divide the assets of the partnership under certain pre-defined procedures set forth in the agreement. Paragon is party to a $275 million revolving credit and letter of credit facility agreement with a group of banks. Paragon also has outstanding $150 million principal amount of 9.56% senior notes due 1995. In each case,borrowings are non-recourse to the Company and to ATC. ttu foreign Elecinc L:tdity Houston Argentina owns a 32.5% interest in an Argentine holding company which acquired,in December 1992, a 51% interest in Edelap S. A., an electric utility company operating in La Plata, Argentina and surrounding regions. Houston Argentina's share of the purchase price was approximately $37.6 million. ;
- 18. H1 sTH LCTL RING HL&P recorded a one-time pre-tax charge of 586 million in the first quarter of 1992 to reflect the implementation of the STEP pro- j gram, a restructuring ofits operations This charge includes 542 million related to the acceptance of an early retirement plan by 468 empicyees of H L< 531 million for severance benefits related to the elimination of an additional 1,100 positions and $13 million in other costs associated u ith the restructuring.
19.CH ANGf IN ACcOL NTING MITHoD f oE RIVLNL Is During the fourth quarter of 1992, HL&P adopted a change in accouming method for revenue from a cycle billing to a full accrual method, effective January 1,1992_ Unbilled revenues represent the estimated amount customers will be charged for service received, but not yet billed, as of the end of each month. The accrual of unbilled revenues results in a be cr matching of revenues and expenses. i This change impacts the pattern of revenue recogmtion, which has the effect of increasing revenues and earnings in the second j and third quarters (periods of higher usage) and decreasing revenues and earnings in the first and fourth quarters (periods of l lower usage). The cumulative effect of this accounting change,less income taxes of $48.5 million, amounted to $94.2 million, and was included in 1992 income. If this change in accounting method were applied retroactively, the effect on ec solidated net income in 1991 and 1990 would not have been material. 59
- _ _ . _ .-.m _. _.. 5
- 20. tlN AUDirED Qt'AR11R1Y INI ORM ATioN The following unaudited quarterly financialinformation includes,in the opinion of management, all adjustments (which coinprise .
only normal recurring accruals) necessary for a fair presentation. Quarterly results are not necessarily indicative of a full yeart opera- L! tions because of seasonality and other factors, including rate increases and variations in operating expense patterns. - i The quarterly results have been restated to include the impact of the adoption of SFAS No.109, as discussed in Note 14, and the- '} recording of unbilled electric revenues as discussed in Note 19. k (THol' SANDS of DOLLARS) EARNINGS ] NET (LosSJ rER ! Q1' ARTER ENDED orERATING INCOME common i 1491 REVENUES INCOM*. (LOSS) sH ARE ' l March 31 $ 918,160 $133,311 5 51,849 $.40 : Adjustment la (963) 2,378 .02 q March 31 Restated $ 918,160 $132.348 5 54,227 $ .42 ' June 30 $ 1,059,605 $216,018 $ 87.424 $ .68 . Adjustment 1*- (963) 2,405 .02 ! June 30 Restated $ 1.059,605 - $215.055 $ 89,829 $ .70
$1,370,609 $459,948 $223,831 >
Sept 30 $1.73 Adjustment In" .(963) (7,873) (.06) l Sept. 30 Restated $ 1,370.609 $458,985 $215,958 $1.67 Dec.31 $1,095,365 $220,530 $ 54,279 - S .42 . Adjustment 1* (962) 2.461 .02 's Dec. 31 Restated $1,095.365 $219.568 $ 56.740 $ .44 ; r 1992 March 31 $ 975,250 $ 68,690 * $ (33,908)'d' $ (.26) Adjustment la (963) 1.366 .01 Adjustment 2* (15,584) (14,681) (9,689) . (.08) t Cumulative effect of adjustment 2e 94,180 .73
- March 31 Restated S 959.666 $ 53,046tdi $ 51,949'd> $ .40*
~
June 30 $1,097,644 $227,656 $ 74,947 $ .58 Adjustment 1* (%3) 1,388 .01 Adjustment 2'" 70,148 66,461 43,865 .34 ' June 30 Restated $1.167,792 $293,154 $120,200 $ .93 Sept. 30 $1,392,164 $447,748 $230,913 $1.78 Adjustment 1* (963) 1,408 .01 Adjustment 2* 11,180 10.676 7.046 .06 Sept. 30 Restated $1.403.344 $457.461 $239.367 $1.85 Dec.31 $1,065,586 $138,753 $ 23,151 $ .18 l
- Quarterly earnings (loss) per common share are based on the weighted average number of sh ires outstanding during the gianer, and the w.nf the !
quarters may not equal annual carnings per common share.
- Adjustment required to restate quarterly amounts for the change in accounting for SFAS No.109 (see Note 14).
<" Adjustment required to restate 1992 quarterly amounts for the change in accounting for revenues (see Note 19). [
- Amounts include the effect of a pre-tax charge of 586 million which relates to HL&P's restructuring of operations as a result of the implementation 'j
~
of the STEP program (see Note 18)
- Loss from continuing operations per share for the first quarter of 1992 was $.33 .
- I
- 21. RICt.As51rlC ATION Certain amounts from the previous years have been reclassified to conform to the 1992 presentation of financial statements.
Such reclassifications do not affect earnings. l t l 1
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INDEPENDENT AUDITOR 8' REPORT i Houston Industries incorporated: We have audited the accompanying consolidated balance sheets and the consolidated statements of capitalization of Houston [ Industries incorporated and its subsidiaries as of December 31,1992 and 1991 and the related statements of consolidated income, consolidated retained earnings and consolidated cash flows for each of the three years in the period ended December 31,1992. ; These financial statements are the responsibility of the Company) management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining. on a test basis, evidence supporting the amounts and disclosures in the financial statements, An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall , financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly. in all material respects. the financial position of the Company and its subsidiaries at December 31,1992 and 1991 and the results of their operations and their cash flows for each of the three years in the period ended December 31,1992 m conformity with generally accepted accounting principles. As discussed in Note 14 to the consolidated financial statements,in 1992 the Company changed its method of accounting forincome taxes to conform with Statement of Financial Accounting Standards No.109 and, retroactively, restated the 1990 and 1991 consolidated financial statements for the change. As discussed in Note 19 to the consolidated financial statements, the Company changed its method of accounting for revenues in 1992. DELOITIE & TOUCHE Houston, Texas February 16,1993 61
I OPERATING STATISTICS OF HL&P f HOUSTONINDUSTRif sINCoRPORC1D ANDsEBS!DI ARIES YEAR ENDED DECEMMR 31. 1992 1991 1990 l su CTRIC ENIRGY GENER ATLD Generated-Net Station Output 51,065,016 52,346,488 52,040,529 AsD Pt Rcn ssin (wwHt Purchased 11,537,872 10.518,246 . 10.320,356 [ Net Interchange 204 (54) (11,845) Total 62,603,092 62,864.680 62,349,040 t Company Use, Lost and Unaccounted for 2.660,704 2,663.539 2.792,536 Energy Sold 59,942,388 60.201,141 59.556,504 ! in civic surs tuuun Residential 16,375,400 16,978,934 16,701,269 [ Commercial 12,541,636 12,501,613 12,188,947 i Industrial 24,374,284 24,250.892 23,812,889 Street Lighting- Government and Municipal 110.8 % 109,874 110,026 Total Firm Retail Sales 53,402,216 53.841,313. 52,813,131 - Other Electric Utilities 243,167 506,558 718.626 Total Firm Sales 53.645,383 54,347,871- 53,531,757 . Interruptible 5,974,203 5,304,345 5,770,154 Off System 322,802 548,925 254,593 , Total 59,942,388 60.201.141 59,556,504 Nt ur,rR os ctstourRS Residential 1,258,556 1.238,451 1,217,594 e (tsD or vi rood 0 Commercial 165,241 163,054 161,067 Industrial (including Interruptible) 1,756 1,791 1,844 . i Street Lighting-Government and Municipal 82 82 82 Other Electric Utilities (Including Off System) 10 13 10 Total 1,425,645 1,403.391 1,380,597 onRorsc Entst r Residential $1,465,627 51,465.403 51,385,710 > rniot sasDs or Dott Atsk Commercial 926,157 882,873 838,325 Industrial 1,134,601 1.109,108 1,070,660 Street Lighting-Government and Municipal 23.148 21,977 20.366 ! Total Electric Revenue- Firm Retail Sales - 3,549,533 3,479.361 3,315.061 Other Electric Utilities 26,834 41,136 48.833 Total Electric Revenue-Firm Sales 3,576.367 3,520,497 3,363,894 i Interruptible 127,042 105,476 121,228 Off-System 6,364 8,907 4,746 Total Electric Revenue 3,709,773 3,634,880 3,489,868 i Miscellaneous Electric Revenues 117.068 39.663 (21,186) -[ Total $3,826,841 $3.674,543 53.468,682 issiulI D NIi GE N1 RCING 13,583,000 13.583,000 13,584,000 l cal'Ar,11IIT (KW)iEND 01 PERIOD) cost or iEt t ichTS tlR Gas 192.3 161.5 178.9 Miwos titt Coal 218.9 230.6 220.5 Lignite 178,8 175.5 160.1 [ Nuclear 59.9 58.3 57.9 ! Average 184.6 175.3 178.9 , 1 62
r HOU310N IMDUtiRIE8 INCDRP0 RATED ! i t- ostens: Joseph M. Hendrie, Ph.D Thoms B. McDade Don D. Sykora ; 68, Consulting Engineer, 69 Pu ceInvestor, 62, Vice President of
?- Milton Carroll P or York, director Houston, Texas, dinctor the Company, e 42, Chairman, President since 1985. since 1980. Houston, Texas, director f and Chief Executive Officer 5
since 198' ofinstrument Pmducts,Inc., Howard W.11orne *Randall Meyer i llouston, Texas, director 66. Vice Chairman of Cushman 70, Retired President of Exxon Jack T. Trotter i since 1992. & Wakefield of Texas,Inc., Company USA, . 66, Private Investor and { llouston, Texas, director Houston, Texas director Vice Chairman of the Board r John T' Cater since 1978. J since 1988. of First Interstate 57, Chairman, Chief Executive Bank of Texas, N. A. ! Officer and Director of River Don D. Jordan Alexander F. Schilt, Ph.D. Ilouston, Texas, director i Oaks Trust Company. 60, Chairman. President and 52, Chancellor of since 1985, h Houston, Texas, director Chief Executive Officer of University of Houston System. j since 1983. the Company, llouston, Texas, director
. Messrs. Culler and Meyer
*Floyd L. Culler, Jr.
" " "' *** direct r Si"C' 9 are expected to retire from l
- 70. President Emeritus and Kenneth L Schnitzer, Sr. me Board of Directors at
{ Consultant to the Electric 63 Chairman of the Board me 1993 Annual Mening of Power Research Institute, Shareholders, pursuant to the of Schnitzer Enterpriscs,Inc. .: Palo Alto, California, director llouston, Texas, director Company's Maws. { since 1988. since 1983. f 5 t i OfFEtr,s Hugh Rice Kelly Christian Schley Marc Kilbride [ 50mee Pmsident, 44. Associate General Counsel 40, Assistant Corporate Don D. Jordan General Counsel and Corporate and Assistant Corporate { 60, Chairman. President Secretary and Assistant > t g Secretary Secretary Ireasurer , and Chief Executive Officer , Don D. Sykora Rufus S. Scott Kevin P. Loughnane ! Raymond J. Snokhous > 62, Vice Pres.i dent 49, Associate General Counsel 36. Assistant Treasurer L 63, Senior Vice Pres.i dent and Assisant Corporate Governmental and Regulatory Gary G. Weik Robert E. Smith Secretary Affairs 47, Vice President 48. Assistant Corporate , W,ilh,am A. Cropper Gretchen H. Denum Secretar3 Ken W. Nabors 38. Assistant Corporate 53, Vice President and i 49, Comptroller Secretary Treasurer ; d d I 63 I
H O U S'T O N LiCMilNE & PODER C00PANY orrms R. Steve Letbetter Lawrence B. Horrigan, Jr. Robert L. Waldrop
##' Gr uPVice President 58, Vice President 45,Vice President -
Don D Jordan Finance and Regulatory Purchasing and Support Public and Customer Relations Chief Executive Officer Rufus S. Scott Stephen C. Schaeffer Warren H. Kinsey, Jr. 49, Associate General Counsel Don D. Sykora "
#" "" "" T" 62,IWsident and . '#
Administration and Support Nuclear Generation Secretary Chief Operating Officer L. G. Brackeen Ancel D. Maddox - Gretchen H. Denum Jack D. Greenwade 58. Vice President 52, Vice President 38, Assistant Corporate
' "" "" Marketing and Industrial . Secretary Fuel and Energy Management E*" "'
Relations J mes S. Bri n Mary P. Ricciardello Donald P. Hall 45, Vice President Stephen W. Naeve 37, Assistant Corporate
- 65. Group Vice President and Comptroller 45, Vice President Secretaryand Assistant Corporate Planning Treasunt Susan D. Fabre and Treasurer l Lee W. Hogan 37, Vice President Christian Schley .;
#8' C*"P * "id*"*
lluman Resources - Stephen L. Rosen 44, Assistant Corporate )
' # ** "" 52, Vice President Secretary . [
Hugh Rice Kelly Nuclear Engineering 50, Senior Vice President. . David G. Tees General Counsel and 48,Vice President Corporate Secretary Energy Production
)
KBLCOM INCDRPORATED ! omcas Dean A. Gilbert William A. Cropper Hugh Rice Kelly , 36Aemth nee Wnident n,we Residmt 50, Comorate Seentag Don D. Jordan Group Operations and Treasurer ; 60, Chairman of the Board and Chief Executive Officer David M. McClanahan Jonathan F. MyerS 37, Assistant Treasurer j
, 43. Senior Vice President 44. Vice President. -
General Counsel and Assistant Marc Kilbride : and Chief Financial Officer 47, President and 40. AssistantTreasurer , Comonte Sectmq Chief Operating Officer Richard N. Clevenger ) 46, Vice President M. Scott Smith John R. Bickham En;ineering and Technology 40,Vice President 43, Executive Vice President g Group Operations ; I UTILi1Y F U E L 8, 1 N C. I arrms Charles L. Merka Hugh Rice Kelly j
"' 8"I ' *"id*! 5 ' C * '*** S""*** !
Don D. Jordan 60, Chairman of the Board Ronald D. Baalman Richard B. Dauphin 43,Vice President 39. Assistant Corporate g gg
]
58, President and Chief Executive Officer ,;
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~l.N VE8T0 Rt i N F 0 R 18 A T I O N . ' .:o r
1 Houston Industries is committed to Sharcholders of mcord may have ; SINER MATHNALS - _ providing the highest level and quality ' their quanerly dividends autdmatical- A copy of the annualreport to the? - ofinvestorinformation and senices. ly, electronically deposited, on pay . Securities and Exchange Commission.l ' . , Investors are encouraged to take ment date, dimetlyto their bankJ on Form 10-K,other corporate publit b^
~ '
' advantage of the full range ofinforma- accounts. Furtherinformation on - > cations and printed copies of key . -
tion and services offered. direct deposit may be obtained by - ; executive speeches are available on L - - hj< writing or calling Investor Senices. - : request. Videotaped copies 6f the ! AN mat u n as annual shareholders' meeting are pr~o - The annual meeting of shareholders sRWEND REUNESTMENT - will be held May 5,1993 at 9 a.m. The Company's dividend reinvest- . vided on loan upon mquest,in early( ,
-. May,6e annual rep rt will be avail-_ ,
i at the Texas Commerce Center ment program gives shareholders the ! Auditorium,601 Travis Street, ' able on audio tapefor the visuallyj opponunity to reinvest dividendsin
. unpaired. All materials may be -
Houston, Texas. All holders of HI common stocki Shareholders also : '
- requested inwriting or by calling ,
H common shares are encouraged to may make optional cash contribu- ~ the numberslisted under" Investor ~ attend and participate. tions ranging from $50 to $6,000 per
. Assutan# '
?
A formal notice of the meeting will calendar quaner to purchase addi-be mailed to shareholders in March. tional shares. FUWWAL EWORMATNN , The notice will be accompanied by a Further information on the divi- . Prospective investors, analysts and proxy statement describing the items dend minvestment program may be - repmsentatives of financialinstitui T of business to be considered and a obtained by calling numbers listed tions requiring infonnation regarding ? proxy card, which may be used to under " investor Assistance" below. ' Houston Industries should contact J vote on nominees for director and any the Financial & Public Relations ? SHARENOLDER REPORTS other matters to be decided at the. Department at-(713) 629 3122 or . - In addition to the annual repon and , meeting. proxy statement distributed in March, (713) 629-3124. TRANSFER AGENT,REW8TRAR shareholders aceive thme quarterly siecttains . AND WWWEND 25BW8mE AGENT reports each year. Repons ofresults . Houston Industries common stock is . The Houston Industries investor ' for the first, second and third ' quarters . traded under the symbol HOU on the : ;
~
Senices Department serves as trans- am mailed about the end of May, New York, Midwest and London-- , fer agent, registrar and dividend dis- August and November, respectively. Stock Exchanges. , 9 bursing agent for H1 common stock' Fourth quarter results are included 1 4 Aueness . ! and for HLAP preferred stock and in the annual report. ; DeloittE & Touche; Houston Texas., first mortgage bonds. ; mvEsTOR ASNEIMCE : mfg NVBEND PAYMENTS Investor Services representatives ! Houston Industries lacorporated ,
' Common stock dividends generally are available during normal business . Five Post Oak ParkI ;)
are paid on March 10. June 10, houn to provide assistance and 4400 Post Oak Parkway 1 } September 10 and December 10 to answer questions regarding HI- L Houston, Texas 77027 z holders of record on February 16, common stock, HlAP preferred P. 0; Box 4567? ! May 16, August 16 and November stock and HL&P fint mortgage.. 1 Houston, Texas 77210. 16, respectively. bonds. Imeston may write to ' . Telephone: (713) 629 3000 . l
? Dividends are subject to declara- Investor Services at the addmss of J!
FAX:(713) 629-3129
' ~
tion by the Board of Directors,which the corporate offices, or call using ~ , establishes the amount of each quar-- = the followingtelephone numberst
'd
~ terly dividend to be paid on common ' ' in Houston: (713) 629-3060 e stock and fixes the record date and . In other parts of Texas: _q x payment date for each common and . 1-800-392-4261 -
" 1 preferred stock series. In other pans of the U.SJ -
1-800-231-6406 O Primed on Recycled Paper. e r
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~~lE Houston - Industries . . _JL Incorporated P.O. Box' 4567 i liouston, Texas 77210 >c 1 I 1 l I i i
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d e UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31,1992 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File Number 1-7629 HOUSTON(Esact INDUSTRIES INCORPORATED name of registrant as speci6ed in its charter) Texas 74-1885573 (State or other jurisdiction of (1.R.S. Employer incorporation or organization) Identifiestion Number) 5 Post Oak Park 4400 Post Oak Parkway 77027 Houston, Texas (Zip Code) (Address of principal esecutive omces) Registrant's telephone number, including area code: (713) 629-3000 Securities registered pursuant to Section 12(b) of the Act: Name of each eschange on Title of Each Class which recistered Common Stock, w%hout par value. New York Stock Exchange and associated rights to purchase Midwest Stock Exchange - preference stock London Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
- contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or I information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Forr 10-K. [<]
Indicate by check mark whether the registrant: (1) has 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / No
' The aggregate market value of the voting stock held by non-affiliates of Houston Industries incorporated -
was $5,937,692,220.12 as of February 1,1993, using the definition of beneficial ownership contained in Rule 13d-3 promulgated pursuant to the Securities Exchange Act of 1934 and excluding shares held by directors and executive officers. As of February 1,1993, Houston Industries Incorporated had 129,587,179 shares of Common Stock outstanding. Portions of the definitive proxy statement relating to the 1993 Annual Meeting of Shareholders of Houston Industries Incorporated, which will be filed within 120 days of December 31,1992, are incorporated by reference in item 10, item II, item 12 and item 13 of Part III of this form. j u j
P . k DEFINITIONS When used herein, the following terms will have the meanings indicated. l TERM DEFINITION 1935 Act Public Utility Holding Company Act of 1935 1992 Cable Act Consumer Protection and Competition Act of 1992 AFUDC Allowance for Funds Used During Construction ATC American Television and Communications ' Corporation Austin City of Austin ' BBtu Billion British Thermal Units Bef Billion Cubic Feet Cable Act Cable Communications Policy Act of 1984 CERCLA Comprehensive Environmental Response, Compensation and Liability Act Clean Air Act Federal Clean Air Act including Amendments of 1990 Clean Water Act Clean Water Act Amendments of 1987 CNN Cable News Network Company Houston Industries Incorporated Copyright Act Copyright Act of 1976 CPL Central Power and Light Company CSW Central and South West Corporation CSW Credit CSW Credit, Inc. Development Ventures Development Ventures, Inc. DOE Department of Energy DSM Demand Side Management Du Pont E.I. du Pont de Nemours Company Energy Act Energy Policy Act of 1992 Enron Enron Corporation , EPA U.S. Environmental Protection Agency ' ESOP Employee Stock Ownership Plan of Houston Industries Incorporated EWG Exempt Wholesale Generator ESPN Entertainment & Sports Programming Network Exxon Exxon Company, U.S.A. FASB Financial Accounting Standards Board FCC Federal Communications Commission FERC Federal Energy Regulatory Commission Gulf States Gulf States Utilities Company HBO Home Box Office HL&P Houston Lighting & Power Company Houston City of Houston Houston Argentina Houston Argentina S.A. Houston Industries Finance Houston Industries Finance, Inc. IRP Integrated Resource Planning IRS Internal Revenue Service - KBL Cable KBL Cable, Inc. KBLCOM KBLCOM Incorporated KW Kilowatt (1,000 Watts) KWH Kilowatt-Hour LIBOR London Interbank Offered Rate Limestone Limestone Electric Generating Station t
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TERM DEFINITION ; Malakoff Malakoff Electric Generating Station. Management's Discussion and Analysis of il l MD&A !' E Financial Condition and Results of l Operations Hva Megavolt Amps f. .; MMBtu Million British Thermal Units i MMcf Million Cubic Feet p{ MW Megawatt (1,000 KW) { NCTA ' National Cable Television Association l l NO, NRC Nitrogen Oxides United States Nuclear Regulatory' Commission fli d . Paragon Paragon Communications ! PCB Polychlorinated Biphenyl , , PURA Texas Public Utility Regulatory Act of 1975 as -
' Amended .~,
RBOC RCRA Regional Bell operating company Resource Conservation'and Recovery Act l) ! < San Antonio City of San Antonio ' l l SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards Showtime South Texas Project Showtime Networks, In c .. South Texas Project Electric Generating fl! g f. STEP Station Success Through Excellence in Performance l.l . Sunset Act Texas Sunset Act l TACB Texas Air Control Board TWC Texas Water Commission I, Utility Commission Public Utility Commission of Texas b Utility Fuels Utility Fuels, Inc. kl UTT United Texas Transmission Company W. A. Parish Westinghouse W.A. Parish Electric Generating Station Westinghouse Electric Corporation ll! n' 1 ! l l l i l l f i I
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E o r HOUSTON INDUSTRIES INCORPORATED Form 10-K for the Year Ended December 31, 1992 TABLE OF CONTENTS i Pace No. Part I Item 1. Business The Company and Its Subsidiaries . . . . . . . . 5 Business of HL&P . . . . . . . . . . . . . . . . 6 ' Business of KBLCOM . . . . . . . . . . . . . . . 20 Businesses of Other Subsidiaries . . . . . . . . 2B 30 Regulation of the Company . . . . . . . . . . . . Executive Officers of the Company . . . . . . . . 32 . e Item 2. Properties . . . . . . . . . . . . . . . . . . . 34 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . 35 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 36 i Part II Item 5. Market for the Registrant's Common Equity and Related Stocholder Matters . . . . . . . . . 37 i Item 6. Selected Financial Data . . . . . . . . . . . . . 39 ; Item 7. Management's Discussion and Ar . lysis of Financial Condition and Results of 41 Operations . . . . . . . . . . . . . . . . . . . Item 8. Financial Statements and 54 Supplementary Data . . . . . . . . . . . . . . . ; Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . 92 Part III ; Item 10. Directors and Executive Officers of 92 the Registrant . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . 92 Item 12. Security Ownership of Certain 92 Beneficial Owners and Management . . . . . . . . Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . 92 Part IV j Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . 93 l
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PART I j Item 1. Business j i i THE COMPANY AND ITS SUBSIDIARIES
- The Company, incorporated in Texas in 1976, is a holding company ] l operating principally in two business segments, the electric utility ;
l business and the cable television business. The Company conducts its j, t' operations primarily through three subsidiaries: HL&P, its principal operating subsidiary; KBLCOM and Utility Fuels. See " Regulation of the l Company" for a description of the Company's status under the 1935 Act. 4 l The Company's electric utility business segment encompasses the j l j cperations of HL&P and Utility Fuels. HL&P is engaged in the generation, . transmission, distribution and sale of electric energy and serves over I l 1.4 million customers in a 5,000 square mile area of the Texas Gulf n Coast, including Houston. As of December 31, 1992, the total assets and } j common stock equity of HL&P represented 84% of the Company's consolidated a assets and 106% of the Company's consolidated common stoch equity, j l respectively. For the year then ended, the operations of HL&F accounted ( for 102% of the Company's consolidated net income. See " Business of j- i HL&P." Utility Fuels primarily provides coal and lignite supply services ? I to HL&P. See " Businesses of Other Subsidiaries - Utility Fuels." l
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The cable television operations of the Company are conducted through , l KBLCOM and its subsidiaries. This segment includes five cable television j systems located in four states and a 50% interest in Paragon, a i partnership which owns systems located in seven states. As of December ( j . 31, 1992, KBL Cable served approximately 577,000 basic. cable customers subscribing to approximately 435,000 premium programming units ' and, ; according to information provided by Paragon's managing partner, Paragon j served approximately 901,000 basic cable customers subscribing to approximately 540,000 premium programming units. See " Business of KBLCOM." j ; l l As of December 31, 1992, the Company and its subsidiaries had 11,376 -! full-time employees. The electric utility segment had 9,57.7 full-time l empic,yees and the cable television segment had 1,513 full-time employees cl (excluding employees of joint ventures and partnerships in which the p! Company holds less than a majority interest). g l In January 1992, HL&P, as part of a program of self-examination to jl identify performance improvement opportunities, of fered certain employees hi a voluntary early retirement plan and announced a severance plan for [l those employees affected by recommended changes to HL&P's workforce. il hj Approximately 500 employees accepted the early retirement offer and an additional 1,100 positions were eliminated. Affected employees were Li released and offered the severance package. HL&P recorded a one-time, , pre-tax charge of $86 million in the first quart 2r of 1992 to reflect the : restructuring of its operations. For a further discussion of this I program, see "Results of Operations" in Item 7 of this Report and Note ]' 18 to the Consolidated Financial Statements in Item B of this Report, j; which are incorporated herein by reference. l i
9 The Company has adopted or will adopt in 1993 certain new accounting principles, including SFAS No. 106, " Employers' Accounting for Postretirement Benefits Other Than Pensions"; SFAS No.107, " Disclosures About Fair Value of Financial Instruments"; and SFAS No.109, " Accounting for Income Taxes." As a result of the adoption of SFAS No. 109, the Company has restated its financial statements for the period 1990-1991. I See the Consolidated Financial Statements in Item 8 of this Report. l From time to time, the Company and its subsidiaries may pursue domestic and international business opportunities including participation ; in the development of non-utility generation projects which, in the i aggregate, are not expected to be significant in the near term in ! comparison with other activities of the Company. See " Businesses of j Other Subsidiaries." For certain financial information with respect to each of the l Company's two principal business segments, see Note 16 to the l Consolidated Financial Statements in Item 8 of this Report, which is , incorporated herein by reference. For a discussion of the Company's liquidity and financing i activities, see " Liquidity and Capital Resources" in Item 7 of this i Report, which is incorporated herein by reference. ( BUSINESS OF HL&P ; HL&P, incorporated in Texas in 1906, is engaged in the generation, ! transmission, distribution and sale of electric energy. Sales are made to residential, commercial and industrial customers in an approximately 5,000 square mile service area of the Texas Gulf Coast, including , Houston. { As an electric utility, HL&P has been affected to varying degrees I by a number of f actors that have af fected the electric utility industry in general, including dif ficulty in obtaining rate increases suf ficient i to provide an adequate return on invested capital, high costs and delays associated with compliance with environmental and nuclear regulations, l changes in regulatory climate, prudence audits, competition from other r energy suppliers and dif ficulty in obtaining regulatory approval for l construction of new generating plants. HL&P is unable to predict the i future effect of these or other factors, including any propcced tax changes contained in the Clinton administration's economic plan, upon its , operations and financial condition. For information concerning judicial review of certain rate orders of the Utility Commission with regard to ; HL&P, see Notes 10 and 11 to the Consolidated Financial Statements in , Item 8 of this Report. l In 1992, Congress enacted the Energy Act which, among other changes, exempts a class of electric power producers engaged in sales of electric energy exclusively at wholesale (EWGs) from the 1935 Act. This . f legislation also directs state regulatory commissions to consider implementation of standards for wholesale purchases of power by electric utilities, IRP, conservation, DSM and energy efficiency. In addition, it expands the FERC's authority to order utilities to transmit power at , the request of any electric utility, federal power marketing agency or r any person generating energy for sale for resale, subject to certain ! t b
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.. 1 conditions. For information with respect to the Energy Act, See
" Business of HL&P - Competition."
The 73rd Texas legislature, which convened in January 1993, is charged with reviewing the operations of the Utility Commission under provisions of the Sunset Act. The Sunset Act staff advisory recommendations have supported continuation of the Utility Commission for t eight more years; however, they have recommended changes to the PURA, d, which provides the Utility Commission its legislative authority. HL&P i-i is unable to predict the outcome of this review; however, it may include J changes to the organization and responsibilities of the Utility g Commission staff and mandate an IRP process for electric utilities, i w The Utility Commission has from time to time independently initiated I rulemakings related to IRP, including a more formal and structured [ approach for approval of an electric utility's resource plan for meeting. p customers' requirements for electricity. This rulemaking has not been M-completed; therefore, HL&P is unable to predict its ultimate outcome. !L Under consideration are requirements for public input, demand side (; resource solicitation, and quantification of externalities (external N costs relating to environmental concerns, health care and similar h matters) for both demand and supply side resources. ;U V HL&P is project manager and one of the four co-owners of the South [. Texas Project, which consists of two 1,250 MW nuclear generating units. r HL&P owns a 30.8% interest in the South Texas Project. For a description W of litigation and regulatory proceedings relating to the South Texas f Project including, among other things, the NRC's recently initiated !y diagnostic evaluation of the South Texas Project, reference is made to f "Regulanory Matters" below, Item 3 of- this Report, " United States y! Regulatory Commission (NRC) Diagnostic Evaluation of the South Texas t Project" in Item 7 of this Report and Notes 9 (b), 9(c), 9(f), 10 and 11 p
- to the Consolidated Financial Statements in Item 8 of this Report, which 4 are incorporated herein by reference. F h
Service Area 'y j During the mid-1980s, the HL&P service area was adversely impacted i l by an economic downturn that was largely attributable to conditions in l the oil and gas, real estate and banking industries. While employment, ! . personal income and industrial activity in the Houston area have steadily , l increased since 1987, the effects of the national recession slowed growth : in HL&P's service area in 1991 and 1992. The local economy continues to
]. j expand and diversify in numerous areas, including medical, professional fij
- I and engineering services, but is still dependent to a large degree on p :
oil, gas, refined products, petrochemicals and related' businesses. i : l HL&P operates under a certificate of convenience and necessity !t granted by the Utility Commission which covers HL&P's present service hl j area and facilities. In addition, HL&P holds franchises.to provide : 4! electric service within the incorporated municipalities in its service g!' territory. None of such franchises expires before 2007. j s
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9 Peak Loads and Capability The following table sets forth for the years indicated information with respect to HL&P's net maximum hourly firm demand, the total net megawatt capability at the time of its maximum hourly firm demand and the resulting reserve margin: Maximum Hourly Firm Demand Installed Pur- % Change Net chased Total Net From Reserve Capability Power Capability Prior Margin Year (MW) (MW) (1) (MW) Date MW (2) Year (%) 1988 12,855 820 13,675 August 9 10,422 1.2 31.2 1989 13,644 820 14,464 Sept. 1 10,456 0.3 38.3 1990 13,584 945 14,529 August 27 11,150 6.6 30.3 1991 13,583 945 14,528 August 21 10,908 (2.2) 33.2 1992 13,583 945 14,528 July 30 10,783 (1.1) 34.7 (1) Reflects firm capacity purchased. (2) Does not include interruptible load at time of peak. At December 31, 1992, HL&P owned and operated generating f acilities with installed net generating capability of 13,583 MW. Because of unusually mild summer weather, HL&P experienced a maximum hourly firm demand in 1992 of only 10,783 MW, a 1.1% decline from the 1991 peak. Including interruptible demand, the peak actually served in 1992 was 11,638 MW compared to 11,601 MW in 1991. For planning purposes, HL&P currently expects peak demand for electricity to grow at a compound annual rate of about.2% over the next ten years. Assuming average weather conditions, reserve margins are projected to decrease from an estimated 29% in 1993 to an estimated 19% in 1995 as a result of growth in peak demand and the expiration of certain firm cogeneration contracts. Assuming facilities currently planned are placed in service and other capacity needs are met as scheduled, HL&P expects to maintain a reserve margin in the range of 17%- 20% in excess of its current estimate of peak load requirements. See
" Capital Program" and " Competition" below.
EL&P experiences significant seasonal variation in its sales of electricity. Sales during the summer months are typically higher than sales during other months of the year due in large part to che reliance on air conditioning in HL&P's service territory. See Note 20 to the Consolidated Financial Statements in Item B of this Report for a presentation of certain unaudited financial information by quarter for 1991 and 1992, which is incorporated herein by reference.
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Capital Program HL&P has a continuous program to maintain its existing facilities and to expand its physical plant as needed to meet customer requirements. Such program and the estimated construction costs set forth below are subject to periodic review and revision because of changes in load forecasts, the need to retire older plants, changing regulatory and , environmental standards and other factors. EL&P's capital program is t currently estimated to cost approximately $1.30 billion during the ! three-year period 1993-1995 with approximately $344 million, $498 million i and $462 million to be spent in 1993, 1994 and 1995, respectively, i excluding AFUDC. In 1992, total capital expenditures were approximately {
$3,1 million. These amounts do not include expenditures on projects for ;
which HL&P was reimbursed or expects to be reimbursed by customers or other parties. :i { HL&P's capital program for 1993-1995 consists of the following n : principal estimated expenditures .
,,t Percent of j Total "
Amount l (millions) Expenditures ' I s Generating facilities...................$ 583 45% , Transmission facilities................. 100 8% i Distribution facilities................. 449 34% [ General plant facilities................ 118 9% l Nuclear fuel............................ 54 4% ,l i; Total.............................. $1,304 100% Current projections indicate a need for ' additional generating r[ i[ capacity beginning in 1995. HL&P intends to address this need with the installation of two gas turbines with attendant heat recovery steam H i generators at the Du Pont chemical plant located in che Houston area. L i The project, which is estimated to cost $121 million, is expected to be available for peak demand in 1995 and is designed to add approximately 4bj (j 160 MW of electrical capacity to HL&P's system while providing needed process steam to the Du Pont chemical plant. For further information dl
- regarding the Du Pont project, see " Liquidity and Capital Resources" in q ]
Item 7 of this Report, which is incorporated herein by reference. HL&P ' does not forecast additional capacity needs until the 1997-1999 time frame. HL&P currently believes that future capacity needs will likely d; be met through the construction of combined cycle ' gas turbines at [ existing HL&P plant sites, the development of additional steam sale j]h ! projects or through other means, such as purchased power, additional DSM j activities or the reactivation of previously retired units. See
- " Competition" below. The remaining construction expenditures relating h]
j to generating f acilities expected in the 1993-1995 period are primarily associated with improvements to existing generating stations. y]s j For information with respect to expenditures on Malakof f, see Note l'{ 12 to the Consolidated Financial Statements in Item 8 of this Report, jy I which is incorporated herein by reference. ;g ; h! i ,t
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i Expenditures for environmental protection facilities for the five years ended December 31, 1992 aggregated $69.6 million (excluding AFUDC) , including expenditures of $7.6 million in 1992. Environmental protection , expenditures for 1993-1995 based on existing laws and current and I anticipated regulations are estimated to be $140 million (excluding l l AFUDC) , primarily for NO, emissions controls and monitoring equipment. See ' " Regulatory Matters - Environmental Quality" below. Actual construction expenditures and scheduled in-service dates may vary from estimates as a result of numerous factors, including, but not : limited to, changes in the rate of inflation, changes in equipment delivery schedules, construction delays and deferrals, availability and relative cost of fuel, availability and cost of purchased power, environmental protection requirements, the availability of adequate and timely rate relief and other regulatory approvals, the ability to secure external financing, legislative changes and changes in anticipated customer demand and business conditions. In connection with its construction program planning, HL&P employs value-based planning techniques that take into account conservation and load management programs along with traditional utility supply options and renewable energy resources to select the plan utilizing the most appropriate and cost-effective alternatives. In 1992, HL&P spent approximately $19 million, excluding AFUDC, for uranium concentrate and nuclear fuel processing services for its share of the fuel for the South Texas Project. See " Fuel - Nuclear Fuel l Supply" below. Total gross additions to the plant of HL&P during the five years ended December 31, 1992 amounted to approximately $4.3 billion and, during the same period, retirements amounted to approximately $347 million. Gross additions during the five-year period amounted to approximately 40% of total utility plant at December 31, 1992. Finance. For a discussion of HL&P's liquidity and financing activities and requirements, including the financing of HL&P's capital program, see " Liquidity and Capital Resources - HL&P and Utility Fuels" in Item 7 of this Report, which is incorporated herein by reference. Competition A number of cogeneration facilities have been built in IIL&P 's service area as a result of a high concentration of process industries located in the Gulf Coast region and the availability of attractively priced fuels. Cogeneration is the simultaneous generation of two forms of energy, usually steam and electricity. The Public Utility Regulatory Policy Act of 1978 generally requires utilities to purchase all electricity offered to them by qualifying cogeneration facilities. In Texas, however, cogenerators generally are not permitted to make sales of electricity to parties other than electric utilities or the sole thermal purchaser. > As of December 31, 1992, HL&P purchased energy from fourteen cogeneration f acilities, representing over 3,400 MW of total generating capability. As of December 31, 1992, HL&P had contracts totaling 945 MW of firm cogeneration capacity and associated energy which expire as .. t 9 i l I follows: 1993 - 225 MW; 1994 - 325 MW; 1998 - 125 MW; and 2005 - 270 MW. ; A ten-year contract for 50 MW of firm capacity and associated energy j becomes effective in 1994. Electric utilities in Texas are required to t provide transmission wheeling service for power sales by cogenerators . During 1992, to j other electric utilities at a compensatory rate. ; approximately 1,400 MW of cogenerated power was transmitted or " wheeled" l by HL&P to other utilities in Texas. : Given the uncertainties associated with efforts to obtain additional f commitments for firm power on reasonable terms, HL&P is continuing to .l pursue plans which include new construction and the possible reactivation c,f e.xisting f acilities. See " Capital Program" above. : In Octcber 1992, the Energy Act became law. The Energy Act contains i provisions which affect the regulatory structure of the electric utility- , industry. First, the legislation amtnds the 1935 Act, exempting a class 1 of power producers known as EWGs. Companies that are already exempt from <! registration under the 1935 Act, as well as companies not otherwise .i ; engaged in the electric utility business, will be permitted to own EWGs without being subject, as a result of such ownership, to the registration !l l requirements and the geographic, ownership and other restrictions imposed "I
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by the 1935 Act on non-exempt holding companies and their subsidiaries. t , Companies registered under the 1935 Act are also permitted to own EWGs. ! The Energy Act instructs state regulatory commissions to consider i standards applicable to wholesale power purchases by electric utilities, -4 including purchases from EWGs. In addition, the Energy Act permits i exempt and registered holding companies to acquire and maintain an interest in " foreign utility companiec" that meet certain requirements , for an exemption from the 1935 Act. Second, the Energy Act significantly I I expands the authority of the FERC to order owners of transmission lines, such as HL&P, to carry power at the request of any electric utility, aj
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i federal power marketing agency or any person generatingThe electric energy Energy Act for sale for resale over such transmission lines. q;! - prohibits the FERC from ordering the transmission of electric energy '! ! directly to an ultimate consumer; however, it does not affect any .! l authority of any state or local government under state law concerning transmission of electric energy directly to an ultimate consumer. The g , full impact of the Energy Act on HL&P cannot be determined at this time. j? !
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i HL&P continues to address the issue of increased competition, among ! other things, by holding down the cost of construction through the - implementation of DSM programs to control load, by deferring the i construction af capital intensive central station generating. units and l related transmission facilities, and by upgrading existing generating i facilities. HL&P attempts to control its cost of fuel by (1) purchasing ! gas at generally low prices and utilizing-gas storage facilities to ; mitigate significant variations in gas demand, (2) purchasing spot coal at prices below existing contract terms, and (3) contracting for additional purchased power when available on attractive terms. HL&P is , also addressing its costs through operat1ng performance improvement l programs; see "Results of Operations" in Item 7 of this Report and Note is to the Consolidated Financial Statemenes in Item 8 of this Report, .{ 11 which are incorporated herein by reference. Additionally, HL&P continues to encourage industrial expansion in its service area by offering an [ j economic development tariff and economically attractive interruptible i' rates for those customers capable of taking such service. j i I 5
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Fuel Approximately 34% of HL&P's energy requirements during 1992 were met with natural gas, 39% with coal and lignite and 9% with nuclear fuel. The remaining 18% were met principally through purchased power, most of which was gas-fired cogeneration. HL&P currently expects its future energy mix to be in the following proportions for the indicated periods: Estimated Enerav Mix IPp3 1995 2000 Gas........................... 36% 38% 40% Coal and Lignite.............. 39 41 39 Nuclear....................... 8 9 7 Cogeneration.................. 17 12 14 Total................... 100% 100% 100% HL&P's actual energy mix in future years may vary from the percentages shown in the table. Such percentages are based upon numerous assumptions relating to, among other things, environmental protection requirements, load growth, load management, availability of purchased power, the cost and availability of fuels and the actual in-service dates of HL&P's planned generating facilities Natural Gas Supply. HL&P purchased its natural gas fuel supplies f rom a large number of suppliers during 1992; however, approximately 65% of HL&P's gas requirements were purchased f rom its traditional suppliers, UTT, Exxon, Enron and their affiliates. Effective April 1992, HL&P entered into three contracts for the supply of gas for a term of five years, the price of which is fixed for the term of the contracts. The total volume of gas available under these contracts is 50 BBru/ day, approximately 8% of HL&P's average daily demand for gas. In February 1993, HL&P entered into a contract for the supply of 50 BBtu/ day of gas for the months May th.ough September of the years 1993-1997 at fixed prices. The total volume of gas available under this ! contract represents approximately 6% of HL&P's average daily demand for gas in the months May through September. In addition, effective June 1992, HL&P and Enron agreed to amend their April 1991 contract to increase the volume of gas deliverable pursuant to such contract and to provide for a fixed term ending May 1997. As a result of this agreement, the annual volume of gas deliverable from Enron increased from 46,000 BBtu to 60,000 BBtu. In February 1992, HL&P exercised its option to reduce the volumes ; to be purchased f rom UTT under a 1990 contract. Effective July 1992, the minimum volume of gas deliverable to HL&P was reduced to 20% of HL&P's requirements. HL&P expects that UTT will' continue to supply 20% or more of HL&P's natural gas requirements under the terms of the 1990 contract, which is scheduled to expire in February 1996. t
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j Exxon sells gas to HL&P under a long-term contract which will expire in 1996 or af ter Exxon has tendered a specified quantity of natural gas, [ whichever comes first.HL&P HL&P believes that Fxxon will complete its r obligation in 1994. is seeking additional firm gas supplies to f l replace the volumes which have been available from Exxon. . HL&P has connected certain of its generating f acilities to a number - of gas pipelines and is able to purchase gas through various sales, I interchange, and gas transportation arrangements. - HL&P has a long-te'rm l contract for gas storage at the North Dayton gas storage facility, providing HL&P with working storage capacity of up to 3,500 BBtu of f i natural gas which can be delivered to HL&P's generating facilities at varying rates up to 500 BBtu per day. HL&P's average daily gas f consumption during 1992 was 610 BBtu per day with peak consumption of j 1,200 BBtu per day. i ! Although natural gas has been relatively plentiful in recent years, supplies available to HL&P and other consumers are vulnerable to ; } disruption due to weather conditions, transportation disruptions, price I l changes and other events. Large boiler fuel users of natural gas, i J including electric utilities, generally have the lowest priority among ! gas users in the event pipeline suppliersAsarea forced to curtail result of this
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deliveries due to inadequate supplies. , vulnerability, supplies of natural gas may become unavailable from time = [
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to time, or prices may increase rapidly in response to temporary supply disruptions. Such events could require HL&P to withdraw gas from the ! ~! North Dayton gas storage facility or shift its gas-fired generation to c i alternative fuel sources such as fuel oil to the extent it has the
- capability to burn those alternative fuels. Since most of the purchased l power capacity available to HL&P is also gas-fired, gas supply ! ;
disruptions may also affect these alternate energy supply-options. j 6 Currently, HL&P anticipates that its alternate fuel capability, 1{ combined with its solid-fueled generating resources and available gas 1 j j storage capability, are adequate to meet fuel needs during any temporary gas supply interruptions. However, there is no assurance that adequate j j levels of gas supply will be available over the long-term. \ l HL&P's average cost of natural gas was $1.85 per MMBtu in 1992 i (excluding storage costs).
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t U Coal and Lignite Supply. Coal supply services for HL&P's four coal-fired units at W. A. Parish are being provided by Utility Fuels. [ Utility Fuels purchases low-sulfur Powder River Basin cbal under two p f long-term coal supply contracts and, if.necessary, on the spot market. 0 l. Substantially all of the coal requirements for the projected operating ! lives of the four coal-fired units at W. A. Parish are expected to be met > under such contracts. j The lignite supply services for HL&P's Limestone units are also , j provided by Utility Fuels. Utility Fuels has under lease or contract , recoverable lignite reserves which are expected to meet substantially all of the total projected lignite fuel requirements for the remaining life - , of the Limestone units. In June 1990, HL&P purchased Utility Fuels' {t interest in the lignite recerves and lignite handling facilities for !! j' Malakof f. The lignite reserves are expected to be sufficient to meet the i t I b
at total lignite fuel requirements of the proposed generating units Malakoff. It is presently contemplated that Utility Fuels will provide management services in connection with the lignite supply for Malakoff. See " Capital Program" above and Note 12 to the Consolidated Financial Statements in Item 8 of this Report, which is incorporated herein by reference. Nuclear Fuel Supply. The supply of fuel for nuclear generating f acilities involves the acquisition of uranium concentrates, conversion to uranium hexafluoride, enrichment of the uranium hexafluoride and fabrication with variousofsuppliers nuclear fuel assemblies. to provide Contracts the South Texashave beenwith Project entered into uranium concentrates to permit operation through 1995, conversion services through 1993, enrichment services through 2014 (except as noted below) and fuel fabrication services for the initial cores and 16 additional years of operation. Contracts werefor enrichment terminated services under from a ten yearOctober 2000 termination through September 2002 ~ notice provision, as determinations were made that other, lower-cost options will be available. Contracts for uranium concentrates and conversion services for 1994 and beyond are currently being evaluated. By contract, the DOE will ultimately take possession of all spent HL&P has been advised that fuel generated by the South Texas Project. the DOE plans to place the spent fuel in a permanent underground storage f acility in an as-yet undetermined location. The DOE contract currently requires payment of a spent fuel disposal fee on nuclear Thisplant generated fee is subject electricity of one mill ($.001) per net KWH sold. The South Texas Project is to adjustment to ensure full cost recovery.on-site storage facilities to accommodate designed to have sufficient over 40 years of the spent fuel discharges for each unit. For information relating to a fee assessment upon domestic utilities having purchased enrichment services from the DOE, see Note 8 to the Consolidated Financial Statements in Item 8 of this Report, which is incorporated herein by reference. Oil Supply. Fuel oil is maintained in inventory by HL&P to provide f or fuel needs in emergency situationsIn in addition, the event suf ficient supplies certain of HL&P's of natural gas are not available. generating plants have the ability to use fuel oil if oil HL&P becomes a more has storage economical fuel than incremental gas supplies. facilities for over six million barrels of oil located at those generating plants capable of burning oil. HL&P's oil inventory is adjusted periodically, as necessary, to accommodate changes in the availability of primary fuel supplies. Recovery of Fuel Costs. For information relating to the cost of fuel over the last three years, see " Operating Statistics of HL&P" and "Results of Operations" in Item 7 of this Report, which are incorporated herein by reference. Recently amended Utility Commission rules continue to provide for the recovery of certain fuel and purchased power costs through an energy component of electric rates (fixed fuel f actor) . The fixed fuel factor is established during either a utility's general rate proceeding, a fuel reconciliation proceeding, or an interim fuel proceeding and is to be generally effective for a minimum of six months, In that unless a substantial change in a utility's cost of fuel occurs. t [' i 4 event, a utility may be authorized to revise the fixed fuel f actor in its : rates appropriately. In any event, a fuel reconciliation is required { every three years. l In January 1992 and August 1992, HL&P credited to customers' f accounts approximately $65 million and $41 million (each such amount including interest), respectively, of amounts previously collected Those amounts resulted primarily from through its fixed fuel factor. lower unit fuel costs and amounts received from settlements in certain , i fuel transportation litigation. In October 1991, the Utility Commission ! approved HL&P's existing fixed fuel factor as contemplated in - the settlement agreement reached in February 1991 by HL&P and most other l i parties to Docket No. 9850. See Note 10 (c) to the Consolidated Financial Statements in Item B of this Report, which is incorporated herein by j reference. Reconciliation of $1.6 billion of fuel expenses was severed from the t 1990 general rate case (Docket No. 9850) into Docket No. 10092. In February 1992, the Utility Commission issued an order disallowing $6.9 After considering interest on the l i million of fuel related costs. disallowed fuel costs, HL&P recorded an af ter-tax charge of $7.3 million l in 1991. r Regulatory Matters ; Rates and Services. Pursuant to the PURA, the Utility Commission I has original jurisdiction over electric rates and services in i' unincorporated areas of the State of Texas and in the cities that have relinquished original jurisdiction. Original jurisdiction over electric rates and services in the remaining incorporated municipalities served by HL&P is exercised by such municipalities, including Houston, but the ; Utility Commission has appellate jurisdiction over electric rates and , services within those incorporated municipalities. Applications for Rate Increases. For information concerning the Utility Commission's orders with respect to HL&P's applications for 8425 for i general rate increases with the Utility Commission (Docket No. ! the 1988 rate case and Docket No. 9850 for the 1990 rate case) and the municipalities within HL&P's service area and the appeals of such orders, .! l reference is made to Notes 10 (b) and 10 (c) to the Consolidated Financial Statements in Item 8 of this Report, which are incorporated herein by l reference. For information concerning a ruling from a District Court of ; Travis County, Texas in connection with HL&P's 1986 general rate case (Dockets No. 6765 and 6766), and the affirmation by another District Court of Travis County, Texas of the Utility Commission's final order in I HL&P's 1984 rate case (Docket No. 5779), reference is made to Note 10 (a) , to the Consolidated Financial Statements in Item 8 of this Report, which l l is incorporated herein by reference. l Prudence Review of South Texas Project. For information concerning ; the Utility Commission's orders in respect of a prudence review of the i South Texas Project (Docket No. 6668) and the appeals of such orders, l reference is made to Note 10 (d) to the Consolidated Financial Statements j in Item 8 of this Report, which is incorporated herein by reference. ! l f f
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Def erred Accounting Dockets. For information concerning the Utility Commission's orders allowing deferred accounting treatment for certain costs associated with the South Texas Project (Docket Nos. 823 0, 9010 and 8425), the appeals of such orders and related proceedings, reference is made to Notes 10(b), 10(e) and 11 to the Consolidated Financial Statements in Item 8 of this Report, which are incorporated herein by reference. Environmental Quality. General. HL&P is subject to regulation with respect to air and water quality, solid waste management and other environmental matters by various federal, state and local authorities. Environmental regulations continue to be affected by legislation, administrative actions and judicial review and interpretation. As a result, the precise effect of existing and potential regulations upon existing and proposed facilities and operations cannot presently be determined. However, developments in these and other areas of regulation in the past have required HL&P to make substantial expenditures to modify, supplement or replace equipment and facilities and may in the future delay or impede construction and operation of new facilities or require substantial expenditures to modify existing facilities. Air. The TACB has jurisdiction and enforcement power to determine the permissible level of air contaminants emitted in the State of Texas. The standards established by the Texas Clean Air Act and the rules of the TACB are subject to modification by standards promulgated by the EPA. Compliance with such standards has resulted, and is expected to continue to result, in substantial expense to HL&P. In addition, expanded permit and fee systems and enforcement penalties may discourage industrial growth within HL&P's service area. In November 1990, significant amendments to the Clean Air Act became law. The law is designed to control emissions of air pollutants which contribute to acid rain, to reduce urban air pollution and to reduce toxic air pollutants. emissions of reducing Parts of the Clean Air Act are directed at emissions of sulfur dioxide from electric utility generating units. This reduction program includes an " allowance" system which sets forth formulas and criteria to establish a cap on sulfur dioxide emissions for each utility generating unit. The EPA will determine the allowances which HL&P will receive under this legislation. Although the EPA is not expected to finalize allowance allocations until mid-1993, HL&P believes, based on its current analysis, it should receive allowances sufficient to permit continued operation of its existing facilities and some expansion of its solid-fuel generating facilities without substantial additional expense relating to modification of its facilities. HL&P has already made substantial investments in pollution control f acilities, and all of its generating f acilities currently comply in all material respects with sulfur dioxide emission standards As a result of this previous established by the Clean Air Act. investment, HL&P does not anticipate that significant expenditures for sulfur dioxide removal equipment will be required. Provisions of the Clean Air Act dealing with urban air pollution require establishing new emission limitations for NO, f rom existing sources. These limitations are expected to be finalized in mid-1993. The cost of modifications necessary to reduce NO, emissions from existing sources has been estimated, based. upon anticipated reg 11ations, at $62 million in 1994 and
$18 million in 1995. The necessary modifications may cause secondary I
s e impacts to generating unit capacity ratings, and cost estimates could change substantially upon analysis of the impact of the final rules. The - Clean Air Act also calls for additional stack gas continuous emissions [ monitoring equipment to be installed on various HL&P generating r facilities. Capital expenditures of $12 million in 1993 and $14 million l' in 1994 are anticipated for installation of this new monitoring equipment beginning in the fall of 1993. See " Capital Program" above. ,
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The Clean Air Act established a new permitting program to be i administered in Texas by the TACB. The precise requirements of the l' program cannot be determined until final regulations have been promulgated. Based on the regulations proposed to date, HL&P anticipates j that additional expenditures may be required for administering the ! permitting process and implementing modifications to a number of existing l generating units to comply with such requirements. The legislation could ; also substantially increase the cost of constructing new generating ; units. ; Water. The TWC has jurisdiction over water discharges in the State I of Texas and is empowered to set water quality standards and issue ! permits regulating water quality. The TWC jurisdiction is currently : shared with the EPA, which also issues water discharge permits and } reviews the Texas water quality standards program. , i HL&P has obtained permits from both the TWC and the EPA for all l facilities currently in operation which require such permits. j Applications for renewal of permits for existing facilities have been ; submitted as required. The reissued permits reflect changes in federal j and state regulations which may increase the cost of maintaining ; compliance. In November 1990, the EPA promulgated stormwater discharge I regulations which implement provisions of the Clean Water Act and require l HL&P to obtain discharge permits and possibly develop additional controls : on certain stormwater discharges. Although compliance with the new ; regulations has resulted and will continue to result in additional costs l to HL&P, the costs have not had and are not expected to have a material [ impact on HL&P's financial condition or results of operations. l For a description of certain Administrative Orders issued by the EPA I to HL&P under the Clean Water Act and for a description of certain other i environmental litigation, see Item 3 of this Report, which is f incorporated herein by reference. i i Solid and Hazardous Waste. HL&P is also subject to regulation by l the TWC and the EPA with respect to the handling and disposal of solid waste generated on-site. Although legislation proposing the expansion l of the scope of RCRA was not adopted in 1992, the TWC has promulgated new l rules regulating the classification of industrial solid waste. These regulations will result in increased analytical and disposal costs to ; HL&P. Although the precise amount of these costs is unknown at this i time, HL&P does not believe that such costs, based on its current l analysis, will be material. The EPA has promulgated a number of ! regulations to protect human health and the environment from hazardous l waste. Compliance with.the regulations promulgated to date-has not ; materially affected the operation of HL&P's facilities, but such ! compliance has increased operating costs. 1 l l l; t 4
Federal Regulation of Nuclear Power. Under the Atomic Energy Act of 1954 and Energy Reorganization Act of 1974, operation of nuclear plants is extensively regulated by the NRC, which has broad power to 7 impose licensing and safety requirements. In the event of non-compliance, the NRC has the authority to impose fines or shut down nuclear plants, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. l For information concerning a diagnostic evaluation that will be : conducted by the NRC at the South Texas Project in the spring of 1993, see " United States Nuclear Regulatory Commission (NRC) Diagnostic ; Evaluation of the South Texas Project" in Item 7 of this Report and Note 9(f) to the Consolidated Financial Statements in Item 8 of this Report, l which are incorporated herein by reference. Low-Level Radioactive Waste. The federal Low-Level Radioactive Waste Policy Act delegates the responsibility for low-level waste ; disposal to the states. Texas created the Texas Low-Level Radioactive : Waste Disposal Authority to build and operate a low-level waste disposal ' facility. HL&P was assessed approximately $1.1 million in 1992 by the : State of Texas for the development work on this facility, and estimates l that the assessment for 1993 will be $1.8 million. The Low-Level i Radioactive Waste Policy Act establishes several milestones to ensure ; adequate progress is being made towards implementation of in-state disposal. States not meeting these milestones may be stopped from : sending their waste to currently operating disposal sites. Texas has met [ the required milestones and access to the low level waste disposal i facility at Barnwell, South Carolina was extended until June 1994. ; HL&P has constructed a temporary low-level radioactive waste storage : f acility at the South Texas Project. The facility was completed in late : 1992 and will be utilized for interim storage of low level radioactive I waste af ter access to the Barnwell f acility is suspended and prior to the [ opening of the Texas Low-Level Radioactive Waste Site. ! I Nuclear Insurance and Nuclear Decommissioning l Reference is made to Notes 9(d) and 9(e) to the Consolidated Financial Statements in Item 8 of this Report for information concerning i ' nuclear insurance and nuclear decommissioning, which are incorporated herein by reference. Labor Matters , 4 As of December 31, 1992, HL&P had 9,388 full-time employees of whom 3,659 were hourly-paid employees represented by the International Brotherhood of Electrical Workers under a collective bargaining agreement which expires on May 25, 1993. ! For a discussion of HL&P's STEP program and related employee f matters, reference is made to "The Company and its Subsidiaries" above; j "Results of Operations" in Item 7 of this Report; and Note 18 to the + Consolidated Financial Statements in Item 8 of this Report, which are j incorporated herein by reference. ; t I I l
. Operating Statistics of HL&P Year Ended December 31, ,
1992 1991 1990 Electric Energy Generated and Purchased (MVH): , Generated - Net Station Output............... 51,065,016 52,346,488 52,040,529 Purchased.................................... 11,537,872 10,518,246 10,320,356 i
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Net Interchange.............................. 204 (54) (11,845) Tota 1...................................... 62,603,092 62,864,680 62,349,040 ! Company Use, Lost and Unaccounted for.......... 2,660,704 2,663,539 2,792,536 ; Energy So1d................................ 59,942,388 60,201,141 59,556,504 Electric Sales (MVH): t Residential.................................. 16,375,400 16,978,934 16,701,269 Commercial................................... 12,541,636 12,501,613 12,188,947 Industrial................................... 24,374,284 24,250,892 23,812,889 Street Lighting - Government and Hunicipal... 110,896 109,874 110,026 Total Firm Retail Sales.................... 53,402,216 53,841,313 52,813,131 Other Electric Utilities..................... 243,167 506,558 718,626 , Total Firm Sales........................... 53,645,383 54,347,871 53,531,757 Interruptib1e................................ 5,974,203 5,304,345 5,770,154 , 0ff-System................................... 322,802 548,925 254,593 i Tota 1...................................... 59,942.388 60,201,141 59.556,504 Number of Customers (End of Period): Residential.................................. 1,258,556 1,238,451 1,217,594 . Commercia1................................... 165,241 163,054 161,067 l Indus trial (Including Interruptible) . . . . . . . . . 1,756 1,791 1,844 Street Lighting - Government and Municipal... 82 82 82 Other Electric Utilities (Including 0ff-System)................................. 10 13 10 Tota 3...................................... 1,425,645 1,403,391 1.380,597 i Operating Revenue (Thousands of Dollars): Residential.................................. $ 1,465,627 $1,465,403 S1,385,710 Commercia1................................... 926,157 882,873 838,325 Industrial................................... 1,134,601 1,109,108 1,070,660 3 Street Lighting - Government and Municipal... 23,148 21,977 20.366 Total Electric Revenue - Firm Retail Sales. 3,549,533 3,479,361 3,315,061 , Other Electric Utilities..................... 26,834 41,136 48,833 Total Electric Revenue - Firm Sales........ 3,576,367 3,520,497 3,363,894 Interruptible................................ 127,042 105,476 121,228 off-System................................... 6,364 8,907 4,746 ; < Total Electric Revenue..................... 3,709,773 3,634,880 3,489,868 Hiscellaneous Electric Revenues.............. 117,068 39,663 (21,186) ! Tota 1...................................... $ 3,826,841 $3,674,543 $3,468,682 l Installed Net Generating Capability (KV) ' (End of Period).............................. 13,583,000 13,583,000 13,584,000 Cost of Fuel (Cents per Hillion Btu): l Gas.......................................... 192.3 161.5 178.9 ; Coal......................................... 218.9 230.6 220.5 Lignite...................................... 178.8 175.5 160.1 , Nuclear...................................... 59.9 58.3 57.9 j Average.................................... 184.6 175.3 178.9 ; l l l I
e BUSINESS OF KBLCOM : General i The cable television operations of the Company are conducted through i KBLCOM and its subsidiaries. KBL Cable, a subsidiary of KBLCOM, owns and operates five cable television systems located in four states. Another subsidiary of KBLCOM owns a 50% interest in Paragon, a Colorado partnership, which in turn owns twenty systems located in seven states. KBLCOM's 50% interest in Paragon is recorded in the financial statements using the equity method of accounting. The remaining 50% interest in Paragon is owned by subsidiaries of ATC, which is a subsidiary of Time l-a Warner Inc. ATC serves as the managing partner for all but one of the Paragon systems. The partnership agreement provides that at any time after December 31, 1993, either partner may elect to divide the assets of the partnership under certain predefined procedures set forth in the p agreement. As of December 31, 1992, KBL Cable served approximately 577,000 basic cable customers who subscribed to approximately 435,000 premium programming units. As of the same date, Paragon served approximately 901,000 basic cable customers who subscribed to approximately 540,000 premium programming units. Unless otherwise indicated or the context otherwise requires, all references in this section to "KBLCOM" mean KBLCOM and its subsidiaries. All references to KBL Cable mean KBL Cable and its subsidiaries, and all references to Paragon mean the Paragon partnership. All information pertaining to Paragon has been provided to KBLCOM by Paragon's managing 1 partner, ATC, unless stated otherwise. ' Cable Television Services j The cable television business of KBLCOM consists primarily of selling to subscribers, for a monthly fee, television programming that ! is distributed through a network of coaxial and fiber optic cables. KBLCOM offers its subscribers both basic services and, for an extra monthly charge, premium services. Each of the KBLCOM systems carries the ; programming of all three major television networks, programming from ; independent and public television stations and certain other local and distant (out-of-market) broadcast television stations. KBLCOM also I l offers to its subscribers locally produced or originated video programming, advertiser-supported cable programming (such as ESPN and CNN), premium programming (such as HBO and Showtime) and a variety of other types of programming services such as sports, f amily and children, ; news, weather and home shopping programming. As is typical in the industry, KBLCOM subscribers may terminate their cable television service on notice. KBLCOM's business is generally not considered to be seasonal. All of KBL Cable's systems are " addressable", allowing individual a subscribers, among other things, to electronically select pay-per-view 7 programs. Approximately 47% of KBL Cable's customers presently have : i converters permitting addressability. This allows KBL Cable to offer pay-per-view services for various movies, sports events, concerts and other entertainment programming. a l , !
Overview of Systems and Development The KBL Cable systems are located in the areas.of greater San Antonio and Laredo, Texas; Minneapolis, Minnesota; Portland, Oregon; and Orange County, California. All of these systems other than the Laredo system, which is the smallest system, were built between 1979 and 1986 and have channel capacities ranging from 45 channels (San Antonio and California) to 125 channels (Minneapolis). The Laredo system was originally wired for cable in the 1960s and upgraded in 1979. It has a - 38-channel capacity. Although all of these systems are considered fully built, annual capital expenditures will be required to accommodate growth within the service areas and to replace and upgrade existing equipment. Capital expenditures of KBL Cable, which were $44 million in - 1992 (including $3.7 million related to the acquisition of a small cable system), are expected to be approximately $152 million over the 1993-1995 period. For additional information with respect to capital expenditures of KBL Cable, see " Liquidity and Capital Resources - KBLCOM" in Item 7 of this Report and Note 8 (b) to the Consolidated Financial Statements in Item 8 of this Report, which are incorporated herein by reference. Paragon owns cable television systems that serve a number of cities, towns or other areas in Texas (including El Paso) , Arizona, Florida (including the Tampa Bay area) , New Hampshire, New York (including a portion of Manhattan), Maine and southern California (areas in Los Angeles County). Paragon made capital expenditures of approximately $66 million in 1992 and expects to make capital expenditures of approximately
$52 million in 1993.
For information regarding KBLCOM's financial results and liquidity and the financing of KBLCOM, see " Liquidity and Capital Resources - KELCOM" in Item 7 of this Report and Note 4 to the Consolidated Financial Statements in Item 8 of this Report, which are incorporated herein by reference. The following table summarizes certain information relating to the
- cable television systems owned by KBL Cable and Paragon:
Total KBL Cable Paragon (1) As of Decerber 31. As of December 31, 1991 1990 1992 1991 1990 1992 Estimated number of homes passed 1,544,000 1,513,000 1,467,000 by cable (2) . . . . 1,176,000 1,160,000 1,149,000 Number of basic 559,000 550,000 901,000 865,000 829,000 subscribers (3). 577,000 Basic subscribers as a percentage 58.4% 57.2% 56.5% of homes passed 49.1% 48.2% 47.9% Number of premium (pay) 453,000 540,000 541,000 541,000 units ( 4 ) . . . . . . . 435,000 434,000 Premium (pay) units as a percentage of basic 59.9% 62.5% 65.3% subscribers.... 75.4% 77.6% 82.4%
- 1) A KBLCOM subsidiary has a 50% interest in Paragon. Information has been furnished by ATC, the managing partner of Paragon.
- 2) A home is " passed by cable" if it can be connected to cable service without extension of the distribution system.
- 3) Basic subscribers means the sum of (i) the number of homes receiving cable services, (ii) all units in multiple dwellings which receive (hotels, one bill, and (iii) each commercial establishment hospitals, etc.), less (iv) complimentary accounts.
- 4) Premium (or pay) units consist of the number of subscriptions to premium programming services, counting as separate subscriptions each service received by a subscriber.
Over the three-year period ended December 31, 1992, growth in the number of subscribers in the KBLCOM systems was achieved through marketing efforts aimed at existing homes passed by cable, population growth in the franchise areas and increased access to potential additional distribution subscribers through the construction of f acilities within existing franchise areas. KBLCOM believes these same factors will contribute to continued growth. In addition, KBLCOM may f rom time to time acquire additional cable television systems. In 1992, KBL Cable acquired a small cable television system (comprising 2,177 , basic subscribers) which adjoined one of the existing systems. KBLCOM is also actively marketing premium programming services and intends to introduce new services as they become commercially feasible. . i 4 t E
W Sources of Revenues and Rates to Subscribers For the year ended December 31, 1992, the average monthly revenue , per subscriber for KBL Cable was approximately $35. Approximately'67% ; of KBL Cable's revenue was derived from monthly fees paid by subscribers ; for basic cable services and 17% was derived from premium programming ! services. Rates to subscribers vary from system to system and.in accordance with the type of service selected. As of December 31, 1992, [ the average monthly basic . revenue per subscriber for the KBL Cable ; systems generally ranged from $18.20 to $23.90. As of December 31, 1992, l approximately 41% of KBL Cable's customers subscribe to one or more ; premium channels. KBL Cable's premium units increased _during 1992 but . declined from 1990 due to a variety of reasons including the effect of recessionary economic conditions, value perception, and competition from - ; other forms of entertainment such as pay-per-view and home video rental. : KBL Cable is implementing a number of strategies designed to strengthen [ this service category including new packaging of premium units and . multiplexing, which is the delivery of multiple channels of a premium l service (with programs beginning at different times) with no change in i price to the subscriber. 4 The remaining portion of KBL Cable's revenues for the year ended , i December 31, 1992 was derived from advertising, pay-per-view services, i installation fees and other ancillary services. KBL Cable believes that, within its present markets, the sale of commercial advertising to local, regional and national advertisers, pay-per-view services - and other ; ancillary services offer the- potential for increased revenues.. . Advertising revenues for the year ended December 31, 1992 increased $3.4 l million or 28% over the previous year while other ancillary revenues i increased by $2.8 million or 26%. Pay-per-view revenues declined $1.2 , j million or 10.5% below the previous year due primarily to the-reduction ;
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in the number of national sporting events available for broadcast. l 3 t'
- For the year ended December 31, 1992, the average monthly revenue !
. per subscriber for Paragon systems was approximately $30. Approximately . 70% of Paragon's revenues was derived from monthly fees for basic 'l I services and 20% was derived from premium services. As of December 31, i 1992, the average monthly basic revenue per subscriber for Paragon systems ranged from $18.45 to $21.45. As of December 31, . 1992, approximately 34% of Paragon's customers subscribe to one or more premium channels. l 1
Franchises KBLCOM's cable television systems generally operate pursuant to ! non-exclusive franchises or permits awarded by local governmental i authorities, and, accordingly, other applicants may obtain franchises or 1 permits in franchise areas served by KBLCOM. See " Regulation" below. As , of December 31, 1992, KBL Cable held 53 franchises with unexpired terms > ranging from under one year to approximately 19 years. A single j
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franchise agreement with San Antonio, which expires in 2003, covers approximately 32% of KBL Cable's subscribers as of December 31, 1992. The ! expiration periods and approximate percentages of subscribers for KBL f Cable's remaining franchises are as follows: { i i
l Percent of Expiration Period Subscribers of Remaining Franchises 14% 1993-1996 ' 32% 1997-2000 49% after 2000 5% No expiration date As of December 31, 1992, Paragon held 147 franchises with unexpired terms ranging from 1993 to 2010. The single largest franchise, which covers a portion of Manhattan, includes more than 20% of Paragon's subscribers as of December 31, 1992. The provisions of state and local franchises are subject to Federal Cable regulation under the Cable Act. See " Regulation" below. television franchises generally can be terminated prior to their stated expiration date under certain circumstances such as a material breach of the franchise by the cable operator. Franchises typically contain a number of provisions dealing with, among other things, minimum technical i specifications for the systems; operational requirements; total channel capacity; local governmental, community and educational access; franchise fees (which range up to 5% of cable system revenues); and procedures for renewal of the franchise. Sometimes conditions of franchise renewal require improved facilities, increased channel capacity or enhanced services. One franchise, with approximately 55,000 subscribers as of December 31, 1992, held by a subsidiary of KBL Cable, provides that the city granting the franchise may at any time require the KBL Cable subsidiary to sell, at fair market value, its franchise and operations in the city to another cable television operator with a franchise for another portion of the city. Conversely, the city may require the other operator to sell, and the KBL Cable subsidiary to purchase, the franchise and operations, with approximately 24,000 subscribers as of December 31, 1992, of the other operator in the city. KBLCOM's f ranchises are also subject to renewal and generally are not transferable without the prior approval of the franchising authority. In addition, some franchises provide for the purchase of the franchise under certain circumstances, such as a failure to renew the franchise. To date, KBLCOM's franchises have generally been renewed or extended upon their stated expirations, but there can be no assurance of renewal of franchises in the future. Programming Contracts A substantial portion of KBLCOM's programming is obtained under contracts with terms that typically extend for more than one year. KBLCOM generally pays program suppliers a monthly fee per subscriber. Certain of these contracts have price escalation provisions that are generally coupled with a right of KBLCOM to cancel the contract if the price exceeds certain agreed-upon limits. Competition Cable television systems experience competition from a variety of sources, including broadcast television signals, multipoint microwave distribution systems, direct broadcast satellite systems (satellite
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signals directly to a subscriber's satellite dish) and satellite master antenna systems (a satellite dish which receives signals and distributes ; them within a multiple unit - dwelling) . The effectiveness of such competition depends, in part, upon the quality of the signals and the , variety of the programming offered by such technologies and the cost These competitive thereof as compared with cable television systems. technologies are not generally subjectCable to the same form of local television systems also regulation that affects cable television. compete to varying degrees with other communications and entertainment media such as motion picture theaters and video cassette rentals, and i r such competition may increase with the development and growth of new technologies. [ KELCOM is addressing increased competition by focusing on (i) improving customer service; (ii) carrying a greater variety of local and ' ' national programming, some of which will be available in its markets only through KBLCOM, and (iii) furthering the development of the interactive use of its cable systems. , , j Since KBLCOM's systems operate under non-exclusive franchises, other in companies may obtain permission to buildA cable television systems 1986 United States Supreme-i areas where KBLCOM presently operates. ' Court decision has raised questions regarding the constitutionality of i the cable television franchising process. The decision requires lower courts to decide whether, in areas where more than one cable operator.can be physically accommodated by local utilities, franchising authorities , may refuse to grant more than one franchise to serve that area. No prediction can be made at this time as to whether additional franchises l will be granted to any competitors, or if granted and a cable television > system is constructed, what the impact on KBLCOM and the Company might , be. 5 KBLCOM competes with a variety of other media in the sale of 1 ' advertising time on its cable television systems. Regulation t. ( Cable television is subject to regulation at the Federal, local and, i in some cases, stata level.
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I' In October 1992, the 1992 Cable Act became law. The 1992 Cable Act I i expands the scope of cable industry regulation beyond that imposed by the Cable Act. The following are new and significant areas of regulation l . imposed by the 1992 Cable Act. ll Rate Regulation. Under the 1992 Cable Act, virtually all of the ! ' Company's cable systems will be subject to rate regulation. The 1992 8 Cable Act mandates that the FCC establish rate standards and Franchising procedures ; governing regulation of basic cable service rates. 7
- authorities may " certify" to the FCC that they will follow the FCC l standards and procedures in regulating basic rates and, once such certification is made, the franchising authorities will assume such rate regulation authority over basic rates. The 1992 Cable Act also requires ;
that the FCC, upon complaint from a franchising authority or a cable ! subscriber, review the " reasonableness" of rates for additional tiers of i cable service. Only rates for premium pay channels and' single event pay-i l i l I
e , s 1 per-view services are excluded entirely from rate regulation. Because implementation of the specific rate standards and formulas for basic tier rates will not be completed by the FCC until at least May 1993, it is impossible to predict the exact impact upon existing and future rates of the Company. It is, however, possible that such rate regulation could result in denial of requested rate increases and in reduction of existing rate levels. The 1992 Cable Act specifically abolishes the annual right to an automatic 5% increase in basic rates provided in the Cable Act. Additionally, the 1992 Cable Act imposes rate regulation pursuant to an FCC formula for the sale and lease of cable equipment such as converters, remote controls and additional outlets "on the basis of actual cost". Must Carry /Retransmission Consent. The 1992 Cable Act establishes a choice for commercial broadcast stations between "must carry" rights or "retransmission consent" rights. This choice must be made by October 1993 and every three years thereafter. Retransmission Consent. As of October 1993, cable operators will be required to secure permission from broadcasters that have selected retransmission consent before retransmitting the broadcasters' signals. Established " super stations" are exempted f rom this provision. Local and distant broadcasters can require cable operators to make payments as a condition to granting such consent for carriage of the broadcast station on the cable system. This requirement has the potential of significantly ' increasing the cost of carriage of broadcast stations on the Company's cable systems. Must Carry Reauirements. The 1992 Cable Act imposes obligations to carry " local" broadcast stations should such stations choose a "must carry" right as opposed to the "retransmission consent" right described above. Generally, the cable operator must dedicate up to approximately one-third of its channel capacity for carriage of both commercial i broadcast television stations and non-commercial broadcast television , stations. Buy-through Prohibition. The 1992 Cable Act prohibits cable systems which have addressable technology and addressable converters in place from requiring cable subscribers to purchase service tiers above basic as a condition to purchasing premium channels, such as HBO or Showtime. If cable systems do not have such addressable technology or addressable converters in place, they are given up to ten years to comply with this i provision. Programming Acquisition. The 1992 Cable Act directs the FCC to promulgate regulations regarding the sale and acquisition of cable programming between cable operators and programming services in which the cable operator has an attributable interest. The legislation and the subsequent FCC regulations will preclude most exclusive programming contracts, will limit " volume discounts" that can be offered to affiliated cable operators, and will generally prohibit cable programmers from providing terms and conditions to af filiated cable operators that are more favorable than those provided to unaffiliated operators. Furthermore, the 1992 Cable Act requires that such cable programmers make : their programming services available to competing video technologies, L such as multi-channel, microwave distribution systems and direct P L
broadcast satellite systems on terms and conditions that do not j discriminate against such competing technologies. Programming Carriage Agreements. The 1992 Cable Act requires the i FCC to adopt regulations that will prohibit cable operators from (1)' l requiring ownership of a financial interest in a program service as a , condition to carriage of such service, (2) coercing exclusive rights in 1 a programming service, or (3) favoring affiliated programmers so as to { restrain unreasonably the ability of unaffiliated programmers to compete. Ownership Restrictions. The 1992 Cable Act requires the FCC to (1) : prescribe rules and regulations establishing reasonable limits on the { number of cable subscribers a person is authorized to reach through cable ! systems owned by such person, or in which such person has an attributable - : interest; (2) prescribe rules and regulations establishing reasonable l limits on the number of channels on a cable system that can be occupied l by a video programmer in which a cable operator has an attributable ! interest; and (3) consider the necessity and appropriateness of imposing ! i limitations on the degree to which multichannel video programming distributors may engage in the creation or production of video j programming. Additionally, cable operators are prohibited from selling i a cable system within three years of acquisition or construction of such ! cable system. t i Customer Service / Technical Standards. The 1992 Cable Act requires ! the FCC to promulgate reculations establishing minimum standards - for ' l customer service and technical system performance. Franchising i authorities are allowed to enforce stricter customer service requirements than the standards so promulgated by the FCC. ! The majority of the provisions of the Cable Act remain in place. j The Cable Act continues to: (a) restrict the ownership of cable systems i by prohibiting cross-ownership by a telephone company within its ! operating area and cross-ownership by local television broadcast station owners; (b) require cable television systems with 36 or more " activated" , channels to reserve a percentage of such channels for commercial use by : unaf filiated third parties; (c) permit franchise authorities to require ! the cable operator to provide channel capacity, equipment and facilities -l for public, educational and governmental access; (d) limit the amount of 6 fees required to be paid by the cable operator to-franchise authorities , to a maximum of 5% of annual gross revenues; (e) grant cable operators l access to public rights of way and utility easements; (f) establish a 3 federal privacy policy regulating the use of subscriber lists and ; subscriber information; (g) establish civil and criminal liability.for j unauthorized reception or interception of programming offered.over a ; cable television system or satellite delivered service; (h) authorize the j FCC to preempt state regulation of rates, terms and conditions for pole j attachments unless the state has issued effective rules; (i) require the ! sale or lease to subscribers of devices enabling them to block ; programming considered of fensive; and (j) contain provisions governing ! cable operators' compliance with equal employment opportunity ; requirements. , The 1992 Cable Act, together with the Cable Act, creates a ~l comprehensive regulatory framework for cable television. Violation by l a cable operator of the statutory provisions or the rules and regulations l
of the FCC can subject the operator to substantial monetary penalties and other significant sanctions. With respect to the 1992 Cable Act, the FCC is directed to conclude i ten separate rulemaking procedures within 180 days of October 5,1992 to clarify and implement significant features of the new statute. While many of the specific obligations imposed on cable television systems ; under these laws and regulations are complex, burdensome and will increase the Company's costs of doing business, it is impossible to assess the detailed impact of the 1992 Cable Act on the Company until the FCC completes such 1992 Cable Act rulemakings. Telephone companies continue in their ef forts to repeal legislative prohibitions against their ownership of cable television systems. In October 1991, the Court of Appeals for the District of Columbia vacated the stay pending appeal of the order of the United States District Court for the District of Columbia in United States v. Western Electric Company, et al. , permitting RBOCs to enter into the information services business both within and outside of each RBOC's service area. While the final effect of this decision is uncertain, RBOCs now may be entitled to own and operate cable television systems outside their service areas as a result of that Court of Appeals' ruling. RBOCs are still prohibited by the Cable Act from owning or operating a cable television system within their service areas. No prediction can be made at this time concerning the impact, if any, of that Court of Appeals decision on KBLCOM and the Company. Any changes to the ownership prohibitions could result in additional direct competition for KBLCOM. Employees Excluding employees of Paragon, KBLCOM had 1,513 full-time employees as of December 31, 1992, none of whom is represented by a union. As of December 31, 1992, Paragon had 1,839 full-time employees of whom 608 were represented by unions. BUSINESSES OF OTHER SUBSIDIARIES , Utility Fuels Utility Fuels provides coal and lignite purchasing, transportation and handling services to HL&P. Substantially all of the coal is purchased under long-term contracts f rom mines in the Powder River Basin area of Wyoming. The coal is transported under terms of a long-term rail contract to Utility Fuels' coal handling facilities located at W. A. Parish by a rail fleet consisting of 1,226 railroad cars owned by Utility Fuels and 1,090 railroad cars that are leased by Utility Fuels. During 1992, Utility Fuels delivered 9.6 million tons of coal to HL&P. At December 31, 1992, Utility Fuels had a net investment of $83.7 million in coal handling facilities and railroad cars. Utility Fuels provides lignite to Limestone from an adjacent mine. Utility Fuels owns the mining equipment, f acilities and a portion of the lignite leases. The lignite is mined by a contract mine operator. Utility Fuels owns and operates the equipment and f acilities that receive and deliver the lignite to Limestone. During 1992, Utility Fuels F
I I delivered 7 million tons of lignite to Limestone. At December 31, 1992, Utility Fuels had a net investment of $240.6 million in lignite mining, handling and transportation equipment. , The coal or lignite under contract and lease is believed to be sufficient to provide a substantial portion of the fuel to W. A. Parish and Limestone for their projected operating lives. As of December 31, 1992, Utility Fuels leased 655 coal-carrying railroad cars in addition to those railroad cars leased in connection , with services provided to HL&P. Utility Fuels leases 220 of these railroad cars on a long-term basis and 435 of these railroad cars on a short-term basis to customers other than HL&P. Utility Fuels expects to make capital expenditures of $10.6 million in 1993, $11.9 million in 1994 and $11.5 million in 1995. These expenditures are primarily related to replacement and maintenance of Utility Fuels' existing equipment and facilities.
' For additional information with respect to Utility Fuels' sources i of coal and lignite, see " Business of HL&P - Fuel - Coal and Lignite
, Supply."
i Houston Argentina . In December 1992, Houston Argentina, a newly formed subsidiary of the Company, acquired a 32.5% interest in an Argentine holding company ' that in turn owns a 51% interest in Edelap S.A., an electric utility i company operating in La Plata, Argentina and surrounding areas. Houston i Argentina's share of the cash purchase price was $37.6 million. Houston j Argentina acts as operator of the utility which cerved approximately ,
+ 200,000 residential customers, and approximately 30,000 commercial and I industrial customers in 1991.
Houston Industries Finance e Houston Industries Finance was organized to purchase receivables from, among others, HL&P and certain KBLCOM subsidiaries. In January 1993, however, HL&P began selling substantially all of its customer accounts-receivable to CSW Credit, and Houston Industries Finance ceased to purchase the KBLCOM receivables. Consequently, in January 1993, Houston Industries Finance terminated its commercial paper program and related . bank lines of credit and ceased operations. i Financing of Operations of Subsidiaries For a description of the financing activities of subsidiaries of the , Company, see " Liquidity and Capital Resources" in Item 7 of this Report, which is incorporated herein by reference. i t i i
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REGULATION OF THE COMPANY , Federal 1935 Act. The Company is a holding company as defined in the 1935 ' Act. It is exempt from regulation under the 1935 Act except with respect to the acquisition of certain voting securities of other domestic public utility companies and holding companies. The Company's exemption is based upon the intrastate character of the operations of its public utility subsidiary, HL&P, and the filing with the SEC of an annual exemption statement pursuant to Section 3 (a) (1) of the 1935 Act and Rule 2 thereunder. The SEC is authorized by the 1935 Act and by its own rules to deny or terminate such an exemption upon a determination that it is detrimental to the public interest or to the interest of investors or i consumers. Based on past SEC policy, there may be limits on the extent to which the Company and its non-utility subsidiaries may engage in non-utility activity without af fecting the Company's exempt status. The Company has no present intention, however, of becoming a registered holding company subject to regulation by the SEC under the 1935 Act. In February 1989, the SEC released for comment a proposed Rule 17 ' and proposed amendments to Rule 2 which would establish a " safe harbor" for exempt public utility holding companies, such as the Company, which diversify into non-utility businesses. Under that proposal, such : 4 diversification would not be considered detrimental to the interests ' protected by the 1935 Act if the investment in such businesses did not l exceed 10% of the holding company's consolidated assets (with no single investment exceeding 2% of consolidated assets) or if the state of its incorporation had enacted legislation specifically regulating diversification. The Company would not meet either of these tests and has submitted comments opposing the proposed rules. If the proposal is adopted, the Company will file for exemption with the SEC. The Company , cannot predict whether or when proposed Rule 17 and the proposed
- amendments to Rule 2 may be adopted or, if adopted, whether they will be
- adopted in the form in which they were proposed.
4 The Energy Act, which amended the 1935 Act, provides that, subject to certain conditions, foreign utility companies are exempt from the , provisions of the 1935 Act and will not be deemed to be "public utility companies" under the 1935 Act. For information with respect to the i Energy Act, See " Business of HL&P - Competition." ) State The Company is not subject to regulation by the Utility Commission under PURA or by the incorporated municipalities served by HL&P. Those
; regulatory bodies do, however, have authority to review accounts, records
] and contracts relating to transactions by HL&P with the company and its other subsidiaries. The Company's ability to acquire and hold a material J interest in a foreign utility company, without becoming subject to regulation as a registered holding company under the 1935 Act, is subject to certification by the Utility Commission to the SEC to the effect that ratepayers subject to its jurisdiction will not be adversely affected. On November 12, 1992, the Utility Commission provided to the SEC the certification contemplated under the 1935 Act with respect to the Company's acquisition of an interest in an Argentine public utility i , ] M 5
m, company. Such certification is also applicable to other foreign utility companies in which the Company may seek to obtain an ownership interest. j The certification is subject, however, to being revised or withdrawn by the Utility Commission as to any future acquisition, t e 6 h i i I
EXECUTIVE OFFICERS OF THE COMPAIE Officer Business Experience 1988-1992 Name Ace (1) Since (2) and Positions (2) Don D. Jordan....... 60 1976 Chairman, President, and Chief 1990-Executive Of ficer and Director President and Chief Executive 1988-1990 Officer and Director Chairman and Chief Executive 1988-Officer and Director - HL&P Raymond J. Snokhous. 63 1983 Senior Vice President - 1990-Governmental and Regulatory Affairs Group Vice President - HL&P 1988-1990 William A. Cropper.. 53 1983 Vice President and Treasurer 1988-Hugh Rice Kelly..... 50 1984 Vice President, General Counsel 1988-and Corporate Secretary Senior Vice President, General 1988-Counsel and Corporate Secretary
- EL&P ,
Don D. Sykora....... 62 1977 Vice President and Director 1988-President and Chief Operating 1988-Officer and Director - HL&P Gary G. Weik........ 46 1989 Vice President 1990-President and Chief Operating 1989-Officer - KBLCOM Chairman and Chief Executive 1988-1989 , Officer - Weik, Gore Associates, a cable television company President and Chief Executive 1988 , I Officer - Harte-Hanks Communications, a cable television company Ken W. Nabors....... 49 1986 Comptroller 1990-Treasurer - HL&P 1988-1990 Each of the following officers is an executive officer of HL&P and for purposes of the requirements of this Report may also be considered an executive officer of the Company: Officer Business Experience 1988-1992 Name Age (1) Since (2) and Positions (2) Jack D. Greenwade... 53 1982 Group Vice President - HL&P 1990-Senior Vice President & Chief 1989 Operating Officer - KELCOM Vice President - HL&P 1988 Donald P. Hall...... 65 1989 Group Vice President - HL&P 1989-Senior Vice President - 1989 Illinois Power Company, an electric utility Vice President - Illinois 1988-1989 Power Company
?
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EXECUTIVE OFFICERS OF THE COMPANT (CONTINUED) Officer Business Experience 1988-1992 , Name Ace (1) Since(2) and Positions (2) [ i t Lee W. Hogan........ 48 1990 Group Vice President - HL&P 1990-President and Chief Executive 1989-1990 Officer - Greater Houston Partnership, an organization t which governs the Houston Economic Development Council, the Houston Chamber of Com-merce and the World Trade i Association President and Chief Executive 1988 Officer - Houston Economic Development Council, an organization formed to promote . economic diversity in Houston R. Steve Letbetter.. 44 1978 Group Vice President - HL&P 1988-Vice President - HL&P 1988 45 Group Vice President - HL&P 1992- , Stephen C. Schaeffer 1989 1989-1992 Vice President - HL&P l General Manager - HL&P 1988-1989 45 1983 Vice President and Comptroller 1988- , James S. Brian......
- HLEP ,
(1) At December 31, 1992. (2) All of the of ficers were elected May 6, 1992 to serve for one year and until their successors are qualified.
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Item 2. Properties. l The Company considers its property and the property of its subsidiaries to be well maintained, in good operating condition and i I suitable for their intended purposes. HL&P i All of HL&P's electric generating stations and all of the other . operating property of HL&P are located in the State of Texas. Electric Generating Stations. As of December 31, 1992, HL&P owned ! eleven electric generating stations (61 generating units) with a combined turbine nameplate rating of 13,425,868 KW, including a 30.8% interest in one station (two units) with a combined turbine nameplate rating of , 2,623,676 KW, j Substations. As of December 31, 1992, HL&P owned 204 major i I substations (with capacities of at least 10.0 Mva) having a total installed rated transformer capacity of 54,323 Mva (exclusive of spare i transformers), including a 30.8% interest in one major substation with : an installed rated transf omer capacity of 3,080 Mva. Electric Lines-Overhead. As of December 31, 1992, HL&P operated 24,117 pole miles of overhead distribution lines and 3,557 circuit miles of overhead transmission lines including 532 circuit miles operated at 69,000 volts, 1,995 circuit miles operated at 138,000 volts and 1,030 circuit miles operated at 345,000 volts. Electric Lines-Underground. As of December 31, 1992, HL&P operated ! 7,470 circuit miles of underground distribution lines and 12.6 circuit , miles of underground transmission lines including 8 circuit miles operated at 138,000 volts and 4.6 circuit miles operated at 69,000 volts. i General Properties. HL&P owns various properties which include a 27-story headquarters of fice building, division of fices, service centers, telecommunications equipment and other facilities used for general purposes. Title. The electric generating plants and other important units of property of HL&P are situated on lands owned in fee by HL&P. Transmission lines and distribution systems have been constructed in part > on or across privately owned land pursuant to easements or on streets and highways and across waterways pursuant to authority granted by municipal and county permits, and by permits issued by state and federal governmental authorities. Under the laws of the State of Texas, HL&P has the right of eminent domain pursuant to which it may secure or perfect i righte-of-way over private property, if necessary. , The major properties of HL&P are subject to liens securing its long-term debt, and title to some of its properties are subject to minor encumbrances and defects, none of which impairs the use of such 2 properties in the operation of its business. I I F
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l KBLCOM ; The principal tangible assets (other than real estate) relating to t KBLCOM's cable television operations consist of operating plant and i equipment for each of its cable television systems. These include signal l receiving apparatus, "headend" f acilities, coaxial and fiber optic cable
- or wire and related electronic equipment over which programming and data ;
i are distributed and decoding converters attached to subscribers' i television receivers. The signal receiving apparatus typically includes ; a tower, antennae, ancillary electronic equipment and earth stations for
; reception of video, audio and data signals transmitted by satellite. !
i 1 Headend facilities, which consist of associated electronic equipment 1 necessary for the reception, amplification, switching and modulation of j
; signals, are located near the signal receiving apparatus and control the '
i programming and data signals distributed on the cable system. For l certain information with respect to property owned directly or indirectly ;
! by KBLCOM, reference is made to " Business of KBLCOM" in Item 1 of this ,
Report, which is incorporated herein by reference. 4 j Other Subsidiaries 4 For certain information with respect to property owned directly or indirectly by the other subsidiaries of the Company, reference is made ! l to " Businesses of Other Subsidiaries" in Item 1 of this Report, which is incorporated herein by reference. ; l Item 3. Legal Proceedings. I" - For a description of certain legal and regulatory proceedings i j affecting the Company and its subsidiaries, see Notes 9 through 12 to the j i Consolidated Financial Statements in Item 8 of this Report, which are incorporated herein by reference. .
; On February 15, 1991, November 20, 1991 and October 19, 1992, the {
; EPA issued Administrative Orders to HL&P pursuant to the Clean Water Act j 1 relating to alleged noncompliance at Limestone in each of the years 1989 l j through 1992. On August 29, 1991 the EPA issued an Administrative Order j
- related to alleged noncompliance at W. A. Parish. HL&P has taken action )
- to address the issues cited by the EPA, but the EPA could impose fines l
! on HL&P for the matters cited. No material impact on the Company's or l HL&P's financial condition or results of operations is expected. j l j ' From time to time, HL&P sells equipment and material it no longer l l requires for its business. In the past, some purchasers may have ;
- improperly handled the material, principally through improper disposal j i
of oils containing PCBs used in older transformers. Claims have been l asserted against HL&P for clean-up of environmental contamination as well l as for personal injury and property damages resulting from the ; i , purchasers' alleged improper activities. Although HL&P has disputed its j 5 responsibility for the actions of such purchasers, HL&P has in some cases participated or contributed in the remediation of those sites. Such i i undertakings in the past have not required material expenditures by HL&P. In 1990, HL&P, together with other companies, participated in the , I clean-up of one such site. Three suits have been brought against HL&P . and a number of other parties for personal injury and property damages ! i in connection with that site and its cleanup. In two of the cases, i s i i i Y
! i ! 1 jl , i i
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i Dumes, et al. vs. Houston Lichtina & Power Company, et al., pending in [ ! the United States District Court for the Southern District of Texas, Corpus Christi Division, and Trevino, et al . vs. Houston Lichting & Power i Company, et al., pending before the 117th District Court of Nueces County, Texas, landowners near the site are seeking damages primarily for lead contamination to their property allegedly occurring during the i operation and during the clean-up of the site. In the third suit, Holland vs. Central Power and Licht Company, et al . , now pending before ' the 148th District Court for Nueces County, Texas, an individual and his relatives allege that he has suf fered various illnesses due to his exposure to PCBs disposed of at the site. In all these cases, HL&P has ; disputed its responsibility for the actions of the disposal site operator ' and whether injuries or damages occurred. In addition, Gulf States has filed suit in the United States District Court for the Southern District . of Texas, Houston Division, against HL&P and another utility concerning > another site in Houston, Texas, which allegedly has been contaminated by PCBs and for which Gulf States is undertaking remediation pursuant to an EPA order. Gulf States seeks contribution from HL&P and the other utility for Gulf States' remediation costs, but HL&P does not currently believe that it has any responsibility for that site, and HL&P has not 3 been determined by the EPA to be a responsible party for that site. ! Discovery is underway in all these cases and, although their ultimate outcomes cannot be predicted at this time, HL&P and the company believe, based on information currently available, that none of these cases will ,
- result in a material adverse effect on the Company or HL&P. l For information with respect to the EPA's identification of HL&P as a "potentially responsible party" for remediation of a CERCLA site adjacent to one of HL&P's transmission lines in Harris County, reference i is made to " Liquidity and Capital Resources--HL&P and Utility Fuels--
Environmental Expenditures" in Item 7 of this Report, which is . incorporated herein by reference. ] i HL&P and the other owners of the South Texas Project have filed suit
, against Westinghouse in the District Court for Matagorda County, Texas
, (Cause No. 90-S-0684-C), alleging breach of warranty and l misrepresentation in connection with the steam generators supplied by - 3 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 > i efficiency, and in some cases utilities have replaced their steam ; generators. To date no similar stress corrosion cracking has been ' - experienced with steam generator tubes supplied for the South Texas Project, but the owners of the South Texas Project have approved remedial operating plans and have undertaken expenditures to forestall such corrosion. The litigation, which is in its early stages, seeks appropriate damages and other relief from Westinghouse and is not expected to go to trial until af ter 1993. No prediction can be made as
*o the ultimate outcome of that litigation. ;
4 Item 4. Submission of Matters to a Vote of Security Holders. + There were no matters submitted to a vote of security holders during the fourth quarter of 1992. f i 1
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PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock, which at February 1, 1993 was held of record by approximately 72,504 shareholders, is listed on the New York, Midwest and London Stock Exchanges (symbol: HOU). The following table sets forth the high and low sales prices of the Common Stock on the composite tape during the periods indicated, as reported by The Wall Street Journal, and the dividends declared for such periods: Dividend Market Price. Declared per Hich Low Share 1992 First Quarter $0.74 January 2............... $44 3/8 February 24... ......... $40 1/8 Second Quarter 0.74 April 8................. 42 May 5................... 44 3/4 Third Quarter 0.75 . August 3................ 46 7/8
- August 26............... 43 3/8 Fourth Quarter 0.75 42 1/2 3
October 7............... December 23............. 46 7/8 4 1991 First Quarter $0.74 January 15.............. $34 5/8 February 8.............. $37 7/8 Second Quarter 0.74 ' May 9 .................. 38 5/8 June 21................. 35 Third Quarter 0.74 July 1.................. 35 3/4 September 30............ 39 3/4 Fourth Quarter 0.74 October 15.............. 38 1/2 December 31............. 44 3/8
. On December 31, 1992, the consolidated book value of the Company's j common stock was $25.36 per share and the market price was $45.88 per ;
share. 9 f
There are no contractual limitations on the payment of dividends on the common stock of the Company or on the common stock of the Company's subsidiaries other than KBLCOM and KBL Cable. Restrictions on distributions and other financial covenants in KBLCOM and KBL Cable ' credit agreements and other debt instruments affecting KBLCOM and KBL Cable will effectively prevent the payment of common stock dividends by these subsidiaries for the foreseeable future. i t I
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t Item 6. Selected Financial Data. The following table sets forth selected financial data with respect to Lne Company's consolidated financial condition and consolidated results of operations and should be read
'in conjunction with the Consolidated Financial Statements and the related notes included elsewhere herein. '
(Thousands of Do12ars, except per share amounts) Year Ended December 31, 1992(4) 1991(1) 1990(1) 1989 1988
$ 4,443,739 $ 4,178,576 $ 3,789,780 $ 3,540,918 Revenues....................$ 4,596,3B8 ;
Income before cumulative ' effect of accounting change....................$ 340,487 $ 416,754 $ 342,789 $ 413,452 $ 395,254 Cumulative effect of 94,180 (219,718) accounting change......... 434,667 $ 416,754 $ 123,071 $ 413,452 $ 395,254 Not income..................$ l Earnings per share before cumulative effect of accounting change..........$ 2.63 $ 3.24 $ 2.70 $ 3.32 $ 3.34 Cumulative effect of accounting change......... .73 (1. 73) 3.36 $ 3.24 S 0.97 $ 3.32 $ 3.34 Earnings per share..........S Cash dividends declared 2.96 $ 2.94 i per common share . . . . . . . . . .$ 2.98 $ 2.96 $ 2.96 $ Return on average canmon equity.................... 13.4% 12.7% 3.6% 11.7% 11.8% Ratio of earnings to fixed charges before cumulative effect of account'ng change: Including ATUDC (2)....... 2.06 2.14 1.91 2.19 2.36 Excluding ATUDC 42)....... 2.03 1.99 1.66 2.81 1.82 At Year-End: Book value per common share.....................$ 25.36 $ 24.96 $ 26.76 $ 29.05 $ 28.75 Market price per common share.....................$ 45.88 $ 44.25 $ 36.75 $ 35.00 $ 28.00 Market price as a percent of book value............. 181% 177% 137% 120% 97% At Year-End: 1 Total assets................$12,417,501 $12,165,164 $12,044,755 $11,681,925 $10,186,752
; Long-term obligations including current ! maturities (3) . . . . . . . . . . . . $ 4, 9 83,7 9 0 $ 5,301,063 $ 4,973,925 $ 4,987,001 $ 3,597,253 j Capitalization:
common stock equity....... 38% 37% 39% 41% 46% j Cumulative preferred stock of HL&P (including
.' current maturities).....
Long-term debt (including 7% 5% 7% 6% 6% 55% 58% 54% 53% 48% current maturities)..... Capital Expenditures: Construction and nuclear fuel expenditures (excluding AFUDC) . . . . . . . . .$ 336,035 $ 375,520 $ 358,455 $ 388,653 $ 543,862 Cable television additions.................$ 44,306 $ 26,624 $ 31,186 $ 1,339,68f $ 1,130 l (continued on next page)
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J Selected Financial Data (continued). t Year Ended December 31, 1992(4) 1991 1990 1989 1988 , HLEP Selected Data: Fercent of construction ; expenditures financed internally from operations................ 139% 130% 84% 76% 37% Ratio of earnings to fixed charges before cumulative effect of accounting change: Including.ATUDC (2)....... 2.68 2.95 2.80 3.11 2.76 Excluding AFUDC (2)....... 2.64 2.71 2.40 2.44 2.06 Ratio of earnings to fixed charges and preferred dividend requirements before cumulative effect of accounting change...... 2.29 2.50 2.34 2.60 2.39 ArUDC as a percent of income before cumulative effect of accounting change...... 3% 14% 25% 32% 49% (1) The 1991 snd 1990 data has been restated to reflect the ef f ects of the adoption in 1992, with restatement to January 1, 1990, of SrAS No. 109, " Accounting for Income Taxen." The cumulative effect of all years prior to 1990 are reflected in 1990 net income. See also Note 14 to the Consolidated Financial Statements. (2) ArUDC includes ML&P's deferred carrying costs and deferred return in 1991, 1990 and 1989. (3) Includes Cumulative Preferred Stock subject to mandatory redemption. (4) The 1992 cumulative effect relates to the change in accounting for revenues. See also Note 19 to the Consolidated Financial Statements. i r L
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1 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ! l AND RESULTS OF OPERATIONS Results of Operations Overview. Consolidated net incone of Houston Industries Incorporated i (Company) for 1992 was $434.7 million, as compared to $416.8 million and >
$123.1 million for 1991 and 1990, respectively. Consolidated earnings per share were $3.36 for 1992 as compared to $3.24 per share in 1991 and $.97 per share in 1990. ,
Houston Lighting & Power Company (HL&P), the Company's electric utility subsidiary, contributed $3.41 to the 1992 consolidated earnings per share on income of $441.9 million af ter preferred dividends. Utility Fuels, Inc. (Utility Fuels), the Company's coal supply subsidiary, contributed $.21 per share on earnings of $27.4 million. KBLCOM Incorporated (KBLCOM), the Company's cable television subsidiary, posted a loss of $21.2 million or $.16 per share- The Company and its other subsidiaries posted a combined loss of
$.10 per share.
The increase in the Company's earnings in 1992 compared to 1991 was principally due to improved results at KBLCOM, partially offset by a slight decrease in earnings at EL&P, in each case for ,he reasons described below. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, " Accounting for Income Taxes" in the fourth quarter of 1992, with restatement to January 1, 1990. The new standard requires : hat deferred taxes be recorded to reflect the future tax consequences of differences that exist between the book and tax bases of assets other than goodvill. The cumulative effect of SFAS No. 109 adoption, as of January 1, 1990, was a charge to earnings of $219.7 million in 1990, stemming primarily from acquisitions of cable television systems by KBLCOM. The primary impact was on 1990 earnings which, along with 1991 earnings, have been restated. The effects on 1991 and 1992 results were not material. HL&P. General. BL&P had income af ter preferred dividends of $441.9 million for 1992, a decrease of $6.4 million from 1991 and an increase of
$50.5 million over 1990. BL&P's 1992 net income was positively impacted by
$94.2 million associated with the adoption, in the fourth quarter of 1992, of a change in accounting principle which reflects a change in the timing of recognition of revenue from electricity sales (unbilled revenues) effective January 1,1992. Unbilled revenues represent the estimated amount customers vill be charged for service received, but not yet billed, as of the end of each month. The accrual of unbilled revenues results in a better matching of revenues and expenses. The change in the method of recording electricity sales from cycle billing to a full accrual method impacts the pattern of revenue recognition, which has the effect of increasing revenues and earnings in the second and third quarters (periods of higher usage) and decreasing revenues and earnings in the first and fourth quarters (periods of lover usage). Earnings were negatively impacted by an $86 million one-time pre-tax charge in the first quarter of 1992 related to the restructuring of operations as a result of the implementation of the Success Through Excellence in Performance (STEP) program discussed below.
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Earnings vere also negatively impacted by a decrease in kilovatt-hour : (KVB) sales, due to substantially milder weather than in 1991. This veather impact was partially offset by the addition of approximately 22,000 customers during 1992. The increase in income for 1991 when compared to 1990 vas due to higher KVH sales in 1991 and a $313 million increase in base ra%s implemented in May 1991, while 1990 earnings were decreased by a vrite-off of disallowed costs of approximately $29 million. During the years 1990 to 1992, HL&P's results of operations were significantly affected by decisions of the Public Utility Commission of Texas (Utility Commission) in connection with rate increase applications filed by HL&P relating to, among other things, the commercial operation for the South Texas Project Electric Generating Station (South Texas Proj ect ) . These decisions are discussed in Notes 10 and 11 to the Consolidated Financial Statements, which are incorporated herein by reference. Operating Revenue and Sales. Electric operating revenue for 1992 increased 4.1% over 1991 due to a rate increase effective May 1991, which reflected recovery of costs previously deferred, partially offset by a decrease in fuel revenue and lover KVH sales. Electric operating revenue for 1991 increased 5.9% over 1990 due to the May 1991 rate increase, higher KVH sales, and an increase in fuel revenue. Residential KVH sales in 1992 decreased approximately 3.6% from 1991 due to substantially milder weather, i vhile 1991 KVH sales increased 1.7% over 1990 due to a 1.7% increase in the number of customers. Commercial and firm industrial sales in 1992 vere almost unchanged compared to 1991, while 1991 commercial and firm industrial sales increased 2.6% and 1.8%, respectfully, compared to 1990. The mild veather in 1992, following a varm 1991, resulted in 1992 base revenue being approximately $100 million lover than in 1991. HL&P expects compound annual growth in firm electricity sales to , average 2.3% over the next 10 years. Despite the loss of some industrial l sales to self-generation, HL&P expects to gain new customers as a result of industrial expansion in the area. Fuel and Purchased Power Expense. Fuel expense for 1992 increased
$27.8 million over the prior year, primarily due to the higher unit cost of '
fuel resulting from higher natural gas prices, which was partially offset by the lover unit cost of coal and increased generation from nuclear and coal units. Fuel expense for 1991 decreased $27.1 million from 1990 primarily due .l to a lover unit cost of fuel resulting from lover natural gas prices which 4 vas partially offset by the higher unit cost of coal and lignite. The average cost of fuel used by HL&P during 1992 was $1.85 per million Btu, compared to $1.75 and $1.79 per million Btu in 1991 and 1990, respectively. The combined cost of fuel used by BL&P and the fuel portion of purchased power vas 1.95 cents per KVH in 1992, up from 1.86 cents per KVH in 1991 and 1.92 cents per KVH in 1990. Purchased power expense increased $42.4 million and $10.2 million in 1992 and 1991, respectively, due to increased usage and escalating capacity charges paid to cogenerators. STEP Program. In October 1991, HL&P launched its STEP program, an internal effort to identify performance improvement opportunities that could be made while maintaining the high level of customer satisfaction that HL&P has achieved in the past. Nov that HL&P's major construction program has been completed and growth in the service area has become more stable, the l i
STEP program intensified HL&P's focus on meeting customer requirements at the lovest possible cost in order to maintain the current level of base electric ; In January 1992, HL&P offered certain rates for an extended period of time. employees a voluntary early retirement plan and announced a severance plan for those employees affected by recommended changes to HL&P's vorkforce. Approximately 500 employees accepted the early retirement offer, and an additional 1,100 positions vere eliminated. Affected employees vere released ( and offered the severance package. HL&P recorded a one-time, pre-tax charge ! of $86 million in the first quarter of 1992 to reflect the restructuring of its operations. As a result of the STEP program, HL&P operations and ! maintenance expenses for 1992 vere substantially below the amounts originally i budgeted for the year. , Various legal proceedings, which the Company and HL&P believe to be immaterial and without merit, have been filed by some former employees of l HLEP under federal and state laws seeking damages alleged to have been caused , by the STEP program. There can be no assurance that additional proceedings 1 asserting labor related claims vill not be filed. The Company and HL&P l believe that the resolution of such proceedings vill not have a material ; adverse impact on the Company's or HL&P's financial position. [ Operation and Maintenance Expenses, Depreciation and Amortization, , Other Taxes and Interest. Electric operation expenses in 1992 decreased l
$28.8 million from 1991 primarily due to savings resulting from the l restructuring of operations discussed above, while maintenance expenses increased $25.4 million primarily due to increases in production, j transmission and distribution maintenance expenses. In 1991, operation and i
maintenance expenses increased $45.6 million over 1990 primarily due to increases in administrative and general, production maintenance and distribution maintenance expenses. The increase in administrative and i general expense was primarily attributable to a $9.4 million increase in [ employee benefits expense related to higher medical and pension expenses. In ; addition, worker's compensation increased $6.6 million over 1990 as a result ! of higher premiums and a one-time adjustment to recognize these costs on an j accrual basis. j Depreciation and amortization expenses increased $21.9 million in 1992 over 1991, while such expenses in 1991 vere $23.7 million higher than in 1990. The 1992 increase is primarily attributable to the increase in , depreciable property and to the amortization of deferred plant costs related ! to the South Texas Project which commenced when new rates were implemented in i Hay 1991, while the 1991 increase is primarily attributable to the amortization of the South Texas Project deferred plant costs. Other taxes increased $37.7 million in 1992 vhich reflects an increase in state franchise , tax due to a new required method of calculating franchise taxes, the positive effects of a state franchise tax refund in 1991 and higher property taxes in 1992 due to increased rates and assessments. Other taxes increased $2.5 i million in 1991, reflecting the effects of a state franchise tax refund of
$10.5 million in 1991 and a change in the franchise tax calculation l methodology, offset by a change in the franchise tax privilege period and by !
higher property taxes due to new tax rates. ( Interest income in 1992 decreased $11.1 million largely because [ interest was received in 1991 on a refund of prior years' income taxes. ! Interest on'long-term debt in 1992 decreased $14.5 million, primarily due to
4 Other interest expense refinancing activities and reduction of debt. decreased S19.2 million due to the reduction of interest on commercial paper and on fuel cost over-recoveries in 1992, and because interest was paid in 1991 on a payment of prior years' income taxes. United States Nuclear Regulatory Commission (NRC) Diagnostic Evaluation of the South Texas Project. In February 1993, the NRC advised HL&P that the NRC vill conduct a diagnostic evaluation of the South Texas Project in the spring of 1993. The NRC's report on its diagnostic evaluation is not expected until the summer of 1993. For further discussion of the NRC diagnostic evaluation of the South Texas Project, see Note 9(f) to the Consolidated Financial Statements, which is incorporated herein by reference. Utility Fuels. Utility Fuels had earnings of $27.4 million, $23.9 million and $51.4 million in 1992, 1991 and 1990, respectively. The increase in 1992 earnings when compared to 1991 was primarily the result of the recording, in 1991, of deferred taxes associated vith the enactment of a Texas corporate franchise tax, which is partially based on taxable income, and lower interest costs, partially offset by decreased returns on assets . under contract with HL&P. The decrease in 1991 earnings when compared to 1990 was primarily due to the recording in 1990 of the cumulative tax benefit resulting from the adoption of SFAS No. 109. KBLCOM. General. KBLCOM experienced a net loss of $21.2 million in 1992 compared to net losses of $57.4 million in 1991 and $303.0 million in 1990. Cable television systems ovned by KBL Cable, Inc. (KBL Cable), which are located in four states, served approximately 577,000, 559,000 and 550,000 basic subscribers at December 31, 1992, 1991 and 1990, respectively. For information, reference is made to Note 16 to the business segment Consolidated Financial Statements, which is incorporated herein by reference. F3LCOM's financial results for the years ended December 31, 1991 and 1990 have been restated to reflect the adoption of SFAS No. 109 retroactive to January 1, 1990. The cumulative effect of the In adoption of SFAS No. 109 addition, this accounting increased 1990's net loss by $241.1 million. change had the following effects on KBLCOM's 1992, 1991 and 1990 depreciation expense, income tax expense and net loss: Year Ended December 31, 1992 1991 1990 (Thousands of Dollars) Depreciation Expense $ 3,851 $ 3,851 $ 3,851 Income Tax Expense (10,889) (1,694) (13,839) Increase (Reduction) to Net Loss S (7,038) $ 2,157 $ (9,988) The positive impact of SFAS No. 109 on tax expense in 1991 vas offset by recording cumulative deferred taxes associated with the enactment of a Texas corporate franchise tax vhich is partially based on taxable income. The effeet of such change under SFAS No. 109 vas to increase 1991 income tax expense by $10.3 million. For information regarding the effect of the adoption of SFAS No. 109, see Note 14 to the Consolidated Financial Statements, which is incorporated herein by reference. l l 44-
KBLCOM's future earnings outlook is dependent, to a large degree, on the success of its marketing programs to increase basic subscribers and premium programming services,_its success in marketing other services such as advertising and pay-per-viev, and the general economic conditions in the areas it serves. In addition, the cable television industry in general, including KBLCOM, is faced with various uncertainties including the impact of recent reregulation of basic service rates by municipalities, the potential entry of telephone companies into the cable business and increased competition from other entities. Recent changes to the legislative and regulatory environment in which the cable television industry operates could limit KBLCOM's ability to increase p: ices charged for cable television services in the future. In October 1992, the Cable Television Consumer Protection and Competition Act of 1992 (1992 Cable Act) became law. The 1992 Cable Act significantly revised various provisions of the Cable Communications Policy Act of 1984. The 1992 Cable Act provides that the Federal Communications Commission (FCC) vill set guidelines for retail prices on basic cable service, which includes network broadcast stations and educational, public and governmental access channels. Local governments vill regulate retail prices for basic service based on the FCC's guidelines. The FCC is required ; to issue new rules and regulations in 1993. The 1992 Cable Act also requires cable programmers to license their services on a fair basis to cable competitors, such as direct broadcast satellite and wireless distribution system. In addition, at the option of the broadcasters, cable operators will be required to obtain the permission of, and potentially pay a charge to, . local broadcast television affiliates to retransmit their programming to cable customers. The full impact of the 1992 Cable Act cannot be determined at this time. Because the Paragon Communications (Paragon) partnership is accounted for under the equity method of accounting, the following discussion of operating revenues and sales, and depreciation and interest expense relates ; only to KBL Cable and its wholly-owned subsidiaries. Operating Revenues and Sales. In 1992, revenues vere $236.8 million, , an increase of 5.4% over 1991. Revenues increased 12.4% in 1991 as compared to 1990. Gross operating margin (revenues less operating expenses, exclusive of depreciation and amortization) grew to $95 million in 1992, an increase of 12.4% over 1991. Gross operating margin increased 15.6% in 1991 over the prior year. Operating margins were 40.1% for 1992, compared to 37.6% for 1991 and 36.6% for 1990. Cable television revenues vere favorably impacted by the addition of approximately 18,000 basic subscribers in 1992, an , increase of 3.2%, and by the addition of approximately 9,000 basic subscribers in 1991, an increase of approximately 1.6%. Basic service revenues increased $10.6 million or 7.2% and $17.9 million or 13.8% in 1992 and 1991, respectively, as compared to the prior years. Basic service revenue increases are due primarily to additional i customers and increased rates. Ancillary service revenues increased significantly in 1992 and 1991. Advertising revenues and installation fees increased $6.2 million or 27% in 1992 from the prior year. In 1991, these same revenue categories increased
$7.1 million or 45.3% over the previous year. The increases in both years
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are due primarily to increased advertising sales and higher installation and other related transaction fees. Pay-per-view revenues declined in 1992 by
$1.2 million or 10.5%. This decrease was primarily due to the lack of major pay-per-view sporting events. In 1991, pay-per-view revenues increased by $3.0 million or 34.8% from the prior year. This increase was due to increased prices, sales and an increased number of major pay-per-viev ,
sporting events. Following a trend in the cable television industry, premium service revenues for 1992 vere dovn $3.5 million or 8.3% compared to 1991 due to a decline in unit prices. Premium service revenues in 1991 decreased $3.1 million or 6.9% from 1990 due to a decline in both the number of premium ' units and unit prices. Depreciation and Interest Expense. Depreciation and amortization increased $5.1 million or 7.3% in 1992 over 1991 and $2.8 million or 4.1% in 1991 over 1990. The increases in both years were due primarily to asset additions. Interest expense decreased $18.1 million or 20.5% in 1992 vhen : compared to the prior year due to lover interest rates and lover debt balances resulting from the conversion, in March 1992, of $117 million of intercompany loans to common stock equity. This debt conversion, which accounted for $5.4 million of the decrease in interest expense, does not affect consolidated earnings. Interest expense decreased $6.6 million or 6.9% in 1991 when compared to 1990, primarily due to lover interest rates. The Company intends to recapitalize KBLCOM to reduce the amount of debt in its capital structure. As part of this restructuring, the Company plans to contribute to KBLCOM $167 million of equity which vill be used to reduce KBLCOM's indebtedness. This restructuring vill increase KBLCOM's equity capitalization, reduce the financial risks associated with indebtedness of , KBLCOM and increase KBLCOM's financial flexibility. Paragon Partnership. A subsidiary of KBLCOM owns a 50% interest in Paragon, a Colorado partnership, which, in turn, owns cable television systems that served approximately 901,000, 865,000 and 829,000 basic cable customers in seven states as of December 31, 1992, 1991 and 1990, respectively. Paragon's revenues vere favorably impacted in 1992 and 1991 by . the addition of approximately 36,000 basic subscribers each year. This represents an increase in subscribers of 4.2% and 4.3% for 1992 and 1991, respectively. KBLCOM's 1992 equity interest in the pre-tax earnings of i Paragon was $24.9 million compared to $10.3 million for the year 1991 and a t loss of $.7 million for the year 1990. The increase in both of these years vas due to increased revenue, improved operating margins and reduced interest expense at Paragon. Liquidity and Capital Resources Overview. The Company's cash requirements stem primarily from operating expenses, capital expenditures, payment of common stock dividends, payment of preferred stock dividends, and interest and principd payments on debt. Net cash provided by operating activities totaled $799.9 million in 1992.
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4
- Het cash used in investing activities in 1992 totaled $397.9 million 7 primarily due to electric and coal handling capital expenditures of - $342.2 million and cable television additions of $44.3 million. {
1 Financing activities for 1992 resulted in a net cash outflow of $360.4 ; million. The Company's primary financing activities vere the payment and' ; I extinguishment of long-term debt and payment of dividends partially offset by the issuance of long-term debt and preferred stock. ! I The liquidity and capital requirements of the Company and its ; subsidiaries are affected primarily by capital programs and debt service requirements. The capital requirements for 1992, and as estimated for 1993 ; through 1995, are as follows: .; Millions of Dollars 1992 1993 1994 1995 : Utility construction and nuclear fuel ' (excluding Allowance for Funds Used During Construction (AFUDC)) (1)......... $331 $344 $498 $462 j Coal handling facilities and lignite mining ; and handling facilities................. 5 11 12 12 Cable television additions................. 44 46 40 54 j Other cable related investments............ 12 Investment in foreign electric utility..... 2 36 Maturities of long-term debt, preferred i stock and minimum capital lease ' payments................................. 208 336 55 66 Total...................................... $590 $785 $605 $594 . t (1) These amounts do not include expenditures on projects for which HL&P l expects to be reimbursed by customers or other parties, j For a discussion of the Company's commitments for capital expenditures, t see Note 8 to the Consolidated Financial Statements, which is' incorporated herein by reference. j The Company. General. The Company has consolidated its financing : activities in order to provide a coordinated, cost-effective method of meeting short and long-term capital requirements. As part of. the ; consolidated financing program, the Company has established a " money fund" l' through which its subsidiaries can borrov or invest on a short-term basis. The funding requirements of individual subsidiaries are aggregated and > borrowing or investing is conducted by the Company based on the net cash i position. Net funding requirements are met with borrowings under the ; Company's commercial paper program except that HL&P's borroving requirements , are generally met with HL&P's commercial paper program. As of December 31, i 1992, the company maintained bank lines aggregating $500 million (exclusive j of bank lines maintained by subsidiaries of the Company) which are used to support its commercial paper program. At December 31, 1992, the Company had l approximately $285 million of commercial paper outstanding. Rates paid by l the Company on its short-term borrowings are generally lover than the prime ; rate. .; { l i
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ESOP. In October 1990, the Company amended its existing Savings Plan (Plan) to add an Employee Stock Ownership Plan (ESOP) component to the Plan. The ESOP component of the Plan allows the Company to satisfy a portion of its obligations to make matching contributions under the Plan. The ESOP trustee purchased shares of the Company's common stock in open market transactions with funds provided by loans from the Company and completed the purchase of stock under the ESOP in December 1991 after purchasing 9,381,092 shares at a cost of $350 million. As the ESOP loans are repaid by the ESOP trustee over a period of up to 20 years, the common stock purchased for the Plan vill be allocated to the participants' accounts. The loans vill be repaid from dividends on the common stock in, and Company contributions to, the Plan. The loans to the Plan vere funded initially by the Company from short-term borrowings which have been refinanced with long-term debt. At December 31, 1992, the balance of the ESOP loans was approximately $332 million. Financing Activities. In July 1992, the Company issued $100 million aggregate principal amount of its debentures, 7 7/8% series due 2002. j Proceeds vere used to repay a portion of the Company's short-term indebtedness, including amounts incurred in connection with loans to the Company's ESOP. The Company has registered with the Securities and Exchange Commission (SEC) $150 million principal amount of debt securities which remain unissued. Proceeds from the sale of these debt securities are expected to be used for general corporate purposes including investments in and loans to subsidiaries. In February 1992 and December 1992, the Company purchased from third parties $19 million and $9.9 million principal amount, respectively, of KBL Cable's 10.95% Senior Notes due 1999 and $23.75 million and $12.3 million principal amount, respectively, of KBL Cable's 11.30% Senior Subordinated Notes due 1999. The notes were purchased at a veighted average price of approximately 109% and 112% of their principal amount in February 1992 and December 1992, respectively. The purchases vere made to reduce interest expense on a consolidated basis. The notes are being held by the Company. In December 1992, the Company established a new bank facility which replaced the Company's existing facilities and increased the Company's bank lines supporting its commercial paper program from $400 million to $500 j million. The Company intends to sell commercial paper supported by the i facility in order to contribute funds to KBLCOM as equity for the prepayment ) of approximately $167 million of KBLCOM's borrovings under its Senior Bank l Facility during the first quarter of 1993. Houston Argentina. Houston Argentina S. A. (Houston Argentina), a subsidiary of the Company, ovns a 32.5% interest in an Argentine holding company which acquired, in December 1992, a 51% interest in Edelap S. A., an electric utility company operating in La Plata, Argentina and surrounding regions. Houston Argentina's share of the purchase price vas approximately
$37.6 million, of which $1.6 million was paid in December 1992 with the remainder to be paid in March 1993.
HL&P and Utility Puels. General. Utility construction and nuclear i fuel expenditures for the 1993-1995 period represent estimated costs of HL&P's construction program. The estimated expenditures for coal handling facilities and lignite mining and handling facilities are expected to be I
incurred by HL&P and Utility Fuels primarily in connection with HL&P's existing plants. Utility Fuels expects to finance its capital program : primarily through internally generated funds. , BL&P's cash requirements stem primarily from operating expenses, capital expenditures, payment of common stock dividends, payment of preferred stock dividends, . and interest and principal payments on debt. HL&P's net cash provided by operating activities for the year ended December 31, 1992 totaled approximately $817.7 million. Het cash used in HL&P's investing activities for the twelve months ended December 31, 1992 totaled $348.0 million. HL&P's financing activities for the twelve months ended December 31, 1992 resulted _in a net cash outflow of approximately $476.9 million. ' Included in these activities were the payment of dividends and the payment and extinguishment of long-term debt, partially offset by the issuance of long-term debt and preferred stock. For information with respect to these ; matters, reference is made to Notes 3 and 4 to the Consolidated Financial Statements, which Notes are incorporated herein by reference. . Capital Program. HL&P's construction and nuclear fuel expenditures (excluding AFUDC) for 1992 totaled $331 million which was below the authorized budgeted level of $395 million. Estimated expenditures for 1993, 1994 and 1995 are $344 million, $498 million and $462 million, respectively. These amounts do not include expenditures on projects for which HL&P expects to be reimbursed by customers or other parties. Maturities of long-term debt and preferred stock with mandatory redemption provisions for this same period include $159 million in 1993, $41 million in 1994 and $46 million in 1995. While over half of HL&P's construction program for the next three years i is expected to relate to costs for transmission, distribution, and general plant, HL&P expects to begin construction of the E.I. du Pont de Nemours Company (Du Pont) project in 1993 in order to provide generating capacity in - i 1995. The Du Pont project is based on a contractual agreement between HL&P and Du Pont, whereby HL&P vill construct, own, and operate two 80 megavatt gas turbine units to be located at Du Pont's chemical plant. The project vill supply Du Pont with process steam while all electrical energy vill be used in the HL&P system. Expenditures for additional generating capacity are planned to begin in 1994. HL&P's capital program is subject to periodic reviev and portions may be revised from time to time due to changes in load forecasts, changing regulatory and environmental standards and other factors. Financing Activities. In January 1992, HL&P repaid at maturity $132 million aggregate principal amount of its 9 3/8% first mortgage bonds. In February 1992, HL&P issued $100 million aggregate liquidation value - of variable term perpetual preferred stock. Proceeds from the sale were used , to reduce short-term indebtedness, including indebtedness from the preferred , stock redemptions that occurred in November 1991. In March 1992, HL&P issued $100 million principal amount of 8.15% < medium-term notes due 2002. In Harch 1992, HL&P also issued $150 million principal amount of 7 5/8% first mortgage bonds due 1997 and $100 million ; l principal amount of 8 3/4% first mortgage bonds due 2022. Proceeds vere used
to provide funds for the purchases and redemptions of HL&P's first mortgage bonds described in the following paragraph and for general corporate purposes, including the repayment of short-term indebtedness of HL&P. In April 1992, HL&P purchased, at 101% of their principal amount,
$56,633,000 aggregate principal amount of its 9 1/4% first mortgage bonds due "
2008, pursuant to its tender offer for any and all bonds of such series. In May 1992, BL&P redeemed all of the remaining $43,367,000 aggregate principal amount of its 9 1/4% first mortgage bonds at 100% of their principal amount, all $125 million aggregate principal amount of its 8 7/8% first mortgage bonds due 2008 at 100% of their principal amount and $82,753,000 aggregate principal amount of its 8 3/4% first mortgage bonds due 2005 at 100.64% of their principal amount. , In April 1992, HL&P purchased, at a premium over the principal amount, portions of seven series of pollution control revenue bonds issued on behalf of HL&P by the Brazos River Authority (BRA) and the Matagorda County Navigation District Number One (HCND). Funds were obtained from the April 1992 issuance of $99,915,000 of 6.7% revenue refunding bonds collateralized by HL&P's first mortgage bonds. Of this amount, $56,095,000 principal amount of bonds were issued on behalf of HL&P by the MCND and mature 2027. The remainder mature in 2017 and were issued on behalf of HL&P by the BRA. The refunded bonds bore interest at rates ranging from 9 3/4% to 10 5/8%. Premiums aggregating $16.9 million vere paid in connection with the purchases of the refunded bonds. In August 1992, HL&P repaid at maturity $25 million aggregate principal amount of its 4 1/2% first mortgage bonds. In October 1992, HL&P purchased at 109.125% of their principal amount,
$212,533,000 aggregate principal amount of its 10 1/4% first mortgage bonds due 2019 pursuant to a tender offer for any and all bonds of such series.
In October 1992, the BRA and the Gulf Coast Vaste Disposal Authority (GCVDA) issued on behalf of HL&P $45.6 million aggregate principal amount of 6 3/8% revenue refunding bonds collateralized by HL&P's first mortgage bonds due 2012. Proceeds vere used to redeem, at 103% of their aggregate principal amount, $45.6 million principal amount of three series of pollution control revenue bonds previously issued on behalf of HL&P by the BRA and GCVDA. In October 1992, BL&P issued $120 million aggregate liquidation value of variable term perpetual preferred stock. Proceeds from the sale vere used (i) to redeem all shares of HL&P's adjustable rate cumulative preferred stock, series A and series B, having an aggregate liquidation value of $100 million at a redemption price of $103 per share; (ii) to redeem $12,467,000 aggregate principal amount of 10 1/4% first mortgage bonds due 2019 at 108.47% of their principal amount; and (iii) for general corporate purposes. , In January 1993, HL&P repaid at maturity $136 million aggregate principal amount of its 9 3/8% first mortgage bonds. Sources of Capital Resources and Liquidity. HL&P expects to finance its capital program for the period 1993-1995 with funds generated internally from operations.
HL&P has registered with the SEC $230 million aggregate liquidation value of preferred stock and $250 million aggregate principal amount of first , mortgage bonds. In addition, HL&P has registered $800 million aggregate principal amount of debt . securities that may be issued as first mortgage bonds and/or as securities collateralized by first mortgage bonds. Proceeds from the 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.
- HL&P's interim financing requirements are met through the issuance of short-term debt, primarily commercial paper, supported by a bank line of credit. At December 31, 1992, a $250 million line was maintained.
Commercial paper outstanding at December 31, 1992 was $139 million. HL&P's capitalization ratios at December 31, 1992 consisted of 46% long-term debt, 8% preferred stock and 46% common equity. Environmental Expenditures. In November 1990, the Clean Air Act was extensively amended by Congress. HL&P has already made a substantial investment in pollution control facilities, and all of its generating facilities currently comply in all material respects with sulfur dioxide emission standards established by the legislation. Provisions of the Clean t Air Act dealing with urban air pollution require establishing new emission limitations for nitrogen oxides (N0x ) from existing sources. These ' limitations are expected to be finalized in mid-1993. The cost of modifications necessary to reduce NOx emissions from existing sources has , been estimated, based upon anticipated regulations, at $62 million in 1994 and $18 million in 1995. The necessary modifications may cause secondary impacts to generating unit capacity ratings, and cost estimates could change , substantially upon analysis of the impact of the final rules. In addition, continuous emission monitoring regulations are anticipated to require expenditures of $12 million in 1993 and $14 million in 1994. Capital expenditures are estimated to total $140 million for the years 1993 through 1995. The United States Environmental Protection Agency (EPA) has identified HL&P as a "potentially responsible party" for the costs of remediation of a Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) site located adjacent to one of HL&P's transmission lines in Harris County. Although HL&P did not contribute vaste to or operate the site, the party primarily responsible for contributing vaste to the site and possibly other , potentially responsible parties have alleged that vaste disposal pits dug by , the site operator encroach onto HL&P's property and therefore HL&P is responsible as a site ovner. HL&P denies that it ever owned the strip _of land containing the pits but admits that it owns the adjacent strip of land onto which substances from the site appear to have migrated. In October 1992, the EPA issued an Administrative Order to HL&P and several other companies purporting to require those parties to implement the management of migration remediation at the site. A related Administrative Order had been issued in June 1990. HL&P, if necessary, will remove substances which have migrated onto its property, but HL&P denies that it has other responsibility for the remediation activities. BL&P understands that the other respondents to the Administrative Orders, through the HOTCO Trust Group, have complied with the first order, and that they ultimately vill assume responsibility for F completion of the management of migration remediation. BL&P is not a member of the MOTCO Trust Group. Neither the EPA nor any other responsible party has presented HL&P with a claim for a share of costs for the management of the migration remediation design or operation. However, in the event HL&P vere ultimately held to be a responsible party for the remediation of this site and if other responsible parties do not complete the management of ' migration remediation, CERCLA provides for substantial remedies that could be pursued by the United States, including substantial fines, punitive damages and treble damages for costs incurred by the United States in completing such remediation. The aggregate potential clean-up costs for the entire site are presently estimated to be approximately $80 million. Although no prediction can be made at this time as to the ultimate outcome of this matter, in light , of all the circumstances, the Company and HL&P do not believe that any costs that HL&P incurs in this matter vill have a material adverse effect on the Company or HL&P. KBLCOM. KBLCOM's net cash provided by operating activities was $40 million and $1.1 million in 1992 and 1991, respectively, compared to net cash used in operating activities of $5.7 million in 1990. The improvements in 1992 and 1991 over the prior years were primarily attributable to increased revenues, improved operating margins and reduced interest expense. During 1992, KBLCOM's primary financing or investing activities were a $5 million reduction in outstanding bank indebtedness, principal payments on other third party indebtedness of $2.7 million, capital expenditures of approximately $44.3 million for cable television additions, which includes the acquisition of a small cable system for $3.7 million. These amounts vere financed principally through internally generated funds and intercompany advances. A substantial portion of KBLCOM's 1993-1995 capital requirements is expected to be met through internally generated funds. It is expected that any shortfall vill be met through intercompany borrowings. The net cash , used in investing activities decreased approximately $5.8 million in 1991 as compared to 1990 primarily due to reductions in construction expenditures and equipment purchases. KBLCOM's net cash provided by financing activities decreased $13 million for 1991, as compared to 1990, primarily due to less borrowing from the Company and reductions in long-term debt. In the first quarter of 1991', the Company advanced KBLCOM $24 million, and additional funds were drawn by KBLCOM under its bank facility to repay a portion of the outstanding bank indebtedness of KBL Cable and to mak.e interest payments. KBLCOM expects to satisfy its cash requirements for 1993 through internally generated funds, intercoinpany borrowings and contributions, and borrowings under KBL Cable's bank facility. KBL Cable's ability to borrow additional funds under its bank facility is currently limited by certain financial covenants which require KBL Cable to maintain and satisfy certain debt to cash flow ratios and other financial tests. KBL Cable is in compliance with all financial covenants contained in its bank facility. Houston Industries Finance. During 1992, Houston Industries Finance, Inc. (Houston Industries Finance) purchased accounts receivable of HL&P and of certain KBLCOM subsidiaries. As of January 12, 1993, Houston Industries
. Finance ceased operations and the $300 million bank revolving credit facility and related commercial paper program were terminated. At December 31, 1992, Houston Industries Finance had $139.9 million of commercial paper outstanding.
New Accounting Pronouncements In December 1990, the Financial Accounting Standards Board issued SFAS No. 106, " Employers' Accounting for Postretirement Benefits _0ther Than Pensions". This accounting etandard, effective for fiscal years beginning - after December 15, 1992, requires companies to recognize the liability for postretirement benefit plans other than pensions, primarily medical and dental benefits. The Company vill adopt SEAS No. 106 in 1993. The transition obligation, or accumulated postretirement benefit obligation, of approximately $213 million vill be amortized over approximately 22 years as permitted by SFAS No. 106. The Company estimates that adoption vill increase benefit costs by approximately $24 million over the expected " pay-as-you-go" amount in 1993. The Utility Commission has published a proposed rule which, if adopted, vould govern the ratemaking treatment for postretirement benefits other than pensions. This rule (i) vill allow for recovery of the current postretirement benefits expense on an accrual basis provided that all amounts recovered in rates are placed in an external trust fund, and (ii) vill not allow recovery of the transition obligation. HL&P is opposing the portion of the rule which would preclude it from recovering the transition obligation in rates. (tem 8. Financial Statements and Supplementary Data. , BOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONS 01.IDATED INCOME (Thousande,of Dollars) Year Ended December 31, 1992 1991 1990 (Restated) (Restated) Revenues: Electric......................................... $3,826,841 $3,674,543 $3,468,682 Coal and lignite................................. 532,787 544,468 510,001 Cable television................................. 236,760 224,728 199,893 Total........................................ 4,596,388 4,443,739 4,178,576 Expenses: Electric: Fuel........................................... 987,918 960,091 987,168 Purchased power................................ 486,414 444,040 433,862 Operation and maintenance...................... 802,194 805,564 759,933 Taxes other than income taxes.................. 228,238 190,526 187,987 Deferred expenses.............................. (22,973) (101,187) Restructuring.................................. 86,431 Cost of coal and lignite sold.................... 455,954 461,444 426,030 Cable television operating expenses.............. 141,744 140,223 126,764 Depreciation and amortization.................... 465,081 438,868 411,340 Total........................................ 3,653,974 3,417,783 3,231,897 Operating Income................................... 942,414 1,025,956 946,679 Other Income (Expense): Allovance for other funds used during construction................................... 6,169 5,749 3,841 Deferred return under phase-in plan.............. 38,758 35,269 Disallowed plant costs and regulatory a dj u s t men t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,483 (35,573) Equity in income (loss) of cable television partnerships................................... 24,871 10,672 (214) Interest income.................................. 1,745 21,144 2,488 Other - net...................................... (20,687) (13,515) (13,001) Tota 1........................................ 12,098 77,291 (7,190) Fixed Charges: Interest on long-term debt....................... 396,323 429,900 435,748 Other interest................................... 19,957 42,970 48,872 Allowance for borrowed funds used during construction................................... (6,191) (10,049) (9,465) Deferred carrying costs.......................... (30,695) (91,152) Preferred dividends of subsidiary................ 39,327 46,187 47,753 Total........................................ 449,416 478,313 431,756 (continued on next page)
BOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (Thousands of Dollars)- (Continued) Year Ended December 31, 1992 1991 1990 (Restated) (Restated) Income Before Income Taxes and Cumulative Effect of Accounting Change............................. $ 505,096 $ 624,934 $ 507,733 Income Taxes....................................... 164,609 208,180 164,944 Income Before Cumulative Effect of Accounting Change........................................... 340,487 416,754 342,789 Cumulative Effect of Change in Accounting for Income Taxes..................................... (219,718) Cuoulative Effect of Change in Accounting for Revenues (net of income taxes of $48,517)........ 94,180 Net Income......................................... S 434,667 $ 416,754 S 123,071 Earnings Per Common Shares: Earnings Per Common Share Before Cumulative Effect of Accounting Change.................... $ 2.63 $ 3.24 $ 2.70 Cumulative Effect of Change in Accounting for ; Income Taxes................................... (1.73) Cumulative Effect of Change in Accounting for Revenues....................................... .73 Earnings Per Common Share.......................... S 3.36 $ 3.24 $ .97 Veighted Average Common Shares Outstanding (000)................................ 129,514 128,802 127,254 i r See Notes to Consolidated Financial Statements. 1 i l 1
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED RETAINED RARNINGS (Thousands of Dollars) Year Ended December 31, 1992 1991 1990 (Restated) (Restated) Balance at Beginning of Year........................ $1,202,125 $1,165,786 $1,419,248 Add - Net Income.................................... 434,667 416,754 - 123,071 Tota 1......................................... 1,636,792 1,582,540 1,542,319 Common Stock Dividends: 1992, $2.98; 1991, $2.96, 1990, $2.96; (per share)....................................... (385,952) (381,117) (376,533) Tax Benefit of ESOP Dividends....................... 8,944 4,862 Redemption of HL&P Preferred Stock.................. (5,200) (4,160) Balance at End of Year.............................. ,$1,254,584 $1,202,125 $1,165,786 See Notes to Consolidated Financial Statements. i l l l l i l i
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- 4 1 . HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES 1 CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) ASSETS , December 31, 1992 1991 (Restated) Property, Plant and Equipment - At Cost: Electric plant: Production................................................... S 6,853,263 $ 6,724,735 ' 818,584 801,049 Transmission................................................. Distribution................................................. 2,394,226 2,302,657 General...................................................... 737,675 690,246 Construction work in progress................................ 201,165 239,159 Nuclear fue1................................................. 202,013 181,853 Plant held for future use.................................... 200,865 275,719 Electric plant acquisition adj us tments. . . . . . . . . . . . . . . . . . . . . . . . . 3,166 3,166 > Coal handling equipment and mining property.................... 537,772 536,728 Cable television property...................................... 320,661 278,052 12,197 12,159 Other property................................................. Tota 1...................................................... 12,281,587 12,045,5f3 Less accumulated depreciation and amortization................. 3,091,132 2,746,451 Property, plant and equipment - net........................ 9,190,455 9,299,072 Current Assets: Cash and cash equivalents...................................... 69,317 27,669 Special deposits............................................... 2,071 1,417 Accounts receivable: Customers (less allowance for doubtful accounts of $10,439 and $12,585 at December 31, 1992 and 1991, respectively)... 135,072 130,666 0thers....................................................... 19,611 36,274 Accrued unbilled revenues...................................... 190,897 Fuel stock, at lifo cost: Oil and gas.................................................. 23,703 25,443 Coal and lignite............................................. 44,861 41,611 Materials and supplies, at average cost........................ 167,438 178,298 Prepayments.................................................... 14,765 18,304 Total current assets....................................... 667,735 459,682 ; other Assets: Cable television franchises and intangible assets (less accumulated amortization of $145,856 and $107,681 at December 31, 1992 and 1991, respectively)............................. 1,021,934 1,058,576 Deferred plant costs........................................... 690,482 716,264 > Deferred debits................................................ 273,750 247,852 Unamortized debt expense and premium on reacquired debt........ 137,395 93,665 Equity investment in cable television partnerships............. 90,220 65,025 Equity investment in foreign electric utility.................. 37,554 Re gul a t o ry as s e t - ne t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,426 165,246 Recoverable project costs...................................... 130,550 59,782 Total other assets......................................... 2,559,311 2,406,410 Tota 1.................................................... $12.417,501 $12,165,164 See Notes to Consolidated Financial Statements. 1 p
~ - i HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES ;
CONSOLIDATED BALANCE SHEETS ! (Thousands of Dollars) CAPITALIZATION AND LIABILITIES December 31, 1992 1991 , (Restated) , Capitalization (statements on following pages): Common Stock Equity........................................... $ 3,284,713 $ 3,232,217 Preference Stock, no par; authorized 10,000,000 shares; none outstanding : Cumulative Preferred Stock of Subsidiary: No t subj ec t t o manda to ry redemp tion. . . . . . . . . . . . . . . . . . . . . . . . . 351,354 232,980 l Subj ec t t o manda t ory redemp tion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,834 226,632 Total cumulative preferred stock.......................... 558,188 459,612 Long-Term Debt................................................ 4,441,205 4,866,923 ; i Total capitalization.................................... 8,284,106 8,558,752 { Current Liabilities: Notes payable................................................. 564,249 330,294 l Accounts payable.............................................. 249,397 238,407 ' Taxes accrued................................................. 187,484 190,675 Interest accrued.............................................. 101,054 116,826 ' Accrued liabilities to municipalities......................... 20,947 21,510 Customer deposits............................................. 69,940 65,224 , current portion of long-term debt and preferred stock......... 335,751 207,508 , Fual refund, including interest............................... 62,993 , 0ther......................................................... 75,485 49,454 Total current liabilities............................... 1,604,307 1,282,891 l Deferred Credits. , Accumulated deferred income taxes............................. 1,789,820 1,703,468 Unamortized investment tax credit............................. 454,782 474,732 0ther......................................................... 284,486 145,321 Total deferred credits.................................. 2,529,088 2,323,521 Commitments and Contingencies Total................................................ $12,417,501 $12,165,164 See Notes to Consolidated Financial Statements. ! HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES i j CONSOLIDATED STATEMENTS OF CAPITALIZATION * (Thousands of Dollars) December 31, 1992 1991 (Restated) l Common Stock Equity: Common stock, no par; authorized, 200,000,000 shares; outstanding, 129,514,483 and 129,513,620 shares at $2,362,581 December 31, 1992 and 1991, respectively..................... $2,362,618 (332,489) (332,489) > Note receivable from ES0P...................................... 1,254,584 1,202,125 Retained earnings.............................................. 3,284,713 3,232,217 Total common stock equity....................... Cumulative Preferred Stock, no par; authorized, 10,000,000 , shares; outstanding, 5,832,397 and 4,632,397 shares at December 31, 1992 and 19c., respectively (entitled upon liquidation to $100 per hare) Houston Lighting & Power Company: Not subject to mandatory redemption: 9,740 9,740
$4.00 series, 97,397 shares............................
250,000 shares............................ 25,115 25,115
$6.72 series, 50,226 500,000 shares............................ 50,226
$7.52 series, 500,000 shares............................ 50,098 50,098
$8.12 series, 48,810 Series A - 1984, 500,000 shares............................ 48,991 >
Series B - 1984, 500,000 shares............................ Series A - 1992, 500,000 shares............................ 49,098 Series B - 1992, 500,000 shares............................ 49,109 Series C - 1992, 600,000 shares............................ 58,984 Series D - 1992, 600,000 shares............................ 58,984. 351,354 232,980 Total................................................ Subj ect to mandatory redemption: 99,195 98,993
$8.50 series, 1,000,000 shares ...........................
127,639 127,639
$9.375 series, 1,285,000 shares............................ 20,000 Less current redemptions................................. 226,632 206,834 Total................................................ 459,612 Total cumulative preferred stock................ 558,188 Long-Term Debt:
Debentures: 200,000 200,000 7 1/4% series, due 1996................................... 250,000 250,000 9 3/8% series, due 2001................................... 7 7/8% series, due 2002................................... 100,000 (1,641) (1,003) Unamortized discount...................................... 548,359 448,997 Total debentures..................................... l Houston Lighting & Power Company: First mortgage bonds: 25,000 4 1/2% series, due 1992................................... 132,000 9 3/8% series, due 1992................................... 136,000 136,000 9 3/8% series, due 1993................................... 5 1/4% series, due 40,000 40,000 , 1996................................... 40,000 40,000 , 5 1/4% series, due 1997................................... 35,000 35,000 6 3/4% series, due 1997................................... (continued on next page) . BOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION (Thousands of Dollars) (Continued) December 31, 1992 1991 (Restated) 7 5/8% s e ri es , due 19 97. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ' $ 150,000 6 3/4% series, due 1998................................... 35,000 S 35,000 7 1/2% series, due 1999................................... 30,000 30,000 7 1/4% series, due 2001................................... 50,000 50,000 ; 7 1/2% series, due 2001................................... 50,000 50,000 , 8 1/8% series, due 2004................................... 100,000 100,000 8 3/4% series, due 2005................................... 42,247 125,000 8 3/8% series, due 2006................................... 125,000 125,000 8 3/8% series, due 2007................................... 125,000 125,000 ; 8 7/8% series, due 2008................................... 125,000 9 1/4% series, due 2008................................... 100,000 9 % series, due 2017................................... 390,519 390,519 10 1/4% series, due 2019................................... 225,000 9.15 % series, due 2021................................... 160,000 160,000 8 3/4% series, due 2022................................... 100,000 7 % pollution control series, due 2008................. 19,200 19,200 6 3/8% pollution control series, due 2012................. 33,470 6 3/8% pollution control series, due 2012................. 12,100 7 3/4% pollution control series, due 2015................. 68,700 68,700 8 1/4% pollution control series, due 2015................. 90,000 90,000 7 7/8% pollution control series, due 2016................. 68,000 68,000 6.70 % pollution control series, due 2017................. 43,820 7 7/8% pollution control series, due 2018................. 50,000 50,000 7.20 % pollution control series, due 2018................. 175,000 175,000 8 1/4% pollution control series, due 2019................. 100,000 100,000 8.10 % pollution control series, due 2019................. 100,000 100,000 7 7/8% pollution control series, due 2019................. 29,685 29,685 7.60 % pollution control series, due 2019................. 70,315 70,315 7.70 % pollution control series, due 2019................. 75,000 75,000 7 1/8% pollution control series, due 2019................. 100,000 100,000. 7 5/8% pollution control series, due 2019................. 100,000 100,000 t 6.70 % pollution control series, due 2027................. 56,095 Medium-term notes series A, 9.79%-9.85%, due 1994-1999..... 200,000 200,000 Hedium-term notes series B, 8 5/8%, due 1996............... 100,000 100,000 Hed'.um-term notes series B, 8.15%, due 2002. . . . . . . . . . . . . . . . 100,000 Total first mortgage bonds........................... 3,200,151 3,394,419 Pollut.'on control revenue bonds: Gulf Coast 1980-T series, floating rate, due 1998.......... 5,000 5,000 Brazcs River 1983 series, 10 1/2%, due 2003................ 17,935 25,000 # Gulf Coast 1974 series, 7 3/8%, due 2004................... 16,950 17,300 Brazos River 1985 A2 series, 9 3/4%, due 2005. . . . . . . . . . . . . . 4,265 10,000 , Gulf Coast 1982 series, 9 7/8%, due 2012................... 12,100 . Brazos River 1982 series, 9 7/8%, due 2012................. 42,800 l Brazos River 1983 series, 10 5/8%, due 2013................ 65,630 75,000 Brazos River 1985 Al series, 9 7/8%, due 2015.............. 87,680 100,000 Matagorda County 1985 series, 10%, due 2015................ 58,905 115,000 Total pollution control revenue bonds................ 256,365 402,200 (continued on next page)
w--. - ~ . _ _ i . HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION i (Thousands of Dollars) (Continued) December 31, 1992 1991 (Restated) Unamortized premium (discount) - net......................... $ (12,118) $ (11,826) 3,190 2,492 Capitalized lease obligations................................ 3,153 3,187 Notes payable................................................ 3,450,043 3,791,170 Tota 1................................................ KBLCOM Incorporated and Subsidiaries: 420,000 KBL Cable, Inc. senior bank debt............................. 415,000 167,349 167,349 KBLCOM Incorporated senior bank debt......................... 69,935 100,000 KBL Cable, Inc. senior notes................................. 125,000 KBL Cable, Inc. senior subordinated notes.................... 87,419 ; 750 854 Capitalized lease obligations................................ 740,453 813,203 Tota 1................................................ Utility Fuels, Inc.: 1,003 1,064 Other notes payable.......................................... 17,098 19,997 Capitalized lease obligations, average discount rate 6.4%.... 18,101 21,061 Total................................................ . Tota 1........................................... 4,756,956 5,074,431 315,751 207,508 l Less current maturities......................... Total long-term debt............................ 4,441,205 4,866,923 l Total capitalization....................... $8,284,106 $8,558,752 See Notes to Consolidated Financial Statements. HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOVS Increase (Decrease) in Cash and Cash Equivalents (Thousands of Dollars) Year Ended' December 31, ' 1992 1991 1990 (Restated) (Restated) Cash Flovs from Operating Activities: Net income...................................... $ 434,667 $ 416,754 $ 123,071 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................. 465,081 438,868 411,340 Amortization of nuclear fue1.................. 29,237 23,145 19,931 Deferred income taxes......................... 61,670 110,243 270,564 Investment tax credits........................ (19,950) (19,903). (25,130) Allowance for other funds used during construction................................ (6,169) (5,749) (3,841) Deferred plant costs.......................... (53,668) (192,339) Payment of disputed income taxes and related interest.................................... (52,817) (104,534) Deferred return under phase-in plan........... (38,758) (35,269) Disallowed plant costs and regulatory ; adj us t men t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,483) 35,573 Disallowed expenses........................... 13,124 20,950 Fuel cost (refund) and over recovery - net.... (84,072) (7,061) 46,424 Restructuring................................. 86,431 Cumulative effect of change in accounting for revenues.................................... (94,180) Regulatory asset - net........................ (12,180) (21,614) (143,632) Equity in (income) loss of cable television partnerships................................ (24,871) (10,672) 214 Cumulative effect of change in accounting for income taxes................................ 219,718 Changes in other assets and liabilities: Accounts receivable - net................... 8,627 6,959 23,770 Inventory................................... 9,350 (7,182) (20,037) Other current assets........................ 2,885 7,989 (5,770) Accounts payable............................. 10,990 11,821 (27,572) Interest and taxes accrued.................. (18,963) 52,889 (8,114) Other current liabilities................... (53,520) (40,225) 8,554 Other - net................................. 57,692 7,407 37,936 Net cash provided by operating activities... 799,908 869,884 651,807 Cash Flows from Investing Activities: Electric and coal handling capital expenditures (including allovance for borrowed funds used during construction)................... (342,226) (385,569) (367,920) Cable television additions...................... (44,306) (26,624) (31,186) Other - net..................................... (11,333) (8,153) 8,417 Net cash used in investing activities....... (397,865) (420,346) (390,689) (continued on next page) t
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! BOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES I STATEMENTS OF CONS 01.IDATED CASH FLOITS Increase (Decrease) in Cash and Cash Equivalents (Thousands of Dollars)
(Continued) Year Ended December 31, 1992 1991 1990 (Restated) (Restated) Cash Flows from Financing Activities: .
.55,674
$ 50,620 $
Proceeds from common stock...................... (285,116) (47,373) Increase in note receivable from ES0P........... Proceeds from preferred stock................... $ 216,700 Proceeds from first mortgage bonds.............. 488,760 258,141 23,504 29,148 Proceeds from senior bank debt.................. 448,935 Proceeds from debentures........................ 99,216 Purchase of senior and subordinated notes....... (71,419) Reacquisition of debentures..................... (205,220) , Payment of matured first mortgage bonds......... (157,000) (132,000) (5,000) (40,000) (40,000) Payment of senior bank debt..................... (376,533) Payment of common stock dividends............... (385,952) (381,117) Redemption of preferred stock................... (103,000) (112,500). Increase (decrease) in notes payable............ 233,955 (34,318) 128,229 Extinguishment of long-term debt................ (717,912) (35,757) (909) 41,257 14,305 (1,997) Other - net..................................... Net cash used in financing activities......... (360,395) (430,523) (253,761) Net Increase in Cash and Cash Equivalents.......... 41,648 19,015 7,357 Cash and Cash Equivalents at Beginning of Year..... 27,669 8,654 1,297 Cash and Cash Equivalents at End of Year. . . . . . . . . . . $ 69,317 $ 27,669 $ 8,654 Supplemental Disclosure of Cash Flov Information: 1 Cash Payments: Interest (net of emounts $ 395,822 $ 384,195 capitalized or deferred)....................... $ 474,655 85,202 141,313 Income taxes..................................... 172,053 See Notes to Consolidated Financial Statements. BOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS' ! For the Three Years Ended December.31, 1992 j i I (1) Summary of Significant Accounting Policies j i (a) System of Accounts. 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- l Energy Regulatory Commission's Uniform System ofiAccounts as adopted' .l by the Public Utility Commission of Texas (Utility Commission). j (b) Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned , subsidiaries. Coal and lignite sales and related cost of coal and lignite - sold : generally represent intercompany sales to HL&P and are not eliminated : because of the distinction for regulatory purposes between utility . > and non-utility operations. For'this same reason, the purchases of accounts receivable from HL&P by Houston Industries Finance, Inc. ; (Houston Industries Finance) also are not eliminated. All other j significant intercompany transactions and balances are eliminated in 1 consolidation. .l Investments in affiliates in which the Company has a 20% to 50% , interest, which includes the investment in Paragon Communications
~
(Paragon), are recorded using the equity method of accounting. See Note 17. (c) Electric D int. Additions to electric plant, betterments-to existing '; property and replacements of units of property are capitalized at- ! cost. Cost includes the original cost.of contracted services, direct , labor and material, indirect charges for engineering supervision and-similar overhead items and an Allowance for Funds Used During. Construction (AFUDC). Customer advances for construction reduce i additions.to electric plant. ; HL&P computes depreciation using the straight-line method. The l depreciation provision as a percentage of the depreciable cost of plant was 3.0% for 1992, 3.1% for 1991 and 3.2% for 1990. ; (d) Cable Television Property. The Company records additions.to. property # at cost which includes amounts for material, labor, overhead and interest. Depreciation is computed by the straight-line method. The depreciation provision as a percentage of the depreciable cost of , property vas 12.1% for 1992, 11.7% for 1991, - and 12.5% for 1990. 4 Expenditures for maintenance and repairs are expensed as incurred. (e) Cable Television Franchises and Intangible Assets. The Company has recorded the acquisition cost in excess of the fair market value of the tangible assets and liabilities of RCA Cablesystems Holding Co. (Cablesystems) in cable television franchises and intangible assets. Such amount is being amortized over periods ranging from 8-40 years . on a straight-line basis. l l l l i h f
m *
- 1. ,
(f) Allowance for Punds Used During Construction. HL&P accrues AFUDC on construction projects and nuclear fuel payments, except for amounts included in the rate base by regulatory authorities. The accrual rates were 8.75% in 1992 and 1991 and 9.25% in 1990. 3 (g) Revenues. Effective January 1, 1992, HL&P changed its method of I recording electricity sales from cycle billing _ to a full accrual 1 method, whereby unbilled electricity sales are estimated and recorded each month in order to better match revenues with expenses. Prior to January 1, 1992, electric revenues were recognized as bills vere rendered (see Note 19). The Utility Commission provides for the recovery of certain fuel and j purchased power costs through an energy component of base electric
< rates.
i l Coal and lignite revenues are recognized as fuel is consumed. Cable television revenues are recognized as the services are provided to subscribers, and advertising revenues are recorded when earned. I (h) Income Taxes. The Company follows a policy of comprehensive interperiod income tax allocation. Investment tax credits are deferred and amortized over the estimated lives of the related property. In 1992, the Company adopted Statement of Financial
' Accounting Standards (SFAS) No.109, " Accounting for Income Taxes,"
with restatement to January 1, 1990 (see Note 14). Under current tax
' laws, the Company may realize tax savings by deducting for tax purposes dividends on the Company's common stock that are used to pay >
debt service on the Employee Stock Ownership Plan (ESOP) loans (see j Note 2).
! (i) Earnings Per Common Share. Earnings per common share is computed by I dividing net income by the weighted average number of shares outstanding during the respective periods.
(j) Statements of Consolidated Cash Flovs. For purposes of reporting cash flows, cash equivalents are considered to be short-term, highly liquid investments readily convertible to cash. (2) Common Stock In October 1990, the Company amended its Savings Plan (Savings Plan) to add an ESOP component. The ESOP component of the Savings Plan allovs the Company to satisfy a portion of its obligations to make matching contributions under the Savings Plan. The ESOP trustee purchased shares of the Company's common stock in open-market j transactions with funds provided by loans from the Company and completed the purchase of stock under the ESOP in December 1991, after purchasing 9,381,092 shares at a cost of $350 million. At December 31, 1992, the balance of the ESOP loans was approximately
! $332 million. The loans from the Company to the ESOP are shown on l
the Company's Consolidated Balance Sheets as a reduction in common j stock equity. Principal and interest on the loans vill be paid with , dividends on the common stock in, and Company contributions to, the l ESOP. Repayment of the loan is scheduled to occur over a 20-year l l l
period with the first mandatory repaymrnt in 1997. The loens to tha ESOP vere funded initially by the Company from short-term borrowings , which have been refinanced with long-term debt. Interest expense on Company borrovings to fund loans to the ESOP has been reduced by interest income on the loans to the ESOP. In May 1989, the Company adopted, vith shareholder approval, a long-term incentive compensation plan, which includes an incentive stock option component. In January 1992, non-statutory stock options for approximately 68,000 shares of the Company's stock were granted to key employees of the Company and its subsidiaries at an option price of $43.50 per share. Beginning one year af ter the grant date, -the options become exercisable in one-third increments each year. No shares were exercisable on December 31, 1992. The options expire ten ' years from the grant date. In July 1990, the Company adopted a shareholders rights plan and declared a dividend of one right for each outstanding share of the Company's common stock. The rights, which under certain circumstances entitle their holders to purchase one one-hundredth of a share of Series A Preference Stock for an exercise price of $85, vill expire on July 11, 2000. The rights vill become exercisable only if a person or entity acquires 20% or more of the Company's outstanding common stock or if a person or entity commences a tender , offer or exchange offer for 20% or more of the outstanding common ! stock. The rights are redeemable by the Company for $.01 per right at any time prior to the date the rights become exercisable. When the rights become exercisable, each right vill entitle the holder to receive, upon the exercise of such right, a number of i shares of the Company's common stock having a current market price (as defined in the plan) equal to twice the exercise price of the right, except pursuant to an offer for all outstanding shares of common stock which a majority of the independent directors of the i Company determines to be at a price which is in the best interests of l the Company and its shareholders (Permitted Offer). In the event that the Company is a party to a merger or other : business combination (other than a merger that follows a Permitted Offer), rights holders vill be entitled to receive, upon the exercise . of a right, a number of shares of common stock of the acquiring [ company having a current market price (as defined in the plan) equal < to twice the exercise price of the right. (3) Preferred Stock of'a Subsidiary ! HL&P's cumulative preferred stock may be redeemed at the following l per share prices, plus any unpaid accrued dividends to the date of , redemption: Series Redemption Price Per Share Current Future Range From To Not Subject to Mandatory , Redemption: 7
$4.00............................ $105.00 $105.00 $105.00 ;
$6.72............................ 102.51 102.51 102.51 ,
$7.52............................ 102.35 102.35 102.35 !
t
4 Series Redemption Price Per Share . Current Future Range From To t
$8.12............................ S102.25 $102.25 $102.25 Variable Term Preferred A (a).... 100.00 100.00 100.00.
Variable Term Preferred B (a).... 100.00 100.00 100.00 Variable Term Preferred C (a).... 100.00 100.00 100.00 Variable Term Preferred D (a).... 100.00 100.00 100.00 i Subject to Mandatory Redemption:
$8.50 (b)........................ $104.25 $102.13 S100.00
$9.375 (c)....................... --- 100.00 100.00 (a) Rates for Variable Term Preferred stock as of December 31, 1992, vere as follows:
Rate i Variable Term Preferred A 3.460% Variable Term Preferred B 3.345% Variable Term Preferred C 3.240% Variable Term Preferred D 2.800% f (b) HL&P is required to redeem 200,000 shares of this series annually beginning June 1, 1993. (c) HL&P is required to redeem 257,000 shares annually beginning April 1, 1995. This series is redeemable at $100 per share after April 1, 1997. Annual mandatory redemptions of HL&P's preferred stock are $20 million in 1993 and 1994, and $45.7 million for each of the years 1995-1997. (4) Long-Term Debt Sinking or improvement fund requirements of HL&P's first mortgage bonds outstanding vill be approximately $51 million for each of the years 1993 through 1997. Of such requirements, approximately $32 j million for each of the years 1993 through 1997 may be satisfied by , certification of property additions at 100% of the requirements, and
! the remainder through certification of such property additions at 166
! 2/3% of the requirements. Sinking or improvement fund requirements I for 1992 and prior years have been satisfied by certification of property additions.
HL&P has agreed to expend an amount each year for replacements and , improvements in respect of its depreciable mortgaged utility property
. equal to $1,450,000 plus 2 1/2% of net. additions to such mortgaged
! property made after March 31, 1948 and before July 1 of the preceding
" year. Such requirement may be met with cash, first mortgage bonds, i gross property additions or expenditures for repairs or replacements,
! or by taking credit for property additions at 100% of the requirements. At the option of HL&P, but only with respect to first I mortgage bonds of a series subject to special redemption, deposited
! cash may be used to redeem first mortgage bonds of such series at the I applicable special redemption price. The replacement fund i
requirement to be satisfied in 1993 is approximately $263 million.
The amount of HL&P's first mortgage bonds is unlimited as to issuance, but limited by property, earnings, and other provisions of' the Mortgage and Deed of Trust dated as of November 1, 1944, between HL&P and South Texas Commercial National Bank of Houston (Texas ; Commerce Bank National Association, as Successor Trustee) and the supplemental indentures thereto. Substantially all properties of HL&P are subject to liens securing HL&P's long-term debt. ; A portion of the funds for the acquisition of Cablesystems was , obtained by KBL Cable, Inc. (KBL Cable) and its corporate parent ! KBLCOM Incorporated (KBLCOM) under the terms of several financing ' agreements: (a) KBL Cable Senior Bank Credit Facility. KBL Cable is a party i to a $531.9 million revolving credit and letter of credit , facility agreement with mandatory commitment reductions (which may require principal payments) which began in 1992. The final maturity for loans under this facility is 1999. 1 Loans have generally borne interest at an interest rate of LIBOR plus an " applicable margin." The margin was .875% at December 31, 1992. The bek credit agreement also contains certain restrktions, including restrictions on dividends, i sales of assets ano limitati< ins on total indebtedness. The amount of indebtedness outnanding at December 31, 1992 and !' 1991 was $41:i million and $420 million, respectively. Based on annualized cash flov for the fourth quarter of 1992, the ; amount of additional borrowings under this agreement vould have been limited. In October 1989, KBL Cable entered into interest rate svap , agreements with four banks which effectively fixed the rates l on $375 million of debt under the KBL Cable senior bank { credit facility at approximately 9% plus the applicable ; margin. As of December 31, 1992 and 1991,- the effective i interest rates on such debt vere approximately 9.875% and ! 10%, respectively. Interest rate svaps aggregating $100 ? million and $75 million terminated in October 1991 and 1992, ; respectively. The remaining interest rate swaps terminate in + 1994 and 1996. The differential to be paid or received under - the interest rate swap agreements is accrued as interest 3 rates change and is recognized over the life of the ; agreement. KBL Cable is exposed to risk of nonperformance by ! the other parties to the interest rate swap agreements. l However, KBL Cable does not anticipate nonperformance by the j parties. ; Commitment fees are required on the unused capacity of the j KBL Cable bank credit facilities. j (b) KBLCOM Senior Bank Pacility. KBLCOM has entered into a $300 l i million letter ot credit and term loan facility under which
$100 million was borrowed upon the closing of the j acquisition. This $100 million Tranche A borrowing matures j in 1996 but is expected to be prepaid in 1993 and has been '
reclassified to current maturities of long-term debt.
i *
'The purpose of the remaining $200 million under the facility -
vas to provide bank lettars of credit (i) to support KBL : Cable's debt service obligations on its senior subordinated notes up to $132.7 million (Exclusive Letters of Credit) and~ (ii) to provide funds to KBLCOM and KBL Cable for certain specified purposes, including reimbursement of KBL Cable's i capital expenditures (Non-Exclusive Letters of Credit). Drawings under these Letters of Credit (Tranche B borrowings) - i totaled approximately $67.3 million as of December 31, 1992 ; i and 1991, all of which related to the Non-Exclusive Letters of Credit, resulting in no remaining capacity on the Non-Exclusive Letters of Credit at December 31, 1992. These borrowings are expected to be prepaid in 1993 and have been reclassified to current maturities of long-term debt. There I have been no draws on the Fxclusive Letters of Credit, i i resulting in remaining capacity of $132.7 million at December 31, 1992. Tranche B borrowings must be repaid over five years beginning in 1995. The interest rate on the Tranche B borrowings is LIBOR plus a margin that increases in several steps from the current .75% to 1.25% in 1996. Borrowings I under the KBLCOM bank facility are recourse to the Company. Prepayments of the Tranche A and Tranche B borrowings in 1993 are expected to be funded with proceeds from the sale of commercial paper by the Company, with the Company's contribution to KBLCOM taking the form of an equity investment. Commitment fees are required on that portion of the KBLCOM facility relating to Exclusive Letters of Credit. (c) KBL Cable Notes. KBL Cable has outstanding $98.8 million of 10.95% senior notes and $123.5 million of 11.30% senior i subordinated notes. Both series mature in 1999 with annual
, principal payments which t,tgan in 1992. The agreement under which the notes vere issued contains restrictions and i covenants similar to those contained in the KBL Cable senior I bank facility. As of December 31, 1992, the Company owned l $28.9 million principal amount of the senior notes and $36.05 i million principal amount of the senior subordinated notes.
Consolidated annual maturities of long-term debt, prepayment of KBLCOM Tranche A and Tranche B borrowings, and minimum capital lease payments for the Company are approximately $316 million in 1993, $35 million in 1994, $20 million in 1995, $376 million in 1996 and $273 million in 1997. (5) Short-Term Financing The interim financing requirements of the Company's operating , subsidiaries are met through short-term bank loans, the issuance of commercial paper and short-term advances from the Company. The ' Company and its subsidiaries had bank lines of credit aggregating
$1.05 tillion at December 31, 1992 and $950 million at December 31, ;
1991, under which borrovings are classified as short-term . l indebtedness. Such bank lines limit the Company's total short-term borrovings and provide for interest at rates generally less than the . prime rate. Outstandt.ug commercial paper was $564 million at December 31, 1992 and $330 million at December 31, 1991. Commitment fees are required on the bank facilities. For a description of bank credit facilities of KBLCOM and KEL Cable, borrowings under which are classified as long-term debt or current maturities of long-term debt, see Note 4. (6) Estimated Fair Value of Financial Instruments In December 1991, the Financial Accounting Standards Board (FASB) issued SPAS No. 107, " Disclosures about Fair Value of Financial Instruments." This accounting standard, which the Company adopted in 1992, requires companies to disclose the fair value of certain financial instruments, as well as the methods and assumptions used to , estimate the fair value. The carrying amount and estimated fair value of the Company's financial instruments at December 31, 1992 are as follows: Carrying Fair , Amount Value (Thousands of Dollars) Financial assets: Cash and short-term investments $ 69,317 $ 69,317 Note receivable from ESOP 332,489 395,202 Financial liabilities: Short-term notes payable 564,249 564,249 i Cumulative preferred stock (subject to mandatory redemption) 226,834 242,289 Debentures 548,359 586,405 Long-term debt of subsidiaries: Electric: i First mortgage bonds 3,188,694 3,407,236 : Pollution control revenue bonds 255,704 286,813 i Cable television: $ Senior bank debt 582,349 582,349 Senior and subordinated notes 157,354 184,044 i Other 4,156 4,747 Unrecognized financial instruments: ' Interest rate swaps: In a net payable position 17,162 The fair values of cash and short-term investments, short-term notes payable and bank debt are equivalent to the carrying amounts. The fair values of the ESOP loan, the Company's debentures, BL&P's cumulative preferred stock subject to mandatory redemption, HL&P's first mortgage bonds, pollution control revenue bonds issued on behalf of HL&P, KBL Cable senior and senior subordinated notes and other long-term debt are estimated using rates currently available for securities with similar terms and remaining maturities. l I i l l 1
The fair value of interest rate svaps is the estimated amount that ' the swap counterparties vould receive or pay to terminate the swap agreements, taking into account current interest rates and the current creditvorthiness of the svap counterparties. (7) Retirement Plans The Company has noncontributory retirement plans covering substantially all employees. The plans provide retirement benefits based on years of service and compensation. The Company's funding policy is to contribute amounts annually in accordance with applicable regulations in order to achieve adequate funding of
; proj ected benefit obligations. The assets of the plans consist l principally of common stocks and. high quality, interest-bearing ; obligations.
Net pension cost includes the following components: Year Ended December 31, 1992 1991 1990 i (Thousands of Dollars) Service cost - benefits earned during the period................. $ 24,282 $ 22,132 $ 21,146 i Interest cost on projected benefit obligation................ 45,585 38,564 35,091 Actual return on plan assets........ (26,934) (61,582) (8,553) Net amortization and deferrals...... (11,749) 30,413 (21,938) Net pension cost.................... S 31,184 S 29,527 $ 25,746 The funded status of the retirement plans was as follows: i December 31, j 1992 1991 (Thousands of Dollars) Actur lal present value of: Vested benefit obligation.................. $ 360,714 $ 278,990 Accumulated benefit obligation............. $ 396,751 $ 310,556 i i Plan assets at fair value.................... $ 444,511 $ 399,400 - Projected benefit obligation................. 598,677 522,962 Assets less than projected benefit obligation................................. (154,166) (123,562) Unrecognized transitional asset.............. (19,179) (21,098) Unrecognized prior service cost.............. 12,129 14,590 , l Unrecognized net loss........................ 86,084 86,426 i l Accrued pension cost......................... $ (75,132) $ (43,644) l The projected benefit obligation was determined using an assumed l discount rate of 8.5% in 1992 and 1991. A long-term rate of j compensation increase ranging from 6.9% to 9.0% vas assumed in 1992 I and 1991. The assumed long-term rate of return on plan assets was ' l 9.5% in 1992 and 1991. The transitional asset at January 1, 1986, is being recognized over approximately 17 years, and the prior service , i cost is being recognized over approximately 15 years. l 1 l In December 1990, the FASB issued SFAS No. 106, " Employers' 1 Accounting for Postretirement Benefits Other Than Pensions." This accounting standard, effective for fiscal years beginning after December 15, 1992, requires companies to recognize the liability for 4
, postretirement benefit plans other than pensions, primarily medical and dental benefits. The Company vill adopt SFAS No. 106 in 1993.
The transition obligation, or accumulated postretirement benefit obligation, of approximately $213 million vill be amortized over approximately 22 years as permitted by SFAS No. 106. The Company estimates that adoption vill increase benefit costs by approximately
$24 million over the expected " pay-as-you-go" amunt in 1993. The Utility Commission has published a proposed rule vbich, if adopted, vould govern the ratemaking treatment for postretirement benefits other than pensions. This rule (i) vill allow for ecovery of the current postretirement benefits expense on an accrual buis provided that all amounts recovered in rates are placcd in an extemal trust fund, and (ii) vill not allow recovery of the transition obligation.
BL&P is opposing the portion of the rule which would preclude it from recovering the transition obligation in rates. (8) Commitments and Contingencies (a) HL&P Commitments. BL&P has various commitments for capital expenditures, fuel, purchased power, cooling vater and operating leases. Commitments in connection with HL&P's capital program are generally revocable by BL&P subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties. HL&P's other commitments have various quantity requirements and durations. However, if these requirements could not be met, various alternatives - are available to mitigate the cost associated with the contracts' i commitments. i HL&P's capital program (exclusive of AFUDC) is presently estimated to ; cost $344 million in 1993, $498 million in 1994 and $462 million in 1995. These amounts do not include expenditures on proj ects for , which HL&P expects to be reimbursed by customers or other parties. ; HL&P has entered into several long-term coal, lignite and natural gas contracts which have various quantity requirements and durations. Minimum obligations for coal and transportation agreements are approximately $167 million in 1993, and $165 million in each of 1994 and 1995. The coal and lignite contracts include provisions permitting HL&P to defer delivery at HL&P's discretion and force ! maj eure provisions. HL&P has entered into several gas purchase agreements containing contract terms in excess of one year which ! provide for specified purchase and delivery obligations. Minimum : obligations for gas purchase contracts are approximately $43.6 ' million in 1993, $45.0 million in 1994 and $46.5 million in 1995. i Collectively, these contracts could amount to 51% of HL&P's annual natural gas requirements. The Utility Commission's rules provide for [ recovery of the coal, lignite and natural gas costs described above ; through the energy component of HL&P's electric rates. Nuclear fuel costs are also included in the energy component of HL&P's electric ! rates based on the cost of nuclear fuel consumed in the reactor. l HL&P has commitments to purchase firm capacity from cogenerators of approximately $206 million in 1993, $144 million in 1994 and $19 million in 1995. The Utility Commission's rules allow recovery of these costs through HL&P's base rates for electric service and i additionally authorize HL&P to charge or credit customers for any - l variation in actual purchased power cost from the cost utilized to 1 1
r
=
s . I determine its base rates. In the event that the Utility Commission, at some future date, does not allow recovery through rates of any amount of purchased power payments, the three principal firm capacity contracts contain provisions allowing HL&P to suspend or reduce payments and seek repayment for amounts disallowed. The Energy Act, which became law in October 1992, includes a provision that assesses a fee upon domestic utilities having
' purchased enrichment services from the Department of Energy. This i fee is to cover a portion of the cost to decontaminate and I decommission the facilities used to perform the enrichment. It is ,
currently estimated that the assessment to the South Texas Project Electric Generating Station (South Texas Project) vill be approximately $1.8 million per year (subject to escalation for inflation), of which HL&P's share is 30.8%. This assessment vill continue until the earlier of 15 years or when $2.25 billion (adjusted for inflation) has been collected from domestic utilities. HL&P's service area is heavily dependent on oil, gas, refined products, petrochemicals and related business. Significant adverse events affecting these industries vould negatively impact the
' revenues of the Company and HL&P.
(b) KBLCOM Commitments and Obligations Under Cable Franchise Agreements. KBLCOM's capital requirements are estimated to be $46 million in 1993, $40 million in 1994 and $54 million in 1995. KBLCOM and its subsidiaries presently have certain cable franchises containing provisions for construction of cable plant and service to customers within the franchise area. In connection with certain obligations under existing franchise agreements, KBLCOM and its subsidiaries obtain surety bonds and letters of credit guaranteeing performance to municipalities and public utilities. Payment is required only in the event of non-performance. KBLCOM and its subsidiaries have fulfilled all of their obligations such that no payments have been required. (c) Equipment Expenditures - Utility Fuels. Utility Fuels, Inc.'s (Utility Fuels) expenditures for coal handling facilities and lignite mining and handling facilities are estimated to be $11 million in 1993, and $12 million in each of 1994 and 1995. 4 I (9) Jointly-Ovned Euclau Plant i (a) HL&P Investment. HL&P is project manager and one of four co-ovners l l l in the South Texas Proj ect , which consists of two 1,250 megawatt i nuclear generating units. Unit Nos. 1 and 2 of the South Texas i
! Project achieved commercial operation in August 1988 and June 1989,
! respectively. Each co-owner funds its own share of capital and I operating costs associated with the plant, vith HL&P's interest in the project being 30.8%. HL&P's share of the operation and j maintenance expenses is included in the corresponding operating expense amounts on the Company's Statements of Consolidated Income.
As of December 31, 1992, HL&P's investments (net of accumulated depreciation and amortization) in the South Texas Proj ect and in i nuclear fuel, including AFUDC, were $2.2 billion and $112 million, respectively. (b) City of Austin Litigation. In July 1989, judgment was entered in ;
. favor of HL&P and the Company in a 1983 suit filed in state district court by the City of Austin (Austin), one of the four co-ovners in the South Texas Project. Austin alleged that it was fraudulently -
induced to participate in the South Texas Proj ect and that HL&P failed to perform properly its duties as project manager. Although ; the amount of alleged damages varied, at trial Austin claimed actual , damages of at least $419 million, with all or some portion alleged to be subject to trebling under the Texas Deceptive Trade Practices-Consumer Protection Act. In October 1992, the Court of Appeals for the Fif th District of Texas at Dallas affirmed the trial court's judgment in favor of the Company and HL&P. Austin has filed an application for writ of error to the Supreme Court of Texas, but the Supreme Court has not yet acted. In its application, Austin seeks a new trial on its breach of contract claim, but is not pursuing its fraud in the inducement or its Deceptive Trade Practices Act claims. The Company and HL&P continue to regard the claims of Austin to be without merit. (c) Arbitration with Co-owners. During the course of the Austin litigation, the City of San Antonio (San Antonio) and Central Power , and Light Company (CPL), the other two co-owners in the South Texas Proj ec t , 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 among the owners of the South Texas Project (Participation Agreement). This matter was severed from the Austin litigation and is pending before the 101st District Court in Dallas County, Texas. The 101st District Court ruled that the demand for arbitration is-valid and enforceable under the Participation Agreement, and that ruling has been upheld by appellate courts. Arbitrators were appointed by HL&P and each of the other co-owners in connection with the District Court's ruling. The Participation Agreement provides that the four-party arbitrators vill appoint a fifth arbitrator, but , that action has not yet occurred. In May 1992, the Company and HL&P entered into a settlement with CPL and its parent company, Central a6d South West Corporation (CSV), i with respect to various matters inc hding the arbitration and related legal proceedings. Pursuant to the settlement, CPL withdrew its demand for arbitration under the Participation Agreement, and the Company, HL&P, CSV and CPL dismissed litigation associated with' the dispute on December 30, 1992. Under the terms of the settlement, HL&P reimbursed CPL for certain costs and expenses incurred in pursuing the arbitration and litigation. The settlement also ; resolved other disputes between the parties concerning various ' transmission agreements and related billing disputes. In addition, the parties also agreed to support, and to seek consent of the other ovners of the South Texas Proj ect to, certain amendments to the Participation Agreement, including changes in the management . structure of the South Texas Proj ect through which HL&P vould be replaced as project manager by an independent entity.
a . , l ' Although settlement with CPL does not directly affect San Antonio's - pending demand for arbitration, HL&P and CPL have reached certain
' other understandings which contemplate that: (i) CPL's arbitrator -
previously appointed for that proceeding would be replaced by CPL; (ii) arbitrators approved by CPL and HL&P for any future arbitrations vill be mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL vill resolve any future disputes between them concerning the South Texas Project without resorting to the arbitration provision of the Participation Agreement. The settlement with CPL did not have a material adverse effect on the Company's or HL&P's financial position and results of operations. HL&P and the Company continue to regard Austin's claims and those
' asserted by San Antonio to be without merit. From time to time, HL&P I and other parties to these proceedings have held discussions with a view toward settling their differences on these matters.
j Vhile HL&P and the Company cannot give definitive assurance regarding the ultimate resolutions of the City of Austin litigation and the
! arbitration, they presently do not believe such resolutions vill have l a material adverse impact on HL&P's or the Company's financial t position and results of operations.
(d) Nuclear Insurance. HL&P and the other owners of the South' Texas Proj ect maintain nuclear property and nuclear liability insurance I coverages as required by law and periodically review available limits
! and coverage for additional protection. The ovners of the South I Texas Proj ect currently maintain $500 million in primary property damage insurance from American Nuclear Insurers (ANI). Effective January 1, 1993, the maximum amounts of excess property insurance available through the insurance industry increased from $2.015 l billion to $2.125 billion. This $2.125 billion of excess property I insurance coverage includes $800 million of excess insurance from ANI I and $1.325 billion of excess property insurance coverage through participation in the Nuclear Electric Insurance Limited (NEIL) II program. The owners of the South Texas Project have approved the purchase of the additional available excess property insurance coverage. Under NEIL II, HL&P and the other owners of the South Texas Project are subject to a maximum assessment, in the aggregate, of approximately $15.3 million in any one policy year. The application of the proceeds of such property insurance is subject to the priorities established by the United States Nuclear Regulatory !
Commission (NRC) regulations relating to the safety of licensed l reactors and decontamination operations. Pursuant to the Price-Anderson Act (Act), public liability for ovners of nuclear power plants, such as the South Texas Project, is limited to approximately $7.9 billion. Ovners 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. This plan provides for assessment of deferred premiums for each nuclear incident up to $63 million per reactor subject to indexing for inflation and a possible 5% surcharge (but no more than $10 million per reactor per incident in any one year). 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. l There can be no assurance that all potential losses or liabilities vill be insurable, or that the amount of insurance vill be sufficient to cover them. Any substantial losses not covered by insurance vould i have a material effect on HL&P's and the Company's financial I condition. l (e) Nuclear Decommissioning. HL&P and the other co-owners of the South Texas Project are required by the NRC to meet minimum decommissioning funding requirements to pay the costs of decommissioning the South Texas Project. Pursuant to the terms of the order of the Utility Commission in Docket No. 9850, HL&P is currently funding > decommissioning costs for the South Texas Project with an independent trustee at an annual amount of $6 million. As of December 31, 1992, the trustee held approximately $11.9 million t for decommissioning, for which the asset and liability are reflected - in the Company's Consolidated Balance Sheet in deferred debits and deferred credits, respectively. HL&P's funding level is estimated to , provide approximately $146 million in 1989 dollars, an amount which exceeds the NRC minimum. There is, however, no assurance that the , amounts held in trust vill be adequate to cover the decommissioning 1 costs. l (f) NRC Diagnostic Evaluation. In February 1993, the NRC advised HL&P that the NRC vill conduct a diagnostic evaluation of the South Texas Project in the spring of 1993. Conducted anfrequently, NRC . diagnostic evaluations are broad-based evaluations of overall plant , operations and are intended to review the strengths and weaknesses of , the licensee's performance and to identify the root. cause of l performance problems. Similar reviews have been conducted at other ; plants in recent years, and in some cases, based on the evaluation results, those plants have received increased regulatory emphasis or , have been required to take actions to improve plant operations, - maintenance or condition. In its notification, the NRC cited no , specific reason for initiating the diagnostic evaluation. However, ! during 1992, a number of personnel-induced, equipment-related problems vere experienced. Most recently, in February 1993, HL&P , shut down both units at the South Texas Project when a problem was i encountered with a turbine-driven auxiliary feedvater pump. A . similar problem had been encounte. red previously, and HL&P determined ! that the units vould not be restarted until HL&P had determined the ( root cause of the difficulty and had briefed the NRC on its corrective action. The NRC formalized that commitment and sent an Augmented Inspection Team to the South Texas Project to review the matter. Resolution of that matter is underway. Unit No. 2 of the l South Texas Project began its scheduled refueling outage during the I shutdown, and Unit No.1 of the South Texas Project is expected to I resume operation in early March 1993. The NRC's report on its I diagnostic evaluation is not expected until the summer of 1993. ' The most recent Systematic Assessment of Licensee Performance rating i for the South Texas Proj ect , issued in October 1992, declined I somewhat from the prior rating, though ratings in all areas were ) i I
'l l
l
.)
. n" .
l
" acceptable" or better, and tuo areas of NRC concern that were l
identified during 1992 are still pending enforcement conferences and could result in the assessment of civil penalties by the NRC. (10) Appeals from Utility Commission 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 Although in new plant construction, includir.g the South Texas Project. Utility Commission action on those applications has been completed, judicial review of a number of the Utility Commission orders is pending. In 4 Texas, Utility Commission orders may be appealed to a District Court i 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 l 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 i Utility Commission in any of these proceedings, such matters vould be remanded to the Utility Commission for action in light of the courts' l 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 I
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 f i Utility Commission's action could range from granting rate relief j 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 j customers of amounts collected pursuant to such rates.
Judicial review currently is pending on the following final orders of the Utility Commission. (a) Docket Nos. 6765, 6766 and 5779. T. . appeals of HL&P's 1986 rate case (Docket Nos. 6765 and 6766) and its 1984 rate case Oral (Docket Nos. argument 5779) are pending before the Austin Court of Appeals. has been presented to the court in both cases. In its final order in Docket Nos. 6765 and 6766, the Utility Commission granted HL&P a general rate increase which included in rate base approximately $678 million of Construction Vork In Progress (CVIP). In December 1991, a District Court of Travis County, Texas, in considering an appeal from that Utility Commission order, ruled that the inclusion of CVIP in rate base did not comply with the ! requirements of the applicable Texas statute on the grounds that a threshold showing of " exceptional circumstances" which the court found to be required by the statute had not been met, despite the Utility Commission's determination that HL&P's financial integrity required inclusion of CVIP at the level granted. Rates pursuant to that final order vere implemented in December 1986 and remained in effect until June 1989, A different result was reached by another District Court of Travis t l County, Texas, in considering a challenge to the inclusion of CVIP in rate base in an appeal of the Utility Commission's final order in m
Docket No. 5779. In February 1992, that District Court affirm 2d the Utility Commission's final order, in which HL&P was authorized to , include CVIP in rate base at a level of $948 million. When that i District Court's decision was appealed to the Austin Court of Appeals, the issue of CVIP in rate base was not appealed. That appeal, concerning the Utility Commission's treatment of certain taxes in Docket No. 5779, remains pending. A motion to voluntarily dismiss the appeal was filed on February 22, 1993, but has not yet been acted upon by the court. Rates ordered in Docket No. 5779 vere ! implemented in January 1985 and remained in effect until December 1986. (b) Docket No. 8425. In October 1992, a District Court in Travis County, Texas affirmed the Utility Commission's order in HL&P's 1988 rate ! case (Docket No. 8425). An appeal to the Austin Court of Appeals is i pending. In its final order in that docket, the Utility Commission granted HL&P a $227 million incrcase in base revenues, allowed a 12.92% return on common equity, authorized a qualified phase-in plan for Unit No. 1 of the South Texas Project (including approximately 72% of HL&P's investment in Unit No.1 of the South Texas Project in rate base) and authorized HL&P to use deferred accounting for Unit ; No. 2 of the South Texas Project. Rates substantially corresponding to the increase granted were implemented by UL&P in June 1989 and remained in effect until May 1991. In the appeal of the Utility Commission's order, certain parties have challenged the Utility Commission's decision regarding deferred accounting, treatment of federal income tax expense and certain other matters. A recent decision of the Austin Court of Appeals, in an appeal involving another utility (and to which HL&P was nor a party), adopted some of the arguments being advanced by parties challenging the Utility Commission's order in Docket No. 8425. The Texas Supreme Court declined to review that decision in December 1992, but motions for rehearing are pending. In that case, Public Utility Commission of Texas vs. GTE-SV, the Austin Court of Appeals ruled that when a ! utility pays federal income taxes as part of a consolidated group, the utility's ratepayers are entitled to a fair share of the tax savings actually realized, which can include savings resulting from unregulated activities. In its final order in Docket No. 8425, the Utility Commission did not reduce HL&P's tax expense by any of the tax savings resulting from the Company's filing of a consolidated tax return. Although the GTE decision was not legally dispositive of the tax issues presented in the appeal of Docket No. 8425, it is possible that the Austin Court of Appeals could utilize the reasoning in GTE in addressing similar issues in the appeal of Docket No. 8425. However, in February 1993 the Austin Court of Appeals, considering an appeal involving another telephone utility, upheld Utility Commission findings that the tax expense for the utility included the utility's fair share of the tax savings resulting from a consolidated tax return, even though the utility's fair share of the tax savings was determined to be zero. HL&P believes that the Utility Commission findings in Docket No. 8425 and in Docket No. 9850 (see Note 10(c)) should be upheld on the same principle, but no assurance can be made as to the ultimate outcome of this matter. d
h The Utility Commission's order in Docket No. 8425 may be af fected l 1 also by the ultimate resolution of appeals concerning the Utility Commission's treatment of deferred accounting. For a discussion of / appeals of the Utility CommissicCs orders on deferred accounting, i l see Notes 10(c) and 11. i (c) Docket No.the 9850. In August 1992, a district court in Travis County f affirmed Utility Commission's final order in Docket No. 9850, HL&P's 1991 rate case. That decision has been appealed by celtain 3 parties to the Austin Court of Appeals, raising issues concerning the , Utility Commission's approval of a non-unanimous settlement in that r i docket, the Utility Commission's calculation of federal income tax expense and the allowance of deferred accounting reflected in the settlement. In Docket No. 9850, the Utility Commission That approved a settlement settlement agreement reached with most parties. agreement provided for a $313 million increase in HL&P's base rates, termination of deferrals granted with respect to Unit No. 2 of the South Texas Project and of the qualified phase-in plan deferrals granted with respect to Unit No. 1 of the South Texas Project, and recovery of deferred plant costs. The settlement authorized a 12.55% return on common equity for HL&P, and HL&P agreed not to request additional increases in base rates that vould be implemented prior to May 1, 1993. Rates contemplated by that settlement agreement vere implemented in May 1991 and remain in effect. The Utility Commission's order in Docket No. 9850 found that HL&P vould have been entitled to more rate relief than the $313 million agreed to in the settlement, but certain recent actions of the Austin Court of Appeals could, if ultimately upheld and applied to the appeal of Docket No. 9850, require a remand of that settlement to the Utility Commission. HL&P believes that the amount which the Utility Commission found HL&P was entitled to would exceed any disallowance that would have been required under the Austin Court of Appeals' ruling regarding deferred accounting (see Notes 10(e) and 11) or any adverse effect on the calculation of tax expense if the court's ruling in the GTE decision vere applied to that settlement (see Note 10(b) above). However, the amount of rate relief to which the l Utility Commission found EL&P to be entitled in excess of the $313 million agreed to in the settlement may not be sufficient if the reasoning in both the GTE decision and the ruling on deferred accounting vere to be applied to the settlement agreement in Docket No. 9850. Although HL&P believes that it should be entitled to , demonstrate entitlement to rate relief equal to that agreed to in the l stipulation in Docket No. 9850, HL&P cannot rule out the possibility that a remand and reopening of that settlement vould be required if decisions unfavorable to HL&P are rendered on both the deferred accounting treatment and the calculation of tax expense for ratemaking purposes. (d) Docket No. 6668. In June 1990, the Utility Commission issued the final order in Docket No. 6668, the Utility Commission's inquiry into ; the prudence of the planning, management and construction of the South Texas Project. The Utility Commission's findings and order in Docket No. 6668 vere incorporated in Docket No. 8425, HL&P's 1988 general rate case. Pursuant to the findings in Dock.et No. 6668, the Utility Commission found imprudent $375.5 million out of HL&P's $2.8 billion investment in the two units of the South Texas Project. The Utility Commission's findings _ did not -reflect $207 million in benefits received in a settlement of litigation with the former architect-engineer of the South Texas Project or the effects of federal income taxes, investment tax credits or certain deferrals. In addition, accounting standards require that the equity portion of AFUDC accrued for regulatory purposes under deferred accounting orders be utilized to determine the cost disallowance for financial reporting purposes. Af ter taking all of these items into account, . EL&P- recorded an after-tax charge of $15 million in 1990 and ! continued to reduce such loss with the equity portion.of deferrals in 1991 related to Unit No. 2 of the South Texas Project. The findings in Docket No. 6668 represent the Utility Commission's final determination regarding the prudence of expenditures associated with the planning and construction of the South Texas Project. Unless the order is modified or reversed on appeal, HL&P vill be precluded from recovering in rate proceedings the amount found 9 prudent by the ' Utility Commission. Appeals by HL&P and other parties of the Utility Commission's order < in Docket No. 6668 vere dismissed by a District Court in Travis County in May 1991. However, in December 1992 the Austin Court of Appeals reversed the District Court's dismissals on procedural ) grounds. It is unknown whether any parties vill seek further review of the Austin Court of Appeals' order by the Texas Supreme Court, but , unless that order is modified on further review, EL&P anticipates that the appeals of the parties vill be reinstated and that the ; merits of issues raised in those appeals of Docket No. 6668 vill be ; considered by the District Court, with the possibility of subsequent t judicial review once the District Court has acted on those appeals. In addition, separate appeals are pending from Utility Commission orders in Dockets Nos. 8425 and 9850, in which the findings of the , order in Docket No. 6668 are reflected in rates. See Notes 10(b) and ! 10(c). (e) Docket Nos. 8230 and 9010. Deferred accounting treatment for Unit ! No. 1 of the South Texas Proj ect was authorized by the Utility Commission in Docket No. 8230 and was extended in Docket No. 9010. Similar deferred accounting treatment with respect to Unit No. 2 of the South Texas Project was authorized in Docket No. 8425. For a ' discussion of the deferred accounting treatment granted, see Note 11. In September 1992, the Austin Court of Appeals, in considering the appeal of the Utility Commission's final order in Docket Nos. 8230 and 9010, upheld the Utility Commission's action in granting deferred . accounting treatment for operation and maintenance expenses, but t rejected such treatment for the carrying costs associated with the ; investment in Unit No. 1 of the South Texas Project. That ruling , followed the Austin Court of Appeals decision rendered in August 1992, on a motion for rehearing, involving another utility which had been granted similar deferred accounting treatment for another ; nuclear plant. In its August decision the court ruled that Texas lav : did not permit the Utility Commission to allow the utility to place , the carrying costs associated with the investment in the utility's rate base, though the court observed that the Utility Commission ! could allow amortization of such costs. HL&P and other parties to the appeal of Docket Nos. 8230 and 9010 have sought discretionary review by the Supreme Court of Texas by filing applications for writ i i
4 of error with the Supreme Court. Similar review is being sought by - parties to the other utility's appeal. The Supreme Court has not i acted on any of those applications. a j (11) Deferred Plant Costs . Deferred plant costs were authorized for the South Texas Project by i the Utility Commission in two contexts. In the first context, or - 5 " deferred accounting," the Utility Commission orders permitted HL&P,
' for regulatory purposes, to continue to accrue carrying costs in the form of AFUDC (at a 10% rate) on its investment in the two units of 4
the South Texas Project until costs of such units were reflected in i rates (which vas July 1990 for approximately 72% of Unit No. 1, and ; j May 1991 for the remainder of Unit No. 1 and 100% of Unit No. 2) and to defer and capitalize depreciation, operation and maintenance, i l insurance and tax expenses associated with such units during the deferral period. Accounting standards do not permit the accrual of the equity portion of AFUDC for financial reporting purposes under these circumstances. However, in accordance with accounting standards, such amounts were utilized to determine the amount of plant cost disallowance for financial reporting purposes. l The deferred expenses and the debt portion of the carrying costs associated with the South Texas Project are included on the Company's
} Statements of Consolidated Income in deferred expenses and deferred i
j carrying costs, respectively. Beginning with the June 1990 order in Docket No. 8425, deferrals were permitted in a second context, a " qualified phase-in plan" for Unit No. 1 of the South Texas Project. Accounting standards require allovable costs deferred for future recovery under a qualified phase-in plan to be capitalized as a deferred charge if certain criteria are met. The qualified phase-in plan as approved by the Utility Commission meets these criteria. . During the period June 1990 through May 15, 1991, HL&P deferred ! depreciation and property taxes related to the 28% of its investment 'i in Unit No.1 of the South Texas Project not reflected in the Docket No. 8425 rates and recorded a deferred return on that investment as part of the qualified phase-in plan. Deferred return represents the financing costs (equity and debt) associated with the qualified phase-in plan. The deferred expenses and deferred return related to the qualified phase-in plan are included on the Company's Statements ' of Consolidated Income in deferred expenses and deferred return under phase-in plan, respectively. Under the phase-in plan, these accumulated deferrals vill be recoverable within ten years of the I. June 1990 order.
' On May 16, 1991, HL&P implemented under bond, in Docket No. 9850, a
$313 million base rate increase consistent with the terms of the settlement. Accordingly, HL&P ceased all cost deferrals related to the South Texas Project and began the recovery of such amounts. .
These deferrals are being amortized on a straight-line basis as , allowed by the final order in Docket No. 9850. The amortization of I these deferrals totaled $25.8 millinn and $16.1 million for 1992 and i 1991, respectively, and is included on the Company's Statements of 4 Consolidated Income in depreciation and amortization expense. See also Notes 10(b), 10(c) and 10(e). l l
The following table shows the original balance of the deferrals and
. the unamortized balance at December 31, 1992.
Balance at Original December 31, Balance 1992 (Thousands of Dollars) Deferred Accounting: (a) Deferred Expenses........... $ 250,151 $ 239,745 Deferred Carrying Costs on Plant Investment....... 399,972 383,333 Total..................... 650,123 623,078 Qualified Phase-In Plan: (b).. 82,254 67,404 Total Deferred Plant Cost..... S 732,377 $ 690,482 (a) Amortized over the estimated depreciable life of the South Texas Proj ect . (b) Amortized over nine years beginning in May 1991. As of December 31, 1992, deferred income taxes of $200.5 million with respect to deferred accounting and $16.3 million with respect to the deferrals associated with the qualified phase-in plan have been recorded. (12) Malakoff Electric Generating Station The scheduled in-service dates for the Malakoff Electric Generating Station (Malakoff) units have been indefinitely deferred due to the availability of other cost effective resource options. In 1987, all developmental work vas stopped and AFUDC accruals ceased. l Due to the indefinite postponement of the in-service date for Malakoff, the engineering design work is no longer considered viable. The costs associated with this engineering design work are currently included in rate base and are earning a return per the Utility i Commission's final order in Docket No. 8425. Pursuant to HL&P's determination that such costs vill have no future value, $84 million has been reclassified from plant held for future use to recoverable project costs as of December 31, 1992, and vill be amortized beginning in January 1993. Amortization amounts vill correspond to the amounts being earned as a result of the inclusion of such costs in rate base. l The Utility Commission's action in allowing treatment of those costs ' as plant held for future use has been challenged in the pending appeal ; of the Utility Commission's final order in Docket No. 8425. See Note 10(b) for a discussion of that appeal. 1 l In June 1990, HL&P purchased from its fuel supply af filiate, Utility Fuels, all of Utility Fuels' interest in the lignite reserves and j 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 i
reserves be considered in HL&P's next general rate case which was
~l However, under the October filed in November 1990 (Docket No. 9850).
' 1991 Utility Commission order in Docket No. 9850, this determination was postponed to a subsequent docket.
HL&P's remaining investment in Malakoff through December 31, 1992 of l
$172 million, consisting primarily of lignite reserves and land, is l included on the Company's Consolidated Balance Sheets in plant held for future use.
For the 1993-1995 period, HL&P anticipates $14 i million of expenditures relating to lignite reserves, primarily to keep lignite leases and other related agreements in effect. I (13) Recoverable Project Costs The Utility Commission has allowed recovery of certain costs over a period of time by amortizing those costs for rate making purposes.
' However, recoverable project costs have not been included in rate base and, as a result, no return on investment is being earned during the recovery period. Malakoff is the only remaining project with an unrecovered amount of $130 million at December 31, 1992, with remaining recovery periods of 78 months ($84 million) and 90 months
. ($46 million). The Allens Creek project was fully recovered at I December 31, 1992.
t
, (14) Income Taxes f
- In February 1992, the FASB issued SFAS No.109 vhich amends SFAS No.
I 96, " Accounting for Income Taxes." The Company adopted SFAS No. 109 SFAS No. 109, among I in 1992, with restatement to January 1, 1990. other things, (i) requires the liability method be used in computing l deferred taxes on all temporary differences between book and tax bases of assets other than goodvill; (ii) requires that deferred tax liabilities and assets be adjusted for an enacted change in tax laws or rates; and (iii) prohibits net-of-tax accounting and reporting. SFAS No. 109 requires that regulated enterprises recognize such adjustments as regulatory assets or liabilities if it is probable that such amounts vill be recovered from or returned to customers in future rates. KBLCOM has significant temporary differences related to its 1986 and 1989 acquisitions of cable television systems, the tax effect of which vere recognized when SFAS No. 109 was adopted. The cumulative effect of the change in accounting principle as of January 1, 1990 was approximately $220 million and is included on the Company's Statement of Consolidated Income as a cumulative effect of change in accounting for income taxes. i i (Y
I The adoption of SFAS No. 109 did not have an effect on revenuas; however, net income for the years 1991 and 1990 were affected and have been restated. A reconciliation of net income and related per share : amounts for the years 1991 and 1990 is presented below: l Year Ended December 31, I 1991 1990 , (Thousands of dollars, except j per share amounts) < Net Income (As Previously i Eeported)...................... $ 417,383 $ 3.24 $ 339,454 $ 2.67 l Depreciation..................... (3,851) (.03) (3,851) (.03) f State Franchise Taxes............ (18,366) (.14) i State and Federal Income Taxes... 21,588 .17 7,186 .06 ; Cumulative Effect of Prior Years. (219,718) (1.73) j Net Income (As Restated). . . . . . . . . S 416,754 $ 3.24 $ 123,071 $ .97 l The current and deferred components of income ta'x expense are as follows: } Year Ended December 31, i 1992 1991 1990 (Restated) (Restated) (Thousands of Dollars) l Current: U.S................................... $130,360 $138,195 $121,855 Deferred: } Liberalized depreciation.............. 79,489 84,763 94,457 ; Investment tax credit................. (20,387) (19,911) (37,979) l Alternative minimum tax............... (438) 10,391 (33,246) f Excess deferred taxes................. (17,403) (17,532) (12,295) l Deferred plant costs.................. (6,671) 22,828 83,725 . IRS 1983-84 audit assessment.......... (2,446) (34,916) l Other - net........................... (341) (8,108) (16,657) ; Income taxes before cumulative effect of i accounting change..................... $164,609 $208,180 $364,944 i Effective income tax rates are lower than statutory corporate rates .? for each year as follows: I Year Ended December 31, i 1992 1991 1990 (Restated) (Restated) { (Thousands of Dollars) , Income before income taxes and l cumulative effect of accounting : change................................ $505,096 $624,934 $507,733 ! Preferred dividends of subsidiary....... 39,327 46,187 47,753 l Tota 1........................... 544,423 671,121- $55,486 - Statutory rate.......................... 34% 34% 34% [ Income taxes at statutory ; rate.................................. 185,104 228,181 188,865 ! Reduction in taxes resulting from: ! AFUDC - other included in income...... 2,097 6,658 4,902 ! Amortization of investment tax credit. 20,359 20,298 41,319 ' Amortization of intangible assets..... (4,264) (4,264) (4,265) j r i I i
l =w7
- 1 w Year Ended December 31, 1992 1991 1990 .
(Restated) (Restated) (Thousands of Dollars)
$ 17,532 $ 12,295 Excess deferred taxes................. $ 17,403 v
L d Difference between book and tax depreciation for which deferred (14,437) (17,482) taxes have not been normalized...... (13,466) 1,699 (11,973) Disallowed plant costs - net.......... (7,485) (875) Other - net........................... (1,634) 4 I 20,495 20,001 23,921 j Total........................... Income taxes before cumulative effect of $164,609
} S208,180 $164,944 accounting change....................
[ I 30.2% 31.0% 29.7% Effective 4 rate.......................... L Following are the tax effects of temporary differences resulting in deferred l o tax assets and liabilities: December 31, 1992 1991 i (Thousands of Dollars) Deferred Tax Assets: Alternative minimum tax.......................... $ 108,287
$ 115,945 l 67,728 69,909 Disallowed plant cost............................ 48,513 74,966 l I IRS audit assessment............................. 51,881 l I Unbilled revenues................................ 54,799 54,978 l Loss and ITC carryforwards.......................
68,999 40,201 l 0ther............................................ 381,427 374,779 l Total deferred tax assets......................
. 56,638 56,817 Less valuation allowance.........................
318,141 324,610 b Total deferred tax assets - net.............. Deferred Tax Liabilities: 1,146,970 1,062,947 Depreciation..................................... 238,778 245,415 } Identifiable intangibles......................... 216,813 227,255 Deferred plant costs............................. 165,246 177,426
~
Regulatory assets - net.......................... Capitalized taxes, employee benefits 122,735 122,268 and removal costs.............................. 205,706 204,480 0ther............................................ 2,107,961 2,028,078 Total deferred tax liabilities............... Accumulated deferred income taxes - net.. $1,789,820 $1,703,468 (15) Supplementary Expense Information f Taxes, other than income taxes, vere charged to expense as follovs: Year Ended December 31, U 1992 1991 1990
! I (Thousands of Dollars) l[ Electric:
$ 99,375
$117,298 Ad valorem............................. $135,872 ll 42,662 40,876 39,091 State gross receipts...................
E 21,582 23,515 22,265 Payrol1................................
- Year Ended December 31, l 1992 1991 1990 l ~
(Thousands of Dollars) f F PUC assessment......................... $ 6,163 $ 6,001 $ 5,713 ; State franchise tax (net of refunds)... 21,065 2,017 21,054 ; Miscellaneous.......................... 894 819 489 : Tota 1............................ 228,238 190,526 187,987
- Taxes included in cable television operating expenses................... 9,481 9,260 8,646 Taxes included in cost of coal and lignite so1d......................... 7,242 5,475 4,945 Total............................ S244,961 $205,261 S201,578 f
Research and development costs charged ' to expense............................. $ 15,963 $ 15,548 $ 15,392 ; (16) Business Segment Information ; The Company operates principally in two business segments: electric utility [ and cable television. The electric utility business segment encompasses ; the operations of HL&P and Utility Fuels. HL&P provides electric service in and around Houston, while Utility Fuels supplies coal, lignite and ! transportation services to certain of HL&P's electric generating , facilities. Financial information by business segment is summarized as i follows: Year Ended December 31, t 1992 1991 1990 . . (Restated) (Restated) , (Thousands of Dollars) ! Revenues: ; Electric utility (a)................ $ 4,359,628 $ 4,219,011 $ 3,978,683 i Cable television (b)................ 236,760 224,728 199,893 , Total revenues.................... $ 4,596,388 $ 4,443,739 $ 4,178,576 + i Operating Income (Expense): Electric utility (c)................ $ 923,931 $ 1,013,542 $ 943,283 > Cable television (b)................ 19,394 14,009 5,460 l Other operations.................... (911) (1,595) (2,064) Total operating income.............. 942,414 1,025,956 946,679 : Other income (expense).............. 12,098 77,291 (7,190) Fixed charges....................... (449,416) (478,313) (431,756) ! Income before income taxes.......... $ 505,096 $ 624,934 S 507,733 , 1 Depreciation and Amortization ' Electric utility.................... $ 388,548 S 366,777 $ 341,608 Cable television (b)................ 75,622 70,496 67,668 i Other operations.................... 911 1,595. 2,064 l Total depreciation and i amortization.................... $ 465,081 $ 438,868 $ 411,340 1 I i
==- Year Ended Decemb2r 31, f, 1992 1991 1990 ~ (Restated) (Restated) (Thousands of Dollars) t Identifiable Assets (end of period): Electric utility.................... $10,823,268 $10,662,099 $10,552,407 l 1,386,927 1,391,526 1,429,768 8 Cable television.................... 328,268 221,160 241,444 Other operations.................... , Adjustments and eliminations. . . . . . . . (120,962) (109,621) (178,864) Total assets...................... [12,417,501 $12,165,164 $12,044,755 l Y Capital Expenditures: Electric utility.................... $ 336,035 $ 375,520 $ 358,455
} Cable television (b)................ 44,306 26,624 31,186 0ther............................... 1,625 Total capital expenditures........ $ 381,966 $ 402,144 $ 389,641
- (a) Electric utility revenues include sales of $529 million,
' $542 million and $510 million for 1992, 1991 and 1990, respectively, between BL&P and Utility Fuels. These sales are not eliminated in consolidation because of the o distinction for regulatory purposes betveen utility and non-utility operations.
I (b) Amounts do not include amounts attributable to Paragon,
! vhich is accounted for under the equity method.
I l (c) 1992 amounts include the effect of a charge of $86 million which relates to HL&P's restructuring of operations as a result of the implementation of the STEP program (see Note 18). (17) Investments (a) Cable Television Partnership. A KBLCOM subsidiary owns a 50% interest in Paragon, a Colorado partnership that owns cable television systems. The remaining interest in the partnership is owned by American Television and Communications Corporation (ATC), a subsidiary of Time
' Varner Inc. The partnership agreement provides that at any time after
! December 31, 1993 either partner may elect to divide the assets of the
[ partnership under certain pre-defined procedures set forth in the i agreement. [ Paragon is party to a $275 million revolving credit and letter of 1 credit facility agreement with a group of banks. Paragon also has
} outstanding $150 million principal amount of 9.56% senior notes due l'
1995. In each case, borrowings are non-recourse to the Company and to ATC. (b) Foreign Electric Utility. Houston Argentina owns a 32.5% interest in an Argentine holding company which acquired, in December 1992, a 51% interest in Edelap S. A., an electric utility company operating in La l Plata, Argentina and surrounding regions. Houston Argentina's share
! of the purchase price vas approximately $37.6 million.
I
+ (18) R: structuring HL&P recorded a one-time pre-tax charge of $86 million in the first l quarter of 1992 to reflect the implementation of the STEP program, a restructuring of its operations. This charge includes $42 million < related to the acceptance of an early retirement plan by 468 employees ; of HL&P, $31 million for severance benefits related to the elimination of an additional 1,100 positions and $13 million in other costs , associated with the restructuring. l (19) Change in Accounting Method for Revenues l During the fourth quarter of 1992, HL&P adopted a change in accounting method for revenue from a cycle billing to a full accrual method, effective January 1, 1992. Unbilled revenues represent the estimated amount customers vill be charged for service received, but not yet' billed, as of the end of each month. The accrual of unbilled revenues-results in a better matching of revenues and expenses. This change , impacts the pattern of revenue recognition, which has the effect of increasing revenues and earnings in the second and third quarters (periods of higher usage) and decreasing revenues and earnings in the first and fourth quarters (periods of lower usage). The cumulative effect of this accounting change, less income taxes of
$48.5 million, amounted to $94.2 million, and was included in 1992 income. If this change in accounting method vere applied i retroactively, the effect on consolidated net income in 1991 and 1990 vould not have been material.
(20) Unaudited Quarterly Information The following unaudited quarterly financial information includes, in the opinion of management, all adjustments (which comprise only normal recurring accruals) necessary for a fair presentation. - Quarterly results are not necessarily indicative of a full year's , operations because of seasonality and other factors, including rate ' increases and variations in operating expense patterns. The quarterly results have been restated to include the impact of the adoption of SFAS No. 109, as discussed in Note 14, and the recording of unbilled electric revenues as discussed in Note 19. i Earnings Net (Loss) per- ' Operating Income Common j Ouarter Ended Revenues Income (Loss) Share (a) ' (Thousands of Dollars) 1991 March 31.......... S 918,160 $ 133,311 $ .40
$ 51,849 Adjustment 1(b). . . (963) 2,378 .02 March 31 Restated. S 918,160 $ 132,348 $ 54,227 $ .42 June 30........... $1,059,605 $ 216,018 $ 87,424 $ .68 Adjustment 1(b)... (963) 2,405 .02 June 30 Restated.. $1,059,605 S 215,055 S 89,829 S,.70
W
- b Earnings Net (Loss) per -
Operating Income Common Revenues Income (Loss) Share (a) L Quarter Ended (Thousands of Dollars) L 1991 o i Sept. 30.......... $1,370,609 $ 459,948 $ 223,831 $1.73 Adjustment 1(b)... (963) (7,873) (.06) Sept. 30 Restated. $1,370,609 $ 458,985 $ 215,958 SM Y Dec. 31........... $1,095,365 $ 220,530
$ 54,279 $ .42 (962) 2,461 .02 Y Adjustment 1(b)...
I Dec. 31 Restated.. $1,095,365 S 219,568 $ 56.740 $ .44 I 1992 March 31.......... S 975,250 $ 68,690(d) $ (33,908)(d) $( 26) Adjustment 1(b)... (963) 1,366 .01 Adjustment 2(c)... (15,584) (14,681) (9,689) (.08) J Cumulative effect
> of adjustment 94,180 .73 2(c)............
g g March 31 Restated. S 959,666 $ 53,046(d) S 51,949(d) $ J (e) June 30........... $1,097,644 $ 227,656
$ 74,947 $ .58 Adjustment 1(b). . . (963) 1,388 .01
! 43,865 .34 Adjustment 2(c)... 70,148 66,461 i
June 30 Restated.. $1,167,792 S 293,154 S 120,200 $ .93 i 4 Sept. 30.......... $1,392,164 $ 447,748 $ 230,913 $1.78 Adjustment 1(b). . . (963) 1,408 .01 Adjustment 2(c)... 11,180 10,676 7,046 .06 Sept. 30 Restated. $1,403,344 $ 457,461 $ 239,367 $1.85 Dec. 31........... $1,065,586 $ 138,753 $ 23,151 $ .18 (a) Quarterly earnings (loss) per common share are based on the veighted average number of shares outstanding during the quarter, and the sum of the quarters may not equal annual [ earnings per common share. (b) Adj us tment required to restate quarterly amounts for the i change in accounting for SFAS No.109 (see Note 14), (c) Adjustment required to restate 1992 quarterly amounts for f the change in accounting for revenues (see Note 19). il ii (d) Amounts include the effect of a pre-tax charge of $86 million which relates to HL&P's restructuring of operations 0" as a result of the implementation of the STEP program (see I Note 18). I l 1
= .. . .
t (e) Loss from continuing operations per share for the first- : quarter of 1992 was S.33.~ ! (21) Reclassification Certain amounts from the previous years have been . reclassified to conform to the 1992 presentation of financial statements. Such reclassifications do not affect earnings, i
?
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INDEPENDENT AUDITORS' REPORT Houston Industries Incorporated: We have audited the accompanying consolidated balance sheets and the consolidated statements of capitalization of Houston Industries Incorporated and its subsidiaries as of December 31, 1992 and 1991 and the related statements of consolidated income, consolidated retained earnings and consolidated cash flows for each of the three years in the period ended December 31, 1992. Our audits also included the financial statement schedules listed in the Index in Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial An audit includes statements are free of materialevidence misstatement. supporting the amounts and y examining, on a test basis, disclosures in the financial statements. An audit also includes "1 assessing the accounting principles used and significant estimates made k by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for [ our opinion. 4 In our opinion, such consolidated financial statements present r fairly, in all material respects, the financial position of the Company and its subsidiaries at December 31, 1992 and 1991 and the results of l
- their operations and their cash flows for each of the three years in the F period ended December 31, 1992 in conformity with generally accepted b accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated o
financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 14 to the consolidated financial statements, L in 1992 the Company changed its method of accounting for income taxes to
- conform with Statement of Financial Accounting Standards No. 109 and, retroactively, restated the 1990 and 1991 consolidated financial statements for the change. As discussed in Note 19 to the consolidated financial statements, the Company changed its method of accounting for revenues in 1992.
J i M41 Mcla DELOITTE & TOUCHE 1 Houston, Texas
, February 16, 1993 t
t' 91 l' l
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant.
- Item 11. Executive Compensation.
- Item 12. Security Ownership of Certain Beneficial Owners and Management.* ,
Item 13. Certain Relationships and Related. Transactions. *
- The information called for by Items 10, 11, 12 and 13, to the extent not set forth under Item 1. " Business-Executive Officers of the Company," ,
is or will be set forth in the definitive proxy statement relating to the . 1993 Annual Meeting of Shareholders of Houston Industries Incorporated ! pursuant to the Commission's Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of l directors and the portions thereof called for by Items 10, 11 (excluding the information required by paragraphs (i), (k) and (1) of Item 402 of Regulation S-K) , 12 and 13 are incorporated herein by reference pursuant to Instruction G to Form 10-K. 4 I i i k 6 i i 4 b E t
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PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. e I (a) (1) Financial Statements. Pace k Statements of Consolidated Income for the Three Years 54
- Ended December 31, 1992 . . . . . . . . .........
" Statements of Consolidated Retained Earnings for the 56 3 Three Years Ended December 31, 1992 . . !........
Consolidated Balance Sheets at December 31, 1992 and 1991 . 57 { Consolidated Statements of Capitalization at December 31, g 59 w 1992 and 1991 . . . . . . . . . . . . . ......... D Statements of Consolidated Cash Flows for the Three Years 62 i Ended December 31, 1992 . . . . . . . . ......... 64 j Notes to Consolidated Financial Statements ......... 91 Independent Auditors' Report . . . . . . b (a) (2) Financial Statement Schedules.
]4 2 Schedules for the Three Years Ended December 31, 1992: 94 f V- Property, Plant and Equipment . . .........
VI -- Accumulated Provision for Depreciation,
.)
Depletion and Amortization of Property, Plant 95 and Equipment . . . . . . . . . . ......... 96 VIII -- Reserves . . . . . . . . . . . . ......... IX -- Short-Term Borrowings . . . . . . ......... 97 i.;, il* The following schedules are omitted because of the absence of the lg t conditions under which they are required or because the required
*". information is included in the financial statements:
U I, II, III, IV, VII, X, XI, XII and XIII. 7 1 (a) (3) Exhibits. h See Index of Exhibits on page 99, which also includes the management h contracts or compensatory plans or arrangements required to be filed as j[ exhibits to this Form 10-K by Item 601(10) (iii) of Regulation S-K. t h (b) Reports on Form 8-K.
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t SCERDULE V - P30PERTY, PLA3T A2D EQU1PMECT For the Three Years Esdad Dscamber 31, 1992 (Thousands of Dollars) Col. A col. B Col. C Col. D Col. E Col. r Other Balance at Additions Changes - Balance at Beginning at Retire- Add End Classification of Period Cost monts (Deduct) ef Period Year Ended December 31, 1992:
- Production Plant................... $ 6,724,735 $ 139,761 $ 11,233 $ 6,853,263 Transmission Plant................. 801,049 20,352 2,817 818,584 Distribution Plant................. 2,302,657 126,417 34,848 2,394,226 General P1ont...................... 690,246 64,800 17,371 737,675 Plant Acquisition Adjustments...... 3,166 3,166 Plant Held for Future Use.......... 275,719 9.221 $ (84,075) 200,865 Coal Handling Equipment and Mining Property......................... 536,728 4,943 3,899 537,772 Cable Television Property.......... 278,052 43,236 627 320,661 Other Property..................... 12,159 225 187 12,197 Total Plant............... 11,624,511 408,955 70,982 (84,075) 11,878,4F9 Construction work in Progress...... 239,159 (37,994) 201,165 Nuclear Fue1....................... 181,853 20,160 202,013 Total.......... .......... $12.045,523 5 391,121 $ 70,982 S 184,075) 612.281,587 Year Ended December 31, 1991:
Production Plant................... $ 6,595,577 $ 131,843 $ 2,685 $ 6,724,735 Transmission Plant................. 764,336 39,937 3,224 801.049 Distribution Plant. .... .......... 2,173,981 163,896 35,220 2,302,657 General Plaut..... ........... . .. 660,969 64,560 35,283 690,246 Plant Acquisition Adjustments.... . 3,166 3,166 r Plant Held for Future Use.......... 263,735 11,984 275,719 i Coal Handling Equipment and Mining Property.......... ..... ..... 518,221 22,489 3,982 536,728 Cable Television Property.......... 252,485 26,624 1,057 .278,052 Other Property.. .................. 11,995 324 17 $_, (83) 12,159 Total Plant............... 11,244,465 461,657 81,528 (83) 11,624,511 Construction Work in Progress...... 287,805 (48,646) 239,159 Nuclear Fue1...................... 177,308 6,049 (1,504) 181,853 Totd1..................... $11,709.578 $ 419.060 $ 81.528 5 (1,5 8 7 ) $12.0 4 5,52 3 Year Ended December 31, 1990: Production Plant.... .............. $ 6,680,966 $ 85,339 $ 2,228 $ (168,500 ) $ 6,59 5,577 l Transmission Plant................ 748,325 17,970 1,959 764,336 Distribution Plant................. 2,060,841 146,187 33,047 2,173,981 General Plant.... ................. 584,454 91,137 13,i 49 (713) 660,969 Plant Acquisition Adjustments...... 3,166 3,166 , Plant Held for Future Use.......... 181,041 5,735 76,959 253,735 Coal Handling Equipment and Mining Property......................... 611,304 20,278 5,723 (107,638) 518,221 Cable Television Property.......... 193,614 31,186 447 28,132 252,485 other Property..................... 15,701 653 4,334 (25) 11,995 Total Plant............... 11.079,412 398,485 61,587 (171,845) 11,244,465 Construction work in Progress...... 296,035 (8,230) 287,805 Nuclear Fue1....................... 161,191 16,117 177,308 Tota 1..................... 611,536,638 5 406.372 6 61,587 5 t 171,8 4 5 ) $ 11,7 0 9,5 7 8 Notees (A) substantially all electric utility additions are originally charged to construction work in Progress and transferred to electric utility plant accounts upon completion. Additions at cost give effect to such transfers. (B) Additions at cost include noncash charges for AFUDC for HL&P and capitalized interest for other subsidiaries. (C) Depreciation is computed using the straight-line method. The depreciation provisions as a percentage of the depreciable cost of plant were 3.4% for 1992, 1991 and 1990. (D) Other changes to Production Plant in 1990 reflect the disallowance of $375.5 million not of the settlement with the former architect-engineer of $207 million. (E) Other changes in Plant Hold for future Use in 1990 represent the addition of $138.2 million related to ELEP's purchase of lignite reserves and lignite handling facilities from Utility ruels and the deduction of recoverable costs of $61.3 million related to Malakoff. (F) Other changes in Coal Handling Equipment and Mining Property in 1990 represent Utility ruels' sale of lignite reserves and lignite handling facilities related to Malakoff to HL&P. (G) Cable television property balances for 1990 and 1991 have been restated to reflect the effects of the adoption in 1992, with restatement to January 1, 1990, of Statement of Financial Accounting standards No. 109, ' Accounting for income Taxes.* (H) Other changes to Plant Held for Future Use in 1992 represent the deduction of $84 million of recoverable costs related to Malakoff.
' ' \i i e
SCREDULE VI - ACCUMULATOD FCOY151C3 FOR D3PR3CIAT102
- AND AMORTIEATION OF FROPERTY, PLANT AND SQUIFKENT For the Three Years Ended December 31, 1992 .
l (Thousands of Dollars) ! i e r Col. A Col. B Col. C Col. D Col. E Additions Deductions from Reserve i Retirements, '[ Balance at Charged Charged Renewals Salance- ; Beginning to to other and at End of Period Income Accounts Replacements other 'of Period Description , h h Year Ended December 31, 1992: ' Depreciation and amortisation of property. $3,000,873 plant and equipment....... $2,685,429 $376,106 $ 11.887 $ 72,549 .
.l Amortisation of nuclear 61,022 29,237 90,259 !
fue1...................... Year Ended December 31, 1991: Depreciation and + amortisation of property, $ 82,617 $ 809 $2.685,429
$ 11,867 {
(l* plant and equipment....... $2,392,410 $364,518 i
'i Amortisation of nuclear 38,603 23,145 726 61,022 !
! fue1......................
j ...r .nded ...e.h., ,1 .9,0s Depreciation and
-y f amortisation of property, $ 57,388 $8,354 $2,392,410 j
plant and equipment....... $2,085,226 $362,060 $ 10,866 i .
. Amortisation of nuclear 18,672 19,931 38,603 (
fue1...................... i l 1 1991 and 1990 balances have been restated to reflect the effects of the adoption ! p [ note: The in 1992, with restatement to January 1, 1990,.of statement of Financia! Accounting l standards No. 109, ' Accounting.for Income Teses.' j
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i SCHEDUL3 VIII - EESERVE8 For the Three Years Ended December 31, 1992 (Thousands of Doldars) ! r Col. A Col. B Col. C Col. D Col. E Addittons Balance at Charged Charged Deductions Balance Beginning to to other from at End Description of Period Income Accounts Reserves -of Period [ t Year Ended December 31, 1992: Accumulated provisions deducted from related assets on balance - sheet Unco 11ectible accounts...... $ 12,585 $16,634 $18,780 $ 10,439 Cable television franchises and intangible asseta..... 107,681 38,175 145,856 Deferred tax asset valuation allowance................. 56,817 179 56,638 Reserve other than those ' deducted from assets on ; balance sheet: Property insurance.......... (4,645) 2,187 363 (2,821) Injuries and damages...... . 5,847 3, F,9 3 5,629 3,911 Year Ended December 31, 1991:
- Accumulated provisions deducted from related assets on balance sheet: i' Unco 11ectible accounts...... $ 10,018 $1 ca ,8 31 $ 204 $12,468 $ 12,585 Cable television fra chises and intangible assets..... 69,723 7,958 107,681 !
Deferred tax asset valuation allowance................. 52,140 4,677 56,817 ' Reserves other than those deducted from assets on , balance sheet: Property insurance.......... (1,539) 1,764 4,870 (4,645) Injuries and damages........ 2,163 8,808 5,124 5,847 I Year Ended December 31, 1990s i Accumulated provisions deducted l from related essets on balance i sheet: i Unco 11ectible accounts...... $ 7,753 $14,248 $ 1,000 $12,983 $ 10,018 Cable television franchises and intangible assets..... 33,365 36,631 273 69,723 Deferred tax asset valuation allowance................. 52,140 52,140 i Reserves other than those deducted from asset
- in '
balance cheet: Property insurance.......... 533 2,072 (1,539) , injuries and damages........ 6,004 5,390 9,231 2,163 NOTES: (A) Deductions from reserves represent losses or expenses for which the respective reserves were created. In the case of the uncollectible accounts reserve, such deductione are not of roccveries of amounts previously written off. : (B) Reflects the adoption in 1992, with restatement to January 1, 1990, of statement ; of Financial Accounting Standards No. 109, " Accounting for Income Taxes.'
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SCEEDULE 11 - SBORT-TERM BORROWINGS For the Three Years Ended December 31, 1992 (Thousanda of Dollars) col. A col. B col. c col. D col. E col. F weighted Maximum Average weighted
' category of Average Amount Amount Average Aggregate Balance interest Rate outstanding Outstarding interest Rate Short-term at End of at End of- During the During the During the Descripti'an Borrowings Period Posiod Period Period Period I L 1 1.ar inded December 31., 1992... commercial g Paper $564,249 4.08% $661,300 $488,582. 4.14%
Year Ended December 31, 1991... Bank Loans $ 5,000 $ 521 7.75% l commercial Paper $330,294 5.37% 689,200 445,994 6.51% Yest Ended December 31, 1990... Bank Loans $ 25,000 10.00% $ 25,000 $ 753 9.224 commercial Paper 339,577 9'004
. 593,300 412,850 8.53%
Notes The weighted average interest rate during the period la calcult.ted by dividing interest f by the weighted average proceeds from the borrowings.
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e,s l SIGNATURES i Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Houston and State of Texas, on the 24th day of February,1993. ; HOUSTON INDUSTRIES INCORPORATED (Registrant) By DON D. JORDAN (Don D. Jordan, chairrnan. Preside and chief Executive ofIicer) Pursuant to the requirements of the Securities Exchange Act of 1934, it is report has tan signed below by the following persons on behalf of the registrant and in the capacities a: d on the date indicated. ! Sirnature lit!r Ea!s Chairman, President and Chief Executive Officer and Director : DON D. JORDAN (Principal Executive and l (Don D. Jordan) Financial Officer) KEN W. NABORS Comptroller ! (Ken W. Nabors) (Principal Accounting Officer) [ MILTON CARROLL Director ! (Milton Carroll) ! JOHN T. CATER Director (John T. Cater) , FLOYD L. CULLER. JR. Director (Floyd L. Culler, Jr.) InSFPM M. HFNT1RIF Director - Febntary 24,1993 Goseph M. Hendrie) HOWARD W. HORNE Director (Howard W. Home) ; i THOMAS B. MCDADE Director (norna B. McDade) > R ANDALL MEYER Director (Randall Meyer) ALEXANDER F. SCHILT Director > (Alexander F. Schilt) , KENNETH L. SCHNIT7.ER. SR. Director (Kenneth L. Schnitzer. Sr.) D.D.SYKORA Director (D. D. Sykora) J ACK T. TROTTER Director pack T. Troner) , b 4 98-
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+
n , HOUSTON INDUSTRIES INCORPORATED Exhibits to the Annual Report on Form 10-K For the Fiscal Year Ended December 31, 1992 e I INDEI OF EIHIBITS p Exhibits not incorporated by reference to a prior filing are designated by a o cross (+); all exhibits not so designated are incorporated herein by reference to a Exhibits designated by an asterisk (*) are management [ prior filing as indicated. contracts or compensatory plans or arrangements required to be filed as exhibits to f* this Form 10-K by Item 601(10) (iii) of Regulation S-K. b SEC File or Report or Exhibit Registration Registration Exhibit Number Description Statement Number Reference f 9 3(a) Restated Articles of Incorporation of the Form 10-0 for the quarter ended 1-7629 3 Company September 30, 1990 3(b) Amended and Restated Form B-K dated 1-7629 3 h Bylaws of the Company June 29, 1992 y
- Mortgage and Deed of Form S-7 of HL&P 2-59748 2 (b) 4 (a) (1) i Trust dated November filed on August 1, 1944 between HL&P 25, 1977 g'
and South Texas U Commercial National y Bank of Houston (Texas Commerce Bank National Association, as successor f" trustee), as Trustee, as
@ amended and supplemented g by 20 Supplemental y Indentures thereto
,k Twenty-First through HL&P's Form 10-K 1-3187H-1 4 (a) (2) 3 4 (a) (2)
Fiftieth Supplemental for the year ended f December 31, 1989
$ Indentures to HL&P g Mortgage and Deed of y Trust 0
Fifty-First Supple- HL&P's Form 10-Q 1-3187H-1 4 (a) 0l 4 (a) (3) l' mental Indenture dated for the quarter March 25, 1991 to ended June 30, h HL&P Mortgage and Deed 1991 [i of Trust HL&P's Form 10-0 1-3187H-1 4 i! 4 (a) (4) Fifty-Second through Fifty-Fifth Supplemen- for the quarter U! tal Indentures, each ended March 31, j l dated March 1, 1992, 1992 il to HL&P Mortgage and Deed of Trust y HL&P's Form 10-0 1-3187H-1 4
'E 4 (a) (5) Fifty-Sixth and Fifty-Seventh Supplemental for the quarter
' Indentures, each dated ended September 30, October 1, 1992, to 1992 HL&P Mortgage and Deed l of Trust l
l . lH l N
o,s O e INDEX OF EXHIBITS (CONT'D) Report or SEC File or Exhibit Registration Registration Exhibit Number Description Statement Number Reference 4 (b) (1) Rights Agreement dated Form B-K dated 1-7629 4 (a) (1) July 11, 1990 between July 11, 1990 > the company and Texas Commerce Bank National l Association, as Rights 3 Agent (Rights Agent), ! which includes form of Statement of Resolution Establishing Series of Shares designated Series , A Preference Stock and form of Rights Certificate 4 (b) (2) Agreement and Appoint- Form 8-K dated 1-7629 4 (a) (2) ' ment of Agent dated July 11, 1990 as of July 11, 1990 , between the Company and the Rights Agent 4 (c) Indenture dated as of Form 10-Q for 1-7629 4 (b) April 1, 1991 between the quarter ended the Company and June 30, 1991 NationsBank of Texas, National Association, as Trustee [
*10 (a) Executive Benefit Plan Form 10-0 for the 1-7629 10 (a) (1) of the company and quarter ended 10 (a) (2)
First and Second March 31, 1987 and Amendments thereto 10 (a) (3) (effective as of June 2, 1982, July 1, 1984 May 7, 1986, respect-ively)
*10 (b) (1) Executive Incentive Form 10-K for the 1-7629 10 (b)
Compensation Plan of year ended December 31, 1991 ' the Company (ef fective as of January 1, 1982)
*10 (b) (2 ) First Amendment to Form 10-Q for the 1-7629 10 (a)
Exhibit 10 (b) (1) quarter ended (effective as of March 31, 1992 March 30, 1992) *
+*10 (b) (3) Second Amendment to Exhibit 10(b) (1) (effec-tive as of November 4, 1992)
- 10 (c) (1) Executive Incentive Form 10-Q for the 1-7629 10 (b) (1)
Compensation Plan of quarter ended the Company (effect- March 31, 1987 ive as of January 1, 1985)
-100- ,
" 'f. *
- l. *,*
A .
b . I "J, INDEX OF EXHIBITS (CONT'D) Report or SEC File or f Registration Registration Exhibit t Exhibit Number Reference
! Number Description Statement First Amendment to Form 10-K for the 1-7629 10 (b) (3) f *10 (c) (2) 6 Exhibit 10 (c) (1) year ended December 31, 1988 3 (effective as of January 1, 1985)
Second Amendment to Form 10-K for the 1-7629 10 (c) (3)
$ *10 (c) (3)
Exhibit 10 (c) (1) year ended g December 31, 1991 (effective as of h, January 1, 1985) Third Amendment to Form 10-Q for the 1-7629 10(b)
- 10 (c) (4 )
Exhibit 10 (c) (1) quarter ended (effective as of March 31, 1992 March 30, 1992) 4 h* +
- 10 (c) (5) Fourth Amendment to Exhibit 10 (c) (1) f q (effective as of November 4, 1992)
Executive Incentive Form 10-Q for the 1-7629 10 (b) (2)
- 10 (d) m Compensation Plan of quarter ended '
HL&P (effective as March 31, 1987 [{ of January 1, 1985)
$ Form 10-Q for the 1-7629 10 (b) 4
- 10 (e) (1) Executive Incentive
" Compensation Plan of quarter ended the Company (ef fec- June 30, 1989 h
tive as of ijf January 1, 1989) First Amendment to Form 10-K for the 1-7629 10 (e) (2)
*10 (e) (2)
{j Exhibit 10 (e) (1) year ended (effective as of December 31, 1991 E h January 1, 1989) N Second Amendment to Fom 10-Q for the 1-7629 10(c)
*10 (e) (3) p# Exhibit 10 (e) (1) quarter ended (effective as of March 31, 1992 11 l March 30, 1992) 0 :
4 h +*10 (e) (4) Third Amendment to 11 Exhibit 10 (e) (1) i! (effective as of i ! November 4, 1992) lli Form 10-K for the 1-7629 10(b) ll +10 (f) (1) Executive Incentive j Compensation Plan of year ended the Company (ef fect- December 31, 1990 ive as of January 1, l{ j . p 1991) First Amendment to Form 10-K for the 1-7629 10 (f) (2) 4 *10 (f) (2)
] ! Exhibit 10 (f) (1) year ended l (effective as of December 31, 1991
!}
f January 1, 1991) l
-101-l x
M { a
,s.
O INDEI 0F EXHIBITS (CONT'D) Report or SEC File or-Exhibit Registration Registration Exhibit Number Description Statement Number t Eeference
*IO (f) (3) Second Amendment to Form 10-Q for the 1-7629 10(d)
Exhibit 10 (f) (1) quarter ended ; (effective as of Marc h 31, 1992 i January 1, 1991)
.i i
+ *10 (f) (4) Third Amendment to Exhibit 10 (f) (1) '
(effective November > 4, 1992)
+*10 (f) (5) Fourth Amendment to Exhibit 10 (f) (1) '
(effective January 1, 1993)
?
*10 (g) (1) Benefit Restoration Form 10-Q for the Plan of the Company 1-7629 10(c) .,
quarter ended (effective as of June March 31, 1987 i 1, 1985) '
*10 (g) (2) Benefit Restoration Form 10-K for 1-7629 10 (g) (2)
Plan of the Company the year ended as amended and re- December 31, 1991 - f stated (effective as ' of January 1, 1988) i
*10 (g) (3) Benefit Restoration Form 10-K for 1-7629 10 (g) (3)
Plan of the Company, the year ended : as amended and re- December 31, 1991 -; stated (effective as of July 1, 1991) ;
*10 (h) (1) Deferred Compensation Form 10-Q for the '1-7629 10(d) t Plan of the Company quarter ended (effective as of March 31., 1987 September 1, 1985) '
*10 (h) (2) First Amendment to Form 10-K for the 1-7629 10 (d) (2) i Exhibit 10(h) (1) year ended (effective as of December 31, 1990 '
September 1, 1985) ! i i
*10 (h) (3) Second Amendment to Form 10-Q for the 1-7629 10 (e)
Exhibit 10 (h) (1) quarter ended (effective as of March 31, 1992 March 30, 1992)
*10 (i) (1) Deferred Compensation Form 10-0 for the 1-7629 10(a)
Plan of the Company quarter ended f' (effective as of Jthe 30, 1989 January 1, 1989)
*10 (i) (2) First Amendment to Form 10-K for the 1-7629 10 (e) (3)
Exhibit 10 (i) (1) year ended (effective as of December 31, 1989 January 1, 1989) '
-102-h
sur
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4 INDEX OF EIHIBITS (CONT'D) Report or SEC File or Exhibit Registration Registration Exhibit Number Descrintion Statement Number Reference
*10 (i) (3) Second Amendment to Form 10-Q for the 1-7629 10 (f)
Exhibit 10 (i) (1) quarter ended (effective as of March 31, 1992 March 30, 1992)
*10 (j ) (1) Deferred Compensation Fom 10-K for the 1-7629 10 (d) (3)
Plan of the Company year ended (effective as of December 31, 1990 January 1, 1991)
*10 (j ) (2) First Amendment to Form 10-K for the 1-7629 10 (j ) (2)
Exhibit 10 (j ) (1) year ended (effective as of December 31, 1991 January 1, 1991)
*10 (j ) (3) Second Amendment to Form 10-Q for the 1-7629 10(g)
Exhibit 10(j) (1) quarter ended (effective as of March 31, 1992 March 30, 1992)
*10 (k) (1) Long-Tem Incentive Form 10-Q for the 1-7629 10 (c)
Compensation Plan of quarter ended the Company (ef fect- June 30, 1989 ive as of January 1, 1989) ;
*10 (k) (2) First Amendment to Form 10-K for the 1-7629 10 (f) (2)
Exhibit 10 (k) (1) year ended (effective as of December 31, 1989 [ January 1, 1990) j
+*10 (k) (3) Second Amendment to Exhibit 10 (k) (1) ll (effective as of December 22, 1992)
- 10 (1) Form of stock option Form 10-Q for the 1-7629 10(h) agreement for nonqual- quarter ended i ified stock options March 31, 1992 l granted under the
! Company's Long-Term .
! ; Incentive Compensation Plan ,
*10(m) Forms of restricted Form 10-Q for the 1-7629 10(i)
; stock agreement for quarter ended restricted stock March 31, 1992 granted under the company's Long-Term Incentive Compensation i Plan d
*10 (n) (1) Savings Restoration Form 10-K for the 1-7629 10(f) 1 Plan of the Company year ended December 31, 1990 l f (effective as of January 1, 1991) j l N I y
-103-N O-s
- 9. , .
- i l
l INDEX OF EXHIBITS (CONT'D) l Report or SEC File or .. Exhibit Registration Registration Exhibit -l. Number Description Statement Number Reference l
*10 (n) (2) First Amendment to Form 10-K for the 1-7629 10 (1) (2) L Exhibit 10 (n) (1) year ended {
(effective as of December 31, 1991 January 1, 1991) l
+ 10 (o) Director Benefits l Form 10-K for the 1-7629 10 (m) ;
Plan, effective as year ended ! of January 1, 1992 December 31, 1991 !
*10 (p) Employment and Form 10-0 for 1-7629 10(f) 1 Supplemental Benefits the quarter ended ;
Agreement between March 31, 1987 HL&P and Hugh Rice i Kelly
*10(q) Employment Agreement Form 10-K for the 1-7629 10(h) between KBLCOM year ended December and Gary G. Weik 31, 1989
+ *10 (r) Employment Agreement dated as of November 2, 1992 between IE&P j and Donald P. Hall 10 (s) (1) Houston Industries Form 10-K for the 1-7629 10 (j ) (1)
Master Savings Trust, year ended effective as of July December 31, 1990 1, 1989, and First Amendment thereto, effective as of October 4, 1989 and Second Amendment there-to, dated October 30,
'1990 each between the l Company and Texas -l Commerce Bank National Association l
l ^ l +10 (s) (2) Third Amendment to l l Exhibit 10 (s) (1) effec- i ) tive as of September 1, i 1991 \ 10 (s) (3) ESOP Trust Agreement Fom 10-K for the 1-7629 10 (j ) (2) between the Company the year ended and State Street Bank December 31, 1990 l and Trust Company, as ESOP Trustee, dated October 5, 1990 10 (s) (4 ) Note Purchase Agree- Fom 10-K for the 1-7629 10 (j ) (3) ment between the the year ended Company and the ESOP December 31, 1990 Trustee, dated as of October 5, 1990
-104-t.
. . , 6. - o
.o INDEX OF EKHIBITS (CONT'D) .;
I Report or SEC File or i Exhibit Registration Registration Exhibit Description Statement' Number Reference j Number i Stock Purchase Agree- Form 10-K for the 1-7629 10 (j) (4) I 10 (s) (5) l ment between the year ended Company and the ESOP December 31, 1991 l j Trustee, dated as of October 5, 1990 I
+ *10 (t) Letter agreement between the Company l
.l and Howard W. Horne f
+11 Computation of ;
Earnings Per Share i
- +12 Computation of Ratios ;
of Earnings to Fixed , Charges I
+1B Letter of Change in '
- h. Accounting Principle W_ l h +22 Subsidiaries of the l Company
+24 Consent of Deloitte & .
Touche, Independent l
'l Auditors of the Company ,
- i. .
i l Pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K, the Company has not filed as l
' I exhibits to this Form 10-K certain long-term debt instruments, under which the total i f !
amount of securities authorized do not exceed 10% of the total assets of.the Company-q and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request. Y,'
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