ML20150B321
| ML20150B321 | |
| Person / Time | |
|---|---|
| Site: | South Texas  |
| Issue date: | 12/31/1987 |
| From: | Jordan D HOUSTON INDUSTRIES, INC. |
| To: | |
| Shared Package | |
| ML20150B316 | List: |
| References | |
| NUDOCS 8807110486 | |
| Download: ML20150B321 (285) | |
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- , Preaiiling uinds. shift
- ng tides. Changes in direction on the road to the future. Opportunities.
Threats. Undeniable. Unstoppable. Houston Indusnies, like all businesses, is impacted by trends: Globalfituincial tresuls. lxcid economic trends. Itultistry directions. We're continuing a long histon of success by undersunuling, asipting to and, schere possible, shaping the changes tiuit are affecting ourfiaure. x . Houston huhutries Incorparated is the parent company of seven subsidiaries: . Houston Lighting & Pouer Company. HL&P is the tuuion's eighth Lngest elecnic taility in tenns l of kilnant-hwr sales, sening a 5,000 square mile area u hich inchdes Houston, the tunion's
- )ourth largest city. Primary Fuels, Inc. PFI is an oil and gas exploration arul production comtuny H uith domestic puduction arul resen es located in the continental U.S. and in the Gulf of Mexico, t
- as uell as intenuniorud (mduction in several cotmtsies. Utility Fuels, Inc. UFI is a full senice coal supply company involved in the acquisition, transportation, handling, mul culministration of
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cad and lignite for electric generating pLmts. KBLCOM Incorporated. KBLCOM is intvived in the otniership and operation of cable teletision systems. It holls a 50 pacent interest in a multi-state cable teletision joint venture called Paragon Communications, uhich serves over 650,000 customers. Imwtutive Controls, Inc. ICI detdaps and markets high-intensity discharge lights driven by electronic Ivilasts. Houston liuhistries Finance, Inc. HIF purchases accounts ? receivable of HLSP. Development Ventures, Inc. DVI is a tenture capital organization u hich j mvests m established fmuls and protides startmp fitumcing for snudi bitsinesses. , l l a k (
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0 i FINANCI AL lilGilLIGilTS 1987 1986 Operating Revenues (000) $3,628,213 $3,535,968 Cperating Expenses (000) $2,890,745 $2,809,387 Net income (000) $434,458 $424,935 Eamings Per Share $3.74 $3.81 Dividends Per Share $2.8b ,
$2.76 Average Number of Shares Outstanding (000) 116,322 111,593 Return on Average Common Equity 13.5 % 14.5 %
Fixed Charge Coverage Ratio 2.86 2.76 Price / Earnings Ratio 8.0 9.1 Book Value Per Share (year-end) $28.33 - $2~.19 Market Price (year end closing) $30.00 $34.75 Market To thk Value 106 % 128 % Total Retum (Disidends & Price Appreciation) -5% 34 % Number of Common Stockholders 78,880 81,914 TABLE OF CONTENTS letter to Shareholders 3 Financial Review 6 E!cctrie Utility Industry-Financial Trends 6 liouston Industries incorporated Financial Review 8 Ilouston Lighting & Power Company Operations 12 llouston Economy-Trends 12 Electricity Sales 14 Electric Utility Induury Structure-Trends 16 Regulatory Proceedings 18 Competitive Strategies 19 Power Supply-Trends 22 South Texas Project 24 Fuel Strategies 25 Operations of Other Subsidiaries 26 Primary Fuels, Inc. 26 Utility Fuch, Inc. 28 KBLCOM Incorporated 30 Innovative Controls. Inc. 31 llouston Industries Finance, Inc. 32 Development Ventures, Inc. 32 Financial Section 33
-4
f l l TO OUR SHAREHOLDERS ineteen eighty-seven were $408.6 million, or $3.51 was a year of hard work, per share, compared to $434.9 l j sigmficant successes and ! million or $3.90 per share I i building for the future for both in 1986. l l Houston Industries incorporated Primary Fuels, while still and our home city. l. affected by unstable oil and gas i j e Houston Industries achieved { prices, recorded significantly im-earnings of $435.0 million, up proved results during 1987, with l from $424.9 million in 1986. a profit of $4.5 million, compared Earnings per share were $3.74 l to a $27.7 million loss in 1986. l
! in 1987, compared to $3.81 the Earnings for Utility Fuels,Inc.,
I i previous year. ! our coal suppiy subsidiary,in-j e Houston Lighting & Power creased to $24.2 million in 1987, l Company,ourmajorsubsidiary, compared to $21.9 million the l completed construction of Unit 1 ! previous year.
- I t at the South Texas Project and : HL&P will file a rate increase i received a license for fuelloading l request during the first half of I l l
I and low-pawer operation. j 1988, primarily for recovery of e The Houston economy, i costs associated vith building l which has been feeling the effecn ard operating two new generat-i l of depressed conditions in the en- ing units. An equitable decision f ergy sector, began showing early l by the Public Utility Commission but convincing signs of economic of Texas could improve the finan-
; recovery. cial outlook for HL&P in 19S9.
i Earnings Withstand ! Nuclear Plant Moves Toward Short Term Impacts ; Opaation i
! HoustonIndustries achieved l The past year has been one of f solid financial results despite fac- major triumphs and a few disap-
! tors which continued to impact pointments for the South Texas <
Houston Lighting & Power ; Project (STP). In August 1987, I (HL& P) and Primary Fuels, Inc., the Nuclear Regulatory Commis-our oil and gas subsidiary. sion issued a license for fuel ; HL&P felt the effects of a soft loading and low power operation local economy and increased ex- of Unit 1. The first nuclear reac-l penses due, primarily, to the cost tion took place March 8,1988. l of operating a new generating ! unit, which is not fully reflected in electric rates. Hl.& P's carnings I
j ~f I ! We expect to put the unit in Austin's 16 percent share of STP for its principal subsidiary, l 1 commercial operation in the in exchange for an equal amount i ilL&P. We are, therefore, pur-i i summer of 1988. of capacity at ilL&P's Limestone ] suing a diversification program j After five years of successfully lignite plant. In addition, HL&P l seeking business opportunities ; managing an aggressive budget will make a cash payment for which offer the potential for j and schedule for STP, the com- purchase of nuclear fuel owned additional earnings growth in ! I mercial operation date for Unit 1 l by Austin, reimbursement of the future. I slipped somewhat from our tar- construction expenses incurred I ilowever,our diversification get date of December 1987. In by Austin during the later stages program is in its early stages, and ! I addition. the estimated com. of negotiations, legal fees,and we are proceeding cautiously. j pleted cost of the plant has settlement of an unrelated pur- IlL&P will remain our core busi- l increased by approximately 5.5 chased power contract. ness for the foreseeable future, l i am convinced that the settle. and continuing our record of suc- l percent, compared to the budget j established in August 1982 when j ment is in the best interests of i cess within the electric utility i about tuo thirds of the construc- both parties. We are committed industry is a top priority. l l l I tion work stilllay ahead to working toward resolution of i
! HL&P Launches Unit 2 was 86.2 percent com- the remaining conditions.
j ' Marketing Effort I
' plete at the end of 1987, on ! In January 1988, HL&P filed . ,
i Success within the electne utility ! schedule for fuelloadmg in legal petitions designed to avert . ! mdustry requires looking ahead !
; December 1988 and commercial additionallitigation related to I and adapting to the fundamental ~
operation the following June. STP. ne petitions ask the courts i changes that are occurring nese 4 to define certain rights and obli- .
! Austin Settlement sought i mclude increasing competition, ;
i gations of IIL&P in relation to - i i Following months of mtense , both from the natural gas indus- ; the other STP owners. In re- , . i negotiations with the City of l try and from cogenerators. l' hat
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! sponse to liL&P's petitions, the !
Austin, HL&P reached an agree- !' means HL&P must becaine much t I
. other owners have sought arbi- !
l ment to acquire Austm's share : more competitive. 1 ; i tration of the disputes. i i l of STP and to resolve a long- ! In addition to ongoing cost I 1 i standing legal dispute between controlefforts,which are helping l HI Seeks Growth Through l l l 1 l the two parties. However, the Diversification ; keep electric rates down, we are i I agreement is subject to a number llousten Industries is k>oking launching a greatly expanded f f i of eventsand conditions includ- I l ahead to a period of declining marketing effort in 199 i mg approval by state regulators capital requirements, improved l HL&P devoted seven months - l \ and the Nuclear Reguhtory i cash flows, and modest growth , during 1987 to a detailed study Commission. of the marketplace for electricity , I if the agreement can be con- fhe resuh was a blueprint, by l l cluded.111.& P will acquire l ; market segment, for a compre- , l hensive program to increase the l j i ! i ! i i 4 I
t 4 use of electricity where benefi- business to locate and prosper. A employees ! within our Company, l ) cial to both customers and case in point was voter approval, are the driving forces behind l l i shareholders. in early 1988. to proceed with a that progress. l The increated sales expected metro mobility construction pro- I also would like to commend to resuit from these marketing l gram, which has set the course i our Directors, who are called on programs will boost revenues for transportation improvements to participate more than the di. and support our goal of holding in the liouston area through th's rectors of any company with l i down electricity costs by allow- , year 2000. which I am familiar. They were ing fixed costs to t,e spread over The plan,which includes asked to attend an average of 33 l a greater number of kilowatt- improvements to existing meetings each during 1987, and l t hours sold. : transportation systems and their response wa axemplary. i l i construction of a light rail sys- Attendance at meetings of the City Builds for the Future tem, will enhance the appeal of full Board and of the various Just as liL&Pis faced with com-our area and contribute to the committees averaged 92 percent. petition for electricity sales, the success of our economic deve!- We owe a special debt of grat-llou; ton area is faced with com-i ) opment efforts. 1 itude for the contnbutions of 1 petition in attracting new { l For liouston Industries and , inree Directors w ho are retiring l businesses that will enhance the j ! the liouston-Gulf Coast,1987 i this year. Scarev Bracewell has i economy of the area. Success in was a year of progress. The l'een a Director for 11 years, Joe ! that arena requires a wdh.ngness - i fonvard-looking people in our l Wessendorff for 9 years and i A to ms est in the future. !
. . communities, and the dedicated Naman for 5 years. Their dedi.
In Houston, we are contmuing - c e e ppreciated and to build the infrastructure w hich l their wise counsel will be missed. i will make our region an mcreas- ; ingly attractive place for new ! i l l depends on your support. We i i smcerely appreciate your interest j f in Houston Industries and remain i committed to providing you with ( f !
! l attractive, stable dividends while l 1
-2 pursuing opportunities for long-
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term grow th. e. [ 7 i JWO qg
, e i I l o~
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) Don D Jordan President and
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! l Chief Executive Olficer y ,
11ouston, Texas tu o /mian 1 March 15.1988 l s
1 1 Reliable utilities. + They're knoun ha sertice cust<nners cmmt <m. Earnings investors hmk on. Catsistent quarterly ditideruls azul attractit e yields. Stable stock prices. Moderate risk, malerate gains. Most of the time. + In the mki-1980s. utility stocks registered rolnut Inice gains: Rhling the indl on Wall Street. Gaining momentum as interest rates tumbled azulint estors bkl up tlie prices of l 1 high-yielding shares. + Then, the ups and dotats of '87: For utilities, a peak in Januan Atul a retreat, as interest rates inched upuurd. Investors turned their attention to indusnics u here the bull charged on. + Until October: Black Monday. A f>ightening plunge. Wall Street's uill ride canied Date huhtstrials doten 23 percent pa the nionth. Maintaining an S e P 5N, off 22 percent. + F<a utilities: even 1 eel m S_,he,,ad,ng Snu&,,n4ce u4ngs aunng wer. t Stormy Waters ,,, ,n ,h, a,,en, h ,oc,ob,,. mo,e ,n<e,,o,, seeking shelter in safe, stable, high-yield investments. + Entering '88: Ttvo pluses for utility stocks. Easing interest rates. Sotoul irulusa, furulamentals: Stable camings. Grouing financial strength as a decade of capital extxutsion eruls. Capit al requirements dottu. I;mg-tenn debt shrinking. Cash flotes Cx[\lluIing. + blott XTou'th, lotV RTou th from utility opeTatimLS. Upside potentialfTom diversifica-tion. + Diversified tailities are investing available cash, pursuing nere sources ofgrou th. Seeking a healthy hilmce: Regulued aru! tmregidated busi>1 esses. Stability aiul grau d1. Prot klitig economiad 1 elcaric senice tchile nuiximizing sluireholler value. j i i i l l l 1 1 6
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. HOUSTON INDUSTRIES Eamings again create downward pressure FINANCIAL REVIEW f Houston Industnes achieved on camings in 1988, particularly earnings of $435.0 million during after Unit 1 at the South Texas 1987, up from the $424.9 million Project (STP)isin service. camed during 1986. liowever, HL&P plans to file a rate in-
- earnings per share decreased to crease request during the first
$3.74 in 1987, compared to $3.81 half of 1988, primarily for costs the previous year, on a 4.2 per- associated with Limestone Unit 2 cent increase in the weighted and STP Unit 1. Action by the average number of shares out- Public Utility Commission of standing. Return on average Texas (PUC) on the rate request NET INCOME m rd:tm' common equity was 13.6 percent, could improve the financial out-compared to 14.5 percent in 1986. look in 1989.
j J j Houston Lighting & Power To relieve pressure on earnings Company H1's principalsubsid- in the interim, HL&P has asked
; iary, recorded eamings of $408.6 the PUC to authonze deferred
, million. or $3.51 per share,in accounting for Limestone Unit 2 6 1987, compared to $434.9 mil- and STP Unit 1. This would allow lion, or $3.90 per share, the HL&P to capitalize operating previous year, costs and carrying costsincurred ;
Allowance for Funds Used from the in-semce date unhl During Construction (AFUDC), these units areincluded in electric j or non cash earnings that repre- rates.
]t sent the carrying costs associated With only one generating unit l 1 y p with construction expenditures, still under construction HL&P will a 4 F '
L accounted for 52 percent of g be entering a period ofimproved i HL&P's earnings in both 1987 cash flow and substantially lower M s si
- 6 and 1986. capitalrequirements. Assuming Consaltdated net vtwmc for 1987 was Qut}qnk M3 5 0 msliion. up inn 1 mollion jrom gr3nted, the qu3hty of c3mings 19se, carning. Operating costs for new genera-ting units, which will not be fully reflected in electric rates until HI &P's next rate order, will s
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also should improve as non-cash $2.88.This marked the 18th in-camings would account for a de- crease in the past 18 years, and creasing portion of total earnings. the 66th consecutive year that the Company has paid regular quar-Stock Performance, Dividends terly dividends on its common After reaching a 20-year high in stock. lanuary 1987, liouston Industries At prices prevalent during the common stock,like many other first quarter of 1988, current divi-issues, took a disappointing tur . dends were providing a yield of later m the year. over 9 percent. III closed at $30 per share on December 31,1987, down 13.7 Bond Refinancings EARNINGS PER SHARE percent from the previous year- Houston Industries continues to end price of $34.75.uis was utilize innovative financing tech slightly better than the Dow Jones niques to meet the individual 2 Utility Index, which declined 15 needs ofits various subsidiaries. a I, 5 percent during the year. For example, the Company Whde stock pnces have lost has been aggressive in refinancing some ground, til continues to high-coupon 11L&P bonds in sup-
, provide shareholders with an port of company wide efforts to ! attractive, stable source of income. hold down expenses. At the end l l
l The dividend yield averaged 8.6 of 1987,liL& P's embedded cost $ percent during 1987. of long term debt was 8.32 per-l 1 i: 5 f r
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3 Effective with the June 1987 cent, down from 8.74 percent at l
, payment, the quarterly dividend the end of the previous year. ,
I was increased from 70 to 72 cents Contnbuting to this reduction per share, for an annual rate of was the retirement of more than
$390 million of high-coupon first n s a % n mortgage bonds through ex. ! change offers. Holders of the Con olidatrdrarningsia darc l
utre $i74 un 1987, Jewn $ 07 a share I high-coupon bonds received new po,,,19se o,, a u .rcent incerase s 9 percent bonds and a cash '" " " N d " "" 'X' """' h" o_f sharts outstartdtng. i premium. I 1 i l l t I l l
The exchange offers, announced 6th year,and has an average life in February 1987, were coupled of 8 years. with an announcement that up to hiJanuary 1988,llL&P issued
$145 million of the outstanding $400 million aggregate principal txmds would be subject to re- amount of 9% percent first demption, at par, under the mortgage bonds in a private annual replacement fund pro- placement.- Approximately equal -
visions of ilL&P's mortgage and principalamountsof thisissue deed of trust. will mature in 3,4, and 5 years. De goals in structuring the ex- Proceeds were used to pay ex-change offers were to achieve a penditures related to llL&P's Q yf{@TyAGE high levelof participation, min- construction program, including imize the cash premiums paid, I repayment of construction-A
'; and avoid conventionalinvest- related, short term debt, and to e n , ment banking fees. call the remair.ing $48.5 million I g The exchange offers, together principal amount of 13% percent
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with the subsequent replacement series first mongage bonds. fund call of $140 million principal flouston Industries Finance, amount of first mortgage bonds, Inc. (lilF) established a $300 mil-reduced liL&P's annualinterest lion bank credit facility in July expense by approximately $14 1987 to finance the purchase of million. liL&P also saved about liL&P accounts receivable. fe
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$45 million in cash premiums, ten- Laterin the year, the finance a
ifv ., der fees, and underwriting costs. subsidiaryimpleiaented its own
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, 3 commercial paper program.He
{s New Fm.ancmgs
? commercial paper received a flL&P raised $99 million of new rating of Duff 1 + from Duff &
capitalin June 1987 through the a s 8s x- n Phelps and a rating of P 1 from sale of 1 million shares of pre- ; iutum on . crag common equiry ferred stock carrying an $8.50 l rYs rInt$uUni aanual dividend. Unlike llL&P's other preferred series, the new preferred is subject to a manda-tory sinking fund beginning in the 4 l i l l ld I i
l Moody's.These are the highest Stoch Sales l short term ratings given by the !!! issued 3.5 million shares af ! agencies. common stock during 1987 j HIFis now using the commercial through its continuous offering paper for short term borrowing, program,its dividend rein-with the bank credit facility serv. vestment plan, and certain I ing principally as a backup. employee benefit plans. Paragon Communications,a Of this number,1,863,000 cable television operating com- shares were sold through the con-pany in which HI has a 50 percent tinuous offering program. Net interest, finalized a $430 million proceeds were approximately bank credit facility during 1987. CASil DIVIDENDS DECLARED PER 570.3 million, or an average of COMMON SilARE Proceeds from borrowings under $37.73 per share. the facility, which is non-recourse n
- 3 Capital Requirements 2 d to HI, were used to permanently . a Capital requirements, while still 2 finance the acquisition of cable ,
n d srnstantial,are continuing to a television propenies distributed decline as HL&P's power plant from the Group W purchase. construction program winds Paragon's revoking credit facil-down. Projected capital require-ity provides financing flexibility ments for 1988,1989, and 1990, through a letter of credit feature, exclusive of AFUDC and maturi-which can be used to support the ties of long term debt, aro as issuance of Paragon debt securities. follows: Capital Requirements a ii 5 (Millions of Dollars) 1988 1989 1990 ( )e ( g i 9 Houston Lighting & = 4 - 1 n 84 ss % 37 Power Company * $ 495 $ 444 $ 368 l Utility Fuels,Inc. $ 57 $ 46 $ 24 ! rhe q2arterty sicisens was rais<a l from 70 to 72 cents per share suring Primary Fuels,Inc. " " '
$ 57 5 $ m7,,/futire w,ra thr fune s,ri-TOTAL $ 609 $ 490 $ 392 d"'d I'd V'"'"'-
' Houston I;ghting i Power capital requirements do not reflect the posuNe acquisinon of an add.tional 16 percent share of the South Texas Projcit.
"Pnmary Fuch' expenditures for od and gas exploration subcquent to 19M are j dependent on roults of its 1953 exploration and dn elopment program, ar.d factors i affectmg the oil and gas mdustry.
l l 1 11
In its heyday, Houston luulit all. Or so it seemal. + It tvas a big time, lunn toten, irn the ruitioitid spotlight. Help tvanted sipu, anutruction pennits, azul U-hind trailas tviih hiichigan plates. All tvere sigiu of the times: Gul times. The days of $.35-a-luncl vil. On the tvay to $50, s<nne l beliered. + 13uill.13omne.13uill some more. Wking to keep alimul of grotetin. I)rit en bx tire oil price surge. + Sadienly: Oversupply, naulerdenunul. Oil nices I plummeted, belou 510 a laurelirn
'86. Dnlling actitity dropped. Sales of equipment and materials foll::tved. + Next the plant closings.
Arul die layof[s. Then, the ripple effect: C<n-tnwtion.13anking. Cub.vatm. I:.ntertainment, restaurants, arui rcrail. SIoutloten. Crankdnen.
, a bountift .
Office glut, [neclosures azul U-luitds out of toten. + Firudly, a future lunling [Mi11t. Housiint fmckl Ole bottom, alul staTied tunti11g up. + In l 1987: The Lut stubbm1 symptoms of econ <nnic ills. The first tital signs of recuten: Linemployment b falling. Office sjdCC filling. l'Ctr< k'llemiCals TChnaulittg. Air trat el rising. The l' ort of Hottston builling steam. Asul die seeds of rettetcal grott di frenit a haddny utix ofiruittstries. + Aerosluce: 52 bihio11 in nav NASA contracts. hiedicine: 5I.5 hllion in nete constniction. Contt>ntions arul tourisin: A nac $100 milhon contention center. + hicana hile, energs is starting a bumpy comeluck: Oil prices
- uv a, a t - G ~ tr a in a xvior - w i w ion 8 agc ,uv u tv m - w 8 a
+ The fraure: Gntiaal, stable grou th. Outpacing the ruitiorud attrage over die next deatle.
i fik7dufn(econ (OnfC freDity (u unst<nl Tcbl Ls on okl silen(tb3 dlkl CxfdIk s f[s boTf[uns. Cultit ating a h mntifulfuture after the drought. l
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, Just as the Houston economy ! at a cost lower than that of their However, when interruptible tumed an important corner dur- j o;her alternatives. sales are included, the peak de-
> ing 1987 and began showing signs l Increasing off system sales is mand actually served hit a new
! of renewed growth, Houston !
an HL&P strategy for utilizing high of 11,31S megawatts in 1987. Lighting & Power Company also l available capacity. As a result of Growth in peak demand for l reversed recent trends, with the l stepped up marketing efforts, electricity is expected to reflect
! first sales increase in three years. ' revenue frem off system sales the pattern of economic recovery.
t l Sales for 1987 ware up by 3.5 j jumped to $32.2 million in 19S7, Be compound annual growth , percent compared to 1986, pri- up from $16.9 in 1986. l rate in peak demand over the manly as the result ofincreases in industrial sales increased by 4.S decade from 1988-1998 is pro-off system sales and interruptible percent during 19S7, fueled in part l jected at 1.1 percent. I l sales to industrial customers by a rebound in the petrochemical l In addition to the Houston r
' i Interruptible sales are sales to .
industry. Residential sales, the i economy,liL&P's future electric-l large customers who are able to i number of residential customers f ity sales wil1 be influenced by
, accept the risk of curtailments served, and their average use l fundamentalchanges within the during periods of peak demand showed httle change in 1987. electric utility industry. HI & P's !
I for electncity in return for lower ommenial sales declined 2.2 strategies stress cost control, ex-rates. Off system sales are made percent durine the year. { cellent cusbmer service, and
; to other utihties, frequently as Peak demand for electricity in l expanding the markets forits economy energy transactSns. 1987 was 10,302 megawatts, ex- product.
l when HL&P can provide energy cluding interruptible demand of l 1,016 megawatts. This is down l
' l
; from 10.356 megawatty m 19S6.
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ex - '& _j t Nearly $1.5 billson in con-struction was underway I
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Shipments through the Port of flouston approveJ. or completed Ju ring Ao rose briskly during 195 rat The Tnas AtcJscal 5 l> 198 r,'runnsn q l Cen ter en llous ton jf ulmost ten percent \ A $2 bolhon N.ASA contract *'*- " I'"" ' '"'"I' awarJed to AfcDonncIl Douglas durung 19%iu sll bcnclut the flouston economy.
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The elecnic compmy. The onty <nte in toten. + With goal reason. Reg 1 dated utilities hace served the public tvell.13igger plmts azul lYtter technologs kept rates late azul stable. For abnost a cenuoy. + Then came the set entics, the decade ofinfLition: The energ, enmch sent[twl prices saning. Intaest rates row. C<msinetion costs climbed. + Elecnicity bills folknced suit, and denuuul dtcindled. Meanu hile, supply expouled. In the tunne of consert ation. In die funn of cogenaation.
+ Cogenaation is: Praluction of elecnicity and anotha funn of energs from the same fuel. An oli technologs. Recitalized by tax breaks. Nurtured by federal policies requiring utilities to buy
; cogenerated kilotcatts. Nete source of pn> fit fi>r i'
Shapm.g the m.c - . Uuhlshial CogeneTatUTs. NetV source of CompClition
- fOr a MOre for utilities. + Nete rules. Diffaent ndes COmnetitive Y future for different playas: Utilities vs. cogenerators.
i Neguliteel t's. ImTCgullteb. Utilities in business lo sert'C, ot'er lhe long tenn. Cogenerators sell at tedl, as long as profits are high. Unlities must buy cogenerators not required to supply. Surphe talay, sharage annorrotc! + Then ihe eighties dw decade of deregulation: Airlines.13anking. Gts pipelines
- and telecommunications. Trucking arul railrauls. + Electric utilities: Still a regulited business. Atul I
hNCl) to sta) NLlt tvay At least in tenns of retail s+ des to customers. Not so fiir clectricity praluction. i CompCrilbIn is heTC alu$ moTC regullhn) k\nTiCrs nuly tumb e. + The futuTC: Note pbayCTs. OutVCr annomics, . .naators, i1depalent potea puducers. A!! seeking sales. NegotLuing using regulainy WCCfkinisms. felfkips, (ine (Idy, bibling to bulbl netC gClkTating pbmts. + bofiCy nkikers' gads: l Maximi:e chiciencx Mmimize costs. + Utility concents: Can reliable senice IM nuiintained! Wal I fuel mix kM blVersiflid alul secure? T:ll effilei;% actually inCTCase! + Will the public rCally kV l'CiteT IsareJ! + Urdits laulers are speaking out m Mtshington. PLtying an actite role in sitiping dte clumges thru are affecting thcir ituhlsin. Representing die interests of customers atulinvestors. Azul, at the same time, dienc rulopting strategies for success in a more competitit e tv<nid. l l IB l
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f l Rate Increase Request l l to be Filed I l liouston Lightmg & Power Com- expected to go into commercial The Company beheves that an i j pany is monitoring electric utility operation later this year. equitable decision in the rate case industry trends, and is playing an The amount of the rate mcrease will eliminate downward pressure active role in shaping the direction granted will be influenced by a j on earnings from costs which are s ' of proposed regulatory changes at PUC prudence review of manage- not yet reflected in electric rates. f the Federal level. Of more imme- ment, planning, and construction liowever, new rates may not be diate importance, however, are of STP This type of review is effective early enough to favot-l ses eralissues snecific to liL&P commonly used by regulators to j ably impact 1988 results. t t which wi!! be decided by state - assess the planning and construc- ! In the meantime,liL&P has i regulators. tion of co.nplex projects in order l asked the PUC for permission to i During the first half of 19SS, I to make appropriate rate decisions. use a special accounting treatment ; i ilL&P expects to file a request for ! liL&P has submitted a substan- with respect to both Limestone ( a rate increase, w hich is needed tial case to demonstrate that the i Unit 2 and STP Unit 1, which l primarily to recover construction ! owners were fully compensated l would allow the Company to and operatmg costs associated ! for any powible imprudent costs l defer operating expenses and !
, I with two new generating units. by a $750 million settlement of a ! continue accruing a carrying ;
i i l Unit 2 at the Limestone lignite < lawsuit against the fonner l charge. If granted, deferred ac-l plant w ent into service in Deccm- l architect engineer and constructor. ! countmg will help offset the l
! ber 1956.1he first nuclear unit l negative impact of costs associ. l at the South Texas Project is ! ated with operating these units l l l l from their in service dates until a i
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! l new rate order goes into effect.
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porting data to document l Ill &P Presiden t Ilon the nced for a bare rate byLora tcsttfred on rict Irtc { l rncicase. A ratefalung is I utilitv industry snues l . antiL ipa tcd Jurtng titc f trst ' ( I'* lU " (55 Il0k SC of ; l ' halfolI M , Represt sta ts rcs l l s u bcomin s tice . j is
1 Cost Control Gives l Competitive Edge i 1 liL&Pis pursuing a number of cests is a staff reduction program, ing 1987, management approved 1 strategies for success in a compet- which has enabled the Company almost 600 of approximately 850 itive business environment. to decrease payroll costs substan- suggestions. Savings from these The most obvious competitive l l ua ly without a major layofi. ideas are expected to exceed $5.3 l strategyis to be the preferred, Target staffinglevels established million in 19S8. low cost producer. IiL&P has in nid 1986 have been achieved, Employees also maintained ex-achicved substantial success in with 914 positions eliminated cellent customer service despite I controlling costs company-wide through voluntary means, such as the need to do more with less, through actions ranging f rom an early retirement program and Nearly four out of five customers work force reductions to renego- employee reassignments. polled in the Annual Consumer tiating fuel contracts. Reassignments are continuing opinion Survey said they had a This success is reflected in the to help the Company utilize favorable opinion of liL&P. Company's increasingly competi- employees for high prionty activ- Customer perceptions that tive rates. In 19S6, the average ities w,thout increasing staffing. IIL&P prosides quality scaice rates llL&P charged its large in- liL&P employees are playing contributed to the high ratings, dustnal customers were the fifth an ac'ive role in controlling costs with 87 percent of those poiled lowest of 61 investor-owned util. by working efficiently and by giving the Company high marks ities in 12 key states, and the contnbuting their good ideas. in this area.11L&P also received lowet of nine investor-owned Employee Focus Groups have favorable ratings for good man-l utilities in Texas. This w as a s'g- produced more than 1,500 ideas agement, willingness tolisten and i nificant improvement compared since their creation in 19S3. Dur- respond, and being concerned to 1985. about the cost of electric senice. In 1987, liL&P undenpent its operations and maintenance bud- - ' g - get by 2.5 percent. Contnbuting 1
; to ongoing success in holdmg down .
I 1 L r I i i 1 l l 1he uarch for ncw l Ilouston ar-a students art w >t-cact ng idca s led \ stavung omfortable and 'll bl* ta test use of bar the schoolJustris Iis rawsg wJang for acs uracy and mancy ssnr c swsts h:n_q 10 l e ffec sency un s
- s!ctsals l
cles tricuts jsr hcatung en y f mana gemen t. l , l some n hoslw lit t P rcp- 4 n . t l l re sentatuccs hcip many l^ p s u stomcrs uden tity bcnclu- n f l t s nal new uses of cics tru ity l ~~~~~N p
Marketing Benefits all Customers Offering excellent service at a benefit the economy by bringing generation for some large custom-competitive price is one part of new businesses to the area and ers who are able to accept the an effective marketing effort. encouraging local expansion by possibility of cudailments. Understanding customers and those a! ready here. During 1987, HL&P consultants help cus-responding to their needs is ML&P's economic development tomers who are considering self another. HL&P has launched a effortsled to the creation of generation projects to avoid major marketing initiative based 1,500 new jobs, those that do not measure up eco-on a detailed market and customer HL&Pidentifies prospects for nomically by explaining current analysis ccnducted during 1987. possiNe business relocation or rate options and providing fore-The new marketing programs expansion through advertising, casts of future energy costs. being implemented all have one working with area economic de- During 198S, HL&P will thing in common. ney are de- velopment organizations, and pursue the residential market signed to benefit all customers, referrals. through a number of avenues, not just those participating. The Company also has ex- neluding stimulating construction Increased sales help hold down parded use of business research of energy-efficient all electne the cost of ekctricity for every- as a tool tc target companies and homes. HL& P will promote one, because fixed costs are industries which are expected to the purchase of homes con-spread over a greater number grow. Prospects are ; hen con- structed under the ' Good of kdowatt hours sold. tacted by HL& P representatives. Cents"" program. Economic development activi- Iksides communicating the in the commercial sector of ties improve electricity sales and benefits of the Ho.iston area, HL&P's service area, electricity is HL&P is working to impros e the economically supenor to natural region's economic appeal. The gas for heating and cooling. Company recently received ap- HL& P's marketmg task is to edu-I, l proval from the PUC for a special ca9 aahitects, engir.eers, and electric rate w hich offers up to a customers about relative costs. f 20 percent discount for basic ne Company aho is working industries creating new iobs in to strengthen ; 'lationships with the area. traJe groups, such as builders l
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Offering a vanety of rates to and heating and cooling con-m orisuorung eet different customer needs tractors who are in a po< tion to
,nacase u,c orrin trioty aho is an imponant tool in m3in- influence apphance ant' equip-(or hea ting anJ other residen tialapplic a tson s taining and increasing sales to ment selection.
by promoting s onstruction andpurs hare of encryv- ' rnaient cln tru homer rates, for example, provide a l cost effective alternative to self N o
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i-d ~.. . vanc_t + _, natasa_in ,- Easy to plot, easy to pLin for. + f'ucts trere abinuluit aruliiiexpensitc. Gigantic poteer plants tccre needed. Economics of scale meant lotver electric rates. It tats the bes: of all tonlis. + Then, the Oil Emlurgo of I95 Gas lines, fuel price shocks, shortages. Aiu! die inetitable legisLiti,nt. Coal and nuclear plants tvere iailities' nete optio u: Expanice to buill, cheaper to fuel. + Costs spirated uptvard: Fuel escalations, construction increases, rising interest rates. Aruldouble-digit in)Lition. AnleTifd p!dfdf dle plug. + L! sage patterns trent atny. Conscreation becanie a tuttiorud obsession. vrot en methids offorecasting electricity denunul staldenly yielled Ba ancin l onix best guesstinuues. Gncertainty reigned. + In the mid-su;?;?y wi 1 T 1980.s:Alxna face! An oversupply of oil arulgas. new cen1anc1s E.venone knows a. .3 temporan. Bia how temporan.> And how severe tvillfiaure shortages be.' + T< day, a fete of the giant p<ncer plants begun dunng the set enties are still coming on stream. Their legacy: Reliable electricity, less depaulatce oil oil and gas. The price: Higher elecnicity costs. The result: Consumer resistance, reguluory reluctance tu pass on costs. + The immediate fiaure: Flexible. Snudler nete sniits, faster to buill. la>tver catnt+d irrtest-mcnts. Pouer purcluses. Arul a myriitl of nete options steeped in nete Lingiatge.1]enutna .1> ot>tions. Consa tutitnl alul Inkl nunulganC11t to smooN1 N1e palhs in CICCtricity use. Off-pCah nulTNeting to l I! iulleys arti use atuild,lc arpacity. All widi die sante crid. Lise pLmts efflciently, mininii:e costs. I;inger tenn A nete cule of constna non bkely Builling for nete grou th in the ninctics, after denumd is evidau. Luge-scale generating units th a meet the test as Lust-cost options inchded as p nt of av oterall[hnver supply plm. + L!tilities are plmning tally fur the netc dentuuls of tunnoriotc. The rules hate cluiriged. The an21 fuis riot. Snile a lvLince: Reliable satice, seasorud,le rates, seaire fuel supply, tath a c<nnpetitit e return for intestors. L
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STP Starts Up, Construction Winds Down HL&P reached a major milestone the fanner architect engineer and Company is able to conclude in its power plant construction tonstructor of STP. an agn'ement with the City of program with completion of Unit 1 This amount reflects an Austin. HL&P's estima.ed share at the South Texas Project. increase of about 5.5 percent, of the completed cost w Md then The Nuclea- Regulatory Com- compared to the budget estab- be approximately $3.0 billion, mission (NRC) issued a license for lished in August 19S2 when based on the September 19S7 fuel loadmg and low-power oper- about two thirds of the construc- cost estimate, ation of Unit 1in August 1987.The tion work stilllay ahead. He agreement is subject to a first nuclear reaction, or initial crit. He estimated cost to HL&P number of events and conditions, icality, took place March 8,19SS. for its 30.8 percent ownership is including regulatory approval HL&P estimates that three to five $2.4 bdlion, or $3,181 per kilo- However,if finalized,it will months of additional testmg are re- u att of capacity, including settle !itigation filed by Atctin quired after initial enticality,to put financing costs, or Allowance for against HL&P in 19S3. Unit 1 in commercial operation. Funds Used During Construction. Undu terms of the agreement, STP Unit 2 was S6.2 percent These estimates were based on Austin would exchange its 400 l complete at the end of 1987, a commercial operation date of megawatt interest in STP for I on schedule for fuelloading March 1,198S for Unit 1. ownership of an equal amount of in December 19SS, and for com. Commercial operation is now capacity at HL&P's ligmte fired mercial operation in June 19S9. anticipated during the summer of ( Limestone phnt and a coh Complenon of the plant will end 1988 The cost estimates are, payment. ne cash pay ment HL&P's major plant construction therefore, subject to review, and would cover purchase of for the near tenn. HL&P anticipates that the cost of nuclear fuel owned by Austin, Based on its September 1987 the total plan' may increase by reimbursement of construction i completion assessment HL&P $100 to S150 million. expenses incurred by Austin dur I estimated that the total cost for HL&P's interest in the piant mg later stages of negotiations, the completed project would be willincrease to 46.8 percent if the legal fees,and wttlement of an
$5.2S billion, net of proceeds unrelated purchased power con-from settlement of htigation with tract dispute. HL&P would 950 assume the remaining construc-tion costs for Austin's share of STP, effcctive SeptemNr 1.1987.
i l t)pcraters at the Re agreement will a!!aw S0uth Ir Js Project Austin to meet its objective of t rt r th onUndng phpnon in
,,,t< STP. HL&P will benefit by acquir-l ,v.p rad"d'<*ts'<ad-ro the torst
,,uca r ,r a c tiom y~
ing additional nuclear capacity, to
'starsh l M~ 'M j further diverNify ils fuel nux.
I i 24
HL&P Maintains Favorable Fuel Costs By enabling flL&P to add low- In addition to completing plants state of the-art gas storage facil-cost uranium to its fuel mix, STP that sill use abundant fuels, ity, placed in ,enice in OctoNr will coatribute to the Company's llL&Pis keeping its cost of natu- 1987, which will help ensure a goal of securing a dis :rsified fuel ralgas among the lowest of major stable natural gas supply and hold supply with prices that will be utilities in the nation. Despite a down gas costs by allowing the stable over time. significant increase in the price of Company to control the timing of l Uranium will account for ap- natural gas late in the year, the purchases. proximately 3' percent of the Company's unit cost of natural HL&P also has added connec. Company's energy mix in 19S8 gas was about the same in 1987 tions which proside access to and 7' percent in 19S9, after STP as it was the previous year. several additional competing sup-Umt 2 goes into service. Coal and To maintain its competitive phers of natural gas. lignite will make up 39' percent edge in natural gas costs, even as The Company's coal costs were of IIL& P's 19SS energy mix, prices rise, fiL&Pis pursuing reduced beginning in January w hile natural gas will drop to 43* strategies to capitalize on the 1988 as a result of renegotiation l percent. competitive forces which now of supply contracts by Utility T.a is a sip :ficant improve- exist in energy markets. This re- Fuels, Inc.,lil's coal supply sub-i.,;nt in fuel hiersification since quires maximum flexibility in the sidiary. The amendments to the , t 1477 win i 1M percent of the timing of fuel purchases and the coal supply contracts are ex-Com} oy's generatmg capacity capability to choose from among pected to result in substantial l was gas fired. many competing suppliers. savings to llL& P's customers
- IlL&P has completed the de- over a 22 year period.
f
- Base.1on Hl2Pior:gmal30 3 er- T velopment of a comprehensive cent wncnhip of STP.
fueldelivery system. A major i component of this system is a yw& 111 bl'has taken aJeantage of competitive forces in l energy markets to achnet e na turalgas costs that are - , among thelvivest of major , '{.
' utslities in the na tion. , [g
- 3
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p# ww. lor .Augu<t 1%'7, the HI bivs Ju verse fuct 51l'lintt I reas for u as r*nt, tvhis k now loadrJ u sth about I7 sn< ludes W percen t coal mnthon fuelpellets. and hgnite, wnll help cas k containung the hold down turicosts energy rqu walent of ot cr the long !crs.t. about one ten of coal P a
l'rinuny $*'uCls,111C. (l'll) Onnpetes trilh large,511tegratCN energN CUH1lhlniCs, Coln[\DiiCs Utl11CN hy furCign gut'entinCnts, athl OthC151hlej)C1h!C11ts ill a DhlrNCt ilkit ikl$ 1Hu$C1gG11C C011siberable t101nnilin recentyears. + A dranuitic oil alui gas Oil prices unsettled _ ' natural gas showing' [ nice collapse in mid-1986 ints follutved by sonte jnice im[nnt elncut stren8th dtning 1987. Huttet'er, at the etul of I. I, oil prices renusined Intsettled. Nattaal gets [nices, un the utluiluirul, tcere situtting signs ofgrotting strengilt at year c1ul. 4 Conflicting estinuttes of near-tenit vil alul gas [nices alxnnul. l~luttett7, lite genCral conseltstis is I that prices tvill continue to tise gralually and gain nunnentunt in the 1990s. PFI Results Improve indude pre-tax gams of $2.3 mil- condensate, and natural gas liquids Pnnury Fuels pmted greatly im- hon associated with the purchase compared to 31.2 BCF of gas and proved results during 1957, w ah and subsequent sale of oil and gas 4,114,000 barrels of oil, condens-canungs of $4.5 nullion. compared properties located in Oklahoma, ate, and natural gas liquids the to a $27.7 mdhon loss in 19S6. and $2.7 million related to the previous year.
- hpher ud prices and increased final settlement of various Revenues increased to $114.0 gas productmn contnbuted to the contracts. million in 1987, up f rom $105.4 improv ement in earnmgs dunng Production dunng 1987 totaled million in 19S6, as a result of im.
1987, as did lower deprecution, 39.2 bdhon cubic feet (BCF) of proved oil prices and increased deplenom c.nd amortvation gas and 3,bS7,000 barrels of od, natural gas sales. Domest:c oil l expense. Earnings for 1987 also prices averaged $16.0S per barrel in December 19S7, up from lhe i I Gordo f rel ! vs Ma tagorda ( o vnty, rm as is I'lli top $13.19 a year carher. Doniestic
- ^ ' "
% producing property It accounts.1 Datural gas pnCes averaged $1.69
, for 18lVrcent of Jamestic natural xas rcecnun in ros7 per thousand cubic feet in De-
,(l cember 19S7, compared to $1.74
. .s per thousand cubic feet the )
s .s .'
;g previous year -
e i' m PFfs capital expenditures w ere
$53.3 million in 19S7 and are es-timated at $57 milhon for 1988.
t PFI acquired and began operat-ing an od .md gas hcense in
. .. . " 1 Argentina during 19S7, w here
- s e
f . The following table sets forth the estimated net proved od and gas reserves and the present value, dtscounted at 10%, of utarna ted future nel revenues, as of the dates mdicated. Estimatedfuture net revenues were computed by applymg year endprues to > car-end rescrt t quantmes. Tstamatedfuture production and det elopment co:ts trere based on year end co.tts, assummg c,mtmuatwn of existmg economic conditwns. Such irt1ormation u based on reports prepared by Keplmger and Assoc sates. Inc., DcGniver and Sf acNaugl aon, II. N. van rool:en and Associates,Inc , u nd). lL Butlev and Compa ny,independen t energy consultanu for 1951'or I986, the mformat on as baswd on reports by Nepimger and Assocsales Inc., DeGalyer and S1acNaug h!on and H. K. x an Poollen and Associates, Inc.. undependent energy consultants, For 1987, the mfarmatsun is based on reports by K & A Energy Con euttants, . Inc., succenors to Kep'unger and Assocmtes, Inc., Haley Engmeenng Inc., successors to ll. K. t an Poollen and Assocsates, Inc , and - DeGolyer and AfacNaughton. independent energy ctmsultants. The Company emphasi:es that the volume < of reserves shou n 3 below are estimates whuch a re subjecttve in nature and are subject to later revuswn. Ihe est:r rates are made usmg al'aradable geologicaland resert our data as well as productwn performance data.11tese estumates are revacu edan nually and re vned, etther etpward or lawnwa rd, as warranted by additionalperfoymance data Proved Reserves Umted St.tes roteign Dacounted Dncoun'ed Od Present Od, Present Condensate %lue of Condensate - Wlue of Natural And Natural - Future Net Natural - Ahd Natural Future Net Gas Gas tiquids Revenues * - Gas Gas t.iquids Revenues'" (MMCF) (llarrels) (000) (MMCF) (Barrels) - . . , - - (000)
. - - - - . - . - ~ - . - . . - ~ . - . . _ -
January 1,1985 102.050 5,121,416 $ 268,446 Revisons of Previous Estimates 830 (482,534) 110,650 Nensions, Dacoveries, and Other Additions 35,496 2,061,867 furchase of Reserve,in Place 42,000 9,100,000 174,309 11 811,60S Sale t,f Reserves in Place (1,202) (173,313) Productmn (20,170) (1,415,500 (457) (730,258) January 1,1946 159,004 14,211,927 $ 363,803 173,852 11,192,000 $ 71,723+- Reviuorn oI Previ ius Estmutes (8,904) (1,055,591) (50) 1,823,197 Extenuons, Disco enes,and Other Additions 8,797 261,861 Pnxioction (24,511) (1,928,386) (6,652) (2,186.044) January 1,198i 134,386 11,489,811 $ 174,547 167,150 10,829,153 $70,990 '2 Revinons of Previou. Estimates 6,729 608,473 2,907 ' 358,410 Extension ,Divovenes,anc Other Additions 8,672 160,$28 Purchase of Reserves in Place 13,260 135.473 Sale of Reserves m I"ace (12.277) (182,197) Production /29,120) (1,626,148) (10,047) (2,261.045) Jsnuary 1,1988 121,650 10,585,440 $ 161,861 160,010 12,926,538 $ 71,52&"
.-- . - -- - - -. . . ~. . .- --- -
Proved Deseloped Rewrves: As of Jawary 1,1986 153,816 13,997,935 $ 359,628 173,223 10,811,700 $ 70,356 As of january 1,1937 130,691 11,487,811 $ 171,485 .167,150 10,829,153 $ 70,990 121,21n 10,584,219 $ 161,681 160,010 12,138,538 $ 67,850 / As of January 1, los8- . . - . - - - . . - - - - - - - . - - - - - . - . - . -
"Estimates of future net revenues do not contam any provision for federalincome ta ses. Accord ng)y, the present value thereof does .
not consntate toe hnancial Accountmg Standards Board's Standardued measure of dacounted f uture net enh floc 7
, "'As of January 1,1988,1987 and 1986,approumately 51% 70% and 38% of the respective year 3 dncounted present value of future net revenues attributable to foreign reserves 6 attnbuted to proved reserves located in Argentma,30% 17% and 39%
respectively,is attnbuted to p os ed reserves located in Greece,16% 11% and 18% ropettively,is attnbuted to pmved reserve-located in Indoneua, and 3% 2% and 5% respectively,is attributed to proved rewrves located m Canada, approximately 45 wells will be its partners also obtained three Company's strategic business drilled over the next 24 months, exploratnq blocksin Argentina. plan calls for focusingits efforts Earnings and cash flow from this PR is addressing continued on existing assets and expertisein license are expected to have a volatility in energy markets by West Texas, offshore in the Gulf positiveimpact in 1988, PR and applying a conservative future of Mexico,and intemationally. pricing scenario when evaluating oiland gas prospects.The l l n l 1
.I.
Utdity Fuels, Inc. (UFI) numages coal supply, inmsportation, and lunulling sertices. UFl's 1987 cail aluI lignite NClit'elies to siX [ $$5F generating units representCd about ] percent of all CaN suppliCN in the U.S., and almut 6 percent of the westem cad i Coal demand nkirket, tchere UFI's supplies are stah~ e m* near term . concentrated. + The supply of cail suition-tride currently exceeds denuttui, inus grottth in d.nunulis forecast at less duin I percent anntudly over the next dectule, [ninunily because utility custanters are planningfew plmt tullitions in Ute near [taure. UFl Salesincrease the Jewett Mine, which supplies aimed at achiesing growth through Utihty Fuels achieved record lignite for the Limestone plant. dev(loping new customers, offer-highs in coal dehveries during The bucketwheel system, sched- ing new senices, and acquiring 1987, and camings of $24.2 mil- uled for startup by late 1989, will new businesses. lion, up from $21.9 million the be the second placed in operation in seeking new customers, UFl previous year. Revenues rose in Texas. His equipment i, more is focusing on the western coal to $513.4 milhon, from $470.9 efficient than traditional mining market and emphasizing its abihty millior. in 1986. equipment in removing the in- to provide cost effective senice Capital requirements continued creased amounts of overburden in fuel supply, transportation, to decEne, and UFI met these encountered as the lignite seams handling, and management. requirements entirely from inter- being mined become deeper. He Company also has begun nally generated funds for the first The capital cost for the bucket- marktting technical senices time in its history. wheel excavator will be related to coal supply and mater. With the second unit at Hous- approximately $25 million. Total iaL handling.These include ton Lighting & Power Company's UFI capital expenditures will customized operations training, ! Limestone plant completing its increase to $57 million in 1988 engineering, and procedure first full year in service during and $46 miiiion in 1989, com- development. 19S7, UFl's lignite sales increased pared w an $17 million in 1987. UFl continues to evaluate op- ! to 7.5 million tons, up 85 percent Utihty Fuels, hke the coal portunities to acquire profitable l over 1986. Total coal and lignite industry in general, faces flat coal supply operations or to in-sales were 15.8 milhon tons in sas. HL&P has no plans for ad- vest in coal transportation and 1987. Sales of Western coal were ! ditional fossil fueled generating handling. With expertise in each 8.3 million tons. capacity until the late 1990s. UF! of these areas, UFI can offer cus-l In an effort to keep HL&P's j has,therefore, adopted strategies tomers a coordmated fuel supply l lignite co3ts as low as possible, package with built m efficiency f UFl has contracted to purchase a j and flexibihty. i , bucketw heel excavator for use at l l
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KBLCOM Incopwated (KBLCOM) otou a 50 percent interest in Paragon Communicanmu one of the top 20 cane teletision companies in the counny. + Cane teletision is a 512 hllion indusny, grouing in oier 10 percent per year. In 1987, cane became the nonn rather tlun the exception u hen l l the percentage of all American homes subsaibing to cane senice passed the 50 percent nuirk. l
. . ad ~~,ino n amming.inanding ccwitc Cah e televislon caterage of nujur s[xnting etents, plus the 1 COITles of a8e proliferation of sertices such as home shopping, are giting
[woph' more reasons to hing cane into their homes. + The cane inthain is maturing and dwnging. Rate deregulation, u hich took effect in Jamun i987, luis led to nuirla't-based [nicing, ttith a ircrul I I touard higher prices [<w htsic cane sertice aiul louvr [nices for premiton sertices. + Meanttitzle. I ongoing consolihion is creating a snudler fieltl of bigger players arul incratsing irulusin sophistication.
! I l
Paragon Improves Saturation, ! television operations semng over l (ATC), a subsidiary of Time l I ' l Service, and Profit Margins j 650,000 customers in eight states. incorporated. Paragon Communicatwns, a joint l KBLCOM, an 111 subsidiary,is Paragon systems are located in j venture partnership, owns cable I participating in the partnership Texas, Arizona, the Tampa Bay with Amencan Television and area of Florida, the northeast, i l Communications Corporation including a portion of Manhattan, j
*= and Cahfornia. The Cahfornia ;
q 3 / I systems, located m the Los ss i s I f, ll Angeles area, were acquired in
- q. June 1987.
f [/ Paragon's mission as a new
, company is to ensure a commit-
.t ment to excellence throue,h six
~
to
, $p ,
measurable goals: a high level of r customer satisfation; a wiJe _ i .. 9 Cabl, telet ision sports , Choice Of quahty programming; Y,.,Nhrto$Ii '
/
positive relationships with its
- <-ghn a,s the Amenas / communities
- skilled and Cup tabor c) avr gu ang [.V. ,
-trwers more reaso,s to
.m E , [, - -
l niotlValed employees; [ , t,n,x atir 1,to thor % s. [ a vdy managed growth;
, 1 i Q - - - , , , , _ _ - - - . - - - - - ~ - - - , - - - - . - - - - , - - - - - - - _ - _ - , - . - , - - - . . , - - - - . . . - - - - - . . - , - - - - - - - - - - - - - - - - - - - - - - - , - . . ,
and financial results that meet among the homes to w hich cable the acquisitmn of the Los Angeles realistic targett Substantial is available, to 54.1 percent at County systems and other strate-progress is being made in the 2nd of 1987, up from 52.5 gic acquisitions in close proximity these areas. percent the previous yean to existing operations. For example, Paragon has Gross profit margins improved Paragon continues to seek op-markedly improved its service as as well, with an increase to 33 6 portunities ta acquire attractive perceived by customers, accord- percent of revenue in 1987, up cable properties. Those located ing to the Company's semi-annual fre.m 32.2 percent the previous near currtat systems are of great-surveys. At the same time, the year. In addition, Paragon's cus- est interest because of the Company increased saturation, or tomer base grew by 55,000, with operatmg efficiencies that can the percentage of basic customers be realized. l V Innovative Controls, inc. (ICO Commitments already have engmeenng group contmues to l , , comp!cted major start-up attivi- been received from several major develop new applications for the , ties dunng 1987 and positioned retail chains to begin or expand ballasts. I itself to build market share in the distnbution of ICI products early in addition to technologita! su-pa ahead m 19SS, providing access to more periority, ICI offers retmlers very ! I The Cem> -. A new flouston j than 1.000 new retail outlets. conmentive pricing plus quahty I I manufaduno; f ar1lity regan full ICI products [cature the Com- control and warranties that are operation m J iy, with producon pany's propnetary electrome unmatched in the industry th erv ! of 70-watt sodiun secunty hehts ba!!asts, w hich weich just a frat . fixture is tested before it leaves in December, the plant began tion as much and consume the llouston plant and most are producina ICI's new fluorescent substantially los energy than backed by a 10 year lumted f I t shop lights. j conventi onal bjllasts, ((j's com- Warranty. ; ! la the first half of 19SS,ICI will ! plete in house research and 1 begln proJaemg a number of proJacts rangmg f rom functional Ilood lights to decorative carriat;C . , - anJ w all ht: hts. The introductions ,
)
will enab!c the Company to offer 3 a well rounded product hne and A I h"'"'"'" ' * h 6 d ' '"- troduad late in 1% 7 tras . (A should greatly enhance its ability the tin t of icc< ral arm i hghts u hn h will round to penetrJte major rela!} chain % out 1(Te produt t hnt. , . - - _ py e*'"'"~~
.m.___ _ . . . _ . - - _ _ . . _ - - ..._..._.__ _ _ __ __ __ .__ _.,__.-_______ - . - _ _ _ _ _ _ _ _ . _ , _ . _ _ _ . _ _ _ _ _ _ . - -_ _ _ _ _ _ _ _ . . _
l Houston Industries Finance, Inc. a reasonable retum on the equity Duff & Phelps and a rating of P 1 (HIF), which began purchasing invested in HIF. from Moody's. These are the the accounts receivable of Hous- HIFis using commercial paper, highest short temi ratings given ton Lighting & Power Company with a bank credit facility as a by the agencies. in January 1987, recorded a Sio backup, to finance the receiv- ne initial purpose of HIF is to million profit during its first year ables. Re $300 million bank purchase the receivables of IIL& P l of operation. credit facility was established in and other HI subsidianes In the Brough use of leverage and July 1987. Later in the year, the future, the finance subsidiary may short term financing, HIF is able finance subsidiary imp!cmented also seek opportunities to acquire to finance the receivables at a its own commercial paper pro- other high quality receivab!cs and lower tost than HL&P would gram. The commercial paper may pave the way for H1 diversi- ! incur. Yhis benefits HL& P cus- received a rating of Duff 1+ from fication into the financial services tomers, w hile allowing HI to earn industry. e i Development Ventures. Inc. (DVl) Secondary consideration is given HI expects at least one new area is a venture capital subsidiary to new business startups. To com- of business to be identified for formed m January 19S7. plement its direct investments, diversification and significant DVI invess in and assists wd DVI will commit a limited portion future growth.
, the development of emerging ser- of its portfolio to other venture To date, four investments have vice and manufactunng businesses, capital fundt been completed. Tw o of these are i
sening markets demonstrating in addition to caming an atuac- in other venture capital fund 3. potential for abos e-as erage tive retum on committed funds. One fund is focused on technolo. growth, primanly in the sunbelt. the venture capitalinvestments of gies w hich are pnmanly for ) ! Prionty is pven to ms estments in DVI are expected to be an impor- application in the utility industry. Texas, especially m the area of tant componem of the Houston ne other focuses on startup com-Houston and the Teus Gulf Coast. Industnes corporate development panies, particularly those in the Investment emphasis is on cx- strategy. Brough relatively small Houston area. DVI ako has made i
- panoon-stage growth companies commitments, nsk can be mini- direct investments in the commer-and new busmess concept com- mi7ed w hile broadening H1's cialization of space and in the I pames with proven products. expenence to indude new broad field of heahh care, two i seruces. or technologies that industnes. Out of this prmess, industnes that offer rapid expan-meet estabhshed market needs. sion opportunities in Texas and f
around the world. t i
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TABLE OF CONTENTS Five-Year Comparison of Selected Financial Data 35 HL&P Operating Statistics 36 Management's Discussion and Analysis 37 Statements of Consolidated income 42 Statements of Consolidated Retained Eamings 43 Consolidated Balance Sheets 44 Statements of Subsidiaries' Preferred Stock and Long Term Debt 46 Statements of Ct.uges in Consolidated Financial Position 48 Notes to Consolidawd Financial Statements 50 Auditors' 0 pinion 64 Officera and Directors 65 Shareholder Information 66 QUARTERI.Y li!Gil AND LOW STOCK PRICES ai $,c Nc. hk hd haange and Genp.ite Tate
!M NJh IF K el I p? (bf*f f o w.*.u'e- IM NT' . ;s.r.:t - -'
34 % N (bncr m. ~ 36 % 7lt" i mm -- lin trJ (bne --- _ 35 72<* . ,c .-~. - 11 4 4*h Quiet ie< >we- 14 4 7.'s * . m ,u~.v- 2pi 1% sab fra n hr Omter >> w }}4 tt < * ~,. 27 6
.'ad Qu4rtet - . .es .w .- 11 6
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29 4 IrJ Qturter aw-. }7 70<' a u-, 30v; 4:h (beter _ 3s . . nowwww. }6 $ 704 ' , w wuww. - 3lu hiciJ, Ja bred n r sh..re 1
F1VEJEAR COMPA RISON OF SEl.ECTED FINANCI AL DATA itawoninhexsineoy aa:d ard abmfancs The following table sets forth selected financial data with respect to the Company's consolidated fmancial cenition and consohdated results of operations and should be read in conjunctwo with the Consolidated Financial Statements and the related notes inc!uded elseuhere hereirt Year Ended Decembtr 31, (Ihouunds of Do!!ars, except per share amounts) 1987 1986 1985 1984 19S3 Revenues $3,62S,213 $3,535,968 $4,061,812 $4.181,575 $3.992,75S Net mcome 5 434,95S $ 424,935 5 434,126 $ 351,146 5 299,857 Earnings per(hare $ 3.74 $ 3 S1 $ 4.13 f 339 $ 3.50 Cash dividends declared per common share $ 2.86 $ 2.76 $ 2.60 $ 2 44 $ 2.28 Rcturn on average common eqmty 13.6 % 14.5 % 16.7'o 15.7 % 15.6 % Ratio of eamings to fned charger Induing AlUDC 2.S6 2.76 2,96 2.S7 3.01 Exdud:ng AFUDC 2.14 2.00 2.23 2 43 2.79 At Year End: Book value per common share $ 28.33 $ 27.19 5 25.8S $ 24.31 $ 2127 Market pnce per common share $ 30.00 $ 34.75 $ 28.00 $ 22 50 $ 19.3S Market pnce as a percent of book value 106 % 128% 108% 93 % 83" At Year End: Total assets $ 9,727,658 $9,027,817 $ 8,625,667 $7,525,977 $ 6.453,035 Ieng temi debt hndudmg current maturitieu $3,136,S52 $3,208.160 32,952,926 $ 2.653.119 $ 2.274.616 Capitalizatmn: Common stock equity 4S% 47" 46% 45 % 467 Cumu!ative preferred stock 6% 5% 6% 5 "< 5"e long term ddt (induding cunent matunties) 46 % 4S?. 48% 50% 49", Capital Expenditures: Construction ano nudear fuel e.xpenditures(exduing AFUDC) $ 662,054 5 755.273 $ 593.053 ! 997.982 5 913.S25 0:1 and gai add: ioni $ 41,455 $ 16.187 $ 224.150 $ 65.928 $ 65,S58 Cab!e television mvestment $ 58,336 $ 26,046 HL&P Selected Data: , Percent of construction e.xpen6tures
)
f manced intema'!y from operations
. 29 % 35 % 394 37", 42'.
Ratio of earnings to fned charges: Induding AFUDC 3.33 3.36 3.76 3 55 3.50 Exduding AlUDC 2.41 2.42 2 S4 2.99 3.22 AFUDC as a percent of net mcome 52 % 52^ 45% 31' 17', 1 i I l 6
OPERATING STAT 1STICS OF HL&P lbtonIndums becqxad and Satwliann Year Ended December 31, 1987 1986 1985 Operating Revenue (Ihousands of Dollars): Residential $ 1,078,934 $ 1,071,356 $ 1,244,002 Commercial 690,078 707 3S6 S31,277 ladustrial 993,610 1,024,459 1,353,162 Street lighting-govemment and municipal 17,786 16,683 16,888 : Other electric utilities 79,503 68,990 106,273 Total 2,859,911 2,888,874 3,551,602 , Miscellaneous elecuic revenues 140,921 70,866 (18,238) Total $ 3,000,832 $ 2,959,740 $ 3,533364 l Electdc Plant Investment (Thousands of Dollars): Gross additions $ 857,045 5 938,075 $ 950,241 Total plantinvestment $ 9,799,877 $ 8,993,8.54 $ 8,137,530 i Accumulated depreciation $ 1,530,543 $ 1,351,412 $ 1,203,039 I Percent of totalplantinvestment 15.6 % 15.0 % 14.8 % Generating Statistics: Steam electric stations economy-Btu per net KWH generated 10,457 10,434 10,331 Net generating capability (MW)- at time of maximum system load' 13,755 13,258 13,913 Matimum system load (MW)" 10,302 10,556 10,618 Electne plant in service per KW of maximum system load ($) 664 618 557 General Statistics: Kilowatt hour sales (000) 55,911,327 54,007,557 55,968,716 Number of customers 1,306,328 1303,205 1316,316 Average residential use (KWH) 12,812 12,675 12,961 Average residential revenue pt r KWH 7.34c 732c 830e Average residential fuel revenue per KWH 1,83e 2.17e 3 40e
' including purchased power and cogeneration capability of 1,295 MW, IJ95 MW and 1,595 MW in 1987,1986 and 19SS, respectively.
"Excludeg mterruptable demand. a
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Consolidated net income for 1987 was $435 milhon, up $10 millien frem 1986 and up $1 milhon from 19S5. Consobdated eamings per share decreased to $3.74 for the current year as compared to $3.S1 per share in 19S6, whde 1985 eaTungs wcre $4.13 per share. Houston Lighting & Power Company (HL&P), the Company's pnncipal operating subsidiary, contnbuted $3.51 to the 1987 consolidated eamings per share on inceme after preferred dividends of $409 mdhon. Utihty Fuels,Inc. (Utihty Fuels) contnbuted $ 21 per share on earmngs of $24.2 miluon while Pnmary Fuels,Inc. (Primary Fuels) reported income of $4.5 milhon or 5 04 per share.The Company's other subsidiaries posted a combined loss of $.10 per share. HL&P's 1987 mceme after preferred dividends fell $26 milhon from 19S6 and $47 million from the record eamings of 1985. Allowance for funJs used during construction (AFUDC) accounted for 52% of earnings in both 19S7 and 1986 compared to 45% in 1935. AFUDC is a non cash item of net income which represents the cost of funds used to fmance construction projects and is capitalized as part of the cost of the assets being constrated. Decreases in AFUDC in 19S7 wcre primanly related to a reduction in the net-of. tax AFUDC rate and the commencement of commercial operation of Unit No. 2 of the Limestone Electnc Generating Station (Limestone). Increases in AFUDC in 1986 resulted from increased levels of investment in construction without corresponding increases in the amount of construction included in rate base and earning a current cash retum. The dcchne in HL& P's 1987 incorr.e is attnbutable to increased expenses principally associated with Limestone, which expenses are not yet fully reflected in electric rates, partially offset by the reduction of the federal corporate income tax rate due to the Tax Reform Act of 1986. Earmngs w ere positively affected by base rate increases allowed by the City of Houston and the Pubhc Utihty Commis, ion of Texas (Utihty Commission)in July and December 19S6, respectively.
- o. , ,u.,.%, um m a . a a 4 .. , m% msr o .
KILOWATT HOUR SALES AVERAGE RESIDENTIAL REVENUE AVERAGE COST OF FUEL i.a s
- m.A, o ,c e.,it rt:
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Electric opeuting revenues increased 1% anG dedined 16% for the years 1987 and 1986, respectively. The increase in ie',enues m 19s7 is pnmanly due to higher base revenues from rate increves implemented in 1986. Kdowatt hour (KWil) ules acre up 3.5% dunng 1987 and down 3.S in 1986 he majonty of the increases was due to off system sales and sales f to mduttnal customers on an intermptible bais both of w h!ch provide minim.d omtnbution to base dectne revenues. 1 Rc4idenhal KWH n!es mereascJ by .5" . m 19S7 and dedmed 2.4% m 19s6. Commercial KWH sales dechned by 2.2% in l 1987 and .5% m 19S6. Industrial KWH sales, which account for approximately half of HIMs overall sales. w cre up 4.S1, and down 4 5% for 19S7 and 1986, respecavdy. Howeser, most of the mcrease was due to sales made on an mtenuptible basis as doenbs Llwe. Fud expenw increved 547 milhon m 19 s7 and dedmed $4Si mdhon m 1986. The merece in 1987 w as pnmanly due to mcrcred generanon, panially of fset by decreases m the pnce paid for fuel, The as erage cost of fuel used by HL& P dunng 1937 was $1.92 per mhn P,tu as compared wnh $197 for 1986 and $2.77 for 19s5.he combmt.d cost of fuel used by HI AP and the fuel portion of purduscJ power dunng 1967 w as 1.86 cents per KWH as compared wah 210 cents in 1986 and 3.02 cents m 19Si Panhased power expense deuened 10% in 1987 and 5% in 1986 due to dectenes in purchases of energy from cogeneraton Flectnc operating and mamtenance expemes m 1987 increased 9% or 552 mdhon wben compared to 1986 In 1980, operatmg and maintenance expemes decrea cd $3 3 milhon or 6% when compared to 198i The increase in 1987 was due pnnunly to increases m operahon and maintenance expenses related to Lunestone and m administrahve and general esptnses ne decrease m 1986 was pnmanly due to a redustion in transmission expenses, customer expenses and admnnstrahve and general expenses. In January 1987, teHowing the December 1956 commencement of commercul operation of Li nestone Umt No. 2, HL&P j fded a penhon with the Utihty Commmion requesting mtenm accountmg treatment to capitahze costs and to continue the l accrual of AFUDC anocuted with Und No. 2 f rom the time it was placed m commercial operation until rates reflecting the ! (ests of ech unit are placed in effect. E!eetric rates do not currently reflect approxunately $174 mdhon of the project's co t or l i any provisien for operat ng npensm, non-retonedable hgmte minmg and handhng costs, taxes or depreciation related to Unit L. 2. esarnated to be $5'l mdhon on an annual basis, in July 1987, a simdar request was made for the first umt of the Sout). j 1 i ENERGY MIX' nu. ura s > l ss et
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Texas project once it goes into commercial opration. He annualized effect of operating expenses, taxes, depreciation and I AR1DC related to Unit No.1 is estunated te be $230 rmllion based on HL&P's 30.8% interest ($290 mdhon based on a 3 46.8% interest), none of which is reflected in e!cetric rates. The Utdity C ommission has not rukd on either requet ' Nd rate f , relief is obtained which reflects Limestondnit No. 2 as plant in service or the requested accounting treatment or othe r 1 regulatory action is granted with respect to Limestone Umt No. 2, operiting resuhs of HL&P and the Company willin ; adversely affected. Upon the comencement of commercial operation of Unit No.1 of tne South Texas project, the operating resuhs of HL&P and the Company will be mm e severely impacted imtil simdar regulatcry rehef is granted with respect to , such umt. ! Utility Fuds' 1987 operatmg results sho A ed improvement over 1986, pnmanly as a result of increased sales of ligmte fuel for use at HL&P's Limestone Unit No. 2. Net income in 1987 was $24.2 mulion compared to $21.9 mdlion m 1986 and $12.2 ; nullion in 1985. Utihty Fuels' fuel supply contract with HL&P generally allows Utihty Fueh to recover its costs plus a fixed return on its net investment in facihties. M a result of the regulation of affiliated costs by the Utdity Commission, a portion of , Utihty Fueh' bilhngs are not recoverable through HL& P's electne rates, Primary Fueh posted income of $4.5 rmllion, rebounding from losses of $27.7 million in 19S6 and $35 mdhon in 1935. The oil and gas subsidiaryi operating resuhs have improved pnmanly due to increased natural gas production, higher od pnces and reduced depreciation, depletion und amortization expeme. Primary Fueh' natural gas production increased to 39,167 : MMCF this year from 31,162 MMCF in 1986 and 20,627 MMCF in 1985. De average price per barrel of oil sold by Pnmary Fuels was $15.74 in 1987 as compared to $13.61 and $25.44 in 1986 and 19S5, respectively. Primary Fuels' depreciation, ; 'y depletion and amortization expeuse for 1986 and 1985 reflected writedowns of $12.4 million and $23.6 millien, respectively, related to the impairment of certain oil and gas properties resulting from steep dechnes in od and gas pnces. Farnings for 1987 also include gains of $23 millbn associated with the purchase and subsequent sale of oil and gas properties and $2.7 mikon : i related to the final settlemem of various contracts KBLCOM incorporated (KBLCOM) experienced a net kns of $10.6 milhon in 1987, the first full year of operatic as for the ! t , Company's cable televmc n subsidiary, compared to a $6.5 milhon loss in 1986. Estabbshed in June 1986, KBLCOM holds a
~
] 50 percent .nterest in Paragon Communications (Paragon), a partncrship which operates cabic televtsion systems n .several j states KBLCOM's canangs outlook for the near future u dependent to a large degree on Paragon's success in achieving in- , l creased basic cable samration m custing markets and the acquisition of additional cable properties near those presently held. t In pnor years, the Company's operating results were adversely affected by the lag in recovery of increased costs through I ciectnc rates Joe r,rimanly to rela"vely high rates of m0ation The rate of innation, however, has moderated over the last several years, and the Company and its subsidiaries have not been sigmficantly impacted by the effects of in0ation. J l Liquidity and Capital Resources ! {' Ligmdity and camtal resources are affected primanly through capiul prwrams The cap:tal reqturements for 1987, and as i estimated for 1958 thmugh 1990, are as follow s; ;
- v. h !! Man ps; les 99 Pm
- h Coutr.itun an Ndor f e: unk; AllTC ' $M1 $65 $444 $M l GJ ! ner; fw .nc, ar.J kree rnn:rs and Fanda.a imM 17 57 46 N R W p up!wn and &,tk; ment ' 53 57 3
1 mNner.t .c cane t& mon pnt s tnf are ' % l 5 M #.h*) d Ir p h "I'dcht $} % 9 3 Ltd $U6 $ 8r,7 144 $ b5 he immrA J] not ti.de eveni:am on pn y a fm Wh HL& P eqvs ta be rnmNred by Motntn er (qcmam [hu aw anS ni do mt ! rede;t the &N e mLr by HI AP cf a add.wA in interesi m ec hih Teus prmt picuth cord by the Cn ti As.: n tar . de m!d
- man < 2e emnd oeta and ratear f ael npend.taa h IN3 mQn for the be-tM pnod,192 mumi of dd a rtb'cd in &
i re. riarcent of cosa r.urud by Amtm pnur ta 1%s nj the phee of heni nuJear feel 2 ! Pnnwy Fed ' egmhm fel a,J ps nptnen sAquert m F4 n Jqendert gen the rm.hf is bH eg':ntn of dotLpment pncam and futa Avg the e:1 anJ p mdanry i I T.e Amart hn r).ptrvr3 mstmerb h kPdCGM n Parart and 50erAl smarier panMShp Construction and nuclear fuel expenditures for the 195S.1990 penod pnncipa!!) represent e,timatcd costs of HL& P's I l l
- construction program and reflect the cost esttmah or f the South Texas project adepted in Det ember 1987 (a'suming a j commercal operation date for Unit No.1 of March 1,1985).De estimated expenditures fcr coat handhn; facihties and hgmte i minmg and handhng faahties are npected to be incurred by UtibPj Fuch in connection with HL&Pi bgmte projects These i
i tr _-- ~ __ _~ _
. - _. .- . ._ . . - - ~ ~ . - -- . . ... --
amounts reflect the modification of the scheduled in service dates for the two lignite units at the Malakoff Electric Generatmg Station as discussed in Note 11 to the Consolidated Financial Statements. HL&P expects to finance a portion of its construction program through funds generated internally from operations. The extent to which HL&P is able to fund its capital requirements from intemal funds is dependent, to a large degree, on regulatory practices which determine the amount and timing of recovery of investments in new plant facilities, depreaation rates, recovery of operating expenses and the opportunity to earn a reasonable rate of retum on itt 'nvested capital. It is presently -stimated triat during 1988,10% to 20% of HL&P's construction program can be fmanced through internally generated funds from operations. Intemally generated funds for subsequent years will be primanly dependent on the regulatory treatment d HL&P's investment in the South Texas project. The balance of HL&P's construction program is expected to be financed through external sources, primarily sales of long term debt, preferred stock and additional shares of ' - common stock to the Company, and, on an interim basis, the issuance of short term debt securities. See Note 5 to the j Consolidated Financial Statements for a discussion of short term financing. l In March 1987, HL&P issued $391 million aggregate principal amount of a new 9% series of first mortgage bonds due 2017 ) in exchange for a like principal amount of outstanding high coupon first mortgage bonds. An additional $140 million principal amount of high coupon first mortgage bonds was redeemed under the Replacement Fund provisions of HL&P's Mongage and Deed of Trust and was retired by the bo~nd trustee in May 1987. In February 1988, $48 million principal amuunt of HL&P's 13%% series first mortgage bonds due 1991 was redeemed at 100% of the principal amount plus accmed interest. These ; actions are part of a continuing program to reduce HL&P's long term debt costs.
- h. June 1987, HL&P sold 1,000,000 shares of $8.50 cumulative preferred stock which are subject to mandatory redemption. The mandatory redemption provision requires HL&P to redeem 200,000 shares annually beginning on June 1, 1993. HL&P received net proceeds of $99 ibillion from the sale.
During 198', HL&P received approximately $128 million from the prcceeds of previously issued pollution control revenue bonds and first mortgage bonds, which proceeds had been held in trust. Approximately $87 million (including interest earned on funds held in trust) was held in trust at December 31,1987 sSubstantially all the funds held in trust are expected to be drawn down by HL&P in 1988 and 1989 to fund qualifying constmetion expenditures. On November 1,1987, $40 million principal amount or HL&P's 4%% senes first mortga;;c bonds matured. In January 1988, HL&P iasued in a private placement
$400 million principal amount of 9n% first mortgage bonds which will mature in approximately equal principal amounts in each of the years 1991,1992, and 1993.
HL&P's capitalization ratios at December 31,1987 cortisted of 45% long term debt,7% preferred stock and 48% common t quity, with similar ratios expected to be maintained in the future, assuming HL&P is able to obtain rate relief at levels comparable to those obtained in the past. Utility Fuels and Primary Fuels expect to fund a substantial part of their capital requirements through internally generated funds. Extemal funding will be met by advances from the Company. KBLCUM's future capital requirements will be primanly dependent upon the acquisition of additional cable television systems by KBLCOM or Paragon. Any such requirements will be met through advances or capital contributions by the l Company. In .'une 1987, KBLCOM contnbuted approximate!y $42 million to Paragon in coanection with the pennanent i financing for Pragon and the acquisition of additional cable television systems in 1987. KBLCOM also invested $11 million in other partnerships which hold certain cable television systems and other assets fonnerly owned by Group W Cable, Inc. pending dispositien of such systems and assets. Houston Industries Finance, Inc. (Houston Industries Finance) began purchasing HL&P's customer accounts receivable in hnuary 1987. De use of leverage and short term borrowings by Houston Industries Finance allows the receivab!cs to be
. financed at a lower cost than would traditionally be incurred by HL&P.ne financing requirements of the new subsidiary are met through short term ba A loans and tne issuance of commercial paper. Houston Industnes Fmance hm entered into a bank revolvirg credit facility which provides for borrowings of up to $300 million aggregate principal amount. %is facihty is !
available to make d: rect borrowings or to support the issuance of commercial paper. i The Tex Reform Act of 1986 (the Tax Act) includes a number of provisions that have adversely affected the Company's , operating subsidiaries. particularly HL&P. Although the Tax Act reduced corporate income tax rates,it eliminated investment ! tax credits effective January 1,1986 (except with respect to certain transitica properties,induding the South Texas project), I eliminated current deductions for interest and property taxes during construction and made substautial changes to the l l 6 4e
. -- -- - - . . - , . - - ._ - .. - . - , .~, ., -- - , . - --
calculation of the attemative minimum tax.This latter provision effectively provides for the inclusion of up to one half of the amount of AFUDC, a non-cash item of financial reporting income, as taxable income in determining the attemative mio mm tax. he and other provisions of the Tax Act are expected to reduce the amount of cash flow generated from operations and therefore increase the Company's reliance on extemal sources of funds. Changesin Accounting Standards In December 1986, the Financial Accounting Standards Board (FASB) issued Statement of Financial Acwunting Standards (SFAS) No. 90, "Regulated Enterprises. Accounting for Abandonments and Disallowances of Plant Costs," which becomes effective for fiscal years beginning af ter December 15,1987. SFAS No. 90 requires the future revenue that is expected to result from the regulator's inclusion of the cost of an abandoned plant in allowable costs for ratemaking purposes to be reported at its present value when the abandonment becomes probiale. If the carrying amount of the abandoned plant exceeds that present value, a loss would be recognized. In addition, SFAS No. 90 requires any costs'of a recently completed plant which are disallowed to be recognized as a loss when such a disallowance becomes probable and the amount of the disallownce is reasonably estimable. If part of the cost is disallowed indirectly (such as a disallowance of retum on investment on a portion of the plant), an equivalent amount of cost shall be deducted from the reported cost of the plant and recognized as a loss. Finally, SFAS No. 90 specifies that AFUDC should be capitalized only if its subsequent inclusion in allowable costs for ratemaking purposes is probable. See Note 10 to the Consolidated Financial Statements for a discussion of the prudence review of the South Texas project by the Utility Commission. HL&P recorded a partial loss or abandonment of the Allens Creek Nuclear Project (Allens Creek)in 1982, and is currently amortizmg the recoverable amount over a ten year period. HL&P believes that the application of SFAS No. 90 to Allens Creek would no, matenally affect the results of operations. See Notes 8 and 12 to the Consolidated Financial Statements for discussions of Allens Creek. In August 1987, the FASB issued SFAS No. 92, "Regulated Enterprises- Accounting for Phase in Plans." SFAS No. 92 requires allowable costs deferred for future recovery under a phase in plan related to plants completed before January 1, 1988, and plants on w hich substantial construction has been perfonned before January 1,1988, to be capitalized as a deferred charge if eah of four cnteria is met. nose criteria are (a) the plan has been agreed to by the regulator,(b) the plan specifies when recovery will occur,(c) all allowable costs deferred under the plan are scheduled for recovery within ten years of the date w hen deferrals begin, and (d) the percentage increase in rates scheduled for each future year under the plan is i.ot greaur than the percentage increase in rates scheduled for each immediately preceding year. SFAS No. 92 does not permit the equity ponion of AFUDC to be capitalized other than during construction or as part of a qualified phase-in plan. ne provisions of SFAS No. 92 must be adopted for fiscal years begmning after December 15,1987. See Note 10 to the Consolidated Financial Statements for a discussion of the effect of SFAS No. 92 on HL&P's deferred accounting request for Unit No.1 of the South Texas project. In December 1937, the FASB issued SFAS No. 96, " Accounting for Income Taxes," which becomes effective for fiscal years beginning after December 15,19S8. SFAS No. 96 requires, among other things, the liability method of recognition for all temporary d:fferences, requires that deferrea tax liabilities and assets be adjusted for an enacted change in tax laws or rates and prohibits net of tax accounting and reporting. Certain provisions of SFAS No. 96 provide that regulated enterpriscs are penmtted to recognize such adjustments as regulatory assets or liaoilities if it is probable that such amounts will be recovered f rom or retumed to customers in future rates. Re Company is currently evaluating the effects of SFAS No. 96 but does not expect the new pronouncement to have a material effect on the Company's fmancial position or results of operations. ne Company presently anticipates adopting SFAS No. 96 in 1989. 1 1 4!
STATEMENTS OFCONSOLIDATED INCOME ibeton inJwtne Incoqurated and Shimin l l
, Year Ended December 31, (thousands of Dollars) 1987 1986 1985 l
Revenues: Electne $3,000,832 $2,959,740 $3,533,364 Fuel sales 513,394 470,852 418,063 Od andyas ._ _ 113,987 105,376 110,385 Total 3,628,213 3.535,968 4,061,812 Expenses: Electnc: Fuel 981,922 935,169 1,420,262 Purdused power 379,497 421,893 442,802 Operation and maintenance 613,355 561,406 594,576 Taxes other than federalincome taxes 151,667 146,791 140,185 Cost of fuct sold 430,754 392,777 372,274 Od and gas operating expenses 47,703 53,440 79,833 Depreciation, depletion and amortization 285,847 297,911 267,004 Total 2,890,745 2,509,387 3,316,936 Operating Income 737,468 726,581 744,876 Other income (Expense): Allow ance for other funds used dunng constructmn 143,584 170,348 154,246 Other-nct 10,199 (9,002) 5,193 Total 153,7S3 161,346 159,439 Fixed Charges: Interest on longtenn debt 270,938 287,506 259,363 Other interest 44,747 42,137 48,608 Allowance for borrow ed funds used during construction (109,160) (109,369) (104,573) Preferred dnidends of subsidiary 31,406 26,817 26,602
'lotal 237,951 247,091 230,000 Income Before FederalIncome Taxes 653,300 640,836 674,315 FederalIncome Taxes 218,342 215,901 240,189 Net income $ 434,958 $ 424,935 5 434,126 Eamings Per Common Share S 3.74 $ 3.81 5 4.13 Weighted Average Common Shares Outstandin 1000) 116,322 111,593 105,014 See Notes to Consohdated Financial Statements.
n
+
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS Ikruston Induuries Incoqueted and Subid;ar;cs Year Ended December 31, (1hausands of Dollars) 1987 1986 1985 13alance at Beginning of Year $1,223,409 $1,106.221 $ 945,227 Add-Nej income _ 434,958 424,935 434,126 Total 1.658,367 1,531,156 1,379,353' Deduct-Common Stock Dividends: 1987, $2.S6; 1986, $2.76; 19S5, $2.60 (per share) 332,458 307,747 . 273,132 Italance at End of Year $1,325,909 51.223,409 $1,106,221 See Notes to Consolidated Financial Statements. l l f 4h i
CONSOLIDATED llAl.ANCE SilEETS Rwon Indonnes inoved and Suhadants Decemher 31, (Thousands pf Dollars) _ _ _ 1987 1986 Assets Property, Plant and Equipment-At Cost:
' Electric plant:
Production $ 3,S94,100 $3,747,442 hansmission 640,423 601,084
' Distnbution 1,845.618 1,747,216 Generaf 456,232 431,048 Consta. tion work in progress 2,648,682 2,170,700 Nudear fuel 131,323 126,190 lleht ner future use 180,333 167,008 .
3,166 3,166 + Electne plant acquisition adjustments Coal handhug equipment and mining property 542,549 527,508 Oil anu gas property 458,947 430,668 Other propedy , 13,217 7,931 Total 10,814,590 9,959,961 1.ess accumulated depreciahon. depletion and amortiratmn _ _ 1,868,791 1,627,621, Property, plant and equipment- net 8,945,799 8,332,340 Current Assets: Cash and temporary mvestments 1,058 13,512 1 Working funds and special deposits 569 34,858 l Accounts receivable:
)
Customers 124,3B 110,741 Othen 65,S91 64,611 Fuel stock, at hfo cost: I Od and gas 18,698 16,583 I Coal and hgrate 49,478 41,286 Materia!s and supplies, at average cost 108.046 S7,959 other 14,068 17,588 Ltal current a(sets 382.141 387,168 Other Assets: Cable television investment 70,4H 16,036 Recoverable cancelled project costs 36,129 43,382 Unamortized debt expense and premium on reacqmred debt 69,348 49.342 Deft ned deluts 223,848 199,549 Tetal other assets 399,748 308,309 Total $ 9,727,688 19,027,817 Sec Notes to Consohdated linanval 5tateme nt; o
I CONS 01,lDATED BALANCE SHEETS nwon Indw,tne, Inwrtwated and Sdmdann 1 l l December 31,
. ~ . _ _ - -- - . - - - . - . . . - . . -.. - . -- ..
(lhousands of Dollars) 1987 1986 Capitalization andiiabiities Capitalizatio1: Common Stock Equity: Common stock, no par; authonzed 200,000,000 shares; outstanding 117,660,632 shares at December 31,1987 and 114,124,015 shares at December 31,1986 52,007,466 $1.879,218 Retained eamings _ _ _ _ _ _ _ _ _ __ 1,325,909i _ 1,223,409 Total common stock equity _ , 3,333,375__ 3,102h27 Preference Stock, no par; authorized 10,000,000 shares; none outstandmg Cumulative Preferred Stock of Subsidiary: (statements on following page) Not subject to mandatory redemption 341,319 341,319 Subject to mandatory redemption _ 99,055 Total cumulative prefe:.ed stock 440,374 341,319 Long Term Debt: Debentures. 9)'W, senes due 1996 199,234 199.139 1.ong-term debt of subsidiariespatements on followmg page) 2,879,915 2,956 254 Totallong term debt 3,079,149 3,155,393 Total capitaliza!!on 6,852,898 6,599,339 Current Liabilities: Notes payable 725.820 220,292 Acccunts payable 264.256 276,166 Tav, acerued 87,138 108.S93 Interest accnJed 74,S70 75,493 Accrued liabilities to municipalities 70,6S5 72,263 Current portion of long-term debt 57,703 52,767 Fuel cost over recovery 94,309 Other 49,696 57,349 Total current liabilities 1.330,16S 957,537 Deferred Credits: Accumulated deferred federal income taxes 902,153 811.096 Unamortized investment tax credit 557.674 561.376 Other 84,795 98,469 Total deferred credits 1.544,622 L470.941 Commitments and Contingencies Total $9,727,688 $9.027,817 See Noses to Consolidated Financhl Statements. 45 [. I
STATEMENTS OF SUBSIDIARIES' PREFERRED STOCK AND LONG. TERM DEDT Ifousma InJamin bamwated anhtmduno 1 Dece:nber 31, (thousands of Dollars) 1987 19S6 Cumulative Preferred Stock, no par; authorized 10,000,000 shares; l outstandmg 4,447,397 shares at December 31,1987 and 3,447,397 > hares at December 31,1986 (entitled upon involuntary liquidation to $100 per share) llouston Lighting & Power Company: 1 Not subject to mandatory redemption: )
$4,00 series, 97,397 shares $ 9,740 $ 9,740
$6,72 series,750,000 shares 25,115 25,115
$7.52 series,500,000 shares 50,225 50,225
$9.5 ? senes,400,000 shares 39,372 39,372
$9.03 series,400,000 shares 39,395 39.395
$S.12 senes,500,000 shares 50,09s 50,1198
$9.04 series,300,000 shares 29,573 29,573 !
" A" series, 500,000 shares 4S,809 48,809 I T series,500,000 shares 4S,992 48,992 Total 341,319 341,319 Subiat to mandatory redemotion:
$8 50 sen. *,1,000,000 shares 99,055
, j Total cumulative prefened stock $ 440,374 $ 341,319 l i
Long Term Debt: l Houston lighting & Paer Cornpany: 1 First mortgage bonds. 4ci senes, due 1987 l
$ 40,000 l 3% senes, due 1989 $ 30,000 30,000 4% series, duc 1989 2:1,000 25,000 l 13'.',% series, due 1991 48,473 65,301 15%% series, duc 1992 52,662 68,712 4n senes, due 1992 25,000 25,000 in% series, due 1996 40,000 40,000 54% 3eries, due 1997 40,000 40,000 te, senes, due 1997 35,000 35,000 6e series, due 1998 35,000 35,000 7h% series, due 1999 30,000 30,000 7% senes, due 2001 50,000 50,000 70% series, due 2001 50,000 50,000 Se series, due 2004 100,000 100,000 10A series,due 2004 35,407 100,000 W4% series, due 2005 125,000 125,000 8 %' 0 series, duc 2006 125,000 125,000 8G senes,due 2007 125,000 125,000 8 S% !eries, due 2008 125,000 125,000 9n% series, duc 200S 100,000 100f)00 u.
STATEMENTS OF SUBSIDIARIES' PREFERRED STOCK AND LONG TERM DEBT lleuston industnes luogwad and Subudianes (Cor.unued) _. _ _ . ~ ._ __ ~___. _. _. _ . _ _ _ ,_ Jeqmber 31, 1987 1986 (Thouunds of Dollars)_ - - - 11WN senes, duc 2009 $ 125,000 12% series,duc 2010 100,000 124% series, due 2013 7,944 11%% series, due 2015 200,000 9% series, due 2017 $ 390,519 7%% po!!ution control series, due 2016 68,000 68,000 7%% pollution controlseries,due 2018 50,000 50,000 Funds on deposit with Trustee (12,612) (39,112) Total first mortgage bonds __ _ _ _. 1p2,449_ , _ , 1,845,845 Pollution control revenue bonds: Gulf Coast 1978 senes,9F%, due 1998 19.200 19,200 Gulf Coast 1930-T senes, Floating Rate, due 199S 5,000 5,000 Brazos River 1983 senes,104%, due 2003 25,000 25,000 Gulf Coast 1974 scries,7%%, duc 2004 18,000 18,000 Brazos River 1985 A2 series,9%%,due 2005 10,000 10.000 Gulf Coast 1982 series,9%%, due 2012 12,100 i2,100 Brazos River 19S2 series. 9%%, due 2012 42,800 42,800 Brazes River 1983 series,10%%, due 2013 75,000 75,000 Brazos River 1985 Al series,9'4%,due 2015 100,000 100,000 Brazos River 1985 B series, Hoating Rate, dac 2015 90,000 90,000 Matagorda County 1985 senes,10%, due 2015 115,000 115,000 Brazos River 1984 F senes, Floating Rate, due 2016 68,700 68,700 Brazos River 1984 A E series, Floating Rate, due 2019 400,000 400,000 Matago da County 1984 A C series, Hoating Rate, due 2019 250,000 250,000 Funds on deposit with Trustee (74,126) (167,110) Total pollution control revenue bonds _ 1,156,674 1,063,690 Unamortized premium or (discount)-net _ _ (4,427) (5,611) Capitalized lease obligations, average discount rate 13.8% 1,181 4.333 Total 2,845,877 2,908,277 l Utinty Fuels,Inc.: 9% secured notes, duc 1988 3,800 11,000 Wriab!e rate notes. duc 1988 50,000 50,000 Other 7,472 6,968 Capitahzed lease obhgations, average discount rate 7 3/4% 30,469 32,776 l lbtal _ 91,741 100,744 Total 2,937,618 3,009,021 ! Ixt current maturines _ _ 57,703 52,767 Totallong-tenu debt of subsidiaries _ $2,879,915 $2,956,254 4 1 Lee Notes to Consolidated Financial Statements. o
STATEMENTS OF CH ANGES IN CONSOLIDATED FINANCI AL POSITION llauen inw s Iumani an.1 suNJuna Year Ended December 31, flhousands of Dollars) _ 1987 1986 1985 Sources of Funds: Operations: Net income $ 434,958 $424,935 $ 434,126 Items not requiring current outlay of working capital: Depreciation, depletion and amortization 296,068 309,428 264,487 lesses from equityinvestments 11,039 10,213 Deferred federalincome taxes-net 123,505 161,561 133,868 Ins estment tax credit defe red-net (3,472) 24,470 53,285 AUowance for funds used during construction , (252,744) (279,717) (258,819) Total 609,354 650,890 626,947 Common stock dividends (332,458) (307,747) (273,132) Reinvested funds from opcrations 276,896 343,143 353,815 Financmg: Sale of common stotk 128,248 176,847 229,215 Sale of preferred stock 99,125 49,021 Sale of first mortgage bonds 200,000 Proceeds from pollution control revenue bonds and first mortgage bonds held in trust 127,874 238,503 275.25S Fint mongage bonds issued in exchange off er 390,519 Sale of debentures and other debt 200.000 8,027 Change in notes payaHe and temporary cash investments 518,428 95,220 (71,004) Total financing 1,264,194 710,570 690,517 Other: Decrease (mcrease) in working capital (exclusive of notes payaHe and temporary cash investments) (140,770) (89.573) 118,184 Reclassification to current nutunty of long term debt (37,703) (52,767) (44,193) Proceeds fmm settkment of litigation 177,439 Other-net (50,324) 4,957 (64,340) Totalotb:r (248,797) (137,383) 187,090 Totat $ 1,292,293 $916,330 $ 1.231,422 Application of Funds: Construction and nuclear fuel expenditures (net of allowance for f unds used dunng construction; $ 662,054 $755 273 $ 893,053 Oil and gas additions 41,48S 16,187 224,150 Cable tdevison investment 38,336 26.046 Re.nquired long term debt 530,415 118.824 114,219 ihtal $ 1,292,293 $916 330 $1.231,422
c STATEMEN'l 50F CHANGES IN CONSOLIDATED FIN ANCI AL POSITION Ikvan loacnes txemeratahna sulmduna (coconued) P ded Dxember 31. - (Thousands of Dollars) 1987 1986 1985 Changes in Comnonents of Working Capital (exclusive of notes payaNe and temporary cash investments) Increase (decrease) in current assets: Cash 5 446 ? (11,460) $ 702 Accoents receis ab!c 14,872 (16,279) (14,933) Inventory 30,364 20,281 (41,992) Other (37,809) 32,205 6,375 Total 7,873 24,747 (49,848) Increase (decrease) m current iiabilities: Accounts payable (11,910) 5,595 (34,057) Taxes and interest accrued (22,381) (8,555) 26,849 Current ponion oflong :crm debt 4,936 8,574 (34,500) Fuel cost over recos ery (94,309) (62,290) 95,831 Other (9,231)--. . (8,150) 14,213 Tojal . _ _ - (132,897). __ (64,826) 68,336 Increase (Decrease)in Working Capital (exclusive of not s
. payable and temporary cash investments) 5 140,770 S 89,573 $ (118,184) l I
See Notes to Consolidated Finanaal Statements. l l l l l l 4>
l NOTES TO CONSOLIDATED FINANCI AL STATEMENT S . limen Indmtnn incoquad wJ SuNJunes 1 for the Tinte Yan frded liecemtvr 3t,1W 1, Summary of Systemof Accounts l Significant The accounting records of flouston Lightmg & Power Company (IllaP), the Company's principal , Accounting subsidiary, are mamtamed in accordan< with the Federal Energy Hegulatory Commission's Umform Policies System of Accounts which has been adopted by the Public Utility Commission of Texas (Utihty Commission). Principles of Consolidation The consohdated financial statements include the accounts of the Company and its wholly owned ) subsidiaries, llL&P, Priney Fuels, Inc. (Primary Fudr.), Utdity Fueh, Inc. (Utility Fuels), innovative Controls, Inc., KBLCOM bcorporated (KBLCOM), liouston Industries Finance,Inc. (llouston Industries Finance) and Development Ventures,Inc. Fuel sales and related cost of fuel sold generally represent Utihty Fuds' coal and lignite sales to llL&P and are not elitninated because of the distinction for regulatory purposes between utility and non.utihty operations For this same reason, the purchases of accounts receivable from Hl1P by Houston Industnes 1 Finance a so are not ehmina'ed. All other significat intercompany transactions and balances are l ehminat d m consolidation. nvestments in affiliates in which the Company has a 20% to 50% interest are recorded using the eqmty method of accounting. The Company adopted Statement of Financial Accoutung Standards (SFAS) No. 94, "Consolidation of All Majonty-Owned Subddiaries," in the fourth quarter at .'987. As a result, the accounts of Ilouston Industries Finance, a wholly owned fmance subsidiary, are inUided in the Company's consohdated i financial statements for the first time. During the first three quamrs of 1987,Ilouston Industries Finance I was presented as an unconsohdated subsidiary accounted for unde 'he equity method. Plant I Addnions to electric phnt, betterments to existing property and replacemats of units of property are I capitahzed at cost. Cost includes the original cost of contracted services, dirct labor and material, indirect charges for engineenng supervmon and similar overhead items and arollowance for fund' used dunng wnstration (AFUDC). Customer advances for construction reduce additiens to electric plant. l Maintenance of property and replacements and renewals of items determined to b4 less than units of property are charged to expense. The actual or average book cost of units of property replaced or renewed is removed from plant and such cost, plus removal cost less salvage,is charged to accumulated depreciation. ' The Company computes depreciation for its non od and gas properties using the straightdine method. j lhe depreciation provision as a percentage of the depreciable cost of plant was 16% for 1987,3.7% for 1986, and 3.8% fnr 1985. Oil and Gas Property 1he Compny follows the successful efforts method of accounting for costs incurred in the exploration and development of oil and gas reserves. Lease acquisition costs are initially capitalized and are periodically assessed for impainnent of value, and a loss is recognized when appropriate. Intangible development costs applicable to productive wcth and to development dry holes and tan;;ible equipment costs related to the development of oil and gas reserves are capitalized. Exploratory costi,induding geological costs, costs of dry hole exploratory wc!!s and lease rentals, are expensed as incurred. Pmducing od and gas leases are depleted on the unit-of-production method over the estimated proved reserves of the held. Related tanable and mtangible costs are depreciated or amormed on the unit of-pnxluction method over the eniniated proved developed reserves Ihe Company recognizes impairment of its producing properties when the net capitahted costs exceed the estimated realizable value detennined on a ficid-by field basis, w
m Allowance for Funds 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. AFUDC was computed using a gross rate of 10.75% beginning in 1987 due to changes caused by the Tax Reform Act of 1986, which generally chminates a current tax deduction for interest dtmng construction. 'Ihis gross rate is apphcable to all property except certain transition property, principally the South Texas Project Electric Generating Station (South Texas project), on w hich interest will be pennitted as a current deduciion.The net of tax accrual rate was 9% during I 1987, and such rate was 10% during 1986 and 1985. Revenues-Electric Revenues are recognized from the sale of electricity as bills are rendered to customers. He Utility Commission provides for the recovary of fuel and the energy portion of purchased power costs through an energy component of base electric rates. The energy component is established dunng a utility's general rate proceeding and is effective for a minimum of twelve months. De rules provide for a reconciliation of fuel revenues, with any over- or under recovery c: fuel costs to be considered in establishing future fuel cost recoveries. In February 1986, the Utility Commission adopted a rule that requires a monthly reduction of the fuel factor if the Utility Commission detennines that a utility has materially over recovered, or projects that it will over-recover allowable fuel costs under its existing fuel factor. He rule also provides for any fuel cost savings to be refunded as a one time credit to customers' bills. FederalIncome Taxes The Company follows a policy of comprehensive interperiod income tax allocation. The Tax Reform Act of 1986 eliminated investment tax credits effective January 1,1986, except with respect to certain transition properties, principally the South Texas project. Investment tax credits are deferred and amortized over the estimated lives of the related property. Eamings Per Common Share Earnings per common share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods.
- 2. Common Stock Common stock issued during 1987,19S6 and 1985 amounted to 3,536,617 shares,5,598,652 shares and 9,063,738 shares, respectively.
- 3. Preferred Stock HL&P's preferred stock may be redeemed at the following per share prices, plus any unpaid accnted dnidends to the date of redemption:
Not subject to mandatory redemption:
$4.00 Series: $10iOO.
$6.72 Senes: $102.51.
$7.52 Series: $102.35.
$9.52 Series: through September 30,1994 $105 00; thereafter-$103.00 to $101.00.
$9.08 Series: through March 31,1991-$103.00; thercafter-$101.00.
$8.12 Series: through November 30,1992-$104.25; thereafter-$102.25.
$9.04 Series: through January 31,1989-$105.00; thereafter-$103.00 to $101.00.
Adjustable Rate Series " A": through March 31,19S9-not redeemab!c; thereafter-$103.00 to
$100.00. The dividend rate on this senes, as of January 1,1988, is 7.75%. The rate is adjusted quanerly, based on the yield on U.S. Treasury secuntics.
Adjustable Rate Series T: through September 30,1990-not redeemable; thereafter-$ 103.00 to
$100.00. The dividend rate on this senes, as of January 1,198S,is 7.50%. De rate is adjusted quarterly, based on the yield on U.S. Treasury secunties.
Subject to mandatory redemption:
$8.50 Series: through May 31,1992-5108.50; thereafter- $104.25 to $100.00; pro ided that the
$8.50 Series may not be redeemed, directly or indirectly, prior to June 1,1992 from the proceeds of any refunding through the incurrence of debt or through the issuance of preferred stock ranking equally with si
\
or prior to the $8.50 Series as to dividends or liquidation, where such debt has an effective interest cost, or such preferred stock has an effective dividend cost, of less than 8.50% per annum. De mandatory redemption provision requires lillP to redeem 200,000 shares annually beginning June 1,1993.
- 4. Long Tenn At December 31,1987, sinking or improvement fund requirements of 1111P's first mortgage bonds Debt outstanding will be approximately $36 million for each of the years 1988 thmugh 1992. Of such requirements, approximately $17 million for each of the years 1988 through 1992 may be satisfied by cenification of property additions at 100% of the requirements, and the remainder through certification of such property additions at 166%% of the requirernents. Sinking or improvement fund requirements for 1987 and prior years have 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 utihty property equal to $1,450,000 plus 2H% 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 replace-ments, or by taking credit for property additions at 100% of the requirements. At the option of lilAP, but only with respect to first mortgage bonds of a series subject to special redemption, deposited cash may be used to redeem first mortgage bonds of such senes at the apphcable special redemption price. Consolidated annual maturities of long.tenn debt and minimum capital Icase payments are approxi-mately $58 million in 1988, $58 million m 1989, $3 million in 1990, $52 milhon in 1991 and $81 million in 1992. See also Note 16. The issuable amount of HL&P's first mortgage bonds is unlimited as to authorization, but limited by property, camings, and other provisions of the Mortgage and Deed of Trust and the supplemental indentures thereto. Substantially all properties of Hl4P are subject to liens securing its long term debt.
- 5. Short Term ne interim financing requirements of the Company's operating subsidianes are met through short term Financing 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 $1.350 billion and $1.050 billion at December 31, 1987 and 1986, respectively, which hmit its total short tenn borrowings and provide for interest at rates generally less than the prime rate. Bank loans and commercial paper outstanding were $6,000,000 and
$718,609,000, respectivdy, at December 31,1987 and $50,000,000 and $169,011,000, respectively, at December 31,1986. Commitment fees are required on the undrawn portion of the lines.
- 6. Retirement in 1986, the Company adopted SFAS No. 87, "Employers' Accounting for Pensions," for its retirement Plan plan, retroactive to January 1,1986. Pension costs for 1987 and 1986, and related disclosures as of December 31,1987 and 1986, are determined under the provisions of SFAS No. 87, Pension costs for the plan in 1985 are det;rmined under the provisions of previous accounting principles.
The Company has a noncontnbutory retirement plan covenng substantially all employees. The plan provides retirement benefits based en years of service and the employee's highest 36 consecutive months' base compensation during the last 120 months of employment. nc policy of the Company is to fund all net pension costs, bet past senice costs only to the extent that the excess of plan aucts over accrued benefits does not meet the Company's funding obligations for past service costs. In 1987 and 1986, however, as a result of the change in federal income tax rates and ilL&P's early retirement 1 program, discussed be! w, the Company funded the maximum amount deductible for federalincome tax l purposes. Plan assets consist principally of common stocks and investments in short tenn, high quality, interest bearing obligations. In January 1987, HL&P offered employees (excludmg officers) who were 55 years of age and had 15 years of service as of February 28,1987 an incentive program to retire early. For employees clecting early retirement, the program would add three years of service credit and three years in age up to 35 years of senice and age 65. respectively,in determining an employee's pension. Each participating employee would also receive a supplemental benefit io age 62 (for a minimum of two years). The early
]
retirement incentive was accepted by 430 employees. ; Pension benehts are being paid out of the Company's retirement plan assets and the supplemental ) benefits are being paid by liL&P. Upon the adoption of the early retirement plan, the projected beneht obligatons pertammg to the Company's retirement plan and supplemental benefits were increased by 1 1 l U l l t ;
$17.5 million and $7.2 million, respectively. HL&P has deferred the costs associated with the increases in these projected benefit obligations and will request recovery through electnc rates in its next rate proceeding before regulatory authorities. At December 31,1987, HL&P's obligation related to the supplemental benefits was $5.8 million.
Net pension cost includes the following components:, Year Ended December 31, 1987 1986-(Thousands of Dollars).. Service cost-benefits carned during the period $ 13,536 $ 11,254
- nterest cost on projected benefit obligation 23,096 18,202 Return on p!an assets-actual (10,359) (26,666)
-deferred gain Ooss) (10,257) 9,128 Amortization of transitional asset and prior service cost .
_ _ _ (1,474) ,_,(1,924) Net pension cost $ 14,542 $ 9,994 Re funded status of the retirement plan was as followsg __ _ _ _ _ __ _ ___ December 31, (Thousands of Dollars) 1987 1986 Actuarial present value of: Vested benefit obligation $182,097 $140,468 Accumulated benefit obligation _ $210,849 $169,494 Plan assets at market value $254,211 $237,702 Projected benefit obligation 279,860 237,643 Assets in excess of Cess than) projected benefit obhgation (25,649) 59 Unrecognized transitional asset at January 1,1986 (28,779) (30,703) Unrecognized prior senice cost 6,220 Umecognized net loss 16,174 11,598 Accrued pension cost at December 31 _._ _ _ _ $ (32,034) $ (19,046) The projected benefit obligation was determined using an assumed discount rate of 9%% in 1987 and 8%% in 986 and an assumed long term tw of compensation increase of 6%% in both years.nc assumed long-term rate of retum on plan arets is 9%. The transitional asset at January 1,19S6 is being recognized over approximately 17 years, and the prior senice cost is being recognized over approxi-mately 15 years. The total pension cost of the Company's retirement plan for 1985 was $14,649,000. l
- 7. Commitments Significant commitments have been incurred in connection with HL&P's construction program and for and Contingencies nuclear fuel purchases. The construction program (exclusive of AFUDC)is presently estimated to cost j
$477 million in 1988, $431 million in 1989 and $349 million in 1990. These amounts do not include expenditures on projects for which HL&P expects to be reimbursed by customers or cogenerators and also do not reflect the possib!e acquisition by HL&P of an additional 16% interest in the South Texas project. See Note 10 for di3cussions of such possible acquisition and the revised budget and schedule for l the South Texas project. An additional $50 million is expected to be spent during such period for uranium !
concentrate and nuclear fuel processing senices for HL&P's portion of the South Texas project. i Commitments in connection with HL&P's constmction program, principally for generating plants and related facilities, are generally revocable by HL&P subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties. In addition, during the 19881990 period, Utility l Fuels expects to spend $127 rnillion for coal and lignite supply related equipment, of which $57 million is expected to be spent in 1988, $46 million m 1989, and $24 million in 1990. Primary fuels expects to spend appmximately $57 million on od and gas exploration and development during 1988. si
1
- 8. Pending Appeal of 1982 Rate Order. I Litigation On December 16,1987, the Texas Supreme Court rendered its decision on an Apphcation for Writ of Error filed by the Utility Commission in connection with a December 1982 rate order by the Utihty Commission (Docket No. 4540). In the rate order, the Utility Commission disallowed the recovery by HL&P of approximately $16ti million of costs incurred in comlection with its cancelled Allens Creek nuclear project, and ordered that any tax savings associated with the disallowed portion be passed through to customers. Whde the Utihty Commission purported to permit $195 million of expenditures for the project to be recovered over a ten-year period, the flow tinough of tax savings on the disallowed portion reduced the recovery to approximately $84 million. That decision was appealed by HL&P to the i 201st Judicial District Court in Travis County, Texas which ruled, in December 1984, that the Utility Commission was without legal authority in imposing uch punitive measures. The District Court ruled ,
that, since the Utdity Commission had found that the shareholders, and not ti.e ratepayers, should bear j the disallowed Allens Creek expenditures, the 3hareholdera should receive any and all tax benefits associated with those expenditures. The rate order had also reduced a recommended return on common equity from 16.85% to 1635% as "a penalty for poor management," based principally on findings that ; HL&P had been imorudent in the handling of its nuclear construction projects. The District Court ruled 1 that the Utility Commission had no statutory authority for such a penahy, and that the Utihty Com-mission's imdings regardmg HL&P's management of the South Texas project were ' premature and ! presumptuous" in view of the then pending htigation on such i sues against the former architect-
)
engineer. The District Court aho ruled that the 1982 rate order had erroneously and prematurely ; attempted to exclude from Hl4P's cost of service any of its expcases in connection with the litigation, I as well as any amounts which may ultunately be assessed against HL&P in such htigation. Based on such rulings, tne Distne'. Court remanded the case to the Utihty Commission for further proceedings consistent I with the final judgment. The Utility Commission appealed the District Court's decisien to the Court of I Appeak for the 'lhird Supreme Judicial District of Texas, which essentially upheld the District Court in an ; opinion issued Apnl 9,1986 (which was modified and reissued on July 2,1986). The Texas Supreme Court granted the Utd:ty Commissmn application for Writ of Error to consider certain points of error raised by the Utihty Commission, as well as certain other points raised by HL&P. Ahhough the Texas Supreme Court affinned certain aspects of the lower courts' decisions, including a nding to the effect that the Utihty Commission had no statutory authority to impose a penalty on HL&P's rate of return, that court reversed the lower co"rts' decisions regarding allocation of certain income tax benefits associated with the disallowed costs to the benefit of shareholders and held that such j income tax benefits should inure to the benefit of HL&P's ratepayers. l HL&P hn fded a motion for rehearing on the issue reversed by the Texas Supreme Court. The Utdity Commission has ako sought rehearing on the issues affinned by that court. Action on thosc motions is currently pending before the Texas Supreme Court. As a result of the Texas Supreme Court's affinnation of certain of the lower courts' decisions, the case is to be remanded to the Utility Commission for detennination and implemeraation subject to pending motions for reheanng and possible further appeals by HL&P. Previously reported financial results will not require restatement, Jury Award in Condemnatmn Proceeding. In July 1981, HL&P fded a condemnation action against the Klein Independent School District (Klein) to take approximately 8.6 acres of Klein's property as an easement for the purpose of crecting, operating and maintaining a 345 kilovolt electric transmission kne. Klein subsequently alleged in the County Civil i Court at Law No.1 of Harris County, Texas that HL&P had abused its discretion in the taking of the property. On November 27,1985, the jury returned a verdict finding that Klein sustained actual damages of aoproximately $104,000. Thejury aho found that HikP's conduct in the construction, operation and maintenance of the transmiuion line on Klein's property was in reckless disregard of the school purposes for which the property was being used, and awarded exemp!ary damages in the amount of $25 trilhen.
'fhe jury found, further, that the value of Klein's property had been reduced 'o zero and that the cost rif j land and fac hties necessary to replace or restore Klein's property and f acilities was approximately $42.1 milhon. On December 13,1985, the tnal judge entered judgment in favor of Klein, awarding thc lull ;
amounts of actual and punitive damages, or a total of approximately $25.1 million, plus intercst, Klein I having clected that form of judgment rather than a judgment awarding condemnuivn damages. In addition, the court granted an injunction, pendmg appeal, that effectively prohibited HL&P from usir.g i u
~ 8. Pending the line for the transmission of energy, except during certain specified emergencies when there are no Iitigation regularly conducted school or other publicly sponsored activities occurring on Klein's property.
(continued) On January 2,1986, HL&P appealed the case to the Court of Appeais for the 14th Supreme Judicial District of Texas, and also sought, from that coun, relief from the injunction against use of the line pending appeal or, in the altemative, an order increasing the bond which K!cin must file in order to protect the interests of HL&P pending appeal. On February 27,1986, the appellate court granted HL&P's requested relief from the injunction and directed the trial court to allow Hi&P to post a bond that would allow continued use of the casement pending a final decision on the meritwf HL&P's appeal. Klein responded on March 3,1986, by asking the Texas Supreme Court for leave to file a mandamus petition against the 14th District Court of Appeals. On November 26,1986, the Supreme Court conditionally granted the mandamus petition sought by Klein. Ruling that the trial coun had not abused its discretion in denying HL&P's request to super.;ede the injunction, the Supreme Court indicated that it would grant the writ of mandamus if the Court of Appeals did not vacate its judgment, with the result of that decision being the reinstatement of the trial coun's original order, which had enjoined HL&P from using the line pending the outcome of the appeal on the merits. In light of the injunction that effectively prohibited use of the line, HL&P placed a rerouted line in service in August 1987. On November 5,1987, the 14th District Court of Appeals issued its decision on the merits of the appeal by HL&P. He court mled that HL&P's action pursuant to the statutory condemnation procedure could not amount to trespass and set aside the award of exemplary damages to Klein, thus relieving HL&P from liabdity for the $25 million in exemplary damages awarded by the trial court. He appeak court affirmed the trial court judgment on the balance of the points raised in the appeal, leaving intact the jury's award of approximately $104,000 in actual damages.Re appeals court noted, however, that HL&P had rerouted the transmission line away from Klein's property. Klein has fded an Application for Writ of Error with the Texas Supreme Coun seeking further review of the appeals court's decision. HL&P has filed a contingent Application for Writ of Error to be considered in the event that the Texas Supreme Court grants Klein's Application. It is possible that the exemplary damages awarded by the trial coun might be reinstated if the Supreme Court agrees to hear a further appeal of the decision. While HL&P and the Company can give no definitive assurance regarding the uhimate resolution of this matter, they presently do not believe such resolution will have a material adverse impact on HL&P's or the Company's financial position. No prediction can be made, however, of the final outcome or the timing of finaljudicial action in this suit. Prudence Review of Coal Supply Agn ements and Litigation with Coal Suppliers. During the course of hearing HL&P's 1986 general rate proceeding (Docket No. 6765), the Utility Commission severed into a separate docket (Docket No. 6963) certain issues related to the prudence of the two long-term contracts under which substantially all of the coal for HL&P's W. A. Parish generating l units is obtained, including the degree to which the chemical characteristics of coal from one of those supphers led to HL&P's decision to upgrade existing pollution control equipment by installing baghouses on three of those generating units. The Utility Corr. mission staff requested that, pending the outcome of the separate docket, HL&P be at risk for all costs associated with the installation of the baghousev l (estimated to total $178 million excluding AFUDC) and for payments made for coalin excess of the ; equivalent of a delivered price of $1.51 per million Blu's. As a result d the Utihty Commission's action, the Company, HL&P and Utihty Fuels hled suit against the two coal suppliers in question in the United States District Court for the Northem District of Texas it. Dallas. In that lawsuit, the plaintiffs requested the court to detennine that performance under the l contracts should be suspended or the contracts modified in the event the Utility Commission should pnxced to a final determination that the maximum cost that can be included in electric rates charyd to l HL&P's customers is less than the amounts called for under the contracts in addition, Utility Fuels began withholding from payments to the coal suppliers the difference between the amounts called for in the contracts and the equivalent of a delivered price of $1.51 per million Btu's and sought to deposit that difference into the registry of the Court. In response, both coal suppliers filed counterciaims and motions i for partial summary judgment on those counterclaims. On November 18,1986, the trial court granted i those motions for summary judgment in part, ruling that HL&P and Utihty Fuds must pay the full ; contract price for coal pending the outcome of the Utihty Commission proceeding and directing that the amounts previously withheld be paid to the coal companies with interest. v,
b l
~ 8. Pending - The Company,llL&P and Utility Fuels appealed the trial court's decision to the Fifth Circuit Conn of .j Litigation Appetis and continued to withhold the amounts in dispute pending the outcome of the appeat On (continued) . October 7,1987, the Fifth Circuit Court of Appeals ruled that the trial court's decision was not a finale appealable order and therefore dismissed the appeal without umidering the issues raised therein, On Apnl 20,1987, a Utility Commission Hearin Examiner granted a motion by HL&P to suspend the procedural dates then in effect in Docket No. 6963 in order to allow Utdity Fueh, HL&P and the coal i companies to continue negotiations of certain modifications to the coal supply arrangements in an l
attempt to provide the basis for resolution of the issues in Docket No. 6961 Those negotiations were concluded on December 21,1987, when amendments to both coal supply contracts in question were executed. Under the amended contracts, the price paid by Utdity Fueh was reduced as of January 1, , 1988, and changes were made in the escalation and certain other provisions of the contracts. At the time -i the amended contracts were executed, Utility Fuels, pursuant to an agreed court order, paid the coal I suppliers the amounts which previously had been withheld, indudmg interest thereon.
)
In January 1988, HL&P and the Utility Commission staff filed testimony proposing that the amended j coal supply arrangements be accepted by the Utility Commission in resolution of the issues raised in Docket No. 6963. HL&P also filed an agreed stipulation executed by HL&P, t%e stalf and one other party to the docket. Under the stipulation, the new coal supply arrangements would be accepted by the Utihty Commission and issues raised in the docket with re:pect to (i) prudence of amounts incurred prior to January 1,-1988 and (ii) the relationship of coal quality to the decision to install baghouses would be resolved without disallowance of amounts paid by HL&P for prior coal deliveries. However,in March 1988, the Utdity Commission Hearings Examiner considering the docket issued a recommended decision l in which he urged the Utility Conunission to remand the' matter for further evidentiary proceedings on , certain points in the proposed stipulation which were questioned by the Hearings Examiner. Rather than reopening the record on his own motion, the Hearings Examiner chose to present his concems to the Utility Commission for ruling prior to remand. A decision by the Utihty Commission on the llearings Examiner's recommendations is expected at the end of March 1988. In the event that the outstanding coal prudence issues are not resolved by the Utility Commission on a mutually acceptable basis, the parties to the new coal supply arrangements have reserved the right to terminate those arrangements and resume the litigation relating to the previous long tenn agreements. While HL&P and the Company can give no definiti/c assurance regarding the ultimate resolution of this matter, they presently do not believe that such resolution will have a materia dverse impact on HL&P's or the Company's financial position. Should HL&P be unable to recover its costs, such costs may have to be charged against eamings. FuelTransponation Litigation. On July 31,1986, HL&P and Utdity Fueh filed suit in Federal District Court in Hnuston, Texas against three railroad holding companies and their railroad operating subsidiaries and two other railroads. The suit alleges that the railroads violated certain federal statutes,induding the Shennan Act,in activities aimed at precluding development of coal slurry pipelines that could have delivered coal to the plaintilfs in competition with the railroads. On February 13,1987, with the agreement of all parties, the Federal District Court in Beaumont, Texas entered its order permitting HL&P and Utih_ty Fuels to fde the same daims for alleged antitrust violations against the same railroads by intervention in an action there pending between a third pany and the same radroads. HL&P and Utility Fuels have joined with the railroads in requesting the Federal Dist2ict Court in Houston to stay proceedings in the Houston litigation pending the outcome of the Beaumont htigation. Among the defendants are the Burlington Northem Railroad Company (Burlington Northem) and the Atchison, Topeka and Santa Fe Railway Company (ATSF), w hich suppl pail transportation services to Utdity Fuels for coal purchased from mines in the Powder River Basin in Montana and Wyoming. In the lidgation, Burlington Northem and AlSF have filed counterdaims based on the assertion that certain of the matters alleged to be in dispute in the litigation filed by Utdity Fuels and HL&P were settled as a result of the execution of the Rail Tramportation Agreement, dated March 8,1985, among Utility I ucts and Burlington Northem and ATSF. Accordingly, the counterdaims assert that Utility Fuels is in breach ofits obbgation under the Rad Transportation Agreement by virtue of the fihng of suit against Burlington Northern and ATSF. In their couaterclaims Burhngton Northem and ATSF seek unspecified damages,induding punitive damages, Utihty Fuch and HL&P regard the counterclaims to be without merit, but no assessment of the 9, ultimate outcome of the litigation can be made at this time. See also Note 10-lointly owned Nudear Plant.
(
- 9. Limestone in December 1986, the second of two 720 megawatt, lignite fired generating units at HL&P's Limestone Generating Units Electric Generating Station (Limestone) was placed into commercial operation. In January 1987, HL&P requested that the Utility Commission order an accounting treatment which would permit HL&P to capitalize operating and maimenance expenses, non reconcilable mining and handling charges, taxes and depreciation associated with Limestone Unit No. 2 and to continue recording AFUDC from the date Unit No. 2 was placed in commercial operation until the date when new rates are implemented that reflect Limestone Unit No. 2 as plant in sersice in rate base (Docket No. 7375). HL&P further requested, as an altemative, that if the mining and handling charges referred to above are not allowed to be capitalized, then those costs would be allowed recovery through the reconcilable fuel ponion of base rates. Hearings in this docket conduded on June 10,1987, and a decision by the Utdity Commission is pending. A simdar accounting treatment had been requested by HL&P for Limestone Unit No.1 but was denied by the Utihty Commission. Until rate relief or other regulatory action is taken with respect to Umestone Unit No. 2, operating results of HL&P and the Company will be adversely affected.
I0. Jointly-Owned HL&P is project manager and one of four participants in the South Texas project, which consists of two Nudear Plant 1,250 megawatt nudear generating units. Each participant finances its own share of construction expenditures wnh HL&Fs participating interest in the project currently being 30.8%. As of December 31,1987, HL&P's investments in the South Texas project and in nudear fuel, induding AFUDC, were
$2.2 bdlion and $131 million, respectively.
Pending Litigation and Agreement in Principle with the City of Austin. In January 1983, the City of Austin (Austin), one of the four owners of the South Texas project, filed suit against HL&P and the Company in the 98th Judicial District Court in Travis County, Texas (Cause No. 343,240), alleging that HL&P had misrepresented the capabilities of the original architect engineer and construction manager of the project and failed to properly perform its duties as project manager. Because of such alleged misrepresentations and failures, Austin asserted it was entitled to, among other things,(a) e, reformation of the participation agreement such that Austin would convey to HL&P its 16% interest in the project (b) a refund f an HL&P of the approximately $437 million expended by Austin to that date, and af all sums expended by Austin on the project thereafter, and (c) damages in an add:tional unspecified amount. In December 1985, Austin filed an amended petition which again alleged that HL&P had misrepresented the capabilities of the former architect engineer and failed to properly perform its duties as project manager for the South Texas project, in addition, the amended petition asserted daims against HL&P under the Texas Deceptive Trede Practices-Consumer Protection Act (DTPA) and sought, from HL&P and the Company, either (a) an unspecified amount of damages, induding treble damages to the extent proper under the DTPA, as well as pre judgment interest costs and attomeys' fees, or (b) a refonnation or rescission of the participation agreement for the South Texas project requiring HL&P to retum to Austin all of the moneys expended by Austin with respect to its 16% interest in the project to the date of the judgment, with interest, relieving Austin of all future obligations with re>pect to such interest in the project, and prosiding for a concurrent transfer by Austin of such interest to HL&P. Austin and HL&P have fded motions for panial summary judgmert. On October 10,1986, the trial judge ruled that Austin is not entitled to reformation or rescission of the paricipation agreement for the South Texas project. He trial judge overruled HL&P's motion for panial sunmary judgment directed at Austin's allegations asserting a cause of action under the DTPA and HL&P's raotion for panial summary judgment directed at Austin's allegations that there was fraud in the inducement relating to Austin's entry into the participation agreement. On June 29,19S7, a newly appointed trialjudge denied Austin's motion seeking to hold HL&P responsible for the actions of the former architect engineer. The judge demed, however, HL&P's request for summary judgment on all claims relating to the panicipation i agreement. The judge naled that Austin must prove that HL&P breached the participation agreement by ) fading to report material information and must prove damages specifically related to such fadure to provide information. De judge permitted Austin to maintain its daim for $830 million under this theory of recovery if it could show that the owners would have canceUed the South Texas project in 1976 and that Austin would have built a coal plant in lieu of the South Texas project. However, cn August 10, l 1987, Austin provided an updated calculation of its alleged damages under that daim, dropping its daim under this theory of recovery to $740 muhon. On August 11,1987, the judge reversed the earlier order U l
-}
- 10. Jointly-Owned denying ilL&P's motion for summaryjudgment as to Austin's DTPA claimt Thus, Austin's DTPA claims.
Nuclear Plant . have been mooted and its damage claims are no longer subject to trebhng under the IMPA. ' (continued) As a result, the maximum damage claim remaining in the case is an altemative claim for $811 million relating to Austin's claim that it was fraudulently induced to enter into the South lexas project in 1973. He judge has not yet acted on filaP's motion for summaryjudgment on this issue. .
,1 On September 3,1987, Ill AP amiounced that it had reached an agreement in principle (Agreenient in Principle) with Austin to acquire Austin's 16% share of the South Texas project. Under the tenns of the Agreement in Principle,1114P and Austin would dismiss all litigation and other claims currently pending.
%e Agreement in Principle pmvides that Austin would convey to llL&P its 400 megawatt (MW) interest in the South Texas project, together with nuclear fuel and related property,in exchange for a 400 MW interest in HL& P's Limestone station, a lignite plant having a capability of 1,440 MW which has been completed and placed in service. uis conveyance would result in Austin having an undivided proponionate inter est in the land, capital equipment, and fixed personal property of IIL&P at Limestone.
A 200 MW interest in Limestone Unit No.1 would be conveyed on the later of June 1,1988 or ihe' closing of the settlement, and a 200 MW interest in Umestone Unit No. 2 would be conveyed on January 1,1990. IIL&P would operate Limestone in accordance with an operating agreement to be mutually agreed upon as part of the definitive documentation. Under the terms of the Agreement in Principle,llL&P would (a) assume Austin's South Texas project obligations for the remaining construction a'nd fuel costs effective September 1,1987, as well as Austin's obligations for continuing capital improvements, decommissioning, and all other matters arising out of Austin's interest in the South Texas pmject;(b) pay Austin $19.7 million for a portion of construction costs incurred during negotiations; (c) purchase Austin's nuclear fuel for $30 million; and (d) pay certain of Austin's legal expenses. In addition, certain claims asserted by Austin under an outstanding purchased power contract would be resolved. Austin would assume responsibility for its portion of the capital improvements and fuel, operating and mairdenance expenses at Limestone. He Agreement in Principle provides that no contract obligation will come into existence until execution of the definitive contract documents and other conditions have been satisfied, including approval by the Utihty Commission and the Nuclear Regulatory Commission (NRC). In addition, the Agreement in Principle provides that it would be necessary that the order of se Utility Commission, among other things, contain no findings, conclusions, aservations; or observations by a majority of the Utdity Commission that raise reasonable doubt that the transfers contemplated by the Agreement in Pnneiple would result in ra:e treatment to liL&P less favorable than the rate treatment of if L& P prior to such transfers. In September 1987, ilL&P fued an application with the Utihty Commission (Docket No. 7725) to reflect the exchange of ownership of Limestone and the South Texas project pursuant to the Agreement in Principle.%e sett!cment is also contingent upon the City of San Antonio (San Antonio) and Central Power and Light Company (CPL), the other participants in the South Texas project, waiving their rights et first refusal relating to acquiring part of Austin's interest. On January 7,1988,ifL&P filed a Fourth Amended Answer,0riginal%ird Party Petition and Original Petition for Declaratory Relief (lhird Party Petition) in the pending litigation with Austin;in the
%ird Party Petition,llL&P requested le te of the court in which the Austin litigation is pending to make service on San Antonio and CPL and its parent corporation, Central and Southwest Corporation (CSW).
The Ri d Party Petition makes claim against San Antonio, CPL and CSW for contribution and indemnity should ilL&P be found to be liable to Austin with respect to certain claims of Austin in the pending litigation, The Hird Party Petition asks for a declaratory judgment that HL&P is not liable to Austin, San Antonio, CPL or CSW with respect to its actions or inactions as project manager under the Participation Agreement among the co owners of the South Texas project and further requests the court in the Austm litigation to implement alternative methods of dispute resolution provided by the Texas Civil Practice and Remedies Act such as non binding arbitration. Finally, the %ird Party Petition asks the court to defer or abate proceedings until completion of the second unit at the South Texas project but no l later than December 31,1990. Unit No. 2 of the South Texas project is presently scheduled for. l commercial operation in June 1989. l At a hearing on January 27,1988, the court in the Austin litigation set the pending suit betwecn Austin and flL&P for trial the first week in June 1988. The court in the Austin htigation, whkh has discretion whether to accept jurisdiction over the claims asserted in the %!rd Party Petition, allowed llL& P to u I L.~ _ _ _ _ _ _ - _ _ ___ --- _ _ __--_-____:___-
/
- 10. Jointly-Owned serve the Tidrd Party Petition on Sar.' Antonio, CPL and CSW without prejudice to the right of those Nuclear Plant parties to later assen that the Third Party Petition should be dismissed or severed for a separate trial in (centinued) the Austin litigation or severed into a separate docket independent of the Austin litigation.The court also ,
H advised the parties that in no event would San Antonio, CPL an 3 CSW be required to panicipate in the trial of the pending suit between Austin and HL&P. HL&P has aho filed an original complaint in the i 130th District Court of Matagorda County against San Antonio, CPL and CSW requesting substantially i the same talief. If the court in the Austin litigation does not ultimately dismiss the Bird Party Petition, - prosecution of the action in Matagorda County will be deferred. , On March 3,1988, San Antonio and CPL filed responses to the nird Party Petition, and each delivered letters requesting arbitration. In their responses and letters, both San Antonio and CPL asserted that HL&P has breached its duties and obhgations as project manager for the South Texas project and is liable to San Antonio and CPL for resulting unspecified damages. San Antonio and CPL asked the trial ~
^
judga in the Austin litigation to compel their requested arbitration and to stay further proceedings with respect to CPL and San Antonio pending the outcome of that arbitration. They further asked the trial comt to enjoin HL&P from pursuing either its Hird Party Petition or the separate htigation filed by HL&P in Matagorda County. No hearing has been scheduled by the court in the Austin htigation to consider these matters. CSW also responded to the Hird Party Petition on March 3,1988, asking that further proceedings be deferred pending the arbitration, and denying any liability with respect to the South Texas project. The parties have continued settlement negotiations within the framework contemplated by the Agreement in Principle; however, no prediction can be made as to whether a settlement with Austin can be achieved If a definitive agreement cannot be reached, any judgment entered after trial, as wcli as the intermediate ruling discussed above, will be subject to appeal after trial With respect to the pending htigation, HL&P and the Company iegaid Austin's claims and those asserted by CPL and San Antcnio to be without ment. While HL&P and the Company cannot give definitive assurance regarding the ultimate resolution of these matters, they presently do not believe such resolution will have a material adverse impact on HL&P's or the Company's financial position. Assuming the Agreement in Pnnciple is consummated, HLAP's construction and nuclear fuel expendi-tures would increase by $205 million for the 1988-1990 period, $92 million of which is related to reimbursement of costs incurred by Austin prior to 1988 and the purchase of Austin's nuclear fuel. Order of the Texas Supreme Court. On November 4,1987, the Texas Supreme Court entered an order which hkely will de!'y the schedule for Docket No. 7725 and cenain other dockets pendmg before the Utility Commission.%e Court's order directed the Commissioners of the Utility Commission to stay hearings and actions in Docket No. 7725 and certain other dockets pending disposition by the Court of a Motion filed by the Attomey General of Texas for Leave to File Petition for Writ of Mandamus against the Commissioners. In addition to Docket No. 7725, the Court's order applies to Docket No. 6184, an inquiry conceming the economic viability cf - Unit No.2 af the South Texas project, and Docket No. 7582,in which HL&P petitioned for deferred accounting treatment for costs related to Unit No.1 of the South Texas project.The mandamus petition arose from action by the Utility Commission in these and certain other dockets denying the Attomey l General's petitions to intervene on behalf of the Texas state agencies. HL&P and the Company cannot be certain at this time as to the duration of the Texas Supreme Court's l l stay or as to the effect of the Court's action on these dockets. A hearing by the Court on the Attomey General's petition was held on December 16,1937, and the Writ of Mandamus will remain in effect until l the Texas Supreme Court resolves this issue. Prudence Review of South Texas Project by Utility Commission. , I The Utility Commission has ;nstituted a prudence review of the South Texas project for the purpose of reaching a final and binding determination for future rate base treatment of the amounts invested in the South Texas project.nis proceeding (Docket No. 6668) will encompass an investigation of the prudence and efficiency of the planning, management and construction of the South Texas project, as well as the proper accounting treatment of the proceede received from the former architect engineer in the settle-ment (Settlement) of cenain litigation relating to the South Texas project. nere is no defmitive schedule i for commencement of hearings, but it is unlikely that hearings will begin before the fall of 1988. l 1 sa 1
S
- 10. Jointly Owned The Utility Commission retained a consulting finn to evnluate the prudence and efficiency of the Nuclear Plant planning and management of the South Texas project and to make recommendatioits to the Utility (continued) Commission regardmg regulatory actions based on such evaluation, in June 1986, the consulting finn presented its report (Report) to the Utility Commission, w hich Report covered the period through 1983.
The consulting finn concluded in the Report that deficiencies in management of the project had occurred
. and that such deficiencies led to impmdent expenditures estimated to be in a range of $1.1 to $1.3 bdlion. According to the Report, such amounts do not include AFUDC or rate elfects which the consultmg firm concluded would substantially offset each other.1he Report also indicated that the estimates relating to the prudence issue were preliminary, were based upon certain assumptions that should be refined and were subject to further refinement and modihcationc A new consultant is expected to be retained by the Utihty Coramission in March 1988 to complete all work necessary for a final evaluation conceming the prudence of management and the reasonableness of costs associated with the South Texas project. Although the scope of that investigation has not been finalized, HL&P anticipates that the Report will not be sponsored by the Utility Commission staff.The manner in which the new consultant or any other party will utilize the Repon in that docket, however, remains unclear.
HL&P believes that the Settlement with the fonner architect engineer provided full compensation for any imprudent or inefficient planning or management during the period in question. Hl.&P will strongly . contest any recommendation or finding that amounts invested in the South Texas project, after taking into consideration the Settlement, have been a result of inefficiency or imprudence. While no definitive assurance can be given that all amounts invested in the South Texas project will be recoverable by HL&P through electric rates or othenvise, HL&P and the Company presently believe the ultimate resolution of the Utility Commission's prudence review will not have a material adverse effect on HL&P's or the Company's financial position. Any amounts that are not recoverable would have to be charged against camings. A substantial write-off could adversely affect the Company's abihty to fmance its capital program and meet other fmancial obligations. Request for Deferred Accounting Deatment. l In July 1987, HL&P requested that the Utihty Commission order an accounting treatment which would allow HL&P to defer its portion of all operating and maintenance expenses, taxes and depreciation that I would otherwise be expensed effective with the commercial operation of Unit No.1 of the South Texas l project and to continue recording AFUDC associated with this investment until rates are placed into ; effect which would reflect this investment as electric plant in service in rate base (Docket No. 7582). ' Because the heanngs in Docket No. 6668 relating to the prudence review of the South Texas project are not currently scheduled and are unlikely to begin before the fall of 1988, a signif cant lag time could occur between the commercial operation date of Unit No. l of the South Texas project and imple-mentation of new rates reflectina such facility as plant in service. As a result of such lag time and without the requested accounting treatn ent referenced above, HL&P's operating results wul be adversely ! affected unless some other mitigative action by the Utility Commission is taken. In October 1987, HL&P hled supplemental testimony in response to the issuance of SFAS No. 92. I SFAS No. 92 precludes the capitahzation of the equity portion of AFUDC for financial reporting purposes as was previously requested in Docket No. 7582. It is anticipated that the elfect of such limitation would reduce ec.mings of the Company by approximately $100 million on an annualized basis. In its supplemental testimony, m lieu of the AFUDC accrual, HL&P requested the accmal of interest on the deferred costs and on the plant investment in Unit No.1 of the South Texas project. Under this request, HL&P's 1988 financial results would be similar to those under the original deferral request. Revised Budget and Schedule. On September 17,1987, HL&P presented a comptetion estimate for the South Texas project to the management committee for the project, which estimate was adopted by the committee on December 17, 1987. Based upon its September 1987 completion assessment (which assumed a commercial operation date for Umt No.1 of March 1,1988), HL&P estimated that the total cost for the completed project would be $5.28 billion, excludmg AFUDC and nct of the Settlement.The revised cost estimate represents an increase of $300 million ever the previous cost estimate which was $4.98 billion, excludmg AFUDC and n t of the Settlement, for the entire South Texas project. HL&P's portion of such increased costs would be approximately $92 milhon based on its current 30 8% interest iv the South Ters project. t& b
F
- 10. Jointly Owned in August 1987, the NRC granted a low power operating license for Unit No.1 of the South Texas Nudear Phnt project. In 1987, the Govermrent Accountability Project (GAF), a citizens interest group, demanded that (continued) the NRC establish a special task force to investigate alleged safety defects at the South Texas project. The group clanned to have evidence of defects but refused to tum over the evidence untillate in 1987. The NRC concluded an on-site investigation to review and evalur te the G AP allegations, The NRC review of all the GAP allegations has identified no substantive safety issues that would warrant delay in the NRC's consideration of a full power Rense for Unit No.1 of the South Texas project. In February 198S, the NRC imposed a civil penalty in the amount of $75,000 for two instances in late 1987 when operations during testing at the South Texas project violated certain technical specifications. In March 1988, the NRC imposed a second civd penalty in the amount of $50,000 for security deficiencies indentified in the fall of 1987.
Initial enticality at Unit No.1 of the South Texas project was achieved in March 1938. He delay in achieving initial criticality has been principally attributable to certain equipment problems identified during the testing process, which have been analyzed and corrected, and the need for additional operator training undertaken to address concems raised by the NRC. He steps remaining before Unit No.1 can be placed into commercial operation are satisfactory completion of low power operation and the receipt of a full power license from the NRC. The in. service date and cost estimate for Unit No.1 of the South Texas project are subject to continuing review in hght of these matters and the ongoing testmg process. HL&P estimates that three to five months of additional testing will be required after imtial cnt cahty before Unit No.1 can be placed in commercial operation. Although no definitive estimate of additional costs has been approved, HL&P anticipates that cost increases in the range of $100 to $150 million (of which HL&P's portion would be
$31 to $46 million based on its 30.8% interest) may result from the delays in achieving initial criticality and the resultmg delay in the anticipated date of commercial operation of Unit No.1. HL&P estimates that the carrying cost of its 30.8% interest in the South Texas project is approximately $15 milhon per month.
Commercial operation of Unit No. 2 of the South Texas project is scheduled to commence in June 1989. Nuclear Insurance. HL&P and the other owners of the South Texas project have obtained all nuclear property and nuclear liability insurarsce requned to date, and additionalinsurance coverage wiJi be purchased w hen the full power license for Unit No.1 is obtained. In addition, HL&P i3 evaluating insurance coverage for incremental replacement power costs resulting from certain possible outages at the South Texas project.
/ However, there can be no assurance that all potential losses or liabilities will be insurable or that the amount of insurance canied will be sufficient to cover all potentiallosses and habilities. Any substanual losses not covered by insurance could have a material adverse effect on the financial condition of HL&P and the Company.
The owners of the South Texas project currently maintain property damage insurance in the amount of
$1.23 bdlion through American Nuclear Insurers (ANI) and Nuclear Electric Insurance Limited (NEIL) and are planning to purchase an additional $165 mdlion in limits from NEIL when the full power license for Umt No.1 is obtained. The owners are also considering the purchase of an additional $130 mdlion in hmits which has recently become available from ANL The NEll excess property damage insurance must be used to cover decon' amination and clean up expenses before being used to cover direct losses to propeny. Although there can be no assurance as to the maximum amount of property insurance available from time to time, it is anticipated that property insurance coverage will be maintained for the South
'lixas project in such amounts as are customary in the industry for similar nuclear generating plants. As a member insured of NEll, HL&P wdl become subject to annual assessments, which cou!d amount to approximately $9 mil! ion for the project,in the event that losses as a result of an accident at a nuclear plant of any NEIL insured ccmpany exceed the accumulated funds avadable to the insurer. HL&P and the other owners of the South Texas project have entered into an arrangement such that the total costs of insurance for the South Texas pr bet (includmg premiums and assessments) are to be shared pro rata based upon the owners' respective ownership interests in the project. Under this arrangement, HL&P would ultimately bear that portion of total propedy damage insurance costs, including any ascessment by NEIL, attributable to its ownership interest (currently 30.8%).
u I
Elfective in October 1987, the NRC amended its regulations to require nudear pmver plant licensees to obtain property insurance coverage in the minimum amount of $ 1.06 billion. These regulations further 1, provide that the pmceeds of this insurance shall be used to fint ensure that the hcensed reactor is in a safe and stable condition and can be maintained in that condition so as to prevent any significant risk to the pubbe health or safety. Any property insurance proceeds not o! ready expended to place the reactor in a safe and stable condition must be used first to complete decontamination operations that may be ordered by the NRC. The owners of the South Texas project are insured against liabihty clanns that may result from a nu: lear meident to the full amount to which such claims are hmited under the Pnce- Andenon At t (which is $720 million as of January 18,1988). In January 1987, HlAP and the other ownen of the South Texas projcet executed with me NRC an mdemnihcation agreement under the proviwns of the Price Anderson Act.uis limitation on liability will increase by $5 million for each additional openting license issued by the NRC. This insurance is provided through a combination of private insurance and a mandatory industry-wide piogram of self insurance under which kcensees may be assessed % the event of a nudear incident involving any licensed facility in the United States up to $5 million per incident for each of its hcensed reactors and up to a maximum per reactor owned of $10 million in any calendar year. Hl AP and each of the other owners are subject to such assessments, which HIAP and such owners have agreed will be borne c r the basis of their respective ownership interests in the project. For purposes of such assessment, the Soutb Texas project currently has one licensed reactor, When fuelloadmg begms at Unit i No. 2, which is expected in December 1988, the South Texas project will have two licensed reactors. Various proposals have been made to amend the Price Anderwn Act induding amendments wh'ch l would increase the limit on habihty. If enacted, such amendments could result in an increase in assenmentr. or other charges to fund the resulting increased coverage. HIAP is unable to predict what action Congress might take regarding the Price. Anderson Act or what effect such actions might have on Hl2P. , 1
- 11. Modified in January 1987, Hl4P announced that the schedule fonhe constn etion of two 645 megawatt lignite Schedule for units at the proposed Malakoff Ficctric Generating Station in llenderson County, Texas (the Malakoff Malakoff Project project) had been modifid. The scheduled in service dates, which are the dates the units are expected to be available to meet peak demand, are now 1997 for Unit No.1 and 1999 for Unit No. 2. He modified schedule resulted hom lowered projections of future demand for electricity in the Houston area. As a result of the modified schedule, all developmental work on the two hgnite units has stopped, but HIAP will tesume activity when necessary to nuet load growth requirements. HlAP's totalinvestment in the Malakoff project, through December 31,1987,is $154 mdlion ;nduding AFUDC and land.This amount is induded in Plant Held for Future Use and the accrual of AFUDC has been suspended until such time as construction resumes. Hl4P has agreed to indemnify Utility Fuels for all necessary and actual costs incurred due to the modification of the schedule. Utdity Fuels has invested $121 million in lignite reserves and handling systems relating to the Malakoff project through December 31,1987 and suspended capitalization of interest effective December 31,1986. For the 1988-1990 period, Utihty Fuck anticipates $22 nullion of expenditures relating to the Malakoff project which are primanly associated with keeping lignite leases and other related agreements in effect.
- 12. Un:ccovered ne Utdity Commission has allowed recovery of certain costs over a period of time by amortizing those Costs costs for rate m. king purposes. However, unrecovered anmunts have not been included in rate base and, as a result, no return on investment is being earned during the recovery period.De amounts of such assets and the remaining recovery penod applicable to each are hsted below:
Unrecmered Amount Remaining Recovery Period (Umusands of Dollars) at ikcember 31.190 at December 31,1987 Allens Cteek Project 5%IN 60 months Other 4.525 11 106 months 1 rd L
13.-Federal The current and deferred components of tax expenses are as follows:._. (Thousands of Dollars) _ 1987 1986 1985- l i Current: U. S. $ 93,607 - $ 23,387 $ 52,259 ! Foreign 4,703- 2,781 2,572 Deferred: Liberalized depreciatica 79,d94 ~ 88,441 85,472
)
~ Applicable to AFUDC 40,263' 50,310 ~47,842 !
Investment tax credit-net .- (3,472) 28,174 51,495 Oil and gas $95. (6,460) (17,'440)
. 0ther-net 2,652 29,268 17,989 Federalincome taxes .
$218,342 $215,901 $240,189 .
Effective federal income tax rates are lower tLa statutory corporate rates for each year as follows: Year Ended December 31,
- . . - . - ~ . . _ . . _ . . . - . . - . - - . - - . - - -
(Thousands of Dollars) 1987 1986 _ 1985-Income before federalincame taxes $653,300 ~ $640,836 ' $674,315 Preferred dividends of subsidiary -31,406 26,817 26,602 Total 684,706 667,653 700,917 Statutory rate 46
. . . . _ . _ _ . _ _ _ . , . 40 % . __ _ _%__ _46. %
Federalincome taxcs at statutory corporate rate _ 273,882 307,120 ~ 322,422 Reduction in taxes resulting from: AFUDC-otherincluded inincome 57,434 78,360 70,953 Other-net (1,894) 12,859 11,280 Total . 55,540- 91.219 82.233 Federalincome taxes $218,342 $215,901- $240,189 Effective rate 31.9 % 323 % 34.3 %
- 14. Supplemen- Taxes, othEr than federal income taxes, were charged to expense as follows; tary Expense Year Ended December 31, Information hhousands of Dollars) .
1987 1986 1985 -I Electric: Ad valorem $ 76,686 $ 73,366 $ 62,806 , State gross receipts 35,177 31,630 38,349 l Payroll 15,222 18,788' 17,712 l PUC assessment .4,758 4,709. 5,717 i Miscellaneous 19,824 18,298 15,601
. _ . Total,__ _ _ _ _ 151,667 146,791 140,185 Taxes included in cost of fuel sold 5,936 4,743 3,193 Taxes included in oil and gas expense 5,475 7,067 8,924 Total _ _ _ _ _ _ _ _ ..$163,078 $158,6'01 ~ $152,302
{esearchand devebpment costs charged to expense __ _ $ 16,141- $ 14,462 $ 14,038
- 15. Cable KBLCOM owns a 50% interest in Paragon Con.munications (Paragon), a partnership that owns cable Television Joint television systems v,hich, as of Decer..oer 31,1987, served approximately 651,000 basic cable customers Venture and approximately 469,000 premium programming customers. The remaining interest in the partnership is owned by American Television and Communications Corporation (ATCt a subsidiary of Time, Inc.
y / t n,, - - _ . . . . . - . -_. , , _ _
b in June 19S7, Paragon entered into a $430 milhon revolving credit and letter of credit facility agreement with a group of banks. Borrowings under the cgreement are non recourse to the Company and to ATC. The initial borrowmgs under the facihty were nied to provide permanent fmancing for the acquisition of cable television properties fomierly owned by Group W Cable,Inc. The Company rt cords its investment in Paragon utduing the equity method of accounting KDLCOM experienced after tax losses of $10 6 million and $6.5 milbon dunng 1987 and 1986, respectively.
- 16. Subsequent in January 1988,ilL&P sold $400 mdlion aggregate principal amotmt of 9%% hrst mortgage bonds Events w hich wdl mature in approximately equal principal amounts in each of the years 1991,1992 and 1993.
In January 1988,lil &P depouted $52 mdlion with the bond trustee to redeem all of the outstanding bonds of the 13% series at 100% of the principal amount and to pay accrued interest.The bonds were redeemed pursuant to the general redemption provismns of HL&Pi Mortgage and Deed of Trust. 17, Unaudited The fof?owing unaudited quarterly financial information includes,in the opinion of n anagement, all Quarterly adjustments (w hich comprise only nonnal recurring accruals) necessary for a fair presentation. Quarterly Infonnation results are not necessarily indicative of expectations for a full year's operations because of seasonal and other factors,includmg rate increases and vanations in operating expense patterns. Operatmg Net Eamings per (Thousands of Dollars) Revenues Income Income ,_ Common Share March 31,1936 $ 795,752 $129,627 5 72,717 $.67 June 30.1986 860,429 135,437 78,151 ,70 September 30,1986 1,101,220 326.245 184,845 1.65 December 31,1986 778,567 135,272 89,222 ,79 March 31,1987 777,253 106,533 57,775 .50 June 30,1987 899,016 171,136 99,690 .86 September 30,1987 1,135,650 327,527 203,676 1.75 December 31,1987 816,267 132,272 73,817 .63
- 18. Reclassification certain amounts from the previous years have been reclawfied to confonn to the 1987 presentation of fmancial statements. Such redassifications do not aflect earnings.
AUDITORS'OplNION llouston Indastries Inwrporated: We have exammed the consolid ited balance sheets and the statements of subsidiaries' preferred stock and long term debt of Hou, ton Industries Incorporated and subsidianes as of December 31,1987 and 1986 and the related statements of consobdated income, consohdated retained camings and changts in consohdated knancial position for each of the three years in the penod ended December 31,1987. Our examinations were made in accordance with generally accepted auditmg standards and accordmgly, included such tests of the accounting records and such other audamg procedures as we considered necesury m the circumstances. 1 In our opmion, the accompanying consohdated fmancial statements present fairly the fmancial position of the Company and i its subsidiaries at December 31,1997 and 1986 and the results of their operations and the changes m their fmancial position j for v.d of the three years in the period ended December 31,1987,in mnformity with generally accepted accounting principles applied on a consistent basis DELOTITE ilASKINS & SELLS
}IoJs!oa, peAas March 3,1988 os L
/ ,
HOUSTON INDUSTRIES INCORPORATED , Officers Marc Kilbride Hollis R. Dean 'Ihomas B, McDade 35, Assistant Secretary and 62, Execouve Vice President - 64, Consultant to Texas Don D. Jordan Asststant Treasurer and Chief Financial Officer Commerce Bancshares, 55, President and Chief of the Company, Houston, . Houston, Texas,& rector Execubve Offxer Kevin P. Loughnane Texas, & rector since 1977. since 1980. 31, Asmtant Treasurer Hollis R. Dean ' Joseph M. Hendrie, Ph.D L A.Naman 62, Executive yke Rufus S. Scott ' 63, Consulung Engineer, 70. Chairman of the Board Presidcnt and Chiel 44, Assistant Corporate Bellport, New York, ofI A. Naman + Associares, hnancial offker. Secre(ary & rector since 1985, Inc., Houston, Texas, . arectoi smce 1983. William A. Cropper Robert E. Smith Howard W. Home - 48, %ce President and 43, Asststant Corporate 61,Chairmanof theBoard Kenneth L Schnitzer,Sr. Treasurer Secretary of ne Horne Cornpany, 58 Chaumanof the Board
. Houston. Texas,6tector of Century Development Robert B. Dyer Directors since 1978. Corp., Houston, Texas, 51, Mee President -
arector since 1983. Corporate Devebpment Charles E. Bishop, Ph.D Don D.Jordaa 66, Presider.t Ementus of 55, President and Chief Don D. Sykora Hugh Rice Kelly Unisersity of Houston System, Executiveoffnerof the 57,%ce President of the
' 45, %ce President, Houston, Texas, & rector Company, Houston, Texas, Company, Houston, Texas, Gcneral Coumel and since 1983. 6 rector since 1974. & rector since 1982.
Corporate Secretary Searcy Bracewell James R. Lesch Jack T, Trotter David M. McClanahan 70, Advisory Director of 66, Retired Chauman of 61, Chairman of First Interstate Bank , 3S, Vke President Shearson lehman Hutton, of Texas, Houston, Texas, the Board of HughesTool 1 and Comptro!!er Inc., Houston, Texas, Company, Houston, Texas, & rector since 1985. d e m ce H R dred r sina 082. Don D. Sykora Joe C. Wessendorff - 57, %ce Presider.t John T. Cater 70, ergaged in ranching and 52, Presdent and Chief personalinvestments, Eichmond, n e m Operatmg 0fLcer.MCorp, Texas,6tector smce 1979. 3 g n Houston, Texas, & rector Secretary ,i3 ,3933. HOUSTON LIGHTING & POWER COMPANY Officers Ray J. Snokhous Ross E. Doan David G. Tees 58, Group %ce President 58, %ce President 43, %ce Presdent Don D. Jordan Extemal Affairs Haman and Information Energy Production 55, Chairman and Chie! Resources Executn e Offwer Edward A.umer Gerald E. Vaughn 60, Group Yke ?resdent Jack D. Gteenwade 45, %ce President Don D. Sykora Adnsistration and Support 43, %ce President Nudear Operations 57, President and Chief . Systern Operabons Operanng Officer Allen R. Beavers Ken W. Nabors 64, %ce Presdent Lawrence B. Horrigan, Jr. 44. Treasurer Jerome H. Goldberg Projea Consutant 53,vice Presaent 57, Group %ce President Purchasing and Matenals Rufus S. Scott 4 Nudear L G. Brackeen Management 44, Associate General 54, %ce Presdent Counseland Ass:stant Hu 'h Rice KcIly Fossd Fuel Re'.ources R. Steve Letbetter Corporate Secretary 45, nier %ce President. 39, VKe President General Counseland James S. Brian gegujatory Relatons Gretchen H. Denum Corporate SecretJry 40, %ce President 33, Asmtant Corporate
. Finance ard ComptroUer Ancel D. Maddox Secretary D. E. Simmons 47, vice President 63, Group %ce Presdent Customer Relauons Frank C. Gemar Power Operanons 50, Assistart Secretary and Assistant Treasurer M
\ i PRIMARY FUELS,INC.
Officers l Don D. Jordan Duane C. Radtke Frank L. Cascio, Jr. Kenneth W. liarbin I 55, Chainran 39, Gmup Vue Pe rudent 40,%ce President land 49, %cc President l Noch Amenca and Corporate Secretary %diand D stnct I bill E. St. John ! ss. Prna at James N. Alsup Kenneth R. Stout Ruth W. Simms l 41.Vice President Fmance. 63, %ce President 33,Comptro!!er j Treasurer and mimant Internahonal Smetary l l UTillTY FUELS,INC. Officers Don D. Jordan Hollis R. Dean Lawrence J. Rogers Ronald D. Baalman
- 55. Chaman 62, %ce President 41. %ce President 38, Comptro!!er F. Ken smith Charles L. Merka
- 53. Pnsdent so, Vke PresiJent John J. Bartell Operanons 50 Secretary and Treasurer INNOVATIVE KBLCOM HOUSTON INDUSTRIES DEVELOPMENT CONTROLS,INC. INCORPORATED FINANCE,INC. VENTURES,INC.
Ho!hs R. Dean Don D. Jordan Hollis R. Dean Robert B. Dyer
- 62. Chainnaa erd 55. Cha:rman 62, Chainnan 51. Prnident Chief heanvc Ofhter HOUSTON INDUSTRIES INCORPORATED SHAREHOLDER INFORMATION Annual Meeting Auditors Shareholder Questions lhe as wat mectmi, el sh m bddermi! be Dehntte Hadins & Sdk, Houston, Texas Sharchdders rnay cail or wnte investor Ser.
teld' M 1%8 at 10 a m. m the fJatnc vices reprang quotons about their simk Taw cr .1 VWer, Haton. leus A for. Counsel and related matten. Shareholders in Hooton mal nonce of the rechn,; accompirued by a Baker & Iktto Hmton.Texa* may :all(713) 629 3060. Texas rendents may pnwv na:cment :ed prmy form mil be .. call toll free at 1400-392 4261. In the reit of nu.Nd tuhaalden l<.g nmrg on or about Dividend Disbursing Agent the U s the number n 1400 231-6406. ; Apnl 8.19% For The Common Stcck Quesnons reprang preferred sim uolden' Hauston Industnes Incorporated accounts and dividends or first rnartpge
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i Executive 0:fices .. bond accounts and mternt paymer.ts for l uv.g ,g part po 3,4337, nuwn, Dividend Rem. vestment uttr should aho be arected to lavestor i I us 77210 Tc!qbi ce GIM29No t For The Common Stock semces Stock Listing The Company traintains a dmdend ' re m estectt rnvram which er.ab!enhare. FinancialInformation Houvon fndatnes corar.er, stak n traded l hauers to autre.atic2Hy reim ot 6vidends Prospective mvntars, ar.alysts and repre. ; under the symba! HOU on ite New Ycrk, in Heaton IrJstnes common stock. sentatives of fmancaHr.stitutivns requ:nng %dw c>t and to., bn Swk Em hares for informanon, cc.ntact ins ester Senices. mfonnation repring Houstun Industnes ; Hcustan Indatnes incorporated, ain:n r should contact Dan BMa. Diredor of fman. i Transfer Agent and Registrar For The trator for the Dmbrid Reinvestmert Plan. cial and Puthe Rel ate, C13) 629-3120. Common Stock at the executive c!f;ces Ho ston hhtno lmcrprated, bvewr Semces. P O. Pm 4505. Hmmn. Tcus SEC Form 10 K 77'10 A copy of the annual reprt to the Secunt;e5 ! and F xcharge Commmion on form 10-K and I other corporate drmnts rnay be obta}ed whout charge cyc wntten request tm i Rc,bert Sm;th, Asutant Corporate Secretary. I at the e recctn e eihcn I l n I
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SECURITIES AND EXCHANGE COMMISSION Washington, D.C 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Flseal Year Ended December 31,1987 Commission File No. 1 318711 1 HOUSTON LIGHTING & ",OWER COMPANY (Exact name of resistrant er r% 'e ir : aarter) Texas 74-0694415 (State or other jurisdiction of (LR.S. Employer incorporation or organization) IdentiScation No.) 611 Walker Avenue flouston, Texas 77002 ( Address of principal executhe 08ees) (Zip Code) l Registrant's telephone number, including area code: (713) 228-9211 Securities registered pursuant to Section 12(b) of the Act. Naine of each exchange on Title of Each Gass whkh registered None Securities registered oursuant to Section 12(g) of the Act: i Title of Each Gass Preferred Stock, cumulative, no par:
$4 Series; $6.72 Series; $7.52 Series; $9.52 Series; $9.08 Series; $8.12 Series: $9.04 Series; Adjustable Rate, !
Series A; Adjustable Rate, Series B; and $8.50 Series. Indicate by check mark whether the registrant (!) 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 sequirements for the past 90 days. Yes / No . As of March 1, 1988, 106,660,778 shares of the registrant's Common Stock, without par value, were issued and outstanding and privately held, beneficially and of record, by Houston Industries Incorporated. Portions of the definitive proxy statement relating to the 1988 Annual Meeting of Shareholders of Houston Industries Incorporated, which ' rill be filed within 120 days of December 31,1987, are incorporated by reference in Item 10, Iteni 11, Item 12 and item 13 of Part III of this form.
HOUSTON LIGHTING & POWER COMPANY Form 10-K for the Year Ended December 31, 1987 TABLE OF CONTENTS Page No. Part I Item 1. Business The Company................................ 3 Certain Factors Affecting Electric Utilities and HL&P.............. 3 Service Area............................... 4 Peak Loads and Capabili ty . . . . . . . . . . . . . . . . . . 4 l Construction Program....................... 5 ; Competition and Least-Cost Planning........ 12 i Purchased Power and Cogenecation........... 13 Fuel....................................... 14 Regulatory Matters......................... 16 Nuclear Insurance.......................... 20 Labor Matters.............................. 21 Operating Statistics....................... 22 0fficers................................... 23 Item 2. Properties................................... 25 Item 3. Legal Proceedings......,..................... 25 I Item 4. Submission of Matters to a Vote of Security Holders............................. 25 Part II Item 5. Market for the Registrant'c Common Stock and Related Stockholder Matters.............. 26 Item 6. Selected Financial Data...................... 26 i Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 27 Item 8. Financial Ctatements......................... 31 Item 9. Changes in and Disagreements with Accountants , on Accounting and Financial Disclosure....... 64 i Part III Item 10. Directors and Executive Officers of the Registrant............................... 64 Item 11. Executive Compensation....................... 64 Item 12. Security ownership of certain I Beneficial Ovners and Management............. 66 Item 13. Certain Relationships and Related Transactions................................. 66 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. ....... 67
. I
PART I , Item 1. Business THE COMPANY Houston Lighting & Power Company (HL&P) is engaged in the generation, transmission, distribution and sale of electric energy, serving an area of the Texas Gulf Coast Region, estimated at 5,000 square miles, which includes Houston (the largest city in Texas) and 156 smaller cities, villages and communities. The address of HL&P's principal executive offices is 611 Valker Avenue, Houston, Texas 77002 (telephone number 713/228-9211). HL&P is a subsidiary of Houston Industries Incorporated (Hounton Industries) which owns all of HL&P's outstanding common stock. Houston Industries is a holding company as defined in the Public Utility Holding Company Act of 1935 (1935 Act), but is exempt from regulation as a "registered" holding company under the 1935 Act except with respect to the acquisition of certain voting securities of other public utility companies and holding companies. Houston Industries also owns all of the outstanding common stock of six other subsidiaries: Primary Fuels, Inc., Utility Fuels, Inc. (Utility Fuels), Innovative Controls, Inc., KBLCOM Incorporated, Houston Industries Finance, Inc., and Development Ventur(s, Inc. Certain Factors Affecting Electric Utilities and HL&P HL&P, in common with electric utilities in general, has experienced problems in a number of areas, including difficulty and delays in securing rate increases in sufficient amounts to finance its construction program and provide an adequate return on common equity; uncertainties and delays respecting the construction and licensing of nuclear-fueled generating units; substantial increases in constructicn and operating costs; uncertainties regarding adequate rate treatment for costs incurred in constructing plants; negative effects on earnings due to the commencement, i at commercial operation of new generating plants, of substantial charges for depreciation and other operating expenses and the cessaticn of the accrual ' of an allowance for funds used during construction (AFUDC) without offsetting rate increases; increased expenditures due to pollution control and environmental considerations; high costs in raising large amounts of capital in competition with other maior users of capital; competition from unregulated suppliers of energy; con roversies over the safety and uses of nuclear pover; and an uncertain ste of change in energy sales due to economic conditions, self-generattan and energy conservation measures undertaken by customers. In addition, HL&P's operations have been adversely affected by I depressed economic conditions in HL&P's service area. Furthermore, the problems referred to in the preceding paragraph have had end are expected to continue to have an impact on HL&P's operations. Certain of these problems l could have an increased impact during 1988 in connection with the commercial l operation of Unit No. 1 of the South Texas Project Electric Generating , 1 1 1
Station (South Texas project), HL&P's request for certain interim accounting treatment with respect to Unit No. 2 of the Limestone Electric Generating Station (Limestone) and Unit No. 1 of the South Texas project and the general rate proceeding which is expected to be filed in the second quarter of 1988. See "Peak Loads and Capability", dConstruction Program",
"Competition and Least-Cost Planning", "Purchased Power and Cogeneration", "Regulatory Matters" (including the discussion in such section of a contemplated general rate proceeding), Item 7. "Fanagement's Discussion and Analysis of Financial Condition and Results of Operations" and Note 9 to the Financial Statements included under Item 8 of this Report.
Service Area HL&P's service area includes major producers of oil, gas, sulphur, refined products, chemicals, petrochemicals, oil tools and related manufacturing, processing and servicing activities. Electronics, paper, building materials, cotton, rice, cattle, salt, magnesium and other minerals are also important products of the service area. The service area is characterized by a favorable year-round climate and ready access to air, land and vater transportation. For a number of years prior to 1983, expansion of industrial activity in HL&P's service area was accompanied by a corresponding increase in the construction of industrial structures and complexes and building activity in many other fields, including multi-block office building complexes, apartment buildings, single and multi-family dwellings, hotels and motels, hospitals and other commercial structures. As a result of general recessionary conditions in the Houston area which began in 1983 and the continued veahness in the oil and gas industry and related servicing and supply industries which persisted through 1987, general economic and population growth in the service area has sloved. Since 1983, industrial and commercial construction, occupancy levels for office space and apartments, and construction of single-family homes have been at reduced levels compared to previous years. HL&P's service area has also been adversely affected by the rapid and substantial declines in vorld oil prices. HL&P's sales, particularly to industrial customers, have been further adversely affected by enetsy conservation measures, self-generation and the production of electric power from cogeneration facilities. HL&P operates under a certificate of convenience and necessity granted l by the Public Utility Commission of Texas (Utility Commission) which covers its present service area and facilities. Peak Loads and Capability l The following table sets forth for the years indicated information with respect to the installed net capability and total net capability of HL&P at the time of peak demand, the net maximum hourly demand on its system t (excluding demand which is interruptible), and the reserve margin at the time of its system net maximum hourly demand: i 1 I i ; l l
Pur- Net Maximum Hourly Demand Installed chased % Change Net Pover Total Net From Reserve Capability (Mega- Capability Prior Margin 1 Year (Megavatts) vatts)(1) (Megavatts) Date Hegsvatt,s Year (%)(1) l l 1983 12,196 1,200 13,396 August 31 10,676 0.8 25.5 l 1984 12,275 925 13,200 August 23 10,851 1.6 21.6 1985 12,318 1,595 13,913 August 19 10.618 (2.1) 31.0 ! 1986 11,863 1,395 13,258 July 30 10,556 (0.6) 25.6 l 1987 12,460(2) 1,295 13,755 August 19 10,302(3) (2.4) 33.5 1 l (1) Reflects firm purchased power capability available through interconnections with other etilities and from cogenerators. ! (2) Capability shown is as of time of system peak and does not reflect (i) ) capacity changes which increased net capability by 175 megavatts but which occurred after the system peak and (ii) the uprating of a plant which had been derated by 220 megavatts during the summer. ; I (3) Does not include interruptible load at time of peak of 1,016 uegawatts. l l For planning purposes, HL&P expects growth in peak demand for electricity to reflect the pattern of economic recovery for the Houston area. The compound annual growth rate in peak demand over the ten-year I period 1988 through 1998 is estimated to be 1.1%. The current demand ] forecast is derived, in part, from a continuing survey of industrial customers which reflects expectations for power consumption and from ) assessments of the effect of additional residential and commercial customers on peak demands. Assuming facilities under construction are placed in service as presently scheduled, HL&P expects to maintain a minimum reserve margin of at least 20% in excess of its current estimate of peak load requirements through 1999, with reserve margins during the period 1988 through 1994 nov projected to be in a range of 30% to 40%. See "Competition and Least-Cos* Planning" and "Purchased Power and Cogeneration". Construction Program HL&P carries on a continuous construction program. Such construction program and the estimated construction costs set forth belov are subject to periodic reviev and are revised from time to time in light of changes in load forecasts, fuel diversification objectives, the need to retire older plants, changing regulatory and environmental standards and other factors. Vith the completion of Limestone Unit No. 2 in December 1986 and the extension of the scheduled in-service dates for the Malakoff Electric Generating Station (Malakoff project) discussed belov, the only active generating project in HL&P's construction program is the South Texas project. The construction program discussed below is currently estimated to cost approximately $1.257 billion ouring the three-year period 1988-1990 vith approximately $477 million to be spent in 1988, $431 million to be spent in 1989 and $349 million to be spent in 1990, excluding nuclear fuel and AFUDC. In 1987, total constructinn expenditures vere approximately $643 million. These amounts do not include expenditures on projects for which HL&P vas reimbursed or expects to be reimbursed by customers or f
cogenerators. These amounts also do not reflect the possible acquisition by HL&P of an additional -16% interest in the South Texas project presently owned by the City of Austin (Austin) which would increase such three year construction programo *y $150 million, $62 million of which is related to the reimbursement of costs incurred by Austin prior to 1988. See Notc 9 to the Financial Statements included under Item 8 of this Report. HL&P's construction program for 1988-1990 consists of the following principal estimated expenditurest Amount , Jmillions) % Fossil-fueled generating facilities..... S 326 26 Nuclear-fueled generating facilities.... 167 13 Transmission facilities................. 183 15 Distr %5ution facilities................. 379 30 General pleet facilities... .... . ..... 202 16 Total.............................. $1,257 100% At December 31, 1987, HL&P ovned and operated generating facilities with generating capability of 12,855 megawatts. The 1988-1990 construction program includes expenditures in connection with the fot. lowing major generating projects aggregating 2,060 megavatts of estimated capability. All dollar amounts are exclusive of AFUDC and nuclear fuel payments. Millions of Dollars (Excluding AFUDC) Expend-Estimated Scheduled itures Unit In- Through Estimated Estimated Plant and Capability Service December Completed Cost Location (County) (KV) Puel Date(a) 31, 1987 Cost Per KV South Texas No. 1 (Matagorda)(b) 385,000 Nuclear 1988 South Texas No. 2 $1,546(c) S1,686(c) $2,190(c) (Matagorda)(b) 385,000 Nuclear 1989 Halakoff No. 1 (Henderson) 645,000 Lignite 1997(d) Halakoff No. 2 137(d) 2,160(d) 1,674(d) (Henderson) 645,000 Lignite 1999(d) l (a) The scheduled in-service date indicates the year during which the I unit is expected to be available to meet peak demand. (b) The figures shovn in the table as to capability, expenditutes and i costs for the South Texas units represent HL&P's 30.8% share of a l jointly owned 2.5 million kilowatt project for which HL&P acts as l project manager. The other owners are Central Pover and Light Company, Austin and the City of San Antonio (San Antonio). See l "South Texas Nuclear Project", "Regulatory Matters" and Note 9 ( _ _ _ _ _ _ _ . _ _ __ _ ___ ._ . _ _ _____________ _ _ to the Financia) Statements included under Item 8 of this Report. In September 1987, in an effort to settle litigation relating to the South Texas project, HL&P reached an agreement in principle (Agreement in Principle) vith Austin to acquire Austin's 16% share of the South Texas project subj ec t to the execution of definitive documentation and the satisfaction of other conditions. For a discussion of the Agreement in Principle and the related litigation, see Note 9 to the Financial Statements included under ! Item 8 of this Report. (c) The amounts shown for total expenditures and estimated completed cost represent HL&P's existing 30.8% interest in the South Texas project and reflect approximately $65 million, or $85 per KV, expected to be capitalized by HL&P for state and local taxes. The total expenditures through December 31, 1987 and the estimated completed cost reflect a credit of $154.1 million (net of expenses) as a result of the settlement of certain litigation with the former architect / engineer-constructor of the South Texas project (Former Architect-Engineer) and its corporate parent. The estimated completed cost represents an increase ef $92 million with respect to HL&P's existing 30.8% interest over the previous completed cost estimate and is derived from a completion e assessment adopted by the management committee for the South Texas " project in December 1987 which assumed a commercial operation date l for Unit No. 1 of March 1, 1988. Although no definitive estimate of additional costs has been approved, HL&P anticipates that cost increases in the range of $100 to 150 million (of which HL&P's portion vould be $31 to $46 million based on its 30.8% interest) may result from the delays in achieving initial criticality and the resulting delay in the anticipated date of commerc'al operation of Unit No. 1. See Note 9 to the Financial Statements included unc a Item 8 of this Report. Based on the cost estimate approved by the management committee in December 1987, HL&P's shure (based on its 30.8% interest) of the estimated completed cost for both units at the South Texas project (including AFUDC) is $2.449 billion or S3,181 per KV. Assuming consummation of the Agreement in Principle with Austin, which would provide HL&P vith an aggregate 46.8% interest in the South Texas project, the estimated completed cost to HL&P excluding AFUDC vould be approximately $2.207 billion or $1,886 per KV, and the estimated completed cost to HL&P including AFUDC voulo be
$2.976 billion or $2,543 per KV.
(d) In January 1987, HL6P announced the extension for five years of the scheduled in-service dates for Unit No. I and Unit No. 2 of the Malakoft p roj ec t . See "Modified Schedule for Malakoff Project". HL&P's total investment in the Malakoff project through - December 31, 1987 vas $154 million including AFUDC and land. In addition, Utility Fuels, HL&P's fuel supply affiliate, had invested $121 million in lignite reserves and mining equipment related to the project through December 31, 1987.
Through December 31, 1987, HL&P spent approximately $112 million excluding AFUDC for uranium concentrate and nuclear fuel processing services for its share of the fuel for the South Texas project. It expects to spend an additional $30 million for siellar purposea in connection with its 30.8% share of the project during the 1988-1990 period. These amounts do not reflect the possible acquisition by HL6P Of an additional 16% interest in 1 the South Texas project which vould increase such nuclear fuel expenditures l by $56 million, $30 million of which is related to the purchase of Austin's i shi ) of nuclear fuel. Additional nuclear fuel expenditures, which could include substantial sums for long-term storage of spent nuclear fuel, vill be required after 1990. See "Fuel - Nuclear Fuel Supply". The estimated construction expenditures set forth above do not include any amounts for the cost of decommissioning the South Texas project at the end of its estimated 40-year useful life. Based on a decommissioning study prepared in early 1987, the estimated cost of decommissioning HL&P's 30.8% ownership share of the two units at the South Texas project is $77 million (3117 raillion if Hl;P's ovnership interest increases to 46.8%) in 1986 dollars. However, actual costs could vary substantially from the estimates and vill depend uprn a number of f3gtors including, without limitation,
~
regulatory requirements and the method ultimately used (c decommission the project. Although HL&P intends to seek to recovet such costs throuih ' electric rates over the South Texas project's useful life, there can be no assurance that all of such costs vill be recoverable through rates. Ac:ual construction expenditures vill vary from the ebove estimates as a result cf numerous factors, including changes in the rate of inflation, changes in equipmen delivery schedules, construction delays and deferrals, availability of fue), environmental protection requirements, changing U. S. Nuclear Regulatory Commission (NRC) requirements and licensing delays, changes in the construction program, the availability of adequate ano timely rate relief, the ability to secure external financing, legislative changes and changes in anticipated customer demand and business conditions. The scheduled in-service dates for generating plants in the construction program may also vary as a result of similar factors. Since 1983, the nuclear industry in general has experienced sign!ficant setbacks as a resul of the cancellatinn or deferral of several nuclear generatin2 units under construction. In addition, the estimated completed cost ar.d the scheduled in-service date for the South Texas project vere revised during 1987 as a result of certain of the factors discussed above, and there can ba no assurance that factors beyond the centrol of the participants vill not adversely affect the South Texas project's construction schedule, schedule for comme'.cial operation or budget. See "South Texas Nuclear Project" below, "Regulatory Matters" and Note 9 to the Financial Statements included I under . Item 8 of this Report. j Expenditures for environmental protection facilities for the five years j ended December 31, 1987 aggregated $939 million (excluding AFUDC), including expenditures of $100 million in 1987. Environmental protection expenditures for 1988-1990 are estimated to be S91 million (excluding AFUDC), of which '
$48 million is expected to be expended during 1988, $38 million during 1989 and $5 million during 1990.
l
Total December 31,gross additions to 1987 amounted the plant of HL&P during the five years ended same period retirements amounted to approximately $4.7 billion, and during the l additions to approximately $257 million. Gross during the same total utility plant at December five-year period amounted to approximately 48% of 31, 1987. South Texas in-service datesNuclear for theProject. The estimated expenditures and scheduled based on the cost estimate South Texas generating units presented above are provided assessment in the September 1987 completion project's for the entire project management committee. which was adopted in December 1987 by the commercial operation date for UnitThe estimate was based on a projected No. 1 of March 1, 1988. commercial operation is not However, Although expected to occur before the summer of 1988. anticipatesno definitive that cost estimate increases of aiditional costs has been approved, HL&P ' which HL&P's portion vould be $31 in the range of $100 to $150 million (of interest) may result to $46 million based on its 30.8% the from the delays in achieving initial criticality and No. resulting
- 1. It delay in the anticipated date of commercial operation of Unit is to meet peak demand anticipated that Unit No. 1 and Unit No. 2 vill be available in 1988 and 1989, r on its current 30.8% interest in the Seuth Texas project) espectively. HL&P's portion (based of the estimated total pursuantexpenditures (excluding AFUDC and net of the proceeds received is $1.686 billion.to a settlement with the Former Architect-Engineer) for the project billion (excluding AFUDC and net of such proceeds). Actual expenditures throug current budget and For a discussion of the Principle pursuant schedtic for the South Texas project, the Agreement in to South Texas proj ec t which HL6P may aEquice Mwtin's _16% interest in '.he the Financial Statements and the related litigation with Austhi,-ree. Note 9 to "Hanagement's included under Item B of this Report and ite'm Ti -
Operations". Discussion and Analysis of Financial Condition and Pasults of As a result of, increases among other factors, the need for significant rate in connection increases in costs 'of with completed nuclear generating units, delays and demands and reduced building nuclear generating units, reduced energy number of other utilities need for additional electrical generating capacity, a through have experienced difficulties cases, electricon action rates the costs expended on nuclear power plants.in recovering In some periods rate increase requests has been delayed for considerable of time, while the utilities' earnings have deteriorated due to the cessation of accrual of AFUDC and the commencement of operating expenses and depreciation For a charges at commarcial operation vithout offsetting rate relief. of the discussion South Texas of the possible impact on HL&P's earnings once Unit No. project 1 HL&P has undertaken to seek to mitigate this effect,is placed in commercial opera see "Regulatory Matters
- Requests for Interim Rate Proceeding" and ItemAccounting 7.
Treatment" and "- Contemplated General Financial Condition and Results of Operations"."Hanagement's Discussion and Analysis of authorities have In other cases, regulatory such expenditures disallowed vere imprudent. certain expenditures based upon a finding that required to "phase-in" Also, a number of utilities have been the costs of nuclear generating units, financing the subsequent costs currently and deferring recovery from customers while date. to a For a discussion of certain changes in accounting standards relating to abandonment and disallowance of plant costs and Ed -
I phase-in plans, see Item 7. "Hanagement's Discussion and Analysis of Financial Condition and Results of Operations - Changes in Accounting Standards". During 1987, there were a number of significant developments in the litigation and in various regulatory proceedings pertaining to the South Texas project. For information respecting such matters, including the pending litigation and the status of negotiations with Austin; the pending litigation with San Antonio, Central Power and Light Company and its parent corporation, Central and Southwest Corporation; the scheduled prudence review of the South Texas project by the Utility Commission; and the budget and schedule for the South Texas project, see Note 9 to the Financial Statements included under Item 8 of this Report. For information respecting a contemplated general rate proceeding and licensing proceedings before the NRC, see "Regulatory Matters - Contemplated General Rate Proceeding" and "- { Nuclear Licensing". Limestone Unit No. 2 Placed In Service. In December 1986, the second of two 720 megavatt, lignite-fired generating units at Limestone was placed into commercial operation. In January 1987, HL&P requested that the Utility ) Commission order an accounting treatment which would have the effect of I minimizing the impact on earnings of Unit No. 2 being placed in service without being fully reflected in the rates charged customers. A similar accounting treatment was requested for Limestone Unit No. 1 but was denied by the Utility Commission. For information concerning HL&P's requests for interim accounting treatment, see "Regulatory Matters - Requests for Interim j Accconting Treatment". Electric rates do not currently reflect approximately $174 million of the project cost or any provision for operating expenses, non-reconcilable lignite mining and handling costs, taxes or depreciation related to Unit No. 2, estimated to be $57 million
, annually. Operating results of HL&P have been adversely affected and vill costipue to be adversely affected until rate relief or other regulatory action is 6Ltaingd with respect to Limestone Unit No. 2.
Modified Schedule for Malaknff. Project. In January 1987, HL&P ! announced that the schedule for the construction of two 645 megawatt lignite units at the prt90 sed Malakoff project in Hende'rs6n Cnunty, Texas had been modified. The scheduled in-service dates, which are the dates-tbe units are ' expected to be available to meet peak demand, are nov 1997 for Unit N: . _1 and 1999 for Unit No. 2. The modified schedule resulted from lovered ' projections of future demand for electricity in the Houston area. As a result of the modified schedule, all developmental work on the two lignite units has stopped, but HL&P vill resume activity, when necessary, to meet load growth requirements. HL&P's total investment in the Malakof f project
*hrough December 31, 1987, is $154 million including AFUDC and land. This amount is included in Plant Held for Future Use and the accrual of AFUDC has been suspended until such time as construction resumes. HL&P has agreed to indemnify Utility Fuels for all necessary and actual costs incurred due to the modification of the schedule. Utility Fuels has invested $121 million in lignite reserves and handling systems relating to the Malakof f project through December 31, 1987 and suspended capitalization of interest effective December 31, 1986. For the 1988-1990 period, Utility Fuels anticipates $22 million of expenditures relating to the Malakoff project which are primarily associated with keeping lignite leases and other related agreements in effect.
Financing of UL&P's Construction Program. HL&P proposes to finance its construction program through the use of internally generated funds and the proceeds received from the issuance of securities including, on an interim basis, short-term debt securities. The interim financing requirements of HL&P are met through short-term bank loans under a $650 million bank line of credit and the issuance of commercial paper. See Note 4 to the Financial Statements included under Item 8 of this Report. HL&P's ability to finance its construction program vill be substantially dependent upon the availability of adequate and timely rate relief. See "Regulatory Hatters - Rates and Services" and " - Contemplated General Rate Proceeding". It is presently estimated that during 1988, 10% to 20% of HL&P's construction program can be financed through internally generated funds from operations. Internally generated funds for subsequent years vill be primarily dependent on the regulatory treatment of HL&P's investment in the South Texas project. HL&P anticipates that it may utilize the sale of first mortgage bonds and/or preferred stock to fund a portion of its construction program during 1988. In this regard, HL&P has registered with the Securities and Exchange l Commission (SEC) $225 million principal amount of first mortgage bonds which it may sell during 1988, subject to favorable narket conditions. The types, amounts and time of issuance of additional securities have not been determined. HL&P's Mortgage and Deed of Trust (Hortgage) and corporate charter specify earnings coverages and other conditions which must be complied with prior to the issuance by HL&P of any first mortgage bonds or additional shares of preferred stock. Vith respect to liquidity and financing plans of HL&P, see Item 7. "Hanagement's Discussion and Analysis of Financial Condition and Results of Operations". In March 1987, HL&P issued $391 million aggregate principal amount of a nov 9% series of first mortgage bonds due 2017 in exchange for an equal principal amount of outstanding high coupon first mortgage bonds. Under the terms of the exchange offers, HL&P also paid a cash premium which varied depending on the series of bonds exchanged. In March 1987, HL&P also deposited $146 million with the bond trustee for the purpose of redeeming ) $140 million principal amount of certain series of outstanding first I mortgage bonds and paying accrued interest to the redemption date. These l l bonds vere called for redemption and funds placed in trust under the ) replacement fund provisions of HL&P's Hortgage. The bonds vere retired by j the trustee in May 1987, 1 l In June 1987, HL&P sold 1,000,000 shares of $8.50 cumulative preferred ! stock which are subject to mandatory redemption. Such stock is entitled to l- a fixed liquidation price of $100 per share, plus a fixed liquidation l premium in the event of a voluntary liquidation before June 1, 1994, in each l case together with accrued dividends. The mandatory redemption provision requires . HL&P.to redeem 200,000 shares annually beginning June 1, 1993, i HL&P received net pteceeds of $99 million from the sale. During 1987, HL&P also recadved $128 million of the proceeds from l pollution control revenue bonds issue ~d in prior years. Approximately $87 million (including interest earned on funds held in trust) was held in trust at December 31, 1987. Substantially all of the funds'neld in trust are expected to be drawn down by HL&P in 1988 and 1989 to fund qualifying construction expenditures. l 1 l 1
l In January 1988, HL&P sold $400 million L c'4 4ate principal amount of first mortgage bonds and received net proceeds 01 g,.toximately $398 million from the sale of the bonds. These bonds vill bsar interest at a rate of 9-3/8% per annum and vill mature in approximately equal principal amounts in etch of the years 1991, 1992 and 1993. In January 1988, HL&P deposited $52 million with the bond trustee for purposes of redeeming all of the outstanding bonds of the 13-7/8% Series at 100% of the principal amount and paying accrued interest. The bonds of this series vere called pursuant to the general redemption provisions of the Hortgage. Competition and Least-Cost Planning ! l HL&P is subj ec t to competition from a number of unregulated suppliers of energy, particularly cogenerated energy. In recent years, rising costs of electricity provided by regulated utilities have caused certain industrial and commercial customers to seek other ways to meet their energy needs, including the construction of cogeneration systems which provide electric energy both for their own needs and for sales to HL&P and other electric utilities. A relatively large numbet of cogeneration facilities have been built in HL&P's service area because of the relatively high concentration of process industries. The availability of unregulated alternative energy sources increases the risk that major customers vill reduce their purchases of electricity from HL&P. Should reduced purchases occur, increased electric prices to the remaining customers could occur. As costs for electricity increase, additional customers may find it economically advantageous to turn to alternative energy supplies. The existence of alternative unregulated producers of electricity has contributed to regulatory uncertainty concerning the recovery of power plant construction costs and a continued focus on "least-cost" planning for alternatives to large capital intensive generating stations. HL&P is addressing this increased competition by, among other things, implementing new programs to reduce costs, particularly construction and l fuel costs; developing a variety of rates and services and other marketing strategies to increase sales and encourage industrial expansion in its service area; and fully evaluating all low-risk, least-cost options before initiating construction of additional large central station generating facilities. Steps that have already been taken in these areas include completion of the nov Limestone units ahead of schedule and under budget; development of an integrated fuel management system to provide increased fuel purchasing flexibility and assure utilization of the most economical available fuels during peak periods; modification of existing generating units to provide improved reliability, reduced maintenance costs and greater flexibility in responding to changing demand conditions; and deferral until the late 1990's of the completion of the Malakoff project. In January 1988, HL&P filed an application with the Utility Commission and various cities in HL&P's service are- that have maintained original jurisdiction requesting approval of an experimental economic redevelopment rate which would provide discounts to qualified customers. The rate has
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been approved by the Utility Commission and by all of the cities. The purpose of the proposed rate is to provide an economic incentive to encourage development of and relocation to HL&P's service area and to create new jobs. The rate vill be offered to certain customers in HL&P's service area including basic manufacturing industries, regional varehousing and distribution facilities, scientific and industrial research and development facilities, corporations relocating to HL&P's service area, governmental projects subj ec t to competitive siting and facilities receiving county tex abatements. Purchased Power and Cogeneration The Public Utility Regulatory Policy Act of 1978 requires utilities to purchase all electricity offered to them by qualifying cogeneration facilities. HL&P is currently purchasing cogenerated energy from thirteen industrial cogeneration facilities and various small power producers which have approximately 3,200 megavatts of total generating capability. Three long-term capacity contracts cover 820 megavatts of this total amount. A fourth capacity contract for 136 megavatts has been temporarily suspended through mid 1990. During 1987, a maximum of approximately 1,800 megavatts of cogenerated power produced in HL&P's service area was wheeled or transmitted by HL&P to other utilities in Texas. HL&P's current load forecast indicates that additional firm cogeneration capacity vill not be needed during the next ten years. Certain rules of the Utili(y Commission specify that a utility is not required to contract for more capacity from cogenerators than is necessary to meet its approved demand forecast. Therefore, HL&P does not intend to pursue any additional long- t e r.n capacity contracts for cogenerat2d electric energy in the near future. Cogenerators are not permitted under Texas lav to make electric sales to parties other than electric utilities, except in the case of sales to the thermal purchaser from the cogeneration facil'ty. Regulated electric utilities are required to provide transmission service for power under a Utility Commission rule that permits the utilities to recover their costs plus a return on investments. Attempts have been made to secure authorization for cogenerators to sell electricity to traditional customers of regulated electric utilities, and some cogenerators have sought greater access to electric transmission facilities. HL&P believes such retail sales or such access to transmission facilities vould work to the detriment of the majority of the utility's remaining customers by forcing them to bear increased costs and by reducing the overall reliability of electric service. In addition, to the extent cogenerators and other unregulated electric entities are allowed to make sales to traditional electric utility customers or to gain access to the electric transmission and distribution systems for their own purposes, HL&P's prospects may be adversely affected. HL&P intends to continue its opposition to such efforts. HL&P's purchased power contracts with San Antonio and Austin expired in December 1987 and HL&P currently has no other long-term contracts in effect with other utilities. Fuel Approximately 46% of HL&P's energy requirements during 1987 was met with natural gas while 40% vas met with coal and lignite. The remaining 14% vas met principally with purchased power and cogenerated power. HL&P currently expects its future energy mix to be in the following proportions, l vith separate presentations based upon HL&P's exiating 30.8% interest in the South Texas project and based upon a possible 46.8% interest in the South Texas project _if the Agreement in Principle with Austin is consummated: Estimated Energy Hix Estimated Energy Hix (30.8% interest in (46.8% interest in South Texas project) South Texas project) 1988 1989 1990 1996 1988 1989 1990 1993 Gas................ 43% 35% 30% 38% 43% 35% 31% 38% Coal and Lignite... 39 41 41 40 38 38 37 36 Nuclear............ 3 7 8 8 4 10 11 12 Cogeneration....... 15 21 14 15 17 21 14 _17 Total......... 100% 100% 100% 100% 100% 100% 100% 100% HL&P's actual energy mix in future years could vary substantially from the percentages shown in the table. Such percentages are based upon numerous estimates and assumptions relating to, among other things, environmental protection requirements, load growth, load management, cogeneration, the cost and availability of fuels and purchased electrical energy, and the actual in-service dates of HL&P's planned generating facilities. Natural Gas Supply. HL&P purchased its natural gas fuel supplies from a large number of suppliers during 1987; however, 77% of HL&P's gas requirements were still purchased from its traditional suppliers and their affiliates. Two of these firms, Exxon Company, U.S.A. (Exxon) and United Texas Transmission Company (UTT), sell gas to HL&P under long-term contracts. The third, Houston Pipe Line Company (HPL) and its affiliates, provided 27% of HL&P's gas requirements even though no long-term contract exists between HL&P and HPL. The contract with Exxon vill expire in 1996 or after delivery of a specified quantity of natural gas, whichever comes first. The UTT contract vill expire on January 1, 1990, unless terminated earlier by operation of certain "economic out" provisions in the agreement i or unless extended by mutual agreement of the parties. As a result of cor.di tions in natural gas markets, aggressive negotiations, and HL&P's strategic position in the marketplace, HL&P maintained its cost of natural gas in 1987 at approximately the same level as in 1986 despite an increase in the price of natural gas late in 1987. Several strategic fuel projects vere completed in 1987. One of these projects is the North Dayton Gas Storage Facility (owned and operated by an unaffiliated third party) which provides gas storage services exclusively to
HL&P. The purpose of this facility is to allow HL&P to reduce variations in hour to hour purchases of gas, thereby avoiding extra charges by gas , suppliers and transporters. Storage capability also enables HL&P to take I advantage of favorable market conditions which may permit the purchase of lower-priced gas and provides a source of gas supplies when deliveries by pipelines may be curtailed. Another strategic project was the modification of certain segments of HL&P's existing fuel pipeline to provide dual fuel capability. This modification of the pipeline allows distribution of either oil or gas among four of HL&P's major gas / oil fueled plants, thus giving HL&P greater access to gas suppliers and/or transporters and increased gas supply flexibility without sacrificing the ability to switch fuels as economics dictate. Coal and Lignite Supply. Coal supply services for HL&P's four coal-fired units at the V. A. Parish plant (aggregating 2,335 megawatts) are being provided by Utility Fuels. Utility Fuels purchases low-sulfur Povder River Basin coal under two long-term coal supply contracts. Substantially all of the coal requirements of the four coal-fired units at the V. A. Parish plant are expected to be met under such contracts. For information concerning a prudence review by the Utility Commission of the two contracts, the resulting litigation filed by HL&P against the two coci suppliers and the settlement of this litigation, see Note 7 to the Financial Statements included under Item 8 of this Report. The lignite supply services for HL&P's Limestone units are also being provided by Utility Fuels. Utility Fuels has under lease or contract recoverable lignite reserves which are expected to be sufficient to meet the total projected lignite fuel requirements of 228 million tons for the remaining life of the Limestone units. It is presently contemplated that Utility Fuels vill also provide the lignite supply services for HL&P's Malakoff project. See "Construction Program". Utility Fuels has purchased or leased various properties in the area of the proposed plant site containing recoverable lignite reserves which are expected to be sufficient to meet the total lignite fuel requirements of the two proposed generating units. Nuclear Fuel Supply. The supply of fuel for nuclear generating facilities involves the acquisition of uranium concentrates, conversion to uranium hexafluoride, enrichment of the uranium hexafluoride, and fabrication of nuclear fuel assemblies. Contracts have been entered into with various suppliers to provide the two South Texas project units with uranium concentrates to allow the units to operate through 1997, conversion services through 1994, enrichment services for a period of 30 years and fuel fabrication services for the initial cores and 16 years of reloads. A portion of the uranium inventory for the South Texas project was produced outside the United States, and it is anticipated that ad6itional quantities of such "foreign source" uranium may be acquired from time to time in the future. Currently, such foreign source uranium is being processed, along with domestically produced uranium, by the U.S. Department of Energy (DOE) under contracts which provide for the enrichment of uranium, a process necessary to produce fuel for nuclear reactors. Litigation is currently pending under which the DOE may be restricted from continuing to
process such foreign source uranium. That litigation was initiated by certain uranium producers which contend that the DOE should not offer enrichment services for foreign source uranium "to the extent necessary to l assure the maintenance of a viable domestic uranium industry." The position i of the uranium producers essentially has been upheld by a federal district ,% court and the U.S. Court of Appeals for the Tenth Circuit. _Th t nitmi U ~ States Supreme Court has agreed to hear an appeal from'those lover co_urt , decisions. The pending litigation is not currently having an adverse effect on HL&P and the South Texas project, but if the lover courts' decisions ultimately are upheld, the cost of acquiring additional uranium over the life of the South Texas project may be increased. Under a contract with the U. S. Department of Energy, the Department of Energy vill take possession of all spent fuel generated by the plant. The Department of Energy plans to place the spent fuel in a permanent underground storage facility. The contract currently requires that a spent fuel disposal fee of one mill ($.001) per net kilovatt-hour generated be paid. The fee may be adjusted in order to ensure full cost recovery. The South Texas project is currently designed to have on-site storage facilities with the capacity to store at least 30 years of spent fuel discharges from each unin Oil Supply. Fuel oil is maintained in inventory by HL&P to provide for fuel needs in emergency situations if and when sufficient supplies of natural gas are not available. In addition, HL&P uses fuel oil from time to time when oil is a more economical fuel than incremental gas supplies. HL&P has storage facilities for approximately 6,700,000 barrels of oil located at those generating plants capable of burning oil. HL&P's oil inventory vill be adjusted periodically, as necessary, to accommodate changes in the availability of primary fuel supplies and to take into consideration the back-up gas fuel supply capability provided by the North Dayton Gas Storage Facility. See "Natural Gas Supply". Recovery of Fuel Costs. For informatirsn relating to the cost of fuel over the last three years, see "Operating Statistics" and Item 8.
"Financial Statements". The Utility Commission rules provide for the recovery of fuel costs through an energy component of base electric rates.
The energy component is established during either a utility's general rate proceeding or an interim fuel proceeding and is to be generally effective for a minimum of twelve months, unicss a substantial change in a utility's cost of fuel occurs. In that event, a utility may be authorized to appropriately revise the energy component of its base rates. The rule also provides for a reconciliation of fuel revenues, with any over- or under-recovery of fuel costs to be considered in establishing future fuel cost factors. RegulrJory Matters Rates and Services. Pursuant to the Texas Public Utility Regulatory Act of 1975 (PURA), the Utility Commission has original jurisdiction over electric rates and services in unincorporated areas of the State of Texas and in the cities that have relinquished original jurisdiction. In addition, the Utility Commission has appellate jurisdiction over electric rates and services within the remaining incorporated municipalities.
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In September 1983, various amendments to the PURA became effective which provide for, among other things, the extension of the life of the Utility Commission to 1995, the creation of an independent Office of Public Utility, Coundel- to represent the interests of residential and small commercial consumers before the Utility Commission, an increase from 125 osys f# d85 days in the period after filing of an application before nev ; rates may be placed into effect under bond, and a prohibition against the collection by a public utility of any rates or charges (including fuel charges) that do not have the prior approval In addition, of the Utility Commission or the PURA, as amended, other proper regulatory authority. , requires the Utility Commission to treat construction vork in progress I I (CVIP) in rate base as an exceptional form of rate relief to be granted only when necessary to maintain the financial integrity of the utility and to exclude from rate base any GUIP on major projects under construction found to have been inefficiently or imprudently planned or managed. The 1983 7 amendments to the PURA have resulted in more protracted rate proceedings and could delay or prevent recovery of major expenses which, in turn, could adversely affect the earnings and cash flow of HL&P. Requests for Interim Accounting Treatment. In January 1987, HL&P requested .the Utility Commission to authorize the capitalization of operating and maintenance expenses, non-reconcilable mining and handling charges, taxes and depreciation associated with Limestone Unit No. 2 and the continued recording of AFUDC from the date that Unit No. 2 was placed in commercial operation until rates reflecting the costs of such unit are placed into effect. HL&P alternatively requested that non-reconcilable mining and handling charges be allowed recovery through its fuel cost factor. Electric rates do not currently reflect approximately $174 million of the project cost or any provision for operating expenses, non-reconcilable lignite mining and handling costs, taxes or depreciation related to Unit No. 2, estimated to be $57 million annually. Although hearings on HL&P's request concluded in June 1987, the examiner presiding over this proceeding has not yet issued a recommendation on this matter. ! Until rate relief is obtained which reflects the placing of Limestone Unit No. 2 into service or the requested accounting treatment or other regulatory action is granted with respect to Limestone Unit No. 2, operating results of i HL&P vill be adversely affected. t In July 1987, HL&P petitioned the Utility Commission to capitalize l HL&P's share of all operation and maintenance expenses, taxes, and depreciation expense of Unit No. 1 of the South Texas project which would be recorded effective with the date the unit is placed into commercial operation. The petition further requested that the Utility Commission authorize HL&P to continue recording AFUDC associated with HL&P's 30.8% share of the investment in Unit No. 1 of the South Texas project until such time as HL&P is allowed to earn a return on this invested capital. The annualized effect of such operating expenses, taxes, depreciation expense and AFUDC is estimated to be $230 million. In November 1987, the Texas Supreme Court issued a Vrit of Handamus which s'.ayed all action in this i proceeding. The Court's action resulted from a controversy between the : i Utility Commission and the Texas Attorney General with respect to the Attorney General's authority both to represent the Utility Commission on dockets which are appealed to the courts and to intervene in dockets pending before the Utility Commission on behalf of the Texas state agencies. The I
Vrit of Mandamus vill remain in effect until the Texas Supreme Court resolves this issue. Until rate relief is obtained which reflects the placing of Unit No. 1 of the South Texas project into service or the requested accounting treatment or other regulatory action is granted with respect to Unit No. 1 of the South Texas project, operating results of HL&P vill be adversely affected. Because the scheduled hearings relating to the prudence review are not expected to begin before the fall of 1988, a significant lag time could occur between the commercial operation date of Unit No. 1 of the South Texas project ar.d implementation of new rates reflecting such facility as plant in-service. See Note 9 to the Financial Statements under Item 8 of this Report for a discussion of the effect of Statement of Financial Accounting Standards (SFAS) No. 92 on HL&P's deferred accounting request for Unit No.1 of the South Texas project. In a related matter, the Utility Commission is reviewing its policy of not allowing post test year adjustments to rate base. In January 1988, the Utility Commission approved the publication of a proposed rule that vould explicitly permit post test year adjustments to rate base. The Utility Commission has indicated that Texas consurers vill benefit if post test year adjustments to rate base are allowed because such adjustments would eliminate the need for additional proceedings and regulatory expenses to handle deferred accounting treatment petitions. Prudence Review of South Texas Project. For information concerning a ! prudence review of the South Texas project by the Utility Commission, see Note O to the Financial Statements included under Item 8 of this Report. 1 Contemplated General Rate Proceeding. HL&P is planning to file a petition for authority to change rates with the Utility Commission and municipalities which retain original jurisdiction during the second quarter of 1988. The amount of the requested increase has not been finalized. This filing vill include a request for recovery of Limestone Unit No. 2 costs not yet in rates. In addition, due to the impending commercial operation of Unit No. 1 of the South Texas project, HL&P plans to include the costs associated with this plant in the requested relief utilizing post test year j adjustments to rate base. Although the details of the requests have not l been finalized, HL&P is considering the use of interim rates and deferred ' accounting treatment in combination with a rate moderation plan in developing a reasonable pricing plan for inclusion of these units in rates. Appeal of 1982 Rate Order. See Note 7 of the Financial Statements included under Item 8 of this Report for information concerning the appeal of a 1982 rate order. Environmental Quality. HL&P is subject to regulation with respect to air and vater quality, solid vaste disposal, and other environmental matters j by various federal, state and local authorities. Environmental regulations i 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 l cannot presently be determined. Hovever, developments in these and other ! areas of regulation have in the past required HL&P to make substantial expenditures to modify, supplement or replace equipment and facilities and I \ : l l l l , _ _ -
may in the future delay or impede construction and operation of nev : facilities or require substantial expenditures to modify existing : facilities. The Texas Air Control Board (TACB) has jurisdiction and enforcement power to determine the 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 federal Environmental Protection Agency (EPA). Compliance with such standards has resulted, and is expected to continue to result, in substantial expense to HL&P. The rate of growth in HL&P's kilowatt-hour r sales to industrial customers is expected to be lover in the future than it i has been in the past partially as a result of requirements imposed by the EPA, nev-source performance standards, restrictions on deterioration of air quality and potential sanctions related to non-attainment regions, all as they apply to portions of HL&P's service area. In addition, expanded permit , and fee systems and enforcement penalties may discourage industrial growth. In order to ensure the control of particulate emissions and compliance ; vith applicable clean air standards at its V. A. Parish plant, HL&P is upgrading existing pollution control equipment at the plant by installing baghouses on three of the four coal-fired generating units. The fourth coal-fired unit at the V. A. Parish plant is already equipped with a baghouse. The first unit was completed in January 1988 and the remaining two units are expected to be completed by January 1989. The total cost of all of the baghouses is approximately $178 million excluding AFUDC. HL&P has obtained relief from certain TACB standards until the baghouse installations are completed. The Texas Vater Commission (TVC) has jurisdiction over all vater discharges in the State of Texas and is empovered to set vater quality standards and issue permits required for vater discharges which might affect the quality of Texas water. The EPA is authorized to set such standards and issue permits with respect to discharges into navigable streams. HL&P has obtained permits from both the TVC and the EPA for all of its generating facilities currently in operation which require such permits. Applications for reneval of permits for existing facilities have been submitted as required. HL&P is also subject to regulation by the TVC and the EPA vith respect to the handling and disposal of rolid vaste generated on-site. The EPA has promulgated a number of regulations to protect human health and the environment from hazardous vaste. 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. The promulgation of new regulations in the future or the amendment of existing regulations could result in revised solid vaste handling and disposal procedures and additional costs to HL&P. Nuclear Licensing. HL&P is subject to licensing and regulation by the NRC vith respect to environmental, public health and safety aspects of the construction and operation of nuclear power plants. In August 1987, the NRC granted a low power operating license for Unit No. 1 of the South Texas project. In 1987 the Government Accountability L .. - .
Project (GAP), a citizens interest group, demanded that the NRC establish a j special task force to investigate alleged safety defects at the South Texas l' proj ec t . The group claimed to have evidence of defects but refused to turn over the evidence to the NRC until late in 1987. The NRC has concluded an on-site investigation to reviev and evaluate the GAP allegations. The NRC review of all the GAP allegations has identified no substantive safety issue that would varrant delay in the NRC's consideration of a full power license for Unit No.1 of the South Texas project. 1 In February 1988, the NRC imposed a civil penalty in the amount of
$75,000 for two instances in late 1987 vhen operations during testing at the ,
South Texas proj ec t violated certain technical specifications. In March e 1988, the NRC imposed a second civil penalty in the amount of $50,000 for security deficiencies identified in the fall of 1987. Initial criticality at Unit No. 1 of the South Texas project was achieved on March 8, 1988. The delay in achieving initial criticality has been principally attributable to certain equipment problems identified during the testing process which have been analyzed and corrected and the need for additional operator training undertaken to address concerns raised by the NRC. The steps remaining before Unit No. 1 can be placed into commercial operation are satisfactory completion of lov power operation and the receipt of a full power license from the NRC. The in-service date and cost estimate for Unit No. 1 of the South Texas proj ec t is subj ec t to continuing review in light of these matters and the ongoing testing process. HL&P estimates that three to five months of additional testing vill be required after initial criticality (which j occurred on March 8, 1988) before Unit No. 1 can be placed in commercial operation. Although no definitive estimate of additional costs has been , approved, HL&P anticipates that cost increases in the range of $100 to $150 million (of which HL&P's portion vould be $31 to $46 million based on its 30.8% interest) may result from the delays in achieving initial criticality, and the resulting delay in the anticipated date of commercial operation of Unit No. 1. HL&P estimates that the carrying cost of its 30.8% interest in the South Texas project is apprcximately $15 million per month. 4 , Commercial operation of Unit No. 2 of the South Texas project is scheduled to commence in June 1989. , Viability Review. In Marca 1935, a Utility Ccamission proceeding was initiated for the purpose of gathering evidence concerning the economic viability of Unit No. 2 of the SoutL Texas project. Initial hearings vere held in January 1987 for the purpose of determining the appropriate computer model to be used for the economic study. Hearings in the final phase vere held in October 1987 to consider the appropriate inputs for the study. An Examiner's report is expected to be issied in 1988. For a discussion of the Texas Supreme Court order to stay hearings on this proceeding before the Utility Commission, see Note 9 to the Financial Statements included under i Item 8 of thir Peport. l Nuclear . Insurance l ! ie 9 to the Financial Statements included under Item 8 of this Report matio.. concerning nuclear insurance. l u . -- . _
Labor Matters As of December 31, 1987, HL&P had 10,910 full-time employees of'which 4,485 vere hourly-paid employees represented by the International Brotherhood of Electrical Vorkers under a collective bargaining agreement which expires on May 25, 1988, I l I i
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Operating Statistics Year Ended December 31, 1987 1986 1985 Electric Energy Generated and Purchased (Mkvh): Generated - Net Station Output............... 48,798,146 '45,507,566 49,653,222 Purchased.................................... 9,959,034 11,104,589 9,020,115 Net Interchange.............................. (362) 737 587 Total'...................................... 58,756,818 56,612,892 58,673,924 Company Use, Lost and Unaccounted for.......... 2,845,491 2,605,335 2,705,208 Energy Sold................................ 55,911,327_ 54,007,557 55,968,716 Electric Sales (Mkvh): acsidentia1.................................. 14,701,438 14,627,569 14,981,112 Commercial................................... 11,188,927 11,437,464 11,490,874 Industrial................................... 27,441,200 26,192,806 27,418,046 Street Lighting - Government and Mun cipal... i 108,176 107,039 __ 103,808 Total...................................... 53,439,741 52,364,878 53,993,840 Other Electric Utilities..................... 2,471,586 1,642,679 1,974,876 Totair..................................... 55,911,327 54,007,557 55,968,716 Number of Customers (End of Period): Residential.................................. 1,147,962 1,144,165 1,156,121 i Comme:cial................................... 156,517 157,199 158,313 Industrial................................... 1,764 1,755 1,800 Stree~', LiF hting - Government and Municipal... 79 80 76 i Total...................................... 1,306,322 1,303,199 1,316,310 . Other Electric Utilities..................... 6 6 6 ) Total....... 4 ............................. 1,306,328 1,303,205 1,316,316 l l Operating Revenue (Thousands of Dollars): Residential.................................. $1,078,934 $1,071,356 $1,244,002 Commercial................................... 690,078 707,386 831,277 Industrial................................... 993,610 1,024,459 1,353,162 Street Lighting - Government and Municipal... 17,786 16,683 16,888 Other Electric Utilities..................... 79,503 68,990 106,273 Tota 1...................................... 2,859,911 2,888,874 3,551,602 Miscellaneous Electric Revenues.............. 140,921 70,866 (18,238) Total...................................... $3,000,832 $2,959,740 $3,533,364 Installed Net Generating Capability (Kv) (End of Period).............................. 12,855,000 12,680,000 12,304,000 Cost of Fuel (Cents per Millio.' Btu): Cas.......................................... 170.0 170.3 291.6 Coal......................................... 252.4 248.1 243.9 Lignite...................................... 162.7 188.5 321.? Average.................................... 192.4 197.1 277.0
H
- - Officers- .
1 Officer Business Experience 1983-1987 Name Age (1) .Since(2) Positions Term-D.-D. Jordan..... 55 1971 Chairman and Chief Executive 1983-Officer and Director D. D. Sykora..... 57 ,1977 President and Chief Operating. 1983-Officer and Director J. H. Goldberg... 56 1980 Group Vice. President - Nuclear. 1985 . Vice President - Nuclear 1983-1985 Engineering and Construction H. R. Kelly...... 45 .1984- 0enior Vice' President, General 1984-. Counsel and' Corporate Secretary-Partner - Baker & Botts - 1983-1984 D. E. Simmons.... 62 1972 . Group Vice President -' Power . 1984-Operations
. Group Vice President - Systems 1983-1984 Engineering & Operations R. J. Snokhous... 58 1983_ Group Vice President, External. 1983-Affairs .
Director of Public Affairs - 1983 Gulf 011 Corporation - U.S. E. A. Turner..... 60 1978 Group Vice President - 1985-Administration and. Support Senior Vice President and 1984-1985 Assistant to the President Group Vice President - Fossil 1983-1984 Plant, Engineering & Construction 4 A. R. Beavers.... 64 1978 'Vice President - Project 1987-Consultant . . . Vice President - Purchasing and 1984-1987 Materials Management Vice President - Purchasing and 1983-1984-Services . , L. G. Brackeen... 53 1984 Vice President - Fossil Fuel 1984 . Resources Senior Purchasing Agent - . 1983-1984 E. I. DuPont De Nemours & Co. J. S. Brian...... 40 1983 Vice President Finance and 1986-Comptroller Comptroller. . . 1983-1986 Assistant Secretary and 1983 Assistant Treasurer R. E. Doan....... 58 1981 Vice President Human and 1986-Information Resources. < e , Vice President - Human 1983-1986 Resources. 1 .
, s Vice President - Rates, 1983 Planning & Information Systems , ,
A
u t. t - Officer Business Experience 1983-1987 Age (1) Since(2) , Positions Ters
,. D. Greenvade.. 48 1982 Vice President - System 1984-Operations Vice President - System 1983-1984 Engineering and Transmission
& Distribution Vice President - System 1983 Engineering L. B. Horrigan... 53 1981 Vice President - Purcha:Ing 1987-and Haterials Management Vice President - Fossil Plant 1983-1987 Engineering and Construction Vice President - Fossil Plant 1983 Construction R. S. Letbetter., 39 1978 Vice President - Regulatory 1983-Relations Vice President & Comptroller 1983 A. D. Maddox..... 46 1982 Vice President Customer 1983-Relations-D. G. Tees....... 43 1986 Vice President - Energy 1986-Production General Manager - Energy 1983-1986 Production-G. E. Vaughn..... 45 1987 Vice President - Nuclear 1987-Operations General'Hanager - Nuclear 1983-1987 Stations - Duke Power Company K. V. Nabors..... 44 1986 Treasurer 1986-Hanager - Accounting Services 1983-1986 Hanager - Corporate Accounting 1983 (1) At December 31, 1987.
(2) Of ficers - Vere elected May 20, 1987 to serve for one year or until their successors are duly elected and qualified. l l l m - _
Item 2. Prop All of HCet generating stations and substantially all of the other ope ra t i'pt of HL&P is located in the State of Texas. HL&P considers thierto be vell maintained and in good operating - condition. Mectric iti;tations. As of December 31, 1987, HL&P had ten electric gene Sns i (60 generating units) with a combined turbine nameplate ratid,t51 Kv. Substation o' ember 31, 1987, HL&P ovned 194 major substations (vith capacit: teast 10.0 Hva) having a total installed rated transformer capf94.Hva (exclusive of spare transformers). Electric ke:. As of December 31, 1987, HL&P operated 21,896 pole milcs of idsmission and distribution lines, including 1,499 pole miles opot)00 volts and 591 pole miles operated at 345,000 volts. Electric inhund. As of December 31, 1987, HL&P operated $ 5,560 circuit (iderground transmission and distribution lines, - including 8 cir.1%rated at 138,000 volts. EM
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General PesHL&P owns various properties which include a 27-story headquofbuilding, division offices, service centers and y other facilitiefceral purposes, , ik:
- w. s Titles. le generating plants and other important units of '
property of H1 sed on lands owned in fee by HL&P. Transmission .. :
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lines and disbntems have been constructed in part on or across privately ovnet ant to easements or on streets and highways and across va t e rva):uto authority granted by municipal and county permits, and pe: issued by state and federal governmental ' - authorities. Unei of the State of Texas, HL&P has the right of %-- eminent domain R tch it may secure or perfect rights-of-way over private properther. "7 ;:i The major :tif HL&P are subject to liens securing its long-term debt, tito some of its properties are subject to minor encumbrances an.ctne of which impairs the use of such properties in the operation tss.s Item 3. Legal fin For a de.on material legal and regulatory proceedings affecting HL&P,otthrough 9 to the Financial Statements included under Item 8 's i t . See also Item 1. "Business - Regulatory -- . Hat ters" f or desSstnding regulatory proceedings. Item 4. Submis8 m to a Vote of Security Holders. There vere t ubmitted to a vote of security holders during i
- the fourth quartqg:
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Item 2. Properties. All of HL&P's electric generating stations and substantially all of the other operating property of HL&P is located in the State of Texas. HL&P considers this property to be well maintained and in good operating condition. Electric Generating Stations. As of December 31, 1987, HL&P had ten electric generating stations (60 generating units) with a combined turbine nameplate rating of 12,619,651 Kv. Substations. As of December 31, 1987, HL&P ovned 194 major substations (vith capacities of at least 10.0 Hva) having a total installed rated transformer cepacity of 50,294.Hva (exclusive of spare transformers). Electric Lines-Overhead. As of December 31, 1987, HL&P operated 21,896 pole miles of overhead transmission and distribution lines, including 1,499 3 pole miles operated at 138,000 volts and 591 pole miles operated at 345,000 volts. Electric Lines-Underground. As of December 31, 1987, HL&P operated 5,560 circuit miles of underground transmission and distribution lines, including 8 circuit miles operated at 138,000 voles 4 General Properties. HL&P owns various properties which include a 27-story headquarters office building, division offic(-, service centers and other facilities used for general purposes. Titles. 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 recure or perfect rights-of-vay over private property, if necessary. The major properties of HL&P are subject to liens securing its long-term debt, and titles to some of its properties are subject to minor encumbrances and defects, none of which impairs the use of such properties in the operation of its business. Item 3. Legal Proceedings. For a description of material legal and regulatory proceedings affecting HL&P, see Notes 7 through 9 to the Financial Statements included under Item 0 of this Report. See also Item 1. "Business - Regulatory Matters" for descriptions of pending regulatory proceedings. Item 4. Submission of Hatters to a Vote of Security Holders. There vere no matters submitted to a vote of security holders during the fourth quarter of 1987. t
i PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. All of HL&P's Common Stock is privately held, beneficially and of record, by its parent, Houston Industries. Item 6. Selected Financial Data. The following table sets forth selected financial data with respect to HL&P's financial condition and results of operations and should be read in conjunction with the Financial Stetsments and the related notes included elsewhere herein. (Thousands of Dollars) Year Ended December 31, 1987 1986 1985 1984 1983 Ravenues..................... $3,000,832 $2,959,740 $3,533,364 $3,674,556 $3,523,745 Income after preferred dividends.................. $ 408,581 $ 434,927 $ 455,904 $ 355,522 $ 291,294 AFUDC as a percent of income after preferred dividends.. 52% 52% 45% 31% 17% Return on average common equity..................... 14.0% 15.5% 17.6% 15.7% 15.0% Ratio of earnings to fixed charges: Including AFUDC............ 3.35 3.36 3.76 3.55 3.50 Excluding AFUDC............ 2.41 2.42 2.84 2.99 3.22 3 Ratio of earnings to fixed chstges and preferred , . . . , _ dividend requirements...... 2.07 2.95 3.26 3.05 3.01 At year-end Total assets............... $8,687,744 $8,136,725 $7,829,390 $6,990,3'2 $6,056,367 Long-term debt (including current maturities)...... $2,845,877 $2,908,277 $2,841,399 $2,573,602 $2,156,000 Capitalization: Common stock equity........ 48% 47% 46% 46% 47% Cumulative preferred etock. 7% 6% 6% 5% 6% Long-term debt (including
- current maturities)...... 45% 47% 48% 49% 47%
Construction and nuclear fuel expenditures (excluding AFUDC).......... $ 644,580 $ 712,418 $ 745,972 $ 904,076 $ 886,892 Parcant of construction expenditures financed internally from operations. 29% 35% 39% 37% 42% ( I l
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OP FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Houston Lighting & Pover Company (HL&P) reported 1987 income after preferred dividends of $408.6 million, down $26 million from 1986 and $47 million from the record earnings of 1985. Allovance for funds used during construction (AFUDC) accounted for 52% of earnings in both 1987 and 1986 compared to 45% in 1985. AFUDC is a non-cash item of net income which represents the cost of funds used to finance construction projects and is capitalized as part of the cost of the assets being constructed. Decreases in AFUDC in 1987 vere primarily related to a reduction in the net-of-tax AFUDC rate and the commencement of commercial operation of Unit No. 2 of the Limestone Electric Generating Station (Limestone). Increases in AFUDC in 1986 resulted from increased levels of investment in construction without corresponding increases in the amount of construction included in rate base and earning a current cash 6etucn. The decline in HL&P's 1987 income is attributable to increased expenses priticipally associated with Limestone, which expenses are not yet fully reflected in electric rates, partially offset by +he reduction of the federal corporate income tax rate due to the Tax Reform Act of 1986. EarnL gs vere positively . affected by base rate increases allowed by the City of Houston and the Public Utility Commission of Texas (Utility Commission) in July and December 1986, respectively. 3 Electric operating revenues increased 1% and declined 16% for the years 1987 a n o' 196V,. respectively. The increase in revenues in 1987 is primarily due to higher base ttvences from rate increases implemented in 1986. Kilowatt hour (KVH) sales were up 3.5% during 1987 and down 3.5% in 1986. The majority of the increases was due to off-system sales and sales to industrial customers on an interruptible basis, both of which provide minimal contribution to base electric revenues. Residential XVH sales increased by .5% in 1987 and declined 2.4% in 1986. Commercial XVH sales declined by 2.2% in 1987 and .5% in 1986. Industrial KVH sales, which account for approximately half of HL&P's over&1l sales, vere up 4.8% and dovn 4.5% for 1987 and 1986, respectively. However, most of the increase vas due to sales made on an interruptible basis as described above. Fuel expense increased $47 million in 1987 and declined $485 million in 1986. The increase in 1987 vas primarily due to increased generation, partially offset by decreases in the price paid for fuel. The average cost of fuel used by HL&P during 1987 vas $1.92 per million Btu as compared with $1.97 for 1986 and
$2.77 for 1985. The combined cost of fuel used by HL&P and the fuel portion of purchased pover during 1987 vas 1.86 cents per KVH as compared with 2.10 cents in 1986 and 3.02 cents in 1985. Purchased power expense decreased 10% in 1987 and 5% in 1986 due to decreases in purchases of energy from cogenerators.
Electric operating and maintenance expenses in 198/ increased 9% or $52 million when compared to 1986. In 1986, operating and maintenance expenses decreased $33 million or 6% when compared to 1985. The increase in 1987 vas due primarily to increases in operation and maintenance expanses related to Limestone and in administrative and general expenses. The decrease in 1986 vas primarily due to a reduction in transmission expenses, custoner expenses and administrative and general expenses. r
In January 1987, following che Dsccmbsr 1986 commancemtnt of commsrcial operation of Limastona Unit No. 2, HL&P filed a petition with tha Utility Commission requesting interim accounting treatment to capitalize costs and to continue the accrual of AFUDC associated with Unit No. 2 from the time it was placed in commercial operation until rates reflecting the costs of such unit are placed in effect. Electric rates do not currently reflect approximately $174 million of the proj ec t 's cost or any provision for operating expenses, non-reconcilable lignite mining and handling costs, taxes or depreciation related to Unit No. 2, estimated to be $57 million on an annual basis. In July 1987, a similar request was made for the first unit of the South Texas project once it goes into commercial operation. The annualized effect of operating expc..es, taxes, depreciation and AFUDC related to Unit No. 1 is estimated to ha $230 million based on HL&P's 30.8% interest ($290 million based on a 46.8% inte t), none of which is reflected in electric rates. The Utility Commissien ' . s not ruled on either request. Until rate relief is obtained which reflects Limestone Unit No. 2 as plant in service or the requested accounting treatment or other regulatory action is granted with respect to Limestone Unit No. 2, operating results of HL&P vill be adversely affected. Upon the commencement of commercial operation of Unit No.1 of the South Texas project, the operating results of HL&P I vill be more severely impacted until similar regulatory relief is granted with respect to such unit. In prior years, HL&P's operating results were adversely affected by the lag in recoverv of increased costs through electric rates due primarily to relatively high rates of inflation. The rate of inflation, however, has moderated over the last several years, and HL&P has not been significantly impacted by the effects of inflation. Lignidity and Capital Resources HL&P's construction and nuclear fuel expenditures (excluding AFUDC) for the year 1987 totaled $645 million. The approved budget for 1987 was $638 million. Estimated expenditures for 1988, 1989, and 1990 are $495 million, $444 million and $368 million, respectively. These anounts reflect the modification of the scheduled in-service dates for the two lignite units at the Malakoff Electric Generating Station as discussed in Note 10 to the Financial Statements. These amounts also reflect the cost estimate for the South Texas project adopted in December 1987 (assuming a commercial operation date for Unit No. 1 of March 1, 1988). These amounts do not reflect the possible acquisition by HL&P of an additional 16% interest in the South T-v s project presently ovned by the City of Austin (Austin). which would increase 1 a estimated construction and nuclear fuel expenditures by S205 million for the wf3-1990 period, $92 million of which is related to the reimbursement of costs curred by Austin prior to 1988 and the purchase of Austin's nuclear fuel. These amounts also do not include expenditures on projects for which HL&P expects to be reimbursed by customers or cogenerators. HL&P expects to finance a portion of its construction program through funds genersted internally from operations. The extent to which HL&P is able to fund its capital requirements from internal funds is dependent, to a large degree, on regulatory practices which determine the amount and timing of recovery of investments in new plant facilities, depreciation rates, recovery of operating expenses and the opportunity to carn a reasonable rate of return on its invested capital. It is presently estimated that during 1988, 10% to 20% of HL&P's construction program can be financed through internally generated funds from operations. Internally generated funds for subsequent years vill be primarily dependent on the regulatory treatment of HL&P's investment in the South Texas
p roj ec t . The balance of HL&P's construction program is expected to be financed through external sources, primarily sales of long-term debt, preferred stock and additional shares of common stock to Houston Industries Incorporated (Houston Industries), and, on an interim basis, the issuance cf short-term debt securities. See Note 4 to the Financial Statements for a discussion of short-term financing. In March 1987, HL&P issued $391 million aggregate principal amount of a nev 9% series of first mortgage bonds due 2017 it. exchange for a like principal amount of outstanding high coupon first mortgage bonds. An additional $140 million principal amount of high coupon first mortgage bonds was redeemed under the Replacement Fund provisions of HL&P's Hortgage at:d Deed of Trust and was retired by the bond trustee in May 1987. In February 1988, $48 million principal amount of HL&P's 13 7/8% series first mortgage bonds due 1?9) was redeemed at 100% of the principal amount plus accrued interest. These actions are part of a continuing program to reduce HL&P's long-term debt costs. In June 1987, HL&P sold 1,000,000 shares of $8.50 cumulative preferred stock which are subj ec t to mandatory redemption. The mandatory redemption provision requires HL&P to redeem 200,000 shares annually beginning on June 1, 1993. HL&P received net proceeds of $99 million from the sale. During 1987, HL&P received approximately $128 million from the proceeds of previously issued pollution control revenue bonds and first mortgage bonds, which proceeds had been held in trust. Approximately $87 nillion (including interest earned on funds held in trust) vas held in trust at December 31, 1987. Substantially all the funds held in trust are expected to be drawn down by HL&P l l in 1988 and 1989 to fund qualifying construction expenditures. On November 1, 1987, $40 matured. million principal amount of HL&P's 4 3/4% series first mortgage bonds In January 1988, HL&P issued in a private placement $400 million principal amount of 9 3/8% first mortgage bonds which vill mature in approximately equal principal amounts in each of the years 1991, 1992, and 1993. debt,HL&P's 7% capitalization ratios at December 31, 1987 consisted of 45% long-term be maintained preferred stock and 48% common equity, with similar ratios expected to in the future, assuming HL&P is able to obtain rate relief at
'evels comparable to those obtained in the past.
Houston Industries Finance, Inc., a wholly-ovned subsidiary of Houston
.us tries, began purchasing HL&P's cus tomer accounts receivable in January 1987.
The Tax Reform have adversely affected HL&P.Act of 1986 (the Tax Act) includes a number of provisions Although the Tax Act reduced corporate income strespect es , it eliminated investment tax credits effective January 1, 1986 (except to certain transition properties, t) , eliminated current including the South Texas deductions for etion and made substantial changes to the calculationinterest and property taxes during tax. of the alternative half This latter provision ef fectively provides for the inclusion of up of the amount of AFUDC, a non-cash item of financial reporting as taxable income in determining the alternative minimum tax. These and wisions of the Tax Act are expected to reduce the amount of cash flov from operations and funds. therefore increase HL&P's reliance on external
project. The balance of HL&P's construction program is expected to be financed through external sources, primarily sales of long-term debt, preferred stock and additional shares of common stock to Houston Industries Incorporated (Houston Industries), and, on an interim basis, the issuance of short-term debt securities. See Note 4 to the Financial Statements for a discussion of short-term financing. In March 1987, HL&P issued $391 million aggregate principal amount of a nev 9% series of first mortgag: bonds due 2017 in exchange for a like principal amount of outstanding high coupon first mortgage bonds. An additional $140 million principal amount of high coupon first mortgage boads was redeemed under t1 Replacement Fund provisions of HL&?'s Hortgage and Deed of Trust and was res..ed by the bond trustee in May 1987. In February 1988, $48 million principal amount of HL&P's 13 7/8% series first mortgage boads due 1991 was redeemed at 100% of the principal amount plus accrued interest. These actions are part of a continuing program to reduce HL&P's long-term debt costs. In June 1987, HL&P sold 1,000,000 shares of $8.50 cumulative preferred stock which are subj ec t to mandatory redemption. The mandatory redemption provision requires HL&P to redeem 200,000 shares annually beginning on June 1, 1993. HL&P received net proceeds of $99 million from the sale. During 1987, HL&P received approximately $128 million from the proceeds of previously issued pollution control revenue bonds and first mortgage bonds, which proceeds had been held in trust. Approximately $87 million (including interest earned on funds held in trust) vas held in trust at December 31, 1987. Substantially all the funds held in trust are expected to be drawn down by HL&P in 1988 and 1989 to fund qualifying construction expenditures. On November 1, 1987, $40 million principal amount of HL&P's 4 3/4% series first mortgage bonds matured. In January 1988, HL&P issued in a private placerent $400 million principal amount of 9 3/8% first mortgage bonds which vill mature in approximately equal principal amounts in each of the years 1991, 1992, and 1993. HL&P's capitalization ratios at December 31, 1987 consisted of 45% long-term debt, 7% preferred stock and 48% common equity, with similar ratios expected to be maintained in the future, assuming HL&P is able to obtain rate relief at levels comparable to those obtained in the past. Houston Industries Finance, Inc., a wholly-owned subsidiary of Houston Industries, began purchasing HL&P's customer accounts receivable in January 1987. The Tax Reform Act of 1986 (the Tax Act) includes a number of provisions that have adversely af fected HL&P. Although the Tax Act reduced corporate income tax rates, it eliminated investment tax credits ef fective January 1,1986 (except with respect to certain transition properties, including the South Texas project), eliminated current deductions for interest and property taxes during ) construction and made substantial changes to the calculation of the alternative minimum tax. This latter provision effectively provides for the inclusion of up to one half of the amount of AFUDC, a non-cash item of financial reporting income, as taxable income in determining the alternative minimum tax. These and i other provisions of the Tax Act are expected to reduce the amount of cash flov generated from operations and therefore increase HL&P's reliance on external sources of funds. { l l
)
Changes in Accounting Standards In December 1986, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 90, "Regulated Enterprises-Accounting for Abandonments and Disallowances of Plant Costs," which i becomes effective for fic:al years beginning after December 15, 1987. SFAS No. 90 requires the future revenue that is expected to result from the regulator's i inclusion of the cost of an abandoned plant in allovable costs for ratemaking l purposes to be reported at its present value when the abandonment becomes probable. If the carrying amount of the abandoned plant exceeds that present value, a loss vould be recognized. In addition, SFAS No. 90 requires any costs of a recently completed plant which are disallowed to be recognized as a loss when such a disallowance becomes probable and the amount of the disallovance is reasonably estimable. If part of the cost is disallowed indirectly (such as a disallowance of return on investment on a portion of the plant), an equivalent amount of cost shall be deducted from the reported cost of the plant and recognized as a loss. Finally, SPAS No. 90 specifies that AFUDC should be capitalized only if its subsequent inclusion in allovable costs for ratemaking purposes is probable. See Note 9 to the Financial Statements for a discussion of the prudence review of the South Texas project by the Utility Commission. HL&P recorded a partial loss on abandonment of the Allens Creek Nuclear Proj ec t (Allens Creek) in 1982, and is currently amortizing the recoverable amount over a ten year period. HL&P believes that the application of SFAS No. 90 to Allens Creek would not materially affect the results of operations. See Notes 7 and 11 to the Financial Statements for discussions of Allens Creek. In August 1987, the FASB issued SFAS No. 92, "Regulated Enterprises - Accounting for Phase-in Plans." SFAS No. 92 requires allovable costs deferred for future recovery under a phase-in plan related to plants completed before January 1, 1988, and plants on which substantial construction has been performed before January 1, 1988, to be capitalized as a deferred charge if each of four criteria is met. Those criteria are (a) the plan has been agreed to by the regulator, (b) the plan specifies when recovery vill occur, (c) all allovable costs deferred under the plan are scheduled for recovery within ten years of the I date when deferrals begin, and (d) the percentage increase in rates scheduled for ( each future year under the plan is not greater than the percentage increase in rates scheduled for each immediately preceding year. SFAS No. 92 does not permit the equity portion of APUDC to be capitalized other than during construction or as part of a qualified phase-in plan. The provisions of SFAS No. 92 must be adopted for fiscal years beginning after December 15, 1987. See Note 9 to the Financial Statements for a discussion of the effect of SFAS No. 92 on HL&P's deferred accounting request for Unit No. 1 of the South Texas project. In December 1987, the FASB issued SFAS No. 96, "Accounting for Income Taxes," which becomes effective for fiscal years beginning after December 15, 1988. SFAS No. 96 requires, among other things, the liability method of recognition for all temporary differences, requires that deferred tax liabilities and assets be adjusted for an enacted change in tax laws or rates and prohibits net-of-tax accounting and reporting. Certain provisions of SFAS No. 96 provide i I that regulated enterprises are permitted to 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. HL&P is currently evaluating the effects of SPAS No. 96 but does not expect the new pronouncement to have a material effect on its financial position or results of operations. HL&P presently anticipates adopting SFAS No. 96 in 1989.
i Itta 8. Financiel Stetcmento. HOUSTON LIGHTING & POWER COM"ANY STATEMENTS OF INCOMB (Thousands of Dollarsj Year Ended December 31, 1987 1986 1985 l Operating Revenues........................ $3,000,832 $2,959,740 $3,533,364 Operating Expenses: Fue1.................................... 981,922 33s,169 1,420,262 Purchased power......................... 379,497 421,893 442,802 0peration............................... 423,789 391,873 419,086 Maintenance............................. 189,566 169,533 175,490 Depreciation and amortization........... 219,501 206,262 177,099 Federal income taxes.................... 195,416 222,281 262,557 l Other taxes............................. 151,667 146,791 140,185 l t ! Total............................... 2,541,358 2,493,802 3,037,481 Operating Income.......................... 459,474 465,938 495,883 Other Income (Expense): A11ovance for other funds used during construction.................. ....... 143,584 170,348 154,246 I Other - net............................. (7,747) 7,236 5,023 Total............................... 135,837 177,584 159,269 I Income Before Interest Charges............ 595,311 643,522 655,152 ) l Interest Charges: Interest on long-term debt.............. 238,919 259,887 248,516 Other interest.......................... 25,432 24,258 16,654 Allowance for borrowed funds used during construction.......................... (68,817) (55,278) (49,963) Taxes applicable to the allowance for borrowed funds used during construction.......................... (40,210) (47,089) (42,561) Total............................... 155,324 181,778 172,646 Net Income................................ 439,987 461,744 482,506 Dividends on Preferred Stock.............. 31,406 26,817 26,602 Income After Preferred Dividends.......... [ 408,581 $ 434,927 $ 455,904 See Notes to Financial Statements. 6 HOUSTON LIGirrING & POVER COMPANY STATEMENTS OF RETAINED EARNINGS l l (Thousands of Dollars) Year Endeo December 31, 1987 -1986 _ 1985 ~~~ BALANCE AT BEGINNING OF YEAR............ $1,269,492 $1,128,547 $ 945,820 ADD - NET INC0ME........................ 439,987 461,744 482,506 1 Tota 1............................. 1,709,479 1,590,291 1,428,326 DEDUCT - CASH DIVIDENDS: Preferred:
$4.00 Series........................ 390 390 390
$6.72 Series........................ 1,680 1,680 1,680
$7.52 Series........................ 3,760 3,760 3,760
$9.52 Series........................ 3,808 3,808 3,808
$9.08 Series........................ 3,632 3,632 3,632
$8.12 Series........................ 4,060 4,060 4,060
$9.04 Series........................- 2,712 2,712 2,712 "A" Series........................ 3,415 3,435 4,845 "B" Series........................ 3,345 3,340 1,715
$8.50 Series........................ 4,604 Common:
1987 $2.86; 1986 $2.76; 1985 $2.60 (per share)....................... 304,868 293,982 273,177 Total............................. 336,274 320,799 299,779 BALANCE AT END OF YEAR.................. $1,373,205 $1,269,492 $1,128,547 See Notes to Financial Statements. STON LIGHTING & POVER COMPANY BALANCE SHEETS (Thousands of Dollars) ASSETS December 31, 1987 1986 PROPERTY, PLANT AU%i-AT COST: Electric plant: Production............................. $3,894,100 $3,747,442 Transmission........................... 640,423 601.084 Distribution........................... 1,845,618 1,747,216 General................................ 456,232 431,048 Cons t ruc t ion iragres s . . . . . . . . . . . . . . . . . . 2,648,682 2,170,700 Nuclear fuel........................... 131,323 126,190 Held for futue......................... 180,333 167,008 Electric plant sit adj ustmen ts. . . . . . . . . . . 3,166 3,166 Total................................ 9,799,877 8,993,854 Less accumulatecetion and amortization. . . 1,530,543 1,351,412 Property, phnpipment - net.......... 8,269,334 7,642,442 CURRENT ASSETS: Cash and tempormvunts................... 260 389 Vorking funds amcideposi ts. . . . . . . . . . . . . . . 483 502 Accounts receiva Customers............................... 110,741 A f f i l i a t e d c om:s . . . . . . . . . . . . . . . . . . . . . . . . 1,208 2,628 0 t h e r s . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 37,159 39,589 Inventory: Fuel oil and gtt b cos t . . . . . . . . . . . . . . . . . 18,698 16,583 Materials and tient avera cost........ 90,946 80,044 0ther......................ge ............... 11,661 11,731 Total currenktt...................... 160,415 262,207 OTHER ASSETS: Recoverable cance pact cos t s . . . . . . . . . . . . . . 36,129 43,382 Unamortized debt ssed premium on reacquired debt,......................... 67,559 47,763 Deferred debits.......................... 154,307 140,931 Total other at........................ 257,995 232,076 Total............................. $8,687,744 $8,136,725
~eettes to Financial Statements.
f HOUSTON LIGHTING & POVER COMPANY BALANCE SHEETS (Thousands of Dollars) ASSETS December 31, 1987 1986 PROPERT'1, PLANT AND EQUIPMENT-AT COST: Electric plant: Production..................................... $3,894,100 $3,747,442 Transmission................................... 640,423 601,084 Distribution................................... 1,845,618 1,747,216 General........................................ 456,232 431,048 Construction work in progress.................. 2,648,682 2,170,700 Nuclear fuel................................... 131,323 126,190 Held for future use............................ 180,333 167,008 Electric plant acquisition adjustments........... 3,166 3,166 Total ....................................... 9,799,877 8,993,854 Less accumulated depreciation and amortization... 1,530,543 1,351,412 Property, plant and equipment - net.......... 8,269,334 7,642,442 CURRENT ASSSTS: Cash and temporary investments................... 260 389 Vorking funds and special deposits............... 483 502 Accounts receivable: Customers...................................... 110,741 Affiliated companies........................... 1,208 2,628 0thers......... ............................... 37,159 39,589 Inventory: Fuel oil and gas, at life cost................. 18,698 16,583 Materials and supplies, at avera 90,946 80,044 0ther.............................ge cost........
............... 11,661 11,731 Total current assets......................... 160,415 262,207 OTHER ASSETS:
Recoverable cancelled project costs.............. 36,129 43,382 Unamortized debt expense and premium on reacquired debt................................ 67,559 47,763 Deferred debits.................................. 154,307 140,931 Total other assets........................... 257,995 232,076 Total................................. . S8,687,744 $8,136,725 See Notes to Financial Statements. i l
1 HOUSTON LICRTING & POWER COMPANY [ BALANCE SHEETS (Thousands of Dollars) CAPITALIZATION AND LIABILITIES December 31, 1987 1986 CAPITALIZATION (statements on following page): Common stock equity.............................. $2,975,302 $2,866,739 Cumulative preferred stock: Not subject to mandatory redemption............ 341,319 41,319 Subj ec t to manda tory redemption. . . . . . . . . . . . . . . . 99,055 Long-term debt..................'................. 2,844,918 2,86a 25 Total capitalization......................... 6,260,594 6,073,163 CURRENT LIABILITIES: Notes payable.................................... 551,007 65,381 Notes payable to affiliated companies............ 3,500 Accounts payable................................. 202,798 229,605 Accounts payable to affiliated companies......... 22,374 17,891 Taxes acesa.-1.................................... 79,224 116,126 Intere.=t e.crued................................. 65,163 66,627 Acc;ued liabilities to municipalities............ 70,685 72,263 Lurrent portion of long-term debt................ 959 43,172 Fuel cost over recovery.......................... 94,309 0ther............................................ 44,375 56,476 Total current liabilities.................. 1,036,585 765,350 DEFERRED CREDITS: Accumulated deferred federal income taxes........ 793,082 725,192 Unamortized investment tax credit................ 529,337 530,292 0ther............................................ 68,146 42,728 Total deferred credits..................... 1,390,565 1,298,212 COMMITHENTS AND CONTINGENCIES Total.................................. $8,687,744 $8,136,725 See Notes to Financial Statements.
HOUSTON LIGHTING & POVER COMPANY STATEMFNTS OF CAPITALIZATION (Thousands of Dollars) December 31, 1987 1986 ; COMMON STOCK EQUITY: Colmon stock, no per; authorized 200,000,000 shares; outstanding 106,660,778 shares at December 31, 1987 cnd 106,515,383 shares at December 31, 1986.................. $1,602,097 $1,597,247 Ratained earnings.............................................. 1,373,205 1,269,492 Total common stock equity.......................... ~l,975,302 2,866,739 CUMULATIVE PREFERRED STOCK, no par; authorized 10,000,000 shares; outstanding 4,447,397 shares at December 31, 1987 and 3,447,397 shares at December 31, 1986 (entitled upon involuntary liquidation to $100 per share) Not subject to mandatory redemption:
$4.00 series, 97,397 shares........................... 9,740 9,740
$6.72 series, 250,000 shares........................... 25,115 25,115
$7.52 series, 500,000 shares........................... 50,225 50,225 l
$9.52 series, 400,000 shares........................... 39,372 39,372 1
$9.08 series, 400,000 shares........................... 39,393 39,395 I
$8.12 series, 500,000 shares........................... 50,098 50,098 l
$9.04 series, 300,000 shares........................... 29,573 29,573 {
"A" series, 500,000 shares........................... 48,809 48,809 "B" series, 500,000 )
shares..._....................... 48,992 48,992 l Total.............................................. 341,319 341,319 Subject to mandatory' redemption
$8.50 series, 1,000,000 shares........................... l 99,055 l Total cumulative preferred stock................... 440,374 341,319 LONG-TERM DEBT:
First mottgage bonds: 4 3/4% series, due 1987.................................. 40,000 3% series, due 1989.................................. 30,000 30,000 4 7/8% series, due 1989.................................. 25,000 25,000 13 7/8% series, due 1991.................................. 48,473 65,301 15 1/8% series, due 1992.................................. 52,662 68,712 4 1/2% series, due 1992.................................. 25,000 25,000 5 1/4% series, due 1996.................................. 40,000 40,000 5 1/4% series, due 1997.................................. 40,000 40,000 6 3/4% series, due 1997.................................. 35,000 35,000 6 3/4% series, due 1998.................................. 35,000 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 10 1/8% series, due 2004.................................. 35,407 100,000 8 3/4% series, due 2005.................................. 125,000 125,000 (continued on next page) HOUSTON LIGHTING & POWER COMPANY STATEMENTS OF CAPITALIZATION (Thousands of Dollars) (Continued) December 31, 1987 1986 8 3/8% series, due 2006.................................. 125,000 125,000 8 3/8% series, due 2007.................................. $ 125,000 $ 125,000 8 7/8% series, oue 2008.................................. 125,000 125,000 9 1/4% series, due 2008.................................. 100,000 100,000 11 1/4% series, due 2009.................................. 125,000 12% series, due 2010.................................. 100,000 12 3/8% series, due 2013.................................. 7,944 11 5/8% series, due 2015.................................. 200,000 9% series, due.2017.................................. 390,519 7 7/8% pollution control series, due 2016................ 68,000 68,000 7 7/8% pollution control series, due 2018................ 50,000 50,000 Funds on deposit with Trustee............................ (12,612) (39,112) Total first mortgage bonds......................... 1,692,449 1,845,845 Follution control revenue bonds: Gulf Coast 1978 series, 9 1/2%,.due 1998................. 19,200 19,200 Gulf Coast 1980-T series, Floating Rate, due 1998........ 5,000 5,000 Brazos River 1983 series, 10 1/2%, due 2003.............. 25,000 25,000 Gulf Coast 1974 series, 7 3/8%, due 2004................. 18,000 18,000 Brazos River 1985 A2 series, 9 3/4%, due 2005............ 10,000 10,000 Gulf Coast 1982 series, 9 7/8%, due 2012................. 12,100 12,100 Brazos River 1982 series, 9 7/8%, due 2012............... 42,800 42,800 Brazos River 1983 series, 10 5/8%, due 2013.............. 75,000 75,000 Brazos River 1985 Al series, 9 7/8%, due 2015............ 100,000 100,000 Brazos River 1985 B series, Floating Rate, due 2015...... 90,000 90,000 Matagorda County 1985 series, 10%, due 2015.............. 115,000 115,000 Brazos River 1984 F series,. Floating Rate, due 2016...... 68,700 68,700 Brazos River 1984 A-E series, Floating Rate, due 2019.... 400,000 400,000 j Hatagorda County 1984 A-C series, Floating Rate, due 2019 250,000 250,000 l Funds on deposit with Trustee............................ (74,126) (167,110) Total pollution control revenue bonds.............. 1,156,674 1,063,690 j i Unamortized premium or (discount)-net...................... (4,427) (5,611) Capitalized lease obligations, average discount rate 13.8%. 1,181 4,353 l f Total.............................................. 2,845,877 2,908,277 Less current maturities............................ 959 43,172 l Total long-term debt............................... _2,844,918 2,865,105 l Total capitalization............................ $6,260,594 $6,073,163 See Notes to Financial Statements.
STON LIGHTING & POVER COMPANY FAYS OF CHANGES IN FINANCIAL POSITION (Thousands of Dollars) Year Ended December 31 1987 1986 1985 Sources of Funds: Operations: Net income.........i...................... $ 439,987 $ 461,744 $ 482,506 Items not requiritellay of working capital , De p r e c i a t i o n ant i n . . . . . . . . . . . . . . . . . . . . . . 229,679 218,092 184,794 De f e r red f ederate s - ne t . . . . . . . . . . . . . . . . 67,890 93,689 86,903 Investment tax dtd-net............... (955) 24,332 39,788 Allowance for fHdng construction....... (212,401) (225,626) (204,209) Total................................. 524,200 572,231 589,782 Dividends declared.......................... (336,274) (320,799) (299,779) Reinves t ed f unds f rrat. . . . . . . . . . . . . . . . . . . . . . 187,926 251,432 290,003 Financing: Sale of common st6........................ 4,850 136,274 Sale of preferred......................... 99,125 49,021 Sale o f f i rs t mo r bor. . . . . . . . . . . . . . . . . . . . . . 200,000 Proceeds f rom pol:ct revenue bonds and f i rs t mor tgage he:t rus t . . . . . . . . . . . . . . . . . 127,874 238,503 275,258 Firs t mor tgage bocuexchange of fer. . . . . . . . 390,519 Change in notes plaporary cash investments............................ 482,126 474,628 (281,339) To t a l f i n a n c i r. . . . . . . . . . . . . . . . . . . . . . . . 1,104,494 713,131 379,214 Other: l Decrease (increaseccapital (exclusive of notes payable anoash investments)...... (109,099) (59,036) 137,166 Reclassification teurity of long-term debt................................... (959) (43,172) (32,756) Proceeds f rom se t t dga tion. . . . . . . . . . . . . . . 177,439 Other - net.........,..................... (7,367) (31,113) (90,875) Total other.......................... (117,425) (133,321) 190,974 Total.......... ..................... $1,174,995 $ 831,242 $ 860,191 Application of Funds: Construction and nuefurnditures (net of allowance for fundticonstruction)........ $ 644,580 $ 712,418 $ 745,972 Reacquired long-term,....................... 530,415 118,824 114,219 Total................................. $1,174,995 $ 831,242 $ 860,191 ontinued on next page) v
HOUSTON LIGHTING & POWER COMPANT s., STATEMENTS OF CHANGES N FINANCIAL POSITION
-(Thousands of Dollars)
Year Ended December 31 1987 1986 1985 Sources of Funds: Operations: Net income........................................... $ 439,987 $ 461,744 $ 482,506 Items not requiring current outlay of working capitals t Depreciation and amortization...................... 229,679 218,092 184,794 Deferred federal income taxes - net................ 67,890 93,689 86,903 Investment tax credit deferred - net............... (955) 24,332 39,788 A11ovance for funds used during construction....... (212,401) (225,626) (204,209) Total............................................ 524,200- 572,231 589,782 Dividends declared..................................... (336,274) (320,799) (299,779) R2 invested funds from operations....................... 187,926 251,432 290,003 Financing: Sale of common stock................................. 4,850 136,274 Sale of preferred stock............. ................ 99,125 49,021 Sale of first mortgage bonds......................... 200,000 Proceeds from pollution control revenue bonds and first mortgage bonds held in trust................. 127,874 238,503- 275,258 First mortgage bonds issued in exchange offet........ 390,519 Change in notes payable and temporary cash investments........................................ 482,126 474,628 (281,339), Total financing.................................. 1,104,494 713,131 379,214 Other: Decrease (increase) in vorking capital (exclusive of notes payable and temporary cash investments)...... (109,099)' (59,036) 137,166 Reclassification to current maturity of long-term debt..............................:................ (959) (43,172) (32,756) Proceeds from settlement of litigation............... 177,439 Other - net.......................................... (7,367) (31,113) (90,875) Total other...................................... (117,425) (133,321) 190,974 Total............................................ $1,174,995 S 831,242 $ 8' ,191 Application of Funds: Construction and nuclear fuel expenditures (net of allovance for funds used during construction)........ $ 644,580 $ 712,418 $ 745,972 Reacquired long-term debt.............................. 530,415 118,824 114,219 Total............................................ $1,174,995 $ 831,242 $ 860,191 (continued on next page)
l BOUSTON LIGHTING & POVER COMPANY STATEMENTS OF CHANGRS IN FINANCIAL POSITION
~~ -
(Thousands of Dollars)
' ~ittr. tim:cd ).
~ .
~ ..
~ > . . 1 Year Ended December II ' - ..)
1987 1986 1985 l Changes in Components of Vorking Capital (exclusive of notes payable and temporary cash investments): 1 Increase (decrease) in current assets: Cash................................................. $ (129) $ (745) $ (4,992) Accounts receivable.................................. (113,171) (14,228) (27,410) Accounts receivable from affiliated companies........ (1,420) 2,117 (1,107) Inventory............................................ 13,017 19,949 (31,836) 0ther................................................ (89) (6,693) 6,265 Total............................................ (101,792) 400 (59,080) Increase (decrease) in current liabilities: (45,409) Accounts payable..................................... (26,807) 29,569 Accounts payable to affiliated companies............. 4,483 8,445 1,679 Taxes and interest accrued........................... (38,366) (36,465) 52,587 Fuel cost over recovery.............................. (94,309) (62,290) 95,831 Current portion of long-term debt.................... (42,213) 10,416 (40,079) 0ther................................................ (13,679) (8,311) 13,477 Total............................................ (210,891) (58,636) 78,086 Inclease (Decrease) in Vorking Capital (exclusive of notes payable and temporary cash investments).......... $ 109,099, $ 59,026 $(137,166) See Notes to Financial Statements. 1 I
TOBTING & POVER COMPANY TEPINANCIAL STATEMENTS s - Fo$rars Ended December 31, 1987 (1) Summary of Smounting Policies System of Ac The accountirdBouston Lighting & Power Company (HL&P) are maintained WW, vith, the Federal Energy Regulatory Commission's1 i of Accou'n 6' #4ch_has been adopted by the Public Utiliis of Texas (Utility CommissicA.
~
k Electric Pla Additions tt r3an t , betterments to existing property and replacemen ts111 property are capitalized at cost. Cost includes tNnet of contracted services, direct labor and material, i as for engineering supervision and similar overhead its llowance for funds used during construction (AFUDC). r aces for construction reduce additions to electric pla Haintenance opt and replacements and renevals of items determined esn units of property are charged to expense. The actual ersook cost of units of property replaced or reneved is j ' plant and such cost, plus removal cost less salvage, is teaulated depreciation. HL&P computreon using the straight-line method. The deprecia tion;its a percentage of the depreciable cost of plant was 3.191.6% for 1986, and 3.8% for 1985. Allowance fo Unring Construction HL&P accrues >n truction projects and nuclear fuel payments except foritsluded in the rate base by regulatory authorities.)C computed using a gross rate of 10.75% beginning it cto changes caused by the Tax Reform Act of 1986, which lyinates a current tax deduction for interest during const. is gross rate is applicable to all property except cer t4nsa property, principally the South Texas Project Eletering Station (South Texas project), on which interest vi:ptted as a current deduction. The net-of-tax accrual ratt9:ing 1987, and such rate was 10% during 1986 i and 1985. Operating Rei Revenues artni f rom the sale of electricity as bills are rendered to ie: The Utility Commission provides for the recovery of age energy portion of purchased power costs 1
HOUSTON LIGHTING & POWER COMPANY NOTES TO FINANCIAL STATEMENTS For the Three Years Ended December 31, 1987 (1) Summary of Significant Accounting Policies System of Accounts The accounting records of Houston Lighting & Power Company (HL&P) are l maintained in accordance with the Federal Energy Regulatory Commission's Uniform System of Accounts which has been adopted by the ' Public Utility Coramission of Texas (Utility Commission). . . _ Electric Plant Adon Ns to electric plant, betterments to existing property and- l 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 j overhead items and an allovance for funds used during construction i (AFUDC). Customer advances for construction reduce additions to l electric plant. Haintenance of property and replacements and renewals of items determined to be less than units of property are charged to expense. l The actual or average book cost of units of property replaced or ! renewed is removed from plant and such cost, plus removal cost less salvage, is charged to accumulated depreciation. . l HL&P computes depreciation using the straight-line method The depreciation provision as a percentage of the depreciable cost of plant was 3.4% for 1987, 3.6% for 1986, and 3.8% for 1985. Allowance for Funds Used During Construction HL&P accrues AFUDC on construction projects and nuclear fuel payments except for amounts included in the rate base by regulatory au horities. AFUDC vas computed using a gross rate of 10.75% beginning in 1987 due to changes caused by the Tax Reform Act of 1986, which generally eliminates a current tax deduction for interest during construction. This gross rate is applicable to all property except certain transition property, principally the South Texas Project Electric Generating Station (South Texas project), on which interest vill be permitted as a current deduction. The net-of-tax accrual rate was 9% during 1987, and such rate was 10% during 1986 and 1985. Operating Revenues Revenues are recognized from the sale of electricity as bills are rendered to customers. The Utility Commission provides for the ! recovery of fuel and the energy portion of purchased power costs J
l l through an energy component of base electric-rates. The energy component is established during a utility's general rate proceeding and is offective for a minimum of twelve months. The rules provide for a reconciliation of fuel revenues, with any over- or under-recovery of fuel costs to be considered in establishing future fuel cost recoveries. In February 1986, the Utility Commission adopted a rule that requires a monthly reduction of the fuel factor if the Utility Commission determines that a utility has materially , over-recovered, or projects that it will over-recover allovable fuel l costs under its existing fuel factor. The rule also provides for any fuel cost savings to be refunded as a one-time credit to customers' bills. Federal Income Taxes Houston Industries Incorporated (Houston Industries) and its subsidiaries file a consolidated income tax return. HL&P records as its current income tax expense an amount equal to the tax it would have to pay if it filed a separate return. HL&P follows a policy of comprehensive interperiod income tax allocation. The Tax Reform Act of 1986 eliminated investment tax credits effective January 1, 1986, except with respect to certain transition properties, principally the South Texas project. Investment tax credits are deferred and amortized over the estimated lives of the related property. (2) Preferred Stock HL&P's preferred stock may be redeemed at the following per share prices, plus any unpaid accrued dividends to the date of redemption: Not subject to mandatory redemption:
$4.00 Series: $105.00.
$6.72 Series: $102.51.
$7.52 Series: $102.35.
! $9.52 Series: through September 30, 1990 - $105.00; thereafter - $103.00 to $101.00. [ $9.08 Series: through March 31, 1991 - $103.00; thereafter - $101.00.
$8.12 Series: through November 30, 1992 - $104.25; thereafter -
$102.25.
l
$9.04 Series: through January 31, 1989 - $105.00; thereafter - $103.00 to $101.00.
Adjustable Rate Series "A": through March 31, 1989 - not redeemsble; thereafter - $103.00 to $100.00. The dividend rate on thic series, as of January 1, 1988, is 7.75%. The rate is adjusted quarter:y, based on the yield on U.S. Treasury t securities. Adjustable Rate Series "B": through September 30, 1990 - not redeemable; thereafter - $103.00 to $100.00. The dividend ! rate on this series, as of January 1, 1988, is 7.50%. The rate is adjusted quarterly, based on the yield on U.S. Treasury securities. l l
Subj ect to mandatory redemption: 1
$8.50 Series: through Hay 31, 1992 - $108.50s thereafter -
$104.25- to $100.00; provided that the $8.50 Series may not be redeemed, directly or indirectly, prior to June 1, 1992 from the proceeds of any refunding through the incurrence of debt or through the issuance of preferred stock ranking equally with or prior to the $8.50 Series as to dividends or liquidation, where such debt has an effective interest cost, or such preferred stock has an effective dividend cost, of less than 8.50% .per annum. The mandatory redemption provision requires HL&P to redeem 200,000 shares annually beginning June 1, 1993.
(3) Long-Tern Debt At December 31, 1987, sinking or improvement fund requirements of HL&P's first mortgage bonds outstanding vill be approximately $36 million for each of the years 1988 through 1992. Of such requirements, approximately $17 million for each of the years 1988 through 1992 may be satisfied by certification of property additions at 100% of the requirements, and the remainder through certification of such propnrty additions at 166 2/3% of the requirements. Sinking or improvement fund requirements for 1987 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, 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 mortgage bonds of a series subject to special redemption, deposited cash may be used to redeem first mortgage bonds of such series at the applicable special redemption price. Annual maturities of long-term debt and minimum capital lease payments are approximately $1 million in 1988, $55 million in 1989, no maturities in 1990, $48 million in 1991 and $78 million in 1992. See also Note 15. The issuable amount of HL&P's first mortgage bonds is unlimited as to authorization, but limited by property, earnings, and other , provisions of the Mortgage and Deed of Trust and the supplemental I indentures thereto. Substantially all properties of HL&P are subject . to liens securing its long-term debt. 1 (4) Short-Term Financing ; The interim financing requirements of HL&P are met through short-term bank loans and the issuance of commercial paper. FL&P had bank lines of credit aggregating $650 million at December 31, 1987 and 1986, l vhich limit its total short-term borrowings and provide for interest i
- } l at rates generally less than the prime rate. Commercial paper outstanding was $549,796,000 at December 31, 1987. Bank loans and commercial paper outstanding were $50,000,000 and $14,100,000, respectively, at December 31, 1986. Commitment fees are required on the undrawn portion of the lines. Houston Industries Finance, Inc. (Houston Industries Finance), a wholly-owned subsidiary of Houston Industries, began purchasing HL&P's customer accounts receivable in January 1987. (5) Retirement Plan In 1986, HL&P adopted Statement of Financial Accounting Standards (SFAS) No. 87, "Employers' Accounting for Pensions," for its retirement plan, retroactive to January 1, 1986. Pension costs for 1987 and 1986, and related disclosures as of December 31, 1987 and 1986, are determined under the provisions of SFAS No. 87. Pension costs for the plan in 1985 are determined under the provisions of previous accounting principles. HL&P has a noncontributory retirement plan covering substantially all employees. The plan provides retirement benefits based on years of service and the employee's highest 36 consecutive months' base compensation during the last 120 months of employment. The policy of HL&P is to fund all net pension costs, but past service costs only to the extent that the excess of plan assets over accrued benefits does not meet HL&P's funding obligations for past service costs. In 1987 and 1986, however, as a result of the change in federal income tax rates and the early retirement program, discussed below, HL&P funded the maximum amount deductible for federal income tax purposes. Plan assets consist principally of common stocks and investments in short-term, high quality, interest-bearing obligations. In January 1987, HL&P offered employees (excluding officers) who were 55 years of age and had 15 years of service as of February 28, 1987 an incentive program to retire early. For employees electing early retirement, the program would add three years of service credit and three years in age up to 35 years of service and age 65, respectively, in determining an employee's pension. Each participating employee vould also receive a supplemental benefit to age 62 (for a minimum of two years). The early retirement incentive was accepted by 430 employees. Pension benefits are being paid out of HL&P's retirement plan ascets and the supplemental benefits are being paid by HL&P. Upon the adoption of the early retirement plan, the proj ec ted benefit obligations pertaining to HL&P's retirement plan and supplemental benefits were increased by $17.5 million and $7.2 million, respectively. HL&P has deferred the costs associated with the increases in these proj ec ted benefit obligations and will request recovery through electric rates in its next rate proceeding before regulatory authorities. At December 31, 1987, HL&P's obligation related to the supplemental benefits was $5.8 million.
Net pension coct includes the following components: Year Ended December 31, 1987 1986 (Thousands of Dollars) Service cost - benefits earned during the period $ 12,909 $ 10,961 Interest cost on projected benefit obligation 22,782 17,971 Return on plan assets - actual (10,186) -(26,379)
- deferred gain (loss) (10,096) 9,064 Amortization of transitional asset and prior service cost (1,455) (1,915)
Net pension cost $ 13,954 $ 9,702 The funded status of the retirement plan was as follows: December 31, 1987 1986 (Thousands of Dollars) i Actuarial present value oft l Vested benefit obligation $ 180,118 $ 138,747 I Accumulated benefit obligation $ 207,859 $ 167,116 ) Plan assets at market value $ 249,403 $ 234,843 Projected benefit obligation 275,342 234,624 Assets in excess of (less than) projected benefit obligation (25,939) 219 Unrecognized transitional asset at January 1, 1986 (28,400) (30,559) Unrecognized prior service cost 6,134 {' Unrecognized net loss 16,034 11,387 Accrued pension cost S (32,171) $ (18,953) ! The projected benefit obligation was determined using an assumed discount rate of 9 1/2% in 1987 and 8 1/2% in 1986 and an assumed long-term rate of compensation increase of 6 1/2% in both years. The assumed long-term rate of return on plan assets is 9%. The transitional asset at January 1, 1986 is being recognized over approximately 17 years, and the prior service cost is being recognized over approximately 15 years. l The total pension cost of HL&P's retirement plan for 1985 was ;
$14,405,000.
l l i _ i
(6) Commitments and Contingencies Significant commitments have been incurred in connection with HL&P's construction program and for nuclear fuel purchases. The construction program (exclusive of AFUDC) is presently estimated to cost $477 million in 1988, $431 million in 1989 and $349 million in 1990. These amounts do not include expenditures on projects for which HL&P expects to be reimbursed by customers or cogenerators and also do not reflect the possible acquisition by HL&P of an additional 16% interest in the South Texas project. See Note 9 for discussions of such possible acquisition and the revised budget and schedule for the South Texas project. An additional $50 million is expected to be spent during such period for uranium concentrate and nuclear fuel processing . services for HL&P's portion of the South Texas project. Cammitments in connection with HL&P's construction program, principally for generating plants and related facilities, are generally revocable by HL&P subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties. HL&P also has certain leases for computer equipment that are treated as capital leases for financial accounting purposes. HL&P has no other material lease commitments. (7) Pending Litigation Appeal of 1982 Rate Order. On December 16, 1987, the Texas Supreme Court rendered its decision on an Application for Vrit of Error filed by the Utility Commission in connection with a December 1982 rate order by the Utility Commission (Docket No. 4540). In the rate order, the Utility Commission disallowed the recovery by HL&P of approximately $166 million of costs incurred in connection with its cancelled Allens Creek nuclear project, and ordered that any tax savings associated with the disallowed portion be passed through to customers. While the Utility Commission purported to permit $195 million of expenditures for the project to be recovered over a ten-year period, the flow-through of tax savings on the disallowed portion reduced the recovery to approximately $84 million. That decision was appealed by HL&P to the 201st Judicial District Court in Travis County, Texas which ruled, in December 1984, that the Utility Commission was without legal authority in imposing such punitive measures. The District Court ruled that, since the Utility l Commission had found that the shareholders, and not the ratepayers, should bear the disallowed Allens Creek expenoitures, the shareholders should receive any and all tax benefits associated with those expenditures. The rate order had also reduced a recermended return on common equity from 16.85% to 16.35% as "a penalty for poor management," based principally on findings that HL&P had been imprudent in the handling of its nuclear construction projects. The District Court ruled that the Utility Commission had no statutory authority for such a penalty, and that the Utility Commission's findings regarding HL&P's management of the South Texas project vere "premature and presumptuous" in view of the then pending litigation on such issues against the former architect-engineer. The District Court also ruled that the -1982 rate order had erroneously and prematurely attempted to exclude from HL&P's cost of service any of its expenses in connection with the litigation, as well as any amounts which may ultimately be assessed against HL&P in such litigation. Based on such rulings, the District Court remanded the case to the Utility Commission for further proceedings consistent with the final judgment. The Utility Commission appealed the District Court's decision to the Court of Appeals for the Third Supreme Judicial District of Texas, which essentially upheld the District Court in an opinion issued April 9, 1986 (which was modified and reissued on July.2, 1986). The Texas Supreme Court granted the Utility Commission application for Vrit of Error to consider certain points of error raised by the Utility Commission, as well as certain other points raised by HL&P. Although the Texas Supreme Court affirmed certain aspects of the lower courts' decisions, including a ruling to the effect that the Utility Commission had no statutory authcrity to impose a penalty on HL&P's rate of return, that court reversed the lover courts' decisions regarding allocation of certain income tax benefits associated with the disallowed costs to the benefit of shareholders and held that such income tax benefits should inure to the benefit of HL&P's ratepayers. HL&P has filed a motion for rehearing on the issue reversed by the Texas Supreme Court. The Utility Commission has also sought rehearing on the issues affirmed by that court. Action on those motions is currently pending before the Texas Supreme Court. As a result of the Texas Supreme Court's affirmation of certain of the lover courts' decisions, the case is to be remanded to the Utility l Commission for determination and implementation, subject to pending ' motions for rehearing and possible further appeals by HL&P. Previously reported financial results vill not require restatement. Jury Award in Condemnation Proceeding. In July 1981, HL&P filed a condemnation action against the Klein Independent School District I (Klein) to take approximately 8.6 acres of Klein's property as an easement for the purpose of erecting, operating and maintaining a 345-kilovolt electric transmission line. Klein subsequently alleged in the County Civil Court at Lav No. 1 of Harris County, Texas that HL&P had abused its discretion in the taking of the property. On November 27, 1985, the jury returned a verdict finding that Klein sustained actual damages of approximately $104,000. The jury also found that HL&P's conduct in the construction, operation and maintenance of the transmission line on Klein's property was in reckless disregard of the school purposes for which the property was being used, and awarded exemplary damages in the amount of $25 million. The jury found, further, that the value of Klein's property had been reduced to zero and that the cost of land and facilities necessary to replace or restore Klein's property and facilities was approximately $42.1 million. On December 13, 1985, the trial judge entered judgment in favor of Klein awarding the full amounts of actual and punitive damages, or a total of approximately $25.1 million, plus interest, Klein having elected that form of judgment rnther than a judgment awarding condemnation damages. 'In addition, the court granted an injunction, pending appeal, that effectively prohibited HL&P from using the line for the transmission of energy, except during certain specified emergencies when :there are no
~
regularly conducted school or other publicly sponsored activities occurring on Klein's property. On January 2, 1986, HL&P appealed the case to the Court of Appeals for the 14th Supreme Judicial. District of Texas, and also sought, from that court, relief from the injunction against use of the line pending appeal or, in the alternative, an order increasing the bond which Klein must file in order to protect the interests of HL&P pending appeal. On F6bruary 27, 1986, the appellate court granted HL&P's ' requested relief from the injunction and directed the trial court to allow HL&P to post a bond that vould allow continued use of the easement pending a final decision on the merits of HL&P's appeal. Klein responded on March 3, 1986, by asking the Texas Supreme Court for leave to file a mandamus petition against the 14th District Court of Appeals. On November 26, 1986, the Supreme Court conditionally granted the mandamus petition sought by Klein. Ruling that the trial court had not abused its discretion in denying HL&P's request to supersede the injunction, the Supreme Court indicated that it would grant the writ of mandamus if the Court of Appeals did not vacate its judgment, with the result of that decision being the reinstatement of the trial court's original order, which had enjoined HL&P from using the line pending the outcome of the appeal on the merits. In light of the injunction that effectively prohibited use of the line, HL&P placed a rerouted line in service in August 1987. On November 5, 1987, the 14th District Court of Appeals issued its decision on the merits of the appeal by HL&P. The court ruled that HL&P's action pursuant to the statutory condemnation procedure could not amount to trespass and set aside the award of exemplary damages to Klein, thus relieving HL&P from liability for the $25 million in exemplary damages awarded by the trial court. The appeals court af firmed the trial court judgment on the balance of the points raised in the appeal, leaving intact the jury's award of approximately $104,000 in actual damages. The appeals court noted, however, that HL&P had rerouted the transmission line away from Klein's property. Klein has filed an Application for Vrit of Error with the Texas Supreme Court seeking further review of the appeals court's decision. HL&P has filed a contingent Application for Vrit of Error to be considered in the event that the Texas Supreme Court grants Klein's Application. It is possible that the exemplary damages awarded by the trial court might be reinstated if the Supreme Court agrees to hear a further appeal of the decision. While HL&P can give no definitive assurance regarding the ultimate resolution of this matter, HL&P presently does not believe such resolution vill have a material adverse impact on its financial position. No prediction can be made, however, of the final outcome or the timing of final judicial action in this suit. j I
Prudence Review of Coal Supply Agreements and Litigation with Coal Suppliers. During the course of hearing HL&P's 1986 general rate i proceeding (Docket No. 6765), the. Utility Commission severed into a ! separate docket (Docket No. 6963) certain issues related to the ! prudence of the two long-term contracts under which substantially all l of the coal for HL&P's V. A. Parish generating units is obtained, l including the degree to which the chemical characteristics of coal I from one of those suppliers led to HL&P's decision to upgrade existing pollution control equipment by installing baghouses on three I of those generating units. The Utility Commission staff requested ,
-that, pending the outcome of the separate docket, HL&P be at risk for )
all costs associated with .the installation of the baghouses (estimated to total $178 million excluding AFUDC) and for payments raade for coal in excess of the equivalent of a delivered price of
$1.51 per million Btu's.
. As a result of the Utility Comn.iss ion's action, HL&P, Houston Industries and Utility Fuels, Inc. (Utility Fuels), a fuel supply subsidiary of Houston Industries, filed suit against the two coal suppliers. in question in the United States District Court for the Northern District of Texas in Dallas. In that lawsuit, the plaintiffs requested the court to determine that performance under the contracts should be suspended or the contracts modified in the event the Utility Commission should proceed to a final determination that the maximum cost that can be included in electric rates charged to HL&P's customers is less than the amounts called for under the contracts. In addition, Utility Fuels began withholding from payments to the coal suppliers the difference between the amounts called for in the contracts and the equivalent of a delivered price of $1.51 per million Btu's and sought to deposit that difference into the registry of the Court. In response, both coal suppliers filed counterclaims and motions for partial summary judgment on those counterclaims. On November 18, 1986,. the trial court granted those liotions for summary judgment in part, ruling that HL&P and Utility Fuels must pay the full contract price for coal pending the outcome of the Utility Commission proceeding and directing that the amounts { previously withheld be paid to the coal companies with interest. j HL&P, Houston Industries and Utility Fuels appealed the trial court's l decision to the Fifth Circuit Court of Appeals and continued to i vithhold the amounts in dispute pending the outaome of the appeal. On October 7, 1987, the Fifth Circuit Court of Apptils ruled that the trial court's decision was not a final, appealable order and therefore dismissed the appeal without considering the issues raised therein. On April 20, 1987, a Utility Commission Hearings Examiner granted a , motion by HL&P to suspend the procedural dates then in effect in : Docket No. 6963 in order to allov HL&P, Utility Fuels and the coal ! companies to continue negotiations of certain modifications to the coal supply arrangements in an attempt to provide the basis for resolution of the issues in Docket No. 6963. Those negotiations were concluded on December 21, 1987, when amendments to bcth coal supply ; i j
contracts in question vere executed. Under the amended contracts, the price paid by Utility Fuels was reduced as of January 1, 1988, and changes were made in the escalation and certain other provisions of- the contracts. At the time the amended contracts were executed, Utility _ Fuels, pursuant to an agreed court order, paid the coal suppliers the amounts which previously had been withheld, including
. interest thereon.
In January. 1988, HL&P and the Utility Commission staff filed testimony proposing that the amended coal supply arrangements be accepted by the Utility Commission in resolution of the issues raised in Docket No. 6963. HL&P also filed an agreed stipulation executed by HL&P, the staff and one other party to the docket. Under the
,s t i pula t ion , the new coal supply arrangements vould be accepted by the Utility Commission and issues raised in the docket with respect to (i) prudence of amounts incurred prior to January 1, 1988 and (ii) the relationship of coal quality to the decision to install baghouses would be resolved without disallovance of amounts paid by HL&P for prior coal deliveries. However, in March 1988, the Utility Commission Hearings Examiner considering the docket issued a recommended decision in which he urged the Utility Commission to remand the matter for further evidentiary proceedings on certain points in the proposed stipulation which were questioned by the Hearings Examiner. Rather than reopening the record on his own motion, the Hearings Examiner chose to present his concerns to the Utility Commission for ruling prior to remand. A decision by the Utility Commission on the Hearings Examiner's recommendations is expected at the end of March 1988. In the event that the outstanding coal prudence issues are not resolved by the Utility Commission on a mutually acceptable basis, the parties to the new coal supply arrangements have reserved the right to terminate those arrangements and resume the litigation relating to the previous long-term agreements.
While HL&P can give no definitive assurance regarding the ultimate resolution of this matter, HL&P presently does not believe that such resolution vill have a material adverse impact on its financial position. Should HL&P be unable to recover its costs, such costs may have to be charged against earnings. Fuel Transportation Litigation. On July 31, 1986, HL&P and Utility Fuels filed suit in Federal District Court in Houston, Texas against three railroad holding companies and their railroad operating subsidiaries and two other railroads. The suit alleges that the railroads violated certain federal statutes, including the Sherman Act, in activities aimed at precluding development of coal slurry pipelines that could have delivered coal to the plaintiffs in competition with the railroads. On February 13, 1987, with the agreement of all parties, the Federal District Court in Beaumont, l Texas entered its order permitting HL&P and Utility Fuels to file the same claims for alleged antitrust violations against the same railroads by intervention in an action there pending between a third party and the same railroads. HL&P and Utility Fuels have joined vith the railroads in requesting the Federal District Court in Houston to stay proceedings in the Houston litigation pending the outcome of the Beaumont litigation. Among the defendants are the Burlington Northern Railroad Company (Burlington Northern) and the Atchison, Topeka and Santa Fe Railway Company (ATSF), which supply rail transportation services to Utility Fuels for coal purchased from mines in the Powder River Basin in Montana and Wyoming. In the litigation, Burlington Northern and ATSF have filed counterclaims based on the assertion that certain of the matters alleged to be in dispute in the litigation filed by Utility Fuels and HL&P vere settled as a result of the execution of the Rail Transportation Agreement, dated March 8, 1985, among Utility Fuels and Burlington Northern and ATSF. 'Accordingly, the counterclaims assert that Utility Fuels is in breach of its obligation under the Rail Transportation Agreement by virtue of the filing of suit against Burlington Northern and ATSF. In their counterclaims Burlington Northern and ATSF seek unspecified damages, including punitive damages. HL&P and Utility Fuels regard the counterclaims to be without merit, but no assessment of the ultimate outcome of the litigation can be made at this . time. See also Note 9 - Jointly-0wned Nuclear Plant. (8) Limestone Generating Units In December 1986, the second of two 720 megavatt, lignite-fired generating units at HL&P's Limestone Electric Generating Station (Limestone) was placed into commercial operation. In January 1987, HL&P requested that the Utility Commission order an accounting treatment which vould permit HL&P to capitalize operating and maintenance expenses, non-reconcilable mining and handling charges, taxes and depreciation associated with Limestone Unit No. 2 and to continue recording AFUDC from the date Unit No. 2 was placed in commercial operation until the date when new rates are implemented
~
that reflect Limestone Unit No. 2 as plant in service in rate base (Docket No. 7375). HL&P further requested, as an alternative, that if the mining and handling charges referred to above are not allowed to be capitalized, then those costs vould be allowed recovery through the reconcilable fuel portion of base rates. Hearings in this docket concluded on June 10, 1987, and a decision by the Utility Commission is pending. A similar accounting treatment had been requested by HL&P for Limestone Unit No. 1 but was denied by the Utility Commission. Until rate relief or other regulatory action is taken with respect to Limestone Unit No. 2, operating results of HL&P vill be adversely affected. (9) Jointly-Ovned Nuclear Plant HL&P is project manager and one of four participants in the South Texas project, which consists of two 1,250 megavatt nuclear generating units. Each participant finances its own share of construction expenditures with HL&P's participating interest in the l l project currently being 30.8%. As of December 31, 1987, HL&P's investments in the South Texas project and in nuclear fuel, including APUDC, were $2.2 billion and $131 million, respectively. Pending Litigation and Agreement in Principle with the City of Austin. In January 1983, the City of Austin (Austin), one of the four owners of the South Texas project, filed suit against HL&P and Houston Industries in the 98th Judicial District Court in Travis County, Texas (Cause No. 343,240), alleging that HL&P had misrepresented the capabilities of the original architect-engineer and construction manager of- the proj ec t and failed to properly perform its duties as project manager. Because of such alleged misreprosentations and failures, Austin asserted it was entitled to, among other things, (a) a reformation of the participation agreement such that Austin vould convey to HL&P its 16% interest in the project, (b) a refund from HL&P of the approxiwately $437 million expended by Austin to that date, and of all sums cepended by Austin on the proj ec t thereafter, and (c) damages in an additional unspecified amount. In December 1985, Austin filed an amended petition which again alleged that HL&P had misrepresented the capabilities of the former architect-engineer and failed to properly perform its duties as project manager for the South Texas project. In addition, the amended petition asserted claims against HL&P under the Texas Deceptive Trade Practices - Consumer Protection Act (DTPA) and sought, from HL&P and Ho'uston Industries, either (a) an unspecified amount of damages, including treble damages to the extent proper under the DTPA, as well as pre-judgment interest costs and attorneys' fees, or (b) a reformation or rescission of the participation agreement for the South Texas project requiring HL&P to return to Austin all of the moneys expended by Austin with respect to its 16% interest in the project to the date of the judgment, with interest, relieving Austin of all future obligations with respect to such interest in the project, and providing for a concurrent transfer by Austin of such interest to HL&P. Austin and HL&P have filed motions for partial summary judgment. On October 10, 1986, the trial judge ruled that Austin is not entitled to reformation or rescission of the participation agreement for the South Texas project. The trial judge overruled HL&P's motion for partial summary judgment directed at Austin's allegations asserting a cause of action under the DTPA and HL&P's motion for partial summary judgment directed at Austin's allegations that there was fraud in the inducement relating to Austin's entry into the participation agreement. On June 29, 1987, a newly appointed trial judge denied Austin's motion seeking to hold HL&P responsible for the actions of the former architect-engineer. The judge denied, however, HL&P's request for summary judgment on all claims relating to the participation agreement. The judge ruled that Austin must prove that HL&P breached the participation agreement by failing to report material information and must prove damages specifically related to such failure to provide information. The judge permitted Austin to maintain its claim for $830 million under this theory of recovery if it could show that the ovners would have cancelled the South Texas project in 1976 and that Austin vould have built a coal plant in lieu of the South Texas project. However, on August 10, 1987, Austin provided an updated calculation of.its alleged damages under that claim, dropping its claim under this theory of recovery to S740 million. On August 11, 1987, the judge reversed the earlier order denying HL&P's motion for summary judgment as .to Austin's DTPA claims. Thus, Austin's DTPA claims have.been mooted and its damage claims are no longer subject to trebling under the DTPA. As a result, the maxir,um dsmage claim remaining in the case is an alternative claim for $811 willion relating to Austin's claim that it was fraudulent?y inducad to enter into the South Texas project in 1973. The juoge has not yet acted on HL&P's motion for summary judgment on this issue. On September 3, 1987, HL&P announced that it hed reached an agreement in principle (Agreement in Principle) with Austin to acquire Austin's 16% share of the South Texas project. Under the terms of the Agreement in Principle, HL&P and Austin vould dismiss all litigation and other claims currently pending. Tne Agreement in Principle provides that Austin would convey to HL&P its 400 megawatt (HV) interest in the South Texas project, together with nuclear fuel and related property, in exchange for a 400 HV interest in HL&P's Limestone station, a lignite plant having a capability of 1,440 HV which has been completed and placed in service. This conveyance vould result in Austin having an undivided proportionate interest in the land, capital equipment, and fixed personal property of HL&P at Limestone. A 200 HV interest in Limestone Unit No. 1 vould be conveyed on the later of June 1, 1988 or the closing of the settlement, and a 200 MV interest in Limestone Unit No. 2 vould be conveyed on January 1, 1990. HL&P vould operate Limestone in accordance with an operating agreement to be mutually agreed upon as part of the definitive documentation. ; Under the terms of the Agreement in Principle, HL&P vould (a) assume Austin's South Texas project obligations for the rcmaining construction and fuel costs effective September 1, 1987, as veli as i Austin's obligations for continuing capital improvements, ! decommissioning, and all ciber mattere arising out of Austin's ! interest in the South Texas project; (b) pay Austin $19.7 million for ! a portion of construction costs incurred during negotiations; (c) purchase Austin's nuclear fuel for $30 million; and (d) pay certain of Austin's legal expenses. In addition, certain claims asserted by Austin under an outstanding purchased power contract vould be resolved. Austin vould assume responsibility for its portion of the capital improvements and fuel, operating and maintenance expenses at Limestone. The Agreement in Principle provides that no contract obligation vill come into existence 'until execution of the definitive contract I documents and other conditions have been satisfied, including . approval by the Utility Commission and the Nuclear Regulatory l i Commission (NRC).
In addition, the Agreement in Principle provides that it vould be necessary that the- order of the Utility Commissian, among other things, contain no findingt, conclusicas, reservaticns, or observations by a majority of the Utility Commissi .t raise reasonable doubt that the transfers contemplated by the Agreement in Principle vould result in rate treatment to HL&P-less favorable than the rate treatment of HL&P prior to such transfers. In September 1987, HL&P filed an application vith the Utility Commissic.. (Docket No. 7725) to reflo c the exchange of ownership of Limestone and the South Texas proj ec t. pursuant to the Agreemen, ir Principle. The settlement is also contingent upon the City of San Antoido (San Antonio) and Central Power emd Light Company (CPL), the other participants in the South Taxas proj ec t , vaiving their rignts of first refusal relating to acquiring part of Austin's interest. On January 7, 1988, HL&P filed a Fourth Amended Answer, Original Third Party Petition and Original Petition for Declaratory Relief (Third Party Petition) in the pending litigation with Austin. In the Third Party Petition, HL&P requested leave of the court in which the Austin litigation is pending to make service on San Antonio and CPL and its parent corporation, Central and Southwest Corporation (CSU). The Third Party Petition makes claim against San Antonio, CPL and CSV for contribution and indemnity should HL&P be found to be liable to Austin with respect to certain claims of Austin in the pending litigation. The Third Party Petition asks for a declaratory judgment that HL&P is not liable to Austin, San Antonio, CPL or CSV with respect to its actions or inacti.ons as project manager under the Participation Agreement among the co-owners of the South Texas proj ec t and further requests the court in the Austin litigation to implement alternative methods of dispute resolution provided by the Texas Civil Practice and Remedies Act such as non-binding arbitration. Finally, the Third Party Petition asks the court to defer or abate proceedings until completion of the second unit at the South Texas project but ne later than December 31, 1990. Unit No. 2 of the South Texas proje t is presently scheduled for commercial operation in June 1989. At a hearing on January 27, 1988, the court in the Austin litigation set the pending suit between Austin and HL&P for trial the first veek in June 1988. The court in the Austin litigation, which has discretion whether to accept jurisdiction over the claims asserted in the Third Party Petition, allowed HL&l' to serve the Third Party Petition on San Antonio, CPL and CSV vithout prejudice to the right of those parties to leter assert that the Third Party Petition should be dismissed or severed for a separate trial in the Austin litigation or severed into a separate docket independent of the Austin litigation. The court also advised the parties that in no event vould San Antonio, CPL and CSV be required to participate in the trial of the pending suit between Austin and HL&?, HL&P has also filed an original complaint 11. the 130th District Court of Matagorda County against San Antonio, CPL and CSV requesting substantially the same relief. If the court in the Austin litigation does not ultimately dismiss the Third Party Petition, prosecution of the action in Matagorda County vill be deferred.
On March 3, 1988, San Antonio and CPL filed responses to the Third Party Petition, and each delivered letters requesting arbitration. In their responses and letters, both San Antonio and CPL asserted that HL&P has breached its duties and obligations as project manager for the South Texas project and is liable to San Antonio and CPL for resulting unspecified damages. San Antonio and CPL asked the trial judge in the Austin litigation to compel their requested arbitration and to stay further proceedings with respect to CPL and San Antonio pending the outcome of that arbitration. They further asked the trial court to enjoin HL&P from pursuing either its Third Party Petition or the separate litigation filed by HL&P in Katagorda County. No hearing has been scheduled by the court in the Austin litigation to consider these matters. CSV also responded to the Third Party Petition on March 3, 1988, asking that further proceedings be deferred pending the arbitration, and denying any liability with respect to the South Texas project. The parties have continued settlement negotiations within the frarevork contemplated by the Agreement in Principle; however, no prediction can be made as to whether a settlement with Austin can be achieved. If a definitive agreement cannot be reached, any judgment entered after trial, as well as the intermediate ruling discussed above, vill be subject to appeal after trial. Vith respect to the pending litigation, HL&P regards Austin's claims and those asserted by CPL and San Antonio to be without merit. While HL&P cannot give definitive assurance regarding the ultimate resolution of these matters, HL&P presently does not believe such resolution vill have a material adverse impact on its financial position. Assuming the Agreement in Pt'.nciple is consummated, HL&P's construction and nuclear fuel expenditures vould increase by $205 millicn for the 1988-1990 period, $92 million of which is related to reimbursement of costs incurred by Austin prior to 1988 and the : purchase of Austin's nuclear fuel. Order of the Texas Supreme Court. On November 4, 1987, the Texas Supreme Court entered an order which likely vill delay the schedule for Docket No. 7725 and certain other dockets pending before the Utility Commission. The Court's order directed the Commissioners of the Utility Commission to stay hearings and actions in Docket No. 7725 and certain other dockets pending disposition by the Court fa Motion filed by the Attorney General of Texas for Leave to Pile Petition for Vrit of Handamus against the Commissioners. In addition to Docket No. 7725, the Court's order applies to Docket No. 6184, an inquiry concerning the economic viability of Unit No. 2 of the South Texas project, and Docket No. 7582, in which IlL&P petitioned for deferred accounting treatment for costs related to Unit No. 1 of the South Texas project. The mandamus petition arose from action by the Utility Commission in these and certain other dockets denying the Attorney General's petitions to intervene on behalf of the Texas state agencies. HL&P cannot be certain .o this time as te the duration of the Texas Supreme Court's stay ot as to the effect of the Court's action on these dockets. A hearing by the Court on the Attorney General's petition was held on December 16, 1987, and the Vrit of Handamus will remain in effect until the Texas Supreme Court resolves this issue. Prudence Review of South Texas Project by Utility Commission. The Utility Commission has instituted a prudence review of the South Texas project for the purpose of reaching a firsl and binding determination for future rate base treatment of the amounts invested in the South Texas project. This proceeding (Docket No. 6668) vill encompass an investigation of the prudence and efficiency of the planning, management and construction of the South Texas project, as well as the proper accounting treatment of the proceeds received from the former architect-engineer in the settlement (Settlement) of certain litigation relating to the South Texas project. There is no definitive schedule for commencement of hearings, but it is unlikely that hearings vill begin before the fall of 1988. The Utility Commission retained a consulting firm to evaluate the prudence and efficiency of the planning and management of the South Texas project and to make recommendations to the Utility Commission regarding regulatory actions ';ased on such evaluation. In June 1986, the consulting firm presented its report (Report) to the Utility Commission, which Report covered the period through 1983. The consulting firm concluded in the Report that deficiencies in management of the project had occurred and that such deficiencies led to imprudent expenditures estimated to be in a range of $1.1 to $1.3 billion. According to the Report, such amounts do not include AFUDC or rate effects which the consulting firm concluded would substantially offset each other. The Report also indicated that the estimates relating to the prudence issue vere preliminary, vere based upon certain assumptions that should be refined and vere subject to further refinement and modification. A new consultant is expected to be retained by the Utility Commission in March 1988 to complete all vork necessary for a final evaluation concerning the prudence of management and the reasonableness of costs associated with the South Texas project. Although the scope of that investigation has not been finalized, HL&P anticipates that the Report vill not be sponsored by the Utility Commission staff. The manner in which the new consultant or any other party vill utilize the Report in that docket, however, remains unclear. HL&P believes that the Settlement with the former architect-engineet provided full compensation for any imprudent or inef ficient plar.ning or management during the period in question. HL&P vill strongly contest any recommendation or finding that amounts invested in the South Texe.s project, after taking into consideration the Settlement, have beea a result of inefficiency or imprudence. While no definitive assurance can be given that all amounts invested in the South Texas project vill be recoverable by HL&P through electric rates or otherwise, HL&P presently believes the ultimate resolution
of the Utility Commission's prudence review vill not have a material adverse effect on its financial position. Any amounts that are not ! recoverable vould have to be charged against earnings. A substantial l vrite-off could adversely affect HL&P's ability to finance its i capital program and meet other financial obligations. l I Request for Deferred Accounting Treatment. In July 1987, HL&P requested that the Utility Commission order an accounting treatment which would allov HL&P to defer its portion of all operating and maintenance expenses, taxes and depreciation that vould otherwise be i expensed effective with the commercial operation of Unit No. 1 of the l South Texas project and to continue recording AFUDC associated with I this investment until rates are placed into effect which would l 1 reflect this investment as electric plant in service in rate base (Docket No. 7582). I Because the hearings .in Docket No. 6668 relating to the prudence i review of the South Texas project are not currently scheduled and are ; unlikely to begin before the fall of 1988, a significant lag time I could occur between the commercial operation date of Unit No. 1 of l the South Texas project and implementation of new rates reflecting l such facility as plant in service. As a result of such lag time and i vithout the requested accounting treatment referenced above, HL&P's i operating results vill be adversely affected unless some other mitigative action by the Utility Commission is taken. In October 1987, HL&P filed supplemental testimony in response to the issuance of SFAS No. 92. SFAS No. 92 precludes the capitalization of the equity portion of AFUDC for financial reporting purposes as was previously requested in Docket No. 7582. It is anticipated that the ' effect of such limitation would reduce earnings of HL&P by approximately $100 million on an annualized basis. In its supplemental testimony, in lieu of the AFUDC accrual, HL&P requested the accrual of interest on the deferred costs and on the plant investment in Unit No. 1 of the South Texas project. Under this request, HL&P's 1988 financial results vould be similar to those under the original deferral request. Revised Budget and Schedule. On September 17, 1987, HL&P presented a completion estimate for the South Texas project to the management committee for the project, which estimate was adopted by the committee on December 17, 1987. Based upon its September 1987 completion assessment (which assumed a commercial operation date for Unit No. 1 of March 1, 1988), HL&P estimated that the total cost for the completed project would be $5.28 billion, excluding AFUDC and net of the Settlement. The revised cost estimate represents an increase of $300 million over the previous cost estimate which was $4.98 billion, excluding AFUDC and net of the Settlement, for the entire South Texas project. HL&P's portion of such increased costs vould be approximately $92 million based on its current 30.8% interest in the South Texas project. In August 1987, the NRC granted a low power operating license for Unit No. 1 of the South Texas project. In 1987, the Government
Accountability Project (GAP), a citizens interest group, demanded that the NRC establish a special task force to. investigate alleged safety defects at the South Texas project. The group claimed to have evidence of defects but refused to turn over the evidence until late in 1987. The NRC concluded an on-site investigation to review and evaluate the GAP allegations. The NRC review of all the GAP allegations 'has identified no substantive safety issues that would varrant delay in the NRC's consideration of a full power license for Unit No. 1 of the South iexas project. In February 1988, the NRC imposed a civil penalty in the amount of $75,000 for two instances in late 1987 when operations during testing at the South Texas project violated certain technical specifications. In March 1988, the NRC imposed a second civil penalty in the amount of $50,000 for security deficiencies identified in the fall of 1987. Initial criticality at Unit No. 1 of the South Texas project was achieved in March 1988. The delay in achieving initial criticality has been principally attributable to certain equipment problems identified during the testing process, which have been analyzed and corrected, and the need for additional operator training undertaken to address concerns raised by the NRC. The steps remaining before Unit No. 1 can be placed into commercial operation are satisfactory completion of lov power operation and the receipt of a full power license from the NRC. The in-service date and cost ea ' mate for Unit No. 1 of the South Texas project are subj ec t to .atinuing review in light of these matters and the ongoing testing cocess. HL&P estimates that three to five months of additional testing vill be required after initial criticality before Unit No. 1 can Le placed in commercial operation. Although no definitive estimate of additional costs .has been approved, HL&P anticipates that cost increases in the range of $100 to $150 million (of which HL&P's portion vould be $31 to $46 million based on its 30.8% interest) may result from the delays in achieving initial criticality and the resulting delay in the anticipated date of commercial operation of Unit No. 1. HL&P estimates that the l carrying cost of its 30.8% interest in the South Texas project is approximately $15 million per month. Commercial operation of Unit No. 2 of the South Texas project is i scheduled to commence in June 1989. l Nuclear Insurance. HL&P and the other owners of the South Texas l proj ec t have obtained all nuclear property and nuclear liability insurance required to date, and additional insurance coverage vill be purchased when the full power license for Unit No. 1 is obtained. In addition, HL&P is evaluating insurance coverage for incremental replacement power costs resulting from certain possible outages at the South Texas project. However, there can be no assurance that all potential losses or liabilities vill be insurable or that the amount of insurance carried vill be sufficient to cover all potential losses and liabilities. Any substantial losses not covered by insurance could have a material adverse effect on the financial condition of HL&P.
< .The: owners of the' South Texasiproject! currently maintain property damage: insurance .in (the amount of $1.23 billion through American Nuclear Insurers (ANI) and Nuclear Electric Insurance' Limited (NEIL)l and are planning -tc ~ purchase an_ additional $165 million in limits from NEIL when the full power-license for Unit No.'1 is obtained.
The owners are also considering the-purchase-of an' additional $130-rillion in limits which has recently1become available from ANI. The NEIL excess property _ damage insurance must; be used- to ' cover - decontamination and clean-up expenses before being used to cover
' direct losses to property.. Although_there can be'no assurance as to the maximum amount of property; insurance available from time to time, it is anticipated that property insurance coverage vill be maintained for the . South Texas project in such amounts as are' customary in the-industry for similar-nuclear generating plants. As a member insured of NEIL, HL&P vill'become subject to annual assessments, which could amount- to approximately $9 million for the total' project, in the event that losses as a result of an accident at.a nuclear plant of any NEIL insured company' exceed the accumulatednfunds available to the insurer.' HL&P and the.other owners of the South Texas project have entered into' an arrangement such that the total costs of insurance for the South Texas project .(including ; premiums and assessments) 'are- to be shared ' pro. rata based- upon the owners' respective. . ownership interests in the ; project. Under this arrangement, HL&P would ultimately bear that portion of total property damage insurance costs, including any assessment by NEIL, attributable'to its'ovnership interest (currently 30.8%).
Effective in October 1987, the NRC amended'its regulations to require nuclear power plant licensees to obtain property insurance coverage in the minimum amount of $1.06 billion. These-regulations further provide that the proceeds of this insurance shall be used to first ensure that the licensed reactor is in a safe and stable condition and can be maintained in that condition so :as to prevent any significant risk to the public health 'or safety. Any property insurance proceeds not already expended to place the reactor in a safe and stable condition must be used first' to complete decontamination operations that may be ordered by the NRC. The owners of the South Texas project are insured against liability claims that may result from a nuclear incident to the full amount to which such claims are limited under the Price-Anderson Act'(which is
$720 million as of January 18, 1988). In January 1987, HL&P and the other ovners of the South Texas project executed with'the NRC an indemnification agreement under the provisions of the' Price-Anderson Act. This limitation on liability vill increase by $5 million for each additional operating license issued by.the NRC.. This. insurance is provided through a combination of private' insurance and a mandatory industry-wide program of self-insurance. under which licensees may be assessed in the event of -a. nuclear incident.
involving any licensed facility in the< United States up to $5 million
- per ' incident for each of its licensed reactors and up to a maximum-per reactor owned of $10 million in any calendar year. HL&P and each of' the other owners are subject to such assessments, which HL&P and
such owners have agreed vill be borne on the basis of their respective ownership interests in the project. For purposes of such assessment, the South Texas project currently has one licensed reactor. When fuel loading begins-at Unit No. 2, which is expected in December 1988, the South Texas project vill have two licensed reactors. . l Various proposals have been made to amend the Price-Anderson Act including amendments which would increase the limit on liability. If enacted, such amendments coulu result in an increase in assessments or other charge. to fund the resulting increased coverage. HL&P is I unable to predict what action Congress might take regarding the Price-Anderson Act or what effect such actions might have on HL&P. (10) Modified Schedule for Malakoff Project In January 1987, HL&P announced that the schedule for the construction of two 645- megavatt lignite units at the proposed Malakoff Electric Generating Station in Henderson County, Texas (the Malakof f project) had been modified. The scheduled in-service dates, which are the dates the units are expected to be available to meet peak demand, are nov 1997 for Unit No. 1 and 1999 for Unit No. 2. The modified schedule resulted from lowered projections of future demand for electricity in the. Houston area. As a result of the modified schedule, all developmental work on the two lignite units has stopped, but HL&P vill resume activity when necessary to meet load growth requirements. HL&P's total investment in the Malakoff project, through December 31, 1987, is $154 million including AFUDC and land. This amount is included in Plant Held for Future Use and the accrual of AFUDC has been suspended until such time as construction resumes. HL&P has agreed to indemnify Utility Fuels for all necessary and actual costs incurred due to the modification of the schedule. See Note 14 for such costs indemnified in 1987. Utility Fuels has invested $121 million in lignite reserves and handling systems relating to the Malakoff project through December 31, 1987 and suspended capitalization of interest effective December 31, 1986. For the 1988 - 1990 period, Utility Fuels anticipates $22 million of expenditures relating to the Malakof f project which are primarily associated with keeping lignite leases and other related agreements in effect. i (11) Unrecovered Costs The Utility Commission has allowed recovery of certain costs over a period of time by amortizing those costs for rate making purposes. However, unrecovered amounts have not been included in rate base and, as a result, no return on investment is being earned during the recovery period. The amounts of such assets and the remaining recovery period applicable to each are listed below: tJnrecovered Amount Remaining Recovery Period at December 31, 1987 at December 31, 1987 ! (Thousands of Dollars) : Allens Creek Project..... $36,129 60 months Other......... 4,525 11-106 months i (12) Federal Income Taxes The current and deferred components of tax expenses are as follows: l l Year Ended Dece:aber 31, 1987 1986 1985 (Thousands of D'oTiars) Current - charged to operations........ S 88,201 $ 53,471 $101,509 Deferred - charged to operations: ) Liberalized depreciation............. 64,615 73,207 60,472 l Investment tax credit - net.......... (885) 28,033 31,584 1 Applicable to AFUDC.................. 40,210 47,089 42,561 Other - net.......................... 3,275 20,481 26,431 l Federal income taxes charged to ! operations........................... 195,416 222,281 262,557 Current - charged to other income I (expense)............................ 48 Total federal income taxes............. $195,416 $222,281 3262,605 ! Effective federal income tax rates are lover than statutory corporate rates for each year as follows: Year Ended December 31, 1987 1986 1985 (Thousands of Dollars) Federal income taxes at statutory corporate rate....................... $254,161 $314,651 $342,751 Reduction in taxes resulting from: AFUDC - other included in income..... 57,434 78,360 70,953 Other - net.......................... 1,311 14,010 9,193 Tota 1.......................... 58,745 , 92,370 80,146 Federal income taxes................... $195,416 $222,281 $262,605 Effective rate......................... 30.8% 32.5% 35.2% (13) Supplementary Expense Information Taxes, other than federal income taxes, vere charged to expense as follows: Year Ended December 31, 1987 1986 1985 (Thousands of Dollars) Ad valorem............................. $ 76,686 $ 73,366 $ 62,806 State gross receipts................... 35,177 31,630 38,349 Payroll................................ 15,222 18,788 17,712 PUC assessment......................... 4,758 4,709 5,717 Miscellaneous.......................... 19,824 18,298 15,601 Total.......................... $151,667 $146,791 $140,185 Research and development costs charged to expense........................... $ 15,317 $ 14,462 $ 14,038 i
~ .
r (14) Principal Transactions Between HL&P, Its Parent and Other Related Companies Pursuant to the corporate restructuring in 1977, Houston Industries assumed joint and several liability with HL&P for payment of principal and interest on the $40,000,000 of 5 1/2% Convertible Debentures due 1985 issued by HL&P. In consideration thereof, HL&P issued Houston Industries a $40,000,000 'S 1/2% debenture which matured February 1, 1985. Included in Interest on Long-Term Debt in the accompanying Statements of Income for the year ended December 31, 1985 is $183,000 related to this debenture. HL&P issued 145,395 shares of common stock to Houston Industries in 1987 for a total consideration of $4,850,000. No common stock of HL&P was issued to Houston Industries in 1986. In 1985, HL&P issued 5,844,416 shares of common stock to Houston Industries for a total consideration of $136,274,000. Common stock dividends paid to Houston Industries by HL&P totaled $304,868,000, $293,982,000 and
$273,177,000 in 1987, 1986 and 1985, respectively.
Operating Expenses-Fucl in the accompanying Statements of Income for the years ended December 31, 1987, 1986 and 1985 includes
$509,739,000, $468,274,000 and $417,700,000, respectively, of coal and lignite purchased from Utility Fuels.
Operating Expenses-Operation in the accompanying Statements of Income for the years ended December 31, 1987, 1986 and 1985 includes
$15,382,000, $9,139,000 and $3,455,000, respectively, of service fees, reimbursable direct costs and shared costs charged by Houston Industries. In addition, such operating expenses include $3,594,000 and $2,408,000 of limestone purchased from Utility Fuels in 1987 and 1986, respectively. Also reflected in 1987 is $26,313,000 of discount expense charged by Houston Industries Finance for the purchase of HL&P's accounts receivable.
Other Income (Expense) in the accompanying Statements of Income for the year ended December 31, 1987 includes $8,931,000 of lignite holding expenses charged by Utility Fuels. As part of the consolidated financing program, Houston Industries has established a money fund through which subsidiaries can borrow or invest on a short-term basis. Other Income (Expense) in the accompanying Statements of Income for the years ended December 31, 1987 and 1986 includes $133,810 and $3,634,000, respectively, of interest income from Houston Industries through such money ftac transactions. (15) Subsequent Events In January 1988, HL&P sold $400 million aggregate principal amount of 9 3/8% first mortgage bonds which vill mature in approximately equal principal amounts in each of the years 1991, 1992 and 1993.
In January 1989 HL&P deposited $52 million with the bond trustee to redeem all of .ue outstanding bonds of the 13 7/8% series at 100% of the principal amount and to pay accrued interest. The bonds were redeemed pursuant to the general redemption provisions of HL&P's Hortgage and Deed of Trust. (16) 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 expectations for a full year's operations because of seasonal and other factors, including rate increases and variations in operating expense patterns. Income After Operating- Preferred Revenues Income Dividends (Thousands of Dollars) March 31, 1986.......... $658,555 $ 86,060 $ 69,970 June 30, 1986.......... 713,022 99,158 85,655 September 30, 1986.......... 937,279 191,836 184,440 December 31, 1986.......... 650,884 88,884 94,862 March 31, 1987.......... 638,353 67,783 51,788 June 30, 1987.......... 737,853 108,383 93,534 September 30, 1987.......... 954,238 202,357 194,319 December 31, 1987.......... 670,388 80,951 68,940 (17) Reclassification Certain amounts from the previous years have been reclassified to conform to the 1987 presentation of financial statements. Such reclassifications do not affect earnings. l
AUDITORS' OPINION Houston Lighting & Power Company: Ve have examined the balance sheets and the statements of capitalization of Houston Lighting & Power Company as of December 31, 1987 and 1986 and the related statements of income, retained earnings and changes in financial position for each of the three years in the period ended December 31, 1987. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the accompanying financial statements present fairly the financial position of Houston Lighting & Power Company at December 31, 1987 and 1986 and the results of its operations and the c:'anges in its financial position for each of the three years in the period eneid December 31, 1987, in conformity with generally accepted accounting 7.inciples applied on a consistent basis. Our examinations also comprehended the supplemental schedules V, VI, VIII and IX for each of the three years in the period ended December 31, 1987. In our opinion, such supplemental schedules, when considered in relation to the basic financial statements, present fairly in all material respects the information shown therein. DELOITTE HASKINS & SELLS Houston, Texas March 3, 1988 I l I
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.(*) The following table shows, for the fiscal year ended December 31, 1987, compensation data for the five most highly compensated executive officers of HL&P whose cash compensation exceeded $60,000 in 1987 and all executive officers of HL&P as a group. Principal Capacity In Cash Compensation Name Vhich Served Salary other(1) D. D. Jordan Chairman of the Board and $513,333 $130,600 Chief Executive Officer D. D. Sykora President ar.d Chief 329,583 76,575 Operating Officer J. H. Goldberg Group Vice President - Nuclear 237,500 36,093 H. R. Kelly Senior Vice President, 213,750 3a,632 General Counsel and Corporate Secretary E. A. Turner Group Vice President - 175,833 27,890 Administration and Support All executive officers of HL&P as a groun (7 persons, including those named above) $1,821,665 $364,290 , 1 (1) Other Cash Compensation includes vested portions of amounts earned under the Executive Incentive Compensation Plan, as described. below, and Board of Director and committee fees, whether received in cash or deferred. The information related to Mr. Jordan also includes compensat.on i earned ; in his capacity as Presidcnt and Chief Executive Officer of Houston Industries. A description of the benefit plans of HL&P and Houstan Industries, pursuant to which cash or non-cash compensation was paid or distributed during 1987 to the named executive officers and the executive officers of HL&P as a group, is set forth in the definitive Proxy Statement relating to l
the 1988 Annual Meeting of Shareholders of Houston Industries. During 1987, HL&P cont-ibuted $501 each to the accounts of Mr. Jordan, Mr. Sykora, Mr. Goldberg, Mr. Kelly and Mr. Turnsr; and $3,507 to the accounts of all executive officers as a group (7 persons) under the Emp'9yee Stock Ownership Plan of Houston Industries. Such amounts are not _acluded in the Cash Compensation Table. Also during 1987, certain officers of HL&P, including those named in the Compensation Table above, received awards under Houston Industries Executive Incentive Compensation Plan (EICP). One half of each award to each participant is contingent and not vested and vill be converted into a number of share equivalent units determined by reference to the market price of Houstc.. industries Common Stock. Amounts equal to dividends paid on the Houston Industries Common Stock are credited to a participant's account in the form of additional share eqaivalent units. The contingent portion of a participant's account vill be payable at the earlier of (a) completion of four years of employment after the award was granted, (b) death or disability, or (c) the expiration of four years after the award was granted if the participant retired after attaining the age of 60 during such four-year period. If a participant is 50 years of age or older and owns 5,000 shares or more of Houston Industries Common Stock, he may elect, with the approval of the Personnel Committee and in lieu of receiving share equivalent units as described above, to have the amount of his annual awards credited to an adjustable account which vill be adjusted as if it had been invested in the Deferred Compensation Plan or in Funds B, C or D of the Savings Plan of Houston Industries. A participant may elect to defer distribution of the contingent portion of his account after expiration of the periods described above by electing to have the contingent portion remain invested in contingent share equivalent units and continue to earn contingent share equivalent units equal to the dividends paid on the Houston Industries Common Stock or the participant may elect to have the contingent portion annually adjusted as if it vere invested in Funds B, C or D of the Savings Plan of Houston Industries. In either event, the participant may elect to receive such deferred distribution in annual installments or in a lump sum payment. The remaining one-half is vested at the date of the award. The vested portions of such awards made pursuant to the EICP are included in the Cash Compensation Table. The non-vested portions of such awards have been excluded from the table and are as follows: $122,500 for Mr. Jordan; $70,875 for Mr. Sykora; $36,093 for Mr. Goldberg; $33,632 for Mr. Kelly; $27,890 for Mr. Turner; and $350,490 for all executive officers as a group (7 officers of HL&P). During 1987, HL&P made contributions under the Savings Plan of Houston Industries to the accounts of its executive officers. The vested portions of such contributions are as follows: Mr. Jordan, $11,415; Mr. Sykora, $7,720; Mr. Goldberg, $5,565; Mr. Kelly,
$1,680; Mr. Turner, $5,145; and all executive officers as a group (7 persons), $39,188. Such amounts are not included in the Cash Compensation Table.
Messrs. Jordan, Sykora, Goldberg, Kelly, and Turner have credited years of service of 32, 32, 7, 3, and 33 years respectively, under the Retirement Plan described in the Houston Industries Proxy Statement. Mr. Goldberg and Mr. Kelly are entitled to an additional ten years of credit for service pursuant to the terms of supplemental agreements with HL&P. i
i Other compensation paid or distributed during 1987 to the executive officers listed in the Cash Compensation Table above did not exceed, with respect to any individual, the lesser of $25,000 or 10% of the compensation reported in the table, or, with respect to all executive officers as a group, the lesser of $175,000 or 10% of the compensation of the group reported in the table. Item 12. Security Ownership of Certain Beneficial Owners and Management.(*) As of March 1, 1988 all directors and officers of HL&P as a group teneficially ovned 152,277 shares of Houston Industries Common Stock. Such ovnership constitutes .13% of the outstanding Common Stock of Houston Industries. 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 - Officers", is set forth in the definitive proxy statement relating to the 1988 Annual Meeting of Shareholders of Houston Industries, which vill be filed by Houston Industries (Commission File No. 1-7629) within 120 days of December 31, 1987 pursuant to Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Items 10, 11, 12 and 13 are incorporated herein by reference pursuant to Instruction G to Form 10-K. Each member of the Board of Directors of Houston i Industries is a member of the Board of Directors of the registrant. l l
l 1
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on. Fora 8-K (a) (1) Financial Statements.
. P_a age .
Statements of Income for the Three Years Ended December 31, 1987...................................... 31 Statements of Retained Earnings for the Three Years Ended December 31, 1987...................................... 32 Balance Sheets at December 31, 1987 and 1986............. 33 Statements of Capitalization at December 31, 1987 and 1986................................................... 35 Statements of Changes in Financial Position for the Three Years Ended December 31, 1987.......................... 37 Notes to Financial Statements............................ 39 Auditors' 0 pinion........................................ 63 (a) (2) Financial Statement Schedules. Schedules for the Three Years Ended December 31, 1987: l V -- Property, Plant and Equipment.................... 68 VI -- Accumulated Ptovision for Depreciation, Depletion and Amortization of Property, Plant and Equipment.................................. 69 VIII -- Reserves......................................... 70 IX -- Short-Term Borrowings............................ 71 l The following schedules are omitted because of the absence of the i I conditions under which they are required or because the required information is included in the financial statements: I, II, III, IV, VII, X, XI, XII and XIII. (a) (3) Exhibits. See Index of Exhibits on page 73. (b) Reports on Fora 8-K. The registrant filed a report on Form 8-K dated December 9, 1987. Item 5. Other Events. Status of Agreement in Principle with City of Austin.
ECNEDUI.E V - PROPERTY, Pl.MIT AND BOUIPMEIrr For the Three Years Ended December 31, 1987 (Thousands of Dollars) Col. A Col. B Col. C Col. O Col. E Col. r other Balance Additions Changes - Balance Beginning at Retire. Add End Classification of Year Cost monts (Deduct) of Year for the Year Ended December 31, 1987: 1 Production Plant................... $3,747,442 $ 146,974 $ 316 $3,894,100 Transmission Plant................. 601,084 41,211 1,872 640,423 Distribution Plant................. 1,747,216 119,045 20,643 1,845,618 General Plant...................... 431,044 44,913 16,557 $ (3,172) 456,232 < Plant Acquisition Adjustments...... 3,166 3,166 Plant Held for Future Use.......... 167,008 13,396 (71) 180,333 Total Plant.............. 6,696,964 365,539 39,388 (3,243) 7,019,872 Construction Work in Progress...... 2,170,700 486,373 (8,391) 2,648,682 1 Nuclear ruel...... . .............. 126,190 5,133 131,323 Total.......... . ...... $8,993,854 $ 857,045 $ 39,388 $ (11,634) $9,799,877 I For the Year Ended December 31, 1986: ' Production P1snt................... $3,238,785 $ 534,322 $ 25,665 $3,747,442 Transmission Plant................. 587,907 14,564 1,387 601,084 ; Distribution Plant................. 1,664,687 105,296 22,767 1,747,216 l l General Plant...................... 414,617 27,357 8,170 $ (2,756) 431,048 Plant Acquisition Adjustments..... 3,166 3,166 Plant Held for Future Use.......... 26,537 140,502 (31) 167,008 Total Plant.............. 5,935,699 422,041 57,989 (2,787) 6,696,964 Construction Worh in Progress 4..... 2,083,650 108,025 (20,975) 2,170,700 Muclear Fue1....................... 118,181 8,009 126,g190 Total. .. ............... $8,137,5 0 $ 938,075 $,57,989 $ q23,762, $8,993,IT4 ror the Year Ended December 31, 1985: 1 Production Plant...... .. ......... $2,370,568 $ 921,177 $ 52,960 $3,238,785 l Transmission Plant................. 549,491 40,307 1,895 $ 4 $87,907 1 Distribution Plant............... . 1,523,625 168,507 27,451 6 1,664,687 General Plant........... . ........ 373,714 49,963 6,215 (2,845) 414,617 l Plant Acquisition Adjustments..... 3,166 3,166 l Plant Held for Future Use...... ... 30,114 (3,577) 26,537 Total Plant.............. 4,850,678 1,176,377 88,521 (2,835) 5,935,699 Construction Work in Progress. .. . 2,488,944 (231,282) (174,012) 2,083,650 Nuclear Fue1............ ...... ... 113,035 5,146 118,181 Tota 1.................... $7,452,657 $ 950,241 _$ 88,521 $(176,847) $i,137,530 l l I i Notes f (A) Substantially all additions are originally charged to Construction Work in Progress and I transferred to electric utility plant accounts upon completion. Additions at cost give effect to such transfers. (B) Additions at cost include non-cash charges for en allowance for funds used during ! construction. l (C) HL&P computes depreciation using the straight-line method. The depreciation provisions as a l percentage of the average depreciable cost of plant were 3.4% for 1987, 3.6% for 198e, and l 3.8% for 1985. (D) Other changes in Plant Accounts include certain reclassification of amounts at December 31, 1984, which do not affect total Plant. Also included, are changes in capital leases. (E) Construction Work in Progress was reduced by the amount of capitalised interest earned on funde held in trust in 1987, 1986, and 1985 and by the proceeds from the settlement of litigation in 1945. (r) Additions to construction work in Progress in 1986 include the transfer of $530 million in December 1986 for the completed Limestone Unit No. 2 project to production plant. Additions
- to Construction Work in Progress in 1985 include the transfer of $893 million in i
December 1985 for the completed Limestone Unit No. 1 project to production plant. I (0) Additions to Plant Held for Future Use in 1986 reflect the transfer of $141 million in ! December 1986 for the Malakoff project. 1
l SCHEDULE VI - ACCUMULATED PROVISION FOR DEPRECIATION, DBPLETION AND AMORTIZATION OF PROPERTY, PLMr AND EQUIPMEKr For the Three Years Ended December 31, 1987 i (Thousands of Dollars) Col. A Col. B Col. C Col. D Col. E l Additions Deductions from Reserve Retirements, Balance at Charged Charged Renewals Balance Beginning to to Other and at Close I Description of Period Income Accounts Replacements Other of Period Year Ended December 31, 1987 - D3preciation, depletion and amortization of property, plant and equipment...... $1,351,412 $219,501 $10,178 $50,548 $1,530,543 Year Ended December 31, 1986 - Dspreciation, depletion and amortization of property, plant and equipment...... $1,203,039 $206,262 $11,830 $69,719 $1,351,412 Year Ended December 31, 1985 - , Depreciation, depletion and j amortization of property, i plant and equipment...... 31,113,412 $177,099 $ 7,695 $95,167 $1.203,039 )
SCBEDUIA VIII - REssavEs For the Three Years Baded December 31, 1987 * (Thousands of Dollars) Col. A Col. 8 Col. C Col. D Col. E Additions Deductions Balance at Charged Charged from Balence Beginning to to Other Reserves at Close Description of Period Income Accounts (A) of Period Year Ended December 31, 1987: Accumulated provisions deducted from related assets on balance sheets . Unco 11ectible accounts...... $4,300 $ 4,300 Reserves other than those deducted from assets on balance sheet Property insurance.......... 43 $ 28 119 (48) Injuries and damages........ 4,72) 2,611 5,467 1,467 Year Ended December 31, 1986: Accumulated provisions deducted from related assets on balance sheett Unco 11ectible accounts...... $5,707 $11,493 $12,900 $4,300 Poserves other than those deducted from assets on balance sheett Property insurance.......... (1,429) 238 $ 1,234 43 Injuries and damages........ 5,597 3,658 4,532 4.723 Year Ended December 31, 1985: Accumulated provisions deducted from related assets on balance sheet: Unco 11ectible accounts...... $8,041 $14,419 $16,753 $5,707 Reserves other than those
- deducted from assets on balance sheett Property insurance.......... 372 1,801 (1,429)
Injuries and damages........ 353 4,131 2,887 5.597 l l NOTES (A) Deductions from reserves represent losses or expenses for which the respective reserves were created. In the case of uncollectible accounts reserve, such deductions are not of recoveries of amounts previously written off. l l 1 > l 1 ! l 1
senBDU1A 11 - sn0RT-TE3M BORROWING 8 Por the Three Years Ended December 31, 1987 (Thousands of Dollars)
............................................................................................r ............
Col. A Col. 8 Col. C Col. D Col. E Col. P Weighted Maximum Average Weighted
- Category of Average Amount Amount Average i
Aggregate Balance Interest Rate Dutstanding Outstanding Interest Rate Bhort-term at End of at End of Dur ng the i During the During the Description Borrowings Period (A) Period Period Period Period Year Ended: December 31, 1987... Bank Loans $ 685 1.50% Commercial Paper $549,796 4.15% $549,796 357,843 7.14% Year Endedt December 31, 1986... Bank Lo ans $ 50,000 7.50% $119,067 $ 1,093 7.91% Commercial Paper 14,100 6.35% 247,381 79,589 6.57% Yser Ended December 31, 1985... commercial Paper $ 60,000 $ 10,096 9.12% Notel (A) The Balance at End of Period excludes land and other notes (in thousands of do11eral of $1,211,
$ 4,781, and $1,4 57 a s of December 31, 1987, 1986, and 1985, respectively.
1
SIGNATURES Pursuant to the requiremenits of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused tLis report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of ifouston and State of Tern, on the 16th day of March,1988. HOUSTON LIGHTING & POWER COMPANY ( Registrant) D. D. JORDAN ( D. D. Jordan. Chairman) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Tiile Dy Principal Executive D. D. JORDAN Officer and Director ( D. D. Jordan, Chairman) Principal Financial J. S. BRIAN and Accounting Officer (J. S. Brian, Vice President-Finance and Comptroller) CHARLES E. BISHOP Director (Charles E. Bishop) SEARCY BRACEWELL Director (Searcy Bracewell) JOHN T. CATER Director (John T. Cater) H. R. DEAN Director
' H. R. Dean)
JOSEPH M. HENDRIE Director March 16,1988 (Joseph M. Hendne) HOWARD W. HC ANE Director ( Howard W. Horne) JAMES R. LESCH Director I (James R. Lesch) ! \ l ~ THOMAS B. MCDADE Director 1 ( l (Thomas B. McDade) j l I. A. NAM AN Director l (I. A. Naman) K ENNETH L. SCHNTTZER, SR. Director ( K enneth L. Scarutzer, Sr. ) ' l D. D. SYKORA Director l ( D. D. 5)Lora ) JACK T. TROTTER Director (Jack T. Trotter) JOE C. WEsSENDORFF Director j ( (Joe C wessendortr) 72 l
HOUSTON LIGHTING & POWER COMPANY Exhibits to the Annual Report on Fora 10-K For the Fiscal Year Ended Deceaber 31, 1987 INDEX OF EXHIBITS Exhibits not incorporated by reference to a prior filing are designated by an asterisks all exhibits not so designated are incorporated herein by reference to a prior filing as indicated. 3(a) - Restated Articles of Incorporation of HL&P, as amended and suppleniented through August 8, 1985 (Exhibit T3A to HL&P's Form T-3 for Applications for Qualification of Indentures Under the Trutt Indenture Act of 1939, as filed with the SEC on February 2, 1987 ("Form T-3"); Registration No. 22-16489). 3(b) - Amended and Restated Bylavs of HL&P, as adopted by resolution of the Board of Directors on July 2, 1986 (Exhibit T3B to HL&P's Form T-3; Registration No. 22-16489).
'e(a )(1) - Hortgage 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), as trustee, as amended and supplemented by 20 Supplemental Indentures thereto (Exhibit 2(b) to HL&F's Registration Statement on Form S-7, as filed with the SEC on August 25, 1977; Registration No. 2-59748).
4(a)(2) - Twenty-First Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 2 to HL&P's Annual Report on Form 10-K for the year ended December 31, 1977; File No. 1-3187H-1). 4(a)(3) - Twenty-Second Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 2(d), File No. 2-62879). 4(a)(4) - Twenty-Third Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 1 to HL&P's Annual Report on Form 10-K for the year ended December 31, 1978; File No. 1-3187H-1). 4(a)(5) - Twenty-Fourth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 1 to HL&P's Annual Report on Form 10-K for the year ended December 31, 1979; File No. 1-3187H-1). 4(a)(6) - Tventy-Fifth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4.6, File No. 2-69854). 4(a)(7) - Twenty-Sixth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4(b)(27) to HL&P's Annual Report on Form 10-K for the year ended December 31, 1980; File No. 1-3187H-1).
INDEX OF EXHIBITS (C0ffr'D) 4(a)(8) - Twenty-Seventh Supplemental Indenture to Exhibit 4(a)(1) (Exhibit (4)(b)(8) to HL&P's Annual Report on Form 10-K for the year ended December 31, 1981; File No. 1-3187H-1).
]
4(a)(9) - Twenty-Eighth Supplemental Indenture to Exhibit 4(a)(1) l (Exhibit (4)(b)(9) to HL&P's Annual Report on Form 10-K for i the year ended December 31, 1982; File No. 1-3187H-1). - 1 4(a)(10) - Twenty-Ninth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4(b)(10) to Houston Industries' Annual Report o'. Form 10-K for the year ended December 31, 1985; File No. 1-7629). 4(a)(11) - Thirtieth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit T3C(11) to HL&P's Form T-3 For Applications for Qualification of Indentures Under the Trust Indenture Act of 1939, as filed with the SEC on February 2, 1987 ("Form T-3"); Registration No. 22-16489). 4(a)(12) - Thirty-First Supplemental Indenture to Exhibit 4(a)(1) (Exhibit T3C(12) to HL&P's Form T-3; Registration No. 22-16489). 4(a)(13) - Thirty-Second Supplemental Indeature to Exhibit 4(a)(1) (Exhibit 4(b)(13) to Houston Industries' Annual Report on Form 10-K for the year ended December 31, 1986; File No. 1-7629). 4(a)(14) - Thirty-Third Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4(a)(14) to Houston Industries' Annual Report on Form 10-K for the year ended December 31, 1987; File No. 1-7629). 4(a)(15) - Thirty-Fourth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4(a)(15) to Houston Industries' Annual Report on Form 10-K for the year ended December 31, 1987; File No. 1-7629). 4(a)(16) - Thirty-Fifth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4(a)(16) to houston Industries' Annual Report on Form 10-K for the year ended December 31, 1987; File No. 1-7629).
*12 - Computation of Ratio of Earnings to Fixed Charges and Earnings to Fixed Charges and Preferred Dividends. '
*24(a) - Consent of Independent Certified Public Accountants.
l HL&P vill furnish to the Securities and Exchange Commission upon request all constituent instruments defining the rights of holders of long-term debt of HL&P not filed herewith as permitted by paragraph (b)4(iii)(A) of Item 601 of Regulation S-K.
~,
OFFICIAL STATEMENT DATED JANUARY 22,195S This Oficial Statement does not constitute an ofter to sell Notes in anyjurisdiction to any person to tehom it is unlauful to make such ofer in suchjurisdiction. Ro dealer, salesman, or any other person has been authorhed to 'ce any information or make any representation, other than those contained herein, in connection trith the ing of these Notes, and ifgiven or made, such i onnation or representation must not be relied upon. The i ation and expressions of opinion herein are su ect to change trilhout notice and neither the delicery of I is Optial Statement nor any sale made hereunder si ll, under any ein curmtances, create any implication that there has been no change in the agairs of the City since the date hereof City of Austin, Texas
$108,000,000 COMBINED UTILITY SYSTEMS REVENUE NOTES, SERIES 1988 la the opinion of Bond Coumel, interest on the Notes tvill be excludable froi federal income taxation under existing late. See "Tax Exen.ption" herein for a anscussion of Bond Coun opinion, including a description of the alternative minimum tax.
Dated: February 1,195S Due: As set forth below The City of Austin, Texas (the "City"), Combined Utility Systems Revenue Notes, Series 1958 "Notes") are special obligations of the City, bearing interest from the date of their deliverv bleand are pava as to both principal and interest solely from and secured by a lien on and pledge of th,e combined Net Revenues of the City's Electric Light and Power System and its Waterworks and Sewer System subject only to the lien and pledge securing the Priority Lien Obli-ations heretofore and hereafter issued. Neither the taxing power of the City nor the State of Texas is pleJged as security for the Notes. The Notes will be issued in bearer form in the denomination of $5.000. Principal and interest will be payable at maturity upon presentation of the Note at the principal corporate trust office of Citibank, N.A., 4 l New York, New York, the initial Paying Agent. l l The Notes are not subject to redemption prior to maturity. l
$80,000,000 - % Notes Due September 1,1988 l l
$28,000,000 - % Notes Due February 1,1989 l l
The Notes are oferedfor delicery schen, as, and ifisst.ed, subject to the opinion of the Attomey General of the State of Texas as to the lascjid ado > tion of the ortlinance authorning the Notes, and the opnlon of McCall, l Parkhurst & llorton, Bond Counsel or the City, as to the rahdity of the issuance of the Notes under the l Constitution and latts of the State o Texas. Certain additional legal matters trill be passed on for the City by Messrs. McCall, Parkhurs: & ilorton. It is expected that the Notes still be tendered for delitcry to the initial l purchaser (s) on or about Febnsary 11, 1955, at the principal ofte of Citibank, N.A., in Nete York, Netc York. l Scaled bids will be opened at 12:00 Noon, CST, Thursday, January 2S,19SS l
l NOTICE OF SALE AND HIDDING INSTRUCTIONS i City of Austin, Texas l
- y[ ;
! N
$108,000,000 Combined Utility Systems Revenue Notes, Series 1988 Selling Thursday, January 2S,1988, at 12:00 Noon, CST Tile SALE Notes Offered for Sale at Competitive Bidding . . . The City of Austin, Texas (the "City"). is offering for sale its Combined Utility Systems Revenue Notes, Series 1958 (the "Notes").
Address of Bids . . . Sealed bids, plainly marked "Did for Combined Utility Systems Revenue Notes", should be addressed and delivered to "Mayor and City Council, City of Austin, Texas" prior to 12:00 Noon, CST, on the date of the bid opening. All bids must be submitted on the O$cial Bid Form, without alteration or interlineation. Place and Time of Bid Opening . . . The City's Director of Financial Services will open and publicly read the bids for the purchase of the Notes in the Council Chambers, City Hall Annex, at 12:00 Noon, CST, Thursday, January 28,1958. Award of the Notes . . . The City Council will take action to award the Notes (or reject all bids) promptly after the opening of bids, and if awarded, adopt an Ordinance (the "Ordinance") authorizing the Notes. Tile NOTFS Description . . . The Notes will be dated February 1,1958, will bear interest from the date of delivery and will mature as set forth on the cover page of the Omcial Statement. The Notes will be issued in bearer form in the denomination of $5,000. Principal and interest will be payable at maturity upon presentation of the Note at the principal corporate trust o$ce of the Paying Agent, initiaily Citibank, N.A., New York, New York. Source of Payment...The Net Revenues of both the Electric Light and Power System and the Waterworks and Sewer System have been irrevocably pledged by the Note Ordinance, jointly and severally, to the payment and security of the Notes and the payment of principal and interest thereon shall constitute s lien on and pledge of the Net Revenues of both Systems subject only to the lien and pledge securing the Priority Lien Obligations (as defined in the Ometal Statement) now or hereafter outstanding. The payment of the principal of the Notes is additionally secured by the proceeds of the sale of Priority Lien Obligations or other obligations issued for such purpose. Additionally, the City has covenanted to issue Priority Lien Obligations or other obligations to fund the repayment of the i
principal of and interest on the Notes to the extent the payment thereof is not otherwise provided from other sources. The Notes are and will be secured by and payable only from the Net Revenues of both Systems and the proceeds of such obligations, and are not secured by or payable from a mortgage or deed of trust on any real, personal or mixed property constituting the Systems. Neither the taxing power of the
- City nor the State of Texas is pledged to the payment of the Notes.
l ( Redemption of Notes...The Notes are not subject to redemption prior to maturity. CONDITIONS OF SALE Types of Bids and Interest Rates . . .The Notes are to be sold in one block on an all or none basis ! and at a price of not less than their par value. Bidders shall name the rates ofinterest to be borne by the Notes. All Notes of one maturity must bear one and the same rate. No bids involving supplemental or zero interest rates will be considered. Basis of Award. . .The sale of the Notes will be awarded to the bidder making a bid that conforms to the specifications herein and which produces the lowest True Interest Cost rate to the City. The True Interest Cost rate is that rate which, when used to compute the total present value as of the date of delivery of all debt service payments on the Notes on the basis of semi annual compounding, produces an amount equal to the sum of the par value of the Notes plus any premium bid. Good Faith Check . . . Each bid must be accompanied by a bank cashier's check or its equivalent, (the "Good Faith Check") payable to the order of"City of Austin, Texas,"in the amount of $1,050,000. Such Good Faith Check shall be retained uneashed by the City pending compliance by the initial purchaser of the Notes from the City (the "Initial Purchaser" or "Purchasers") with the terms ofits bid and the Notice of Sale and Bidding Instructions. The Good Faith Check may accompany the Official Bid form or it may be submitted separately. If submitted separately,it shall be made available to the City prior to the opening of the bids, and shall be accompanied by instructions from the bank on which drawn which authorizes its use as a Good Faith Check by the bidder who shall be named in such instructions. The Good Faith Check of the Initial Purchaser will be returned upon payment for the Notes. No imerest will be allowed on the Good Faith Check. In the event the Initial Purchaser should fall or refuse to take up and pay for the Notes in accordance with his bid, then said check shall be cashed and accepted by the City as full and comphte liquidated damages. Good Faith Checks accompanying bids other than the bid of the Initial Purchaser will be returned promptly after the bids are orened, and an award of tha Notes has been made. 1 DELIVERY OF Tile NOTES AND ACCOMPANYING DOCUMENTS Delivery . .. Notes will be tendered for delivery to the initial purchaser at Citibank, N.A. In New York, New York, payment for which must be made in Federal funds for immediate and unconditional credit to the City or as otherwise di ected by the City. The initial Purchaser will be given six business days' notice of the date fixed for delivery of the Notes ("Initial Delivery"). It is anticipated that Initial Delivery can be made on or about 10.00 a.m.. EST, February 11,1958 at Citibank. N.A.,17th Floor,65 Beaver Street, New York, New York, but if for any reason the City is unable to make delivery on or before March 10,1955, the City shall immediately contact the Initial Purchaser and offer to allow the Initial Purchaser to extend h!s offer for an additional thirty days. If the Initial Purchaser does not elect to extend his offer within six days thereafter, his Good Faith Check will be returned, and both the City and the Initial Purchaser shall be relieved of any further obligation. In no event shall the City be liable for any damages by rea on of its failure to deliver the Notes. Conditions to Initial Dells ery . . . The obligation of the Initial Purchaser to tske up and pay for the Notes is subject to the Initial Purchaser's receipt at Initial Delivery of (a) the legal opinion of McCall, 11
f Parkhurst & Iforton, Bond Counsel for the City, (b) the no litigation certificate, and (c) the certification as to the Official Statement, all as further described in the Official Statement. CUSIP Numbers ... It is anticipated that CUSIP identification numbers will appear on the definitive Notes, but neither the failure to print or type such number on any definitive Note nor any error with respect thereto shall constitute cause for a failure or refusal by the Initial Purchaser to accept del:very of and pay for the Notes in accordance with the terms of this Notice of Sale and Bidding Instructions and the terms of the Official Bid Form. All expenses in relation to the printing or typing of CUSIP numbers on the definitive Notes shall be paid by the Citv: provided. however, that the CUSIP Service Bureau charge for the assignment of the numbers shall be the responsibility of and shall be paid for by the Initial Purchaser. Legal Opinions .. . The Notes are offered when, as and if issued. subject to the opinions of the Attorney General of the State of Texas, and hicCall, Parkhurst & ilorton (see Legal Opinions in Official Statement); the opinion of Bond Counsel will be printed on the Notes. Change in Tax Exempt Status . . . At any time before Initial Delivery, the initial Purchaser may withdraw his bid if the interest received by private holders from notes of the same type and character shall be declared to be taxable income under present Federalincome tax laws, either by ruling of the Internal Revenue Service or by a decision of any Federal court, or shall be declared taxable or be required to be taken into account in computing any Federalincome taxes, by the terms of any Federal income tax law enacted subsequent to the date of the bid opening for the Notes. GENERAL Financial Advhor's Hight to Bid . . . First Southwest Company, the City's Financial Advisor, will not submit a bid for the Notes, either independently or as a member of a syndicate organized to submit a bid for the Notes. First Southwest Company, in its capacity as Financial Adsisor, has not verified and does not assume any responsibility for the information, cosenants and representations contained in any of the bond documentation with respect to the fGeral income tax status of the Notes. Blue Sky Laws . . . By submission of his bid, the Purchaser represents that the sale of the Notes in states other than Texas will be made only pursuant tu -xemptions from registration or, where necessary, the Purchaser will register the Notes in accordance with the securities law of the states in which the Notes are offered or sold. The City agrees to cooperate with the Initial Purchaser, at the Purchaser's written request and expense, in registering the Notes or obtaining an exemption from registration in any state where such action is necessary. Not an Offer to Sell . . . This Notice of Sale does not alone constitute an olTer to sell the Notes, but I is merely notice of the sale of the Notes. The offer to sell the Notes is being made by means of the Notice of Sale and Bidding Instructions, the Official Bid Form and the Official Statement. Prospecti e purchasers are urged to examine the Official Statement carefully. Bond Ratings ... Applications for ratings on this issue base been made to both bloody's and Standard & Poor's. The results of their determination wil! be provided as soon as possible. Stunicipal Bond Insurance . . . In the esent the Notes ura qualified for hiunicipal Bond insurance, and the Initial Purchaser desires to purchase such insurance, the cost therefore will be paid by the initial Purchaser. It will be the duty of the Initial Purchaser to disclose to the holders of the Notes the existence of insurance and its terms and effects, l Official Statement ... Upon the award of the sale of the Notes, the Purchaser will he furnished
, with copies of the Offletal Statement for distribution as he may reasonably request. The Purchaser assumes responsibility for proper delisery of the Official Statement to each purchaser of Notes from ill
l the Purchaser, and the City assumes no responsibility or obligation for the distribution or delivery of any copies of the Official Stntement to anyone other than the Purchaser. Additional Copies of Notice,Ilid Form and Statement . .. Additional copies of this Notice of Sale and Ilidding Instructions, the Official llid Form may be obtained at the offices of First Southwest l Corr.pany,211 E. 7th Street, Suite 707, Austin, Texas 76701, telephone (512) 476 4372. The City reservo the right to reject any ar.d all bids and to v.alve irregularities, except time of filing. The Official Statement will be approved as to form and content and the use thereof in the offering of the Notes will be authorized, ratified and approved by the City Council. l l FnANK C. COOK 5EY Mayor Arrrst: JAKES E. ALontocs City Cleri. January 22,196S iv
l CERTIFICATE OF UNDERWRITER REGARDING OFFERING PRICE OF NOTES The undersigned hereby certilles with respect to the sale of $108.000,000 CITY OF AUSTIN, TEXAS, COMBINED UTILITY SYSTEMS REVENUE NOTES, SERIES 1958 (the "Notes"), l 1. The undersigned is the underwriter or the manager of the syndicate of underwriters which has purchased the Notes from the City of Ausn, Texas (the "City") at competitive sale.
- 2. The undersigned and/or one or more other members of the underwriting syndicate, if any, have made a bona fide offering of the Notes to the public.
- 3. The initial offering prices (expressed as a yield) for the Notes at which a substantial amount of the Notes was sold to the public is with respect to the Septe nber 1,1958 maturity and with respect to the February 1,1959 maturity.
- 4. The term "public", as used herein, means persons other than bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers.
- 5. The offering prices tvields) described above reflect current market prices at the time of such sales.
- 6. The undersigned understands that the statements made herein will be relied upon by the City in its effort to comply with the conditions imposed by the Internal Revenue Code of 1956 on the exemption ofinterest on the Notes from the gross income of their owners.
EXECUTED and DELIVERED this day of _, 19_. (Name of Underwriter or Manager) By (Title)
-J CERTIFICATE OF UNDERWRITER REGARDING OFFERING PRICE OF NOTES q The undersigned hereby certifies with respect to the sale of $108,000,000 CITY OF AUSTIN, TEXAS, COhlBINED UTILITY SYSTEhtS REVENUE NOTES, SERIES 1958 (the "Notes").
- 1. The undersigned is the underwriter or the manager of the syndicate of underwriters which has purchased the Notes from the City of Austin, Texas (the "City") at competitive sale.
- 2. The undersigned and/or one or more other members of the underwriting syndicate, if any, have made a bona lide offering of the Notes to the public.
- 3. The initial offering prices (expressed as a yield) for the Notes at which a substantial amount of the Notes was sold to the public is with respect to the September 1,1958 maturity and with respect to the February 1,1959 maturity.
- 4. The term "public", as used herein, means persons other than bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers.
- 5. The offering prices (yields) described above reflect current market prices at the time of such sales.
- 6. The undersigned understands that the statements made herein will be relied upon by the City in its effort to comply with the conditions imposed by the Internal llevenue Code of 1956 on the exeinption ofinterest on the Notes from the gross income of their owners.
EXECUTED and DELIVERED this day of , 19_. (Name of Underunter or Manager) By (Title) L
l l. l l OFFICIAI, BID FOR.\1 Ilonorable hfayor and City Council January 28,19S8 City of Austin Austin, Texas hiayor and City Councilmembers: Reference is made to your Official Statement and Notice of Sale and Bidding Instructions, dated January 22 ,1958 of $10S,000,000 CITY OF AUSTIN, TEXAS COh!BINED UflLITY SYSTEhtS REVE-NUE NOTES, SERIES 1958 both of which constitute a part hereof. For your legally issued Notes, as described in said Notice of Sale and Bidding Instructions and Official Statement, we will pay you par, plus a cash premium of $ for Notes maturing and bearing interest as follows.
$50,000,000 Notes Due September 1,1958 %
$28,000,000 Notes Due February 1,1959 %
Our calculation (which is not a part of this bid) of the interest cost from the above bid is: TRUE INTEREST COST RATE .. ..... ... % We are having the Notes maturing insured by at a premium of $ (excluding fees paid to rating agencies). Check of the Bank, ;in the amount of $1,0S0,000, which represents our Good Faith Deposit (is attached hereto) or (has been made available to you prior to the opening of this bid), and is submitted in accordance with the terms as set forth in the Official Statement and Notice of Sale and Bidding Instructions. We agree to make payment for the Notes in immediately available funds as directed by the City and to accept delivery of the Notes at Citibank, N.A.,17th Floor,65 Beaver St., New York, New York, not later than 'r 00, EST, on February 11,1988, or thereaftcr on the date the Notes are tendered for delivery, pu- to the terms set forth in the Notice of Sale and Bidding Instructions. The under. ,ned agrees to complete, execute, and deliver to the City, at least 6 business days prior to deliv, e af the Notes, a certificate relating to the "issue price" of the Notes in the form and to the effect so. ached to or accompanying the Notice of Sale and Bidding Instructions, with such changes thereto as may be acceptable to the City. Respectfully submitted, By Authorized Representative ACCElTANCE CLAUSE The above and foregoing bid is hereby in all things accepted by the City of Austin, Texas, this the 28th day of January,1988. ATTEST: Mayor, aty of Austin, Texas Approved: City Clerk, Cuy of Austin, Texas City Attomey, City of Austin. Texas Return of Good Faith Check h hereby acknowledged; By
OFFICIAL BID FORM T?onorable Mayor and City Council January 28,1988 City of Austin Austin, Texas Mayor and City Councilmembers: Reference is made to your O$cial Statement and Notice of Sale and Bidding Instructions, dated January 22,1958 of $108,000.000 CITY OF AUSTIN, TEXAS COMBINED UTILITY SYSTEMS REVE-NUE NOTES, SERIES 1988 both of which constitute a part herenf. For your legally issued Notes, as described in said Notice of Sale and Bidding Instructions and O$cial Statement, we will pay you par, plus a cash premium of $ for Notes maturing and bearing interest as follows.
$50,000,000 Notes Due September 1,1958 %
$28,000,000 Notes Due February 1,19S9 %
Our calculation (which is not a part of this bid) of the interest cost from the above bid is: TRUE INTEREST COST RATE . . . . . . . . . . .. % We are having the Notes maturing insured by at a premium of $ (excluding fees paid to rating agencies). Check of the Bank, .In the amount of $1,050.000, which represents our Good Faith Deposit (is attached hereto) or (has been made available to you prior to the opening of this bid), and is submitted in accordance with the terms as set forth in the 0$cial Statement and Notice of Sale and Bidding Instructions. We agree to make payment for the Notes in immediately available funds as directed by the City and to accept delivery of the Notes at Citibank, N.A.,17th Floor,65 Beaver St., New York, Ne.v York, not later than 10:00, EST, on February 11,1983, or thereafter on the date the Notes are tendered for delivery, pursuant to the terms set forth in the Notice of Sale and Bidding Instructions. The undersigned agrees to complete, execute, and deliver to the City, at least 6 business days prior to delivery of the Notes, a certificate relating to the "issue price" of the Notes in the form and to the effect attached to or accompanying the Notice of Sale and Bidding Instructions, with such changes thereto as may be acceptable to the City. Respectfully submitted, '
- By Authorized Representative ACCEliANCE CLAUSE The above and foregoing bid is hereby in all things accepted by the City of Austin, Texas, this the 28th day of January,1988.
A'ITEST: Mayor, Oty of Amtin. Texas Approved: Oty Clerk, Oty of Autin. Texas Ot if Attorney, Oly of Autin, Texas Return of Good Faith Check is hereby acknowledged:
- By i.
CITY OF AUSTIN ELECTED OFFICIALS (All Terms Expire hfe, 15,1958 or 1900') , Frank C. Cooksey. . . . . . . . . . . . . . . . . .... . .... ... . . . hf ayor John Trevino, Jr.. . . . . . . . . . . . .htayor Pro-Tem. Councilmember Place 5 hiichael Nofziger . . . . . . . . . . . . . . . . . . . . . . . . . . Councilmember Place 1 Smoot Carl.htitchell . . . . . . . . . . . . .. . . Councilmember Place 2 Sally Shipman . . . . . . . . . . .... . . . . . . . . . Councilmember Place 3 George ilumphrey . . . . . . . . . . . . . . . . . . . . . . Councilmember Place 4 Dr. Charles E. Urdy . . . . ..... .. .. . . . . . Councilmember Place 6 Mee "The City"- Administration APPOINTED OFFICIALS John Ware . ....... ...... ... .... ..... . Acting City hianager Gary Hunt . . . ...... .. ... .. . Assistant City hianager Libby Watson . .. . . ,. ... ... . . Assistant City hianager Barney Knight . . .
.. .. ... .. . Acting Assistant City hfanager James E. Thompson . . . ... .. . . Acting Assistant City hianager Jonathan Davis . . . . . . . . ....... . .. . . Acting City Attorney Virginia B. Rutledge . . . . . . . . . .
Director of Financial Services James E. Aldridge . . . . . . . . . .. .. .... . City Clerk i i BOND COUNSEL hicCall, Parkhurst & Horton Dallas and Austin, Texas AUDITORS Coopers & L> brand Austin, Texas FINANCIAL ADVISOR First Southwest Company i j Dalks and Austin, Texas j I
. . ._ _ _ _ _ - _ . ~- - --
- q TAlllE OF CONTENTS P8E E*E' Information Concerning Water Sales . 34 Introduction . 1 I Large Water Customers . 34 Debt Payable from Systems Resenues . I Wastewater Utihty 35 Debt Statement . 2 Senice Area . 35 Selected Financial Information 2 Facihties . 35 Operating Summary Coserage of Principal and Interest Summary of Texas Water Commission Wastewster 2 Discharge Permits . 36 Requirements . 3 Lift Stations . 37 Debt Service Requirements , llistorical Wastewater Flows 37 Authority and Security For the Notes . 4 4 Projected Wastewater Flows 38 Pledge of Net Resenues 4 Future Capital Improsemriits. 38 lbte Cosenant . 40 Additio ial Notes . 4 Water and Sewer Rates . Capital Recoscry Fees . 41 Additional Priority Lien Obbgations . 5 Obhgations of Inferior Lien and Pledge. 5 Comparative Analysis of Electric Light and Power Application of Cross Resenues 5 System and Waterworks and Sewer System 5 Operations 42 Description of the Notes . Redemption 5 Operating Statement - Electric Light and Power 5 System and Waterworks and Sewer System 43 Paying Agent Discussion of Operating Statement . . 45 Mutilated - Destroyed - Lost and Stolen Notes 5 6 45 The Systems . Electric S> stem Revenues . Employee Relations . 6 Waterworks and Sewer System Resenues . 45 6 Electric System Expenses 45 The Electric Utihty . M anagement . 6 Waterworks and Sewer System Espenses 45 Generation . 7 The Electric IJght and Power System and Conventinnal Sptem improsements . 12 Waterworks and Sewer System 46 Cost After Depreciation. 46 Electric Supply Plan . 13 City's Equity in the Systems . 46 Transmission and Distribution System . 14 Litigation . 47 l Power and Energy Sales Contracts . 15 16 Electric Light and Power System Latigation . 47 i Purchased Power Contracts
!!istorical Demand and Electric Ut lity Sales . 16 Burlington Northern and Missouri. Kansas. Texas Projected Aggregate Peak and Energy Railroad v. LCRA and the City of Austin 49 hequirement s . 17 LCRA and City of Austin V. Burlington Northern (
17 Inc. et al. . 49 l Capacity Requirements . Assessment of Electric Supply Needs . 18 Water and Wastewater System Litigation . 50 l Annual Summary of Customer Consumption and City of Austin. Texas Organisation Chart . 51 l Aserage Price . 18 The City . 52 l I 19 Administration . 52 Generation and Use Data Large Customers . 20 Senices Provided by the City 52 21 Employ ees . 53 Electne Rates. Fuel Charge . 21 Annexation Program . 53 22 Pension Plans . 54 Comparison of Residential Electnc Rates . Fuel Supply 22 Tai Eaemption . 55 Bate Regulation . 25 Other Information . 56 27 Ratir.gs . 50 Real Estate Tames Senice Area . 27 Legal Investments in Texas. 56 Federal Regulation . 27 Irgal Opinions and No. Litigation CertiGeate . 56 General Fund Transfer from Electric Utihty. 27 Authenticity of Financial Informatmn . 57 The Waterworks and Sewer System . 28 Financial Advisor. 57 Management . 28 General . 57 W ater Utihty 28 Certification of the OMcial Statement . 57 Senice Area . 2rs General Information Regarding the Facilities . 29 City and its Economy . . Appendia A Water Treatment Plants. 30 Summary of Certain Note Ordinance Water Consenation Plan. 31 Provisions . Appendix B Water Storage and Pumping Facihties . 32 City of Austin. Texas - Utility llistorical Water Pumpage. 32 Funds Financial Statements. . Appendix C Projected Water Pumpage. 32 Form of Bond Opinion . . Appendis D Analysis of Water Bdis. 33 i
l l Official Statement City of Austin, Texas I ' y 7 (/
$108,000,000 COMBINED UTILITY SYSTEMS REVENUE NOTES, SERIES 1988 INTRODUCTION This OfEclal Statement is being furnished in connection with the proposed issuance by the City of Austin, Texas, (the "City") of its $105,000,000 Combined Utility Systems Revenue Notes, Series 1958 (the "Notes"). The Notes are authorized to be issued pursuant to Vernon's Annotated Texas Civil 4 Statutes, Article 717q, as amended, and an Ordinance of the City Council (the "Note Ordinance" or "Ordinance"). The proceeds from the sele of the Notes will be used to pay the principal of the
$35,000,000 of Series 1987 Nues maturing February 15,1958, to make the Electric System's ongoing payments on the South Texas Project 'breugh the beginning of June 1958 (estimated to be approxi-mately $45,000,000) and to fund approximately .$28,000,000 in settlement costs with respect to the Decker litigation. The City currently anticipates that it will issue approximately $150,000,000 of Combined Utility Systems Revene Bonds in hfarch 1958 for other capital needs of the Systems.
DEBT PAYABLE FRO.\1 SYSTE.\lS REVENUES Debt Statement Prior Lien Bonds . . . . . . . . ... . . ... . $1,668,855,000 Subordinate Lien Bonds . .. . . ...... . . . .. 436,440,000 The Notes . . . . . .. . . 108.000,000 Sub-Total . . . . .. .. . . .. .. $2,213,295,000 I Water and Sewer System Separate I.len Obligations North Central Austin Growth Corridor hiunicipal Utility District No.1 .. $ 60,000,000 North Austin hfunicipal Utility District No.1 l
.. .. 16.300.000 -
Southland Oaks h!UD.. .. . . .. ... . 30,900,000 Village at Western Oaks . . . .. . . . ... 22,900,000 hiaple Run $1UD . . . . . . .. . . .... 20,900,000 Circle "C" h1UD No. 3 . . . . .. . .. .. . .. . . . . . . 36,000,000 Assumed Bonds and Obligations Assumed Water District Bonds (a) . . . . .. $ 2,162,000 Contract Tax Obligations (b) . . .... 11,155.000 Total (c) . . .. . . . . .. .
. . $2,413,612g j l
(a) Such bonds are payable from City ad valorem taxes, but are currently being paid from surplus Net l Revenues of the Waterworks and Sewer System. l (b) Such obligations are payable from City ad valorem taxes and additionally payable from surplus Net Revenues of the Waterworks and Sewer System. (c) The City has entered into Subleases with respect to spam to house the Electric Utility and the i Water and Wastewater Utility and $23,060 000 and $14,a000, respectively, of Certificates of j Participation have been issued payable from payments made under such Subleases. The City 1 anticipates funding the required lease payments from the revenues of the respective utility system, although the City may make such payments from any available funds of the City as a whole appropriated for such purposes. The revenues of the Electric System and the Waterworks , and Sewer System are not specifically pledged in such Subleases. I
SELECTED FINANCIAL INFORhlATION Electric System and Waterworks and Sewer System Operating Summary Final Year d Fiscal Year Ended September 3o s,pg(""m ber 30, 1997 1956 __ 1945 1944 1943 (Unaudited) Combined Cross Revenues (000's) . . . . . 1581,497 $568.448 $459,859 $4S2.451 $389,259 Co;nbined hiaintenance and Operating Expenses (000's) . . . . . . . . . 3 47,459 257,532 276,5 3 288,286 232,731
$334928 $310,91Q $213,313 $194,165 $156,528 Combined Net Revenues (000's) . . . . . . .
Principal and Interest on Revenue Bonds (l) (000's) . . . . . . . . . $207,829 - $158.276 . $113.'135 $ 99,694 $ 99,254 Debt Service Coverage on 1.61 1.96 1,68 1.95 1.58 Revenue Bonds (l) ...... ......... (1) Prior and Subordinate Lien Bonds only. Cosernae By Combined Net Revenues,12 Months Ended Cnverage of Principal and Isderest Requirements
- beptember 30.1997 (Unaudited)
Average Annual Requirements (1988 2018) on: Prior Lien Bonds . . . . . . . . . . . . . . . .................... ...... $136395,168 2.44 times Prior Lien Bonds and Subordinate Lien Bonds. , .......... .... . $169,031,843 1.98 times hiaximum Annual Requirements on: Prior Lien Bonds (2001) . . . .... .... ...... ... ......... . $187,597,279 1.78 times Prior Lien Bonds and Subordinate Lien Eonds (1989) . . . . . . .. . $226.678,16'2 1.47 times
- Does not include the principal of the Notes.
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