ML20155G162

Securities & Exchange Commission Form 10K for FY87

ML20155G162
Person / Time
Site:	South Texas
Issue date:	12/31/1987
From:	HOUSTON LIGHTING & POWER CO.
To:
Shared Package
ML20155G140	List: ML20155G143 ML20155G150 ML20155G155 ML20155G162 ST-HL-AE-2639, Forwards Amend 10 to Application for CP & Ol,Reflecting Adjustment in Ownership Interests Resulting from Settlement of Litigation Between Util & City of Austin,Per 880317 Agreement.Financial Rept for 1987 Also Encl
References
NUDOCS 8806170185
Download: ML20155G162 (388)

Text

{{#Wiki_filter:. . 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 Fises! Year Ended December 31,1987 Commission File No.13187H 1 HOUSTON LIGHTING & POWER COMPANY (Exact name of registrant as specif>ed la it.: charter) Texas 74-0694415 (Siste or other jurujieteos of (LR.S. Empk>yer tacorpora tion or orgasuateon) Watificatson No. ) 611 Walker Atenue Houston, Texas 77002 (Zip Code ) ( Address of princ6 pal esecttree ofbees) Registrant's telephone number, including area code: (713) 228-9211 Securities registered pursuant to Section 12(b) of the Act: Name of each encbasse on whkb registered Title of Each Cass None Securities registered pursuant to Section 12(g) of the Act: Title of Each Onis Preferred Stock, cumulative, no par. 54 Senes; 56.72 Series; $7.52 Senes: 54.52 Series; $9.05 Senes 55.12 Series; $9.04 Series; Adjustable Rate, Sencs A; Adjustable Rate, Senes B; and SE.50 Senes. Indicate by check mark whether the registrant (1 ) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter penod that the registrant was required to file such reports), and (2) has been subject to such ftling requirements for the past 90 days. Yes v 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 Industnes incorporated. Portions of the definitive proxy statement relaung to the 19M Annual Meeting of Sharenolders of Houston Industnes incorporated, w!uch will be filed within 120 days of December H 1987, are incorporated by reference in item 10, item 11. Itern 12 and item 13 of Pan Ill of this forrr. 8806170185 880609 PDR ADOCK 0500049G ef DCD J

HOUSTON LIGHTING & POWER COMPANY Form 10-K for the Year Ended December 31, 1987 TABLE OF CONTENTS i Page No. Part I Item 1. Business The Company................................ 3 Certain Factors Affecting . Electric Utilities and HL&P.............. 3 Service Area............................... 4 4 Peak Loads and Capability.................. Construction Program....................... 5

                   -     Competition and Least-Cost Planning........                                     12 Purchased Power and Cogeneration...........                                     13 Fuel.......................................                                     14 Regulatory Matters.........................                                     16 Nuclear Insurance..........................                                     20 Labor Matters..............................                                     21 Operating Statistics.......................                                     *?

4 0fficers................................... 23 Item 2. Properties................................... 25 Item 3. Legal Proceedings......,..................... 25 Item 4. Submission of Matters to a Vote of Security Holders............................. 25 Part II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.............. 26 Item 6. Selected Financial Data...................... 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of 0perati;ns................................ 27 Item 8. Financial Statements......................... 31 Item 9. Changes in and Disagreements vith Accountants on Accounting and Financial Disclosure....... 64 Part III Item 10. Directors and Executive Officers of the Registrant............................... 64 Item 11. Executive Compensation....................... 64 Item 12. Security Ovnership of Certain Beneficial Ovners and Management............. 60 Item 13. Certain Reittionships and Related Transactions........ ........ .............. si Part IV Item 14 Exhibits, Financial Statement Scheduler, an: Reports on Form E-l'.................... . ... i'

                                                                                 . o PART I

• Item 1. Business THE COMPANT 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 saaller 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 (Houston Industries) which ovns 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 acquisi* ion of certain voting securities of other public utility companies and holding companies. Houston Industries also ovns 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 Ventures, Inc. Certain Factors Affecting Electric Utilities and EL&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; un:ertainties and delays respecting the construction and licensing of nuclear-fueled generating units; substantial increases in construction and operating costs; uncertainties regarding adequate rate treatment for costs incurred in constructing plants; negative effects on earnings due to the commencement, at commercial operation of new generating plants, of substantial charges for depreciation and other operating expenses and the cessation of the accrual of an allovance 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 major users of capital; competition from unregulated suppliers of energy; controversies over the safety and uses of nuclear pover; and an uncertain rate of change in energy sales due to economic conditions, self-generation and energy conservation measures undertaken by customers. In addition, HL&P's operations have been adversely affected by depressed economic conditions in HL&P's service area. Furthermore, the problems referred to in the preceding paragraph have had and are expected to continue to have an impact on HL&P's operations. Certain of these problems could have an increased impact during 1988 in connection with the commercial operation of Unit No. 1 of the South Texas Project Electric Generating Station (South Texas project), HL&P's request for certain interim accounting t' ea tment 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", "Construction 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. "Management'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 vas 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 weakness in the oil and gas industry and related servicing and supply industries which persisted through 1987, general economic and i population grovth 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 energy conservation measures, self-generation and the production of electric pover from cogeneration facilities. HL&P operates under a certificate of convenience and necessity granted by the Public Utility Commission of Texas (Utility Commission) vhich covers its present service area and facilities. Peak Loads and Capability The following table sets forth for the years indicated information vith 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 (excluding demand which is interruptible), and the reserve margin at the time of its system net maximum hourly demand: v

e a Pur- Net Maximum Hourly Demand Installed chased  % Change Net Power Total Net From Reserve Capability (Mega- Capability Prior Margin Year (Megavatts) vatts)(1) (Megavatts) Date Megavatts Year (%)(1) 1983 12,196 1,200 13,396 August 31 10,676 0.8 25.5 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 1987 12,460(2) 1,295 13,755 August 19 10,302(3) (2.4) 33.5 (1) Reflects firm purchased power capability available through interconnections vith other utili;ies and from cogenerators. (2) Capability shovn is as of time of system peak and does not reflect (i) capacity changes which increased net capability by 175 megawatts but which occurred after the system peak and (ii) the uprating of a plant which had been derated by 220 megavatts during the summer. (3) Does not include interruptible load at time of peak of 1,016 megavatts. 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 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 now projected to be in a range of 30% to 40%. See "Competition and Least-Cost Planning" and "Purchased Pover 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 review and are revised from time to time in light of changes in load forecants, fuel diversification objectives, the need to retire older plants, changing regulatory and environmental standards and other factors. Vith the completion of Limes +one 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 belov is currently estimated to cost approximately $1.257 billion during 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 construction expenditures were 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 i .

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cogenerators. These amounts also do not reflect the possible acquisition by l 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 program by $150 million, S62 million of which is related to the ' reimbursement of costs incurred by Austin prior to 1988. See Note 9 to the Financial Statements included under Item 8 of this Report. HL&P's construction program for 1988-1990 consists of the following r principal estimated expenditures: , Amount (millions)  % Fossil-fueled generating facilities..... $ 326 26  : Nuclear-fueled generating facilities.... 167 13 l 183 15  ; Transmission facilities................. Distribution facilities................. 379 30 General plant facilities................ 202 16 Total.............................. S1,257 100% At December 31, 1987 HL&P owned and operated generating facilities with generating capability of 12,855 megavatts. .The 1988-1990 construction program includes expenditures in connection with the following major generating projects aggregating 2,060 megawatts 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 end Capability Service December Completed Cost Location (County) iKV) Fuel Date(a) 31, 1987 Cost Per KV South Texas No. 1 (Matagorda)(b) 385,000 Nuclear 1986 South Texas No. 2 $1,546(c) S1,686(c) S2,190(c) (Matagorda)(b) 385,00D Nuclear 1989 Malakoff No. 1 (Henderson) 645.000 Lignite 1997(d) Malakoff No. 2 137(d) 2,160(d) 1,674(d) (Henderson) 645.000 Lignite 1999(d)  ; (a) The scheduled in-service date indicates the year during which the unit is expected to be available to meet peak demand. (b) The figures shovn in the table as to capability, expenditures and costs for the South Tcxas units represent HL&P's 30.8% share of a jointly owned 2.5 tillion kilovatt project for which HL&P acts as i project manager. The other ovners are Central Pover and Light . Company, Austin and the City of San Antonio (San Antonio). See '

                     "South Texas Nuclear Project",                           "Regulatory Matters" and Note 9

to the Financial 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 subject 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 shovn 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 capitali:ed by HL&P for state and local taxes. The total expenditures through December 31, 1987 and the estimated completed cost reflect a credit of S154.1 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 of $92 million with respect to HL&P's existing 30.8% interest over the previous completed cost estimate and is derived from a completion assessment adopted by the management committee for the South Texas project in December 1987 vhich assumed a commercial operation date 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 S31 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 uperation of Unit No. 1. See Note 9 to the Financial Statements included under Item 8 of this Report. Based on the cost estimate approved by the management committee in December 1987, HL&P's share (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 $3,181 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 S1,886 per KV, and the estimated completed cost to HL&P including AFUDC vould be S2.976 billion or $2,543 per KV. (d) In January 1987, HL&P announced the extension for five years of the scheduled in-service dates for Unit No. 1 and Unit No. 2 of the Malakoff project. See "Modified Schedule for Malakoff Project". HL&P's total investment in the Malakof f 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 1 excluding AFUDC for uranium concentrate and nuclear fuel processing services for its share of the fuel for the South N : project. It expects to spend an additional S50 million for similar purposes in connection with its 30.8% share of the project during the 1988-1990 period. These amounts do not reflect the possible acquisition by HL&P of an additional 16% interest in the South Texas project which vould increase such nuclear fuel expenditures by S56 mil 3ior, S30 million of which is related to the purchase of Austin's share of nuclear fuel. Additional nuclear fuel expenditures, which could include subetantial 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. Besed on a decommissioning study prepared in early 1987, the estimated cost of decommissioning HL&P's 30.8% ovnership share of the two units at the South Texas project is $77 million ($117 million if HL&P's ovnership interest increases to 46.8%) in 1986 dollars. Hovever, actual costs could vary substantially from that estimates and vill depend upon a number of factors including, without limitation, regulatory requirements and the method ultimately used to decommission the project. Although HL&P intends to seek to recover such costs through 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.

1 Actual construction expenditures vill vary from the above estimates as a result of numerous factors, including changes in the rate of inflation, changes in equipment delivery schedules, construction delays and deferrals, availability of fuel, environmental protection requirements, changing U. S. Nuclear Regulatory Commission (NRC) requirements and licensing del ys, changes in the construction program, the availability of adequate and 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 of similar factors. Since 1983, the nuclear may also vary as a result industry in general has experienced significant setbacks as a result of the cancellation or deferral of several nuclear generating units under construction. In 'ddition, the estimated completed cost and the scheduled in-service date for the South Texas project vere revised during 1987 as a result of certain o: the factors discussed above, and there can be no assurance that factors beyond the control of the participants vill not adversely affect the Sot.*h Texas project's exstruction schedule, schedule for commercial operation 3r budget. See "South Texas Nuclear Project" belov, "Regulatory Matters" and Note 9 to the Financial Statements included under Item 8 of this Report. Expenditures for environmental protection facilities for the five years 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 ATUDO of which S48 million is expected to be expended during 1988, S38 million curing 1989 and SS million during 1990. [-

Totcl cross cdditions to the plant of HL&P during tho-fivo yccrs cnd:d December 31, 1987 amounted to approximately S4.7 billion, and during the same period retirements amounted to approximately $257 million. Gross additions during the same five-year period amounted to approximately 48% of total utility plant at Deces.ber 31, 1987. South Texas Nuclear Project. The estimated expenditures and scheduled in-service dates for the South Texas generating units presented above are based on the cost estimate provided in the September 1987 completion assessment for the entire project which vas adopted in December 1987 by the proj ec t's management committee. The estimate vas based on a. projected commercial operation date for Unit No. 1 of March 1, 1988. However, commercial operation is not expected to occur before the summer of 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 S31 to S46 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. It is anticipated that Unit No. I and Unit No. 2 vill be available to meet peak demand in 1988 and 1989, respectively. HL&P's portion (based on its current 30.8% interest in the South Texas project) of the estimated total expenditures (excluding AFUDC and net of the proceeds received pursuant to a settlement with the Former Architect-Engineer) for the project is $1.686 billion. Actual expenditures through December 1987 totaled $1.546 billion (excluding AFUDC and net of such proceeds). For a discussion of the current budget and schedule for the South Texas project, the Agreement in Principle pursuant to which HL&P may acquire Austin's 16% interest in the South Texas project and the related litigation with Austin, see Note 9 to the Financial Statements included under Item 8 of this Report and Item 7.

 "Management's Discussion and Analysis of Financial Condition and Results of Operations".

As a result of, among other factors, the need for significant rate increases in connection with completed nuclear generating units, delays and increases in costs of building nuclear generating units, reduced energy demands and reduced need for additional electrical generating capacity, a number of other utilities have experienced difficulties in recovering through electric rates the costs expended on nuclear power plants. In some cases, action on rate increase requests has been delayed for considerable periods of time, while the utilities' earnings have deteriorated due to the cessation of accrual of AFUDC and the commencement of operating expenses and depreciation charges at commercial operation vithout offsetting rate relief. For a discussion of the possible impact on HL&P's earnings once Unit No. 1 of the South Texas project is placed in commercial operation and the steps HL&P has undertaken to seek to mitigate this effect, see "Regulatory Matters Requests for Interim Accounting Treatment" and "- Contemplated General Rate Proceeding" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations". In other cases, regulatory authorities have disallowed certain expenditures based upon a finding that such expenditures vere imprudent. Also, a number of utilities have been required to "phase-in" the costs of nuclear generating units, while financing the costs currently and deferring recovery from customers to a subsequent date. For a discussion of certain changes in accounting standards relating to abandonment and disallovance of plant costs and

                                          -9

l t phase-in plans, see Item 7. "Management's Discussion and Analysis of Finencial Condition and Results of Operations - Changes in Accounting standards". During 1987, there vere 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 Austing the pending litigation with San Antonio, Central Pover and Light Company and its parent corporation, Central and Southwest Corporations the scheduled prudence review of the South Texas project by the Utility Commissions 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 vould have the effect of 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 Accounting 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 continue te be adversely affected until rate relief or other regulatory > activn is obtained with respect to Limestone Unit No. 2. Modified Schedule for Malakoff Project. In January 1987, HL&P announced that the schedule for the construction of tvo 645 megavatt lignite units at the proposed Malakoff project in Henderson County, Texas 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. I 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 vork on the tvo lignite units has stopped, but HL&P vill resume activity, when necessary, to meet load growth requirements. HL&P's total investment in the halakoff 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. Utility Fuels has invested $121 million in lignite reserves and handling systems relating to the Malakoff project through December 31, 1987 and suspended capitali:ation of interert effective December 31, 1986. For the 1986-1090 pe:iod. Utility Fuels anticipates $22 l million of expenditures relating te the Malchoff project vr.ich are primarily associated with keeping lignite  ; eases and other related agreements in t effect.

e . Financing of HL&P's Construction Program. HL&P proposes to fin:nco 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 dependunt upon the availability of adequate and timely rate relief. See "Regulatory Matters - 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. 1 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 Commission (SEC) S225 million principal amount of first mortgage bonds which it may sell during 1988, subject to favorable market conditions. The types, amounts and time of issuance of additional securities have not been determined. HL&P's Mortgage and Deed of Trust (Mortgage) 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. "Management's Discussion and Analysis of Financial Condition and Results of Operations". In March 1987, HL&P issued $391 million aggregate principal amount of a nev 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 , S140 million principal amount of certain series of outstanding first mortgage bonds and paying accrued interest to the redemption date. These ' bonds were called for redemption and funds placed in trust under the replacement fund provisions of HL&P's Mortgage. The bonds vere retired by the trustee in May 1987. ' In June 1987, HL&P sold 1,000,000 shares of $8.50 cumulative preferred i stock which are subject to mandatory redemption. Such stock is entitled to a fixed liquidation price of S100 per share, plus a fixed liquidation premium in the event of a voluntary liquidation before June 1, 1994, in each case together with accrued dividends. The mandatory redemption provision requires HL&P to redeem 200,000 shares annually beginning June 1, 1993. HL&P received net proceeds of $99 million from the sale. During 1987, HL&P also received $128 million of the proceeds from pollution control revenue bonds issued in prior years. Approximately $87 million (including interest earned on funds held in trust) vas held in trust at December 31, 1987. Substantially all of the funds held in trust are expected to be drawn dovn by HL&P in 1988 and 1989 to fund qualifying construction expenditures. l li: In January 1988, !!L&P sold $400 million aggregate principal amount of

  ~                first mortgage bonds and received not proceeds of approximately $398 million from the sale of              the bonds. These bonds vill bear interest at a rate of 9-3/8% per annum and vill nature in approximately equal principal amounts in cach of the years 1991,.1992;end 1993.                                                    ,

t. In January 1988, HL&P deposited S52 million with .the bond trustee for l

              ,    purposes of redeeming all of the outstanding bonds of the 13-7/8% Series at 100% of the principal amm nt and paying accrued interest. The bonds of this
 " -         j series were called puryuant to the general redemption provisions of the 1      Hortgage.
          ~

Competition and Least-Cost Planning

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HL&P is subject to competition from a number of unregulated suppliers of energy, particularly cogenerated energy. In recent4 years, rising costs of electricity provided by regulated utilities have caused certain industrial and comeercial customers to seek otu r>vaytr to meet their energy needs, including the cor's t ruc t ion of ' cogeneration systems which provide < electric energy both for their own needs and for sales to HL&P and other A relatively larg, number of cogeneration facilities

   >               electric utilities.

g j have been built in HL&P's service area beca.use of the relatively high > concentration of process industries. t The availability of unregulated alternative e.ergy sources increases " the risk that major customers vi n reduce their,nor dases of electricity from HL&P. Should reduced purchases oc' cur, increased electric prices to tne e remaining customers could occur. As costs for electricity increase, additional customers may find it economically advantageous to turn te alternative energy supplies. The nis tence of alternative unregulated . producers of electricity has contt46uted 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&F is addressing this increased comy cit $orIby, among other things, implementing new programs to reduce costs, particularly construction and fuel costs; developing a variety of rates and envices and other marketing strategies to increase sales and encourare industrial expansion in its service area; and fully evaluating all lov-risk, leest-cost options before initiating construction of addit!.onal large central station generating facilities. Steps that have al eady been ?aken in these a.reas include ' (

completion of the nev Limestone units ahead of schedule and under budgets ,

development of an integrated fuel managementj/ stem to provide increased ' fuel purchasing fley.ibility and assure unlint hn of the most economical r available fuels during, ped,c periods modification of existing generating , units to provide improvei reliability, reduced maintenance costs and greater flexibility in responding to changing demand condit. inns; and deferral until ' j the late 2990's of the completion of the Malakoff project. i

            ~

In January 1988, HL&T filed an application vith the Utility Commission and various cities in HL&P's service area that have maintaitsed original jurisdiction requesting approval of at. e.xperimental economic recavelopment rate which vould pm'H e discounu t- c alified customers. Th( rate has

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1; , 8 .

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the Utility Commission and by all of chh citleb. Tha \ bn approvsd by purpose of the proposed rate is to provide an economic incentive to  ;( "[s , encourage development of and relocation to HL&P's service area and to create ' new j o bs '. 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 developmen.t ' facilities, corporations relocating to HL&P's service area, governmentil proj ec ts subject to competitive siting r.nd facilities receiving county tax abatements. Purchased Power and Cogeneration ' ' The Public Utility Regulatory Policy Act.cf.1978 requires utilities ta purchase all electricity offered to ther.fb) qualifying cogeneration facilities. HL&P is currently purchasing cogenerated/ energy from thirteen industrial cogeneration facilities and variouctsma'1 power prodig.u s which have approximately 3,200 megavatts of total generati.sg carcollity. Three long-term capacity contracts cover 82L megavatts'of this total amount. A fourth capacity contract for 136 megavatts has been temparariir' suspended through mid 1990. During 1987, a maximum of approximately 1.!(DD megcvat ts of cogenerated power produced in HL&P's service area Nas vbeeled or transmitted by HL&P to other utilities in Texas. ., HL&P's current load forecast indicates that addi tional firm cogeneration capacity will not be needed during the next ten years' Certain .

ales of the Utility Commission specify that a utility ig hot required to contract for more capacity from cogenerators than is necessary to meet its approved demand forecast. Therefore, HL&P does not intend ic 99rsue any additional long-term capacity contracts for cogenerated electric inergy in ,

the near future. Cogenerators are not permitted tuder Texas lav to make electric sales to parties other than electric utilities, except in the case of. sales to thC thermal purchaser from the cogeneration facility. Regulated electric utilities are required to provide transmission serv'.ce for power under,w Utility Commission rule that permits the utilities to recover their coitd plus a return on investments. s Attempts have been made to secure authorization for cogenerators.to,, sell electricity to traditional customers of rrg: Lated electric utilitfea, and some cogenerators have sought greater necetd to electric transmisslen ! s facilities. HL&P believes such retail sales or such access to transmissica facilities vould vork 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. 2 11 addition, to the extent ' cogenerators and other unregulated electricentitiesareallowedtomake sales to traditional electric utility customers'or to gain access to the , electric transmission and distribution syst+as for their own purposes, HL&P's prospects may be adversel:; af fected. HL&P intends to contirne its opposition to such erforts. - HL&P's purchased power contracts,vi.L' San Antonio and Austin expired in December 1987 and HL&P currently hai no other long-term contracta in effect with other utilities.

                                                                                                                           \
                                                                       ,             _.              ,      L

y, * ' is i ' I l-  %, T'hel (

                                     ' i'l',
                           \    )

A;.prc.tiegtely ,46% of HL&P's energy requirements during 1987 was met with natur)1 gas while 40% vas met with coal and lignite. The remaining 14% vas met p!!ncipally with purcha< red power and cogenerated power. HL&P currently expects its future energ7 mir to be in the following proportions, with separate presentations based upon HL&P's existing 30.8% interest in the South Texas project and based upon a possible 46.8% interest in the South Texas project if the Igrument in Prfnciplo with Austin is consummated:

                                                                  \
                                                  \ ,I       .bs[imatedEnergyMix               Estimated Energy Mix i    s (30.8% interest in               (46.8% interest in
                                                       '/   iSouth Texas project)_             South Texas project)_

1938 1989 1990 19?6 1988 1989 1990 1996 43% 35% 30% 38% 43% 35% 31% 38%

            <   Gas................

Coal aM Ligni te. . . 39 41 41 40 38 38 37 36 3 7 8 8 4 10 11 12 Nuclear ........... 15 17 21 14 15 17 21 14 Cogene;ation....... fotal......... 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 estimates and assumptions relating to, among other things, numerous environmental protection requirements, load growth, load management, cogeneration, the cost and availability of fuels and purchased electrical energy, and the actual in-:iervice dates of HL&P's planned generating facilities, c i

    -                   Natural Galt Supply.                        HL&P purchased its natural gas fuel supplies from a large numbe                          cf suppliers during 1987; however, 77% of HL&P's gas requirements              vere 7till purchased from its traditional suppliers and their affiliates.                  Lio of these firms, Exxon Company, U.S.A. (Exxon) and United Texas       Transmission Company (I'T), scl3 gas to HLSP under long-term
                . contracts.               The third. Houston Pipe Line Company (HPL) and its affiliates, provided 27% 'o f HL&P's gas requirements even though no long-term contract y

exists between HL&P and HPL. The contract with Exxon vill expire in 1996 or after deliver, of a specified ouantity of natural gas, whichever comes The UTT contract vill expird on January 1, 1990, unless terminated first. i earlier by operation of certain "econc.n.c ou " provisions in the agreement or unless extended by mutual agreement of the parties. As a result of conditions in natural gas markets, aggressive negotiations, and HL&P's strategic position in the marketplace, HL&P maintained its cost af natural gas in 1987 at approximately the same level as in 1986 despite an ;ncrea u in the price of natural gas late in 1987. Several strategic fuel projects vere completed in 1987. One of these proj ec t s is the North Dayton Gas Storage Facility (ovned and operated by an unaffiliated third. party) which provides gar storage services exclusively to a .-

 \
                                                                                                                                 )

HLSP. The purposa of this facility is to allov HL&P to rcduca veristions in hour to hour purchases of gas, thereby avoiding extra charges by gas suppliers and transporters. Storage capability also enables HL&P to take 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 1 vithout sacrificing the ability to svitch fuels as economics dictate. Coal and Lignite Supply. Coal supply serv. cec 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 Powder 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 coal suppliers and the settlement ot 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 whien 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 Puel 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 additional 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 l l

process such foreign source uranium. That litigation was initiated by certain uranium producers which contend that the DOE should not offer snrichment services for foreign source uranium "to the extent necessary to assure the maintenance of a viable domestic uranium industry." The position of the uranium producers essentially has been upheld by a federal district court and the U.S. Court of Appeals for the Tenth Circuit. The United States Supreme Court has agreed to hear an appeal from those lower court 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 acy be increased. Under a contract with the U. S. Department of Energy, the Department of The Energy vill take possession of all spent fuel generated by the plant. 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 kilowatt-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 unit. Oil Supply. Fuel oil is maintained in inventory by HL&P to provide for if and when sufficient supplies of fuel needs in emergency situations 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 Puel Costs. For information 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 tvclve months, unless 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. Regulatory Matters Rates and Services. Pursuant to the Texas Public U'.ility 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. 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 Counsel to represent the interests of residential and small commercial consumers before the Utility Commission, an increase from 125 days to 185 days in the period after filing of an application before new 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 of the Utility Commission or other proper regula to ry authority. In addition, the PURA, as amended, requires the Utility Commission to treat construction work in progress (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 GVIP on major projects under construction found to have been inefficiently or imprudently planned or managed. The 1983 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 flov 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 proj ec t 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 HL&P vill be adversely affected. In July 1987, HL&P petitioned the Utility Commission to capitalize 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 operatica. 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 stayed all action in this proceeding. The Court's action resulted from a controversy between the 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

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 reviev 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 and 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 revieving 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 consumers vill benefit if post test year adjustments to rate base are allowed because such adjustments vould 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 reviev of the South Texas p'oject r by the Utility Commission, see Note 9 to the Financial Statements included under Item 8 of this Report. Contemplated General Rate Proceeding. HL&P is planning to file a petition for authority to change rates vith 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 adjustments to rate base. Although the details of the requests have not 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 vith respect to air and vater quality, solid vaste disposal, and other environmental matters by various federal, state and local authorities. Environmental regulations continue to be affected by legislation, administrative actions, and judicial reviev and interpretation. As a result, the precise effect of existing and potential regulations upon existing and proposed facilities and operations cannot presently be determined. However,' developments in these and other areas of regulation have in the past required HL&P to make substantial expenditures to modify, supplement or replace equipment and facilities and

                                               -1E-

may in the futura dalay or imptda construction end opsretion of nnv 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 sales to industrial customers is expected to be lover in the future than it 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 water 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 fac;.ities 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 solid 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 lov power operating license for Unit No. 1 of the South Texas project. In 1987 the Government Accountability l l l

Project (GAP), a citizens intere.et group, demanded that the NRC establish a special task force to investigate alleged safety defects at the South Texas 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 review and evaluate the GAP allegations. The NRC review of all the GAP allegations has identified no substantive safety issue that vould varrant delay in the NRC's consideration of a full power license for Unit No. 1 of the South Texas 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 on March 8, 1988. The delay in achieving initial criticality has been principally attributable to certain equipment problems identified during the testing process wh!ch 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 e.ompletion of lov power operation and the receipt of a full power license fram the NRC. The in-service date and cost estimate for Unit No. 1 of the South Texas project is subject 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 occurred on Ha ch 8, 1988) before Unit No. 1 can be pleced 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 S150 million (of which HL&P's portion vould be S31 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 approximately S15 million per month. Commercial operation of Unit No.  : of the South Texas project is scheduled to commence in June 1989. Viability Review. In March 1985, a Utility Commission proceeding was initiated for the purpose of gathering evidence concerning the economic viability of Unit No. 2 of the South Texas project. Initial hearings were 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 issued 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 Item 8 of this Report. Nuclear Insurance See Note 9 to the Financial Statements included under Iter E of this Report for information concerning nuclear insurance.

                                           -2C-

Labor Mattcrs' 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 Workers under a collective bargaining agreement which expires on May 25, 1988.

  .       a Operating Statistics                                       _

Year Ended December 31, 1987 1986 1985 Electric Energy Generated and Purchased (Mkwh): Generated - Net Station output............... 48,798,146 45,507,566 49,653,222 Purchased.................................... 9,959,034 11,104,589 9,020,115 Nat Interchange.............................. (362) 737 587 Total...................................... 58,756,818 56,612,892 58,673,924

 .C:cp:ny 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 Elsctric Sales (Mkvh):

Rasidentia1.................................. 14,701,438 14,627,569 14,981,112 Cormercial................................... 11,188,927 11,437,464 11,490,874 Industrial................................... 27,441,200 26,192,806 27,418,046 Street Lighting - Government and Municipal... 108,176 107,039 103,808 Tota 1...................................... 53,439,741 52,364,878 53,993,840 Other Electric Utilities..................... 2,471,586 1,642,679 1,974,876 Tota 1...................................... 55,911,327 54,007,557 55,968,716 Nunb:r of Customers (End of Period): Rasidential.................................. 1,147,962 1,144,165 1,156,121 Commercial................................... 156,517 157,199 158,313 Industrial................................... 1,764 1,755 1,800 Street Lighting - Government and Municipal... 79 80 76 Total...................................... 1,306,322 1,303,199 1,316,310 Other Electric Utilities..................... 6 6 6 Total...................................... 1,306,328 1.303,205 1,316,316 Oparating Revenue (Thousands of Dollars): Residential.................................. $1,078,93i $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 Total...................................... 2,859,911 2,888,874 3,551,602 Miscellaneous Electric Revenues.............. 140,921 70,866 (18.238) Total...................................... S3,000,832 S2.959,740 S3,533.364 Installed Net Generating Capability (Kv) (End of Period).............................. 12,855,000 12,680,000 12,304,000 Cost of fuel (Cents per Million Btu): l Gas.......................................... 170.0 170.3 291.6 l Coa 1......................................... 252.4 24E.1 243.9 i Lignite...................................... 162.7 188.5 321.9 Average.................................... 192.4 197.1 277.0 l l t

                                               -2:-

l 1 l

Offic:ra Officer Business Experience 1983-1987 Name Age (1) Since(2) - Positions Tern 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 Senior Vice President, General 1984-Counsel and Corporate Secre tary 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 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 Vice President - Human 1983-1986 Resources Vice President - Rates, 1983 Planning & Information Systems mrr w- wrw w,w -- r-v -

                                             -"w'-wm-= - - -- -    -'v-* -- *- - " -

Officers Officer Business Experience 1983-1987 Name Age (1) Since(2) Positions Ters J. 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 - Purchasing      1987-and Materials 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 Manager - Nuclear        1983-1987 Sta*'ans - Duke Power Company K. V. Nabors.....        44       1986  Treast                           1986-Manager - Accounting Services    1983-1986 Manager - Corporate Accounting   1983 (1) At December 31, 1987.

(2) Officers vere elected May 20, 1987 to serve for one year or until their successors are duly elected and qualified.

4 S Item 2. Properties. All of HL&P's electric generating stations and substantially all of the othbr operating property of HL&P is located in the State of Texas. BL&P considers this propertv to be vell maintained and in good operating condition. Electric Generating Stations. As of December 31, 1987, HL&P had ten electric generating stations (60 generating units) vith a combined turbine nameplate rating of 12,619,651 Kv. Substations. As of December 31, 1987, HL&P ovned 194 major substations (with capacities of at least 10.0 Hva) having a total installed rated transformer capacity of 50,294.Mva (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 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 volts. General Properties. HL&P ovns various properties which include a 27-story headquarters office building, division offices, 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 ovned in fee by HL&P. Transmission lines and distribution systems have been constructed in part on or across privately ovned land pursuant to easements or on streets and highways and across vatervays 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, BL&P has the right of eminent demain pursuant to which it may secure 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 tie Financial Statements included under Item 8 of this Report. See also Item 1. "Business - Regulatory Matters" for descriptions of pending regulatory proceedings. Item 4. Submission of Matters to a Vote of Security Holders. There vere no matters submitted to a vote of security holders during the fourth quarter of 1987.

PART II Ites 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 candition and results of operations and should be read in conjunction with the Financial Statencnts and the related notes included elsewhere herein. (Thousands of Dollars) Year Ended December 31, 1987 1986 1985 1984 1983 Rtv& nuts..................... $3,000,832 $2,959,740 S3,533,364 $3,674,556 S3,523,745 Inco2s after preferred dividends.................. S 408,581 $ 434,927 $ 455,904 S 355,522 $ 291,294 AFUDC cs a percent of income 52% 52% 45% 31% 17% after preferred dividends.. Rsturn on average common equity..................... 14.0% 15.5% 17.6% 15.7% 15.0% Rstio of earnings to fixed chtrges: Including AFUDC............ 3.35 3.36 3.76 3.55 3.50 Excluding AFUDC............ 2.41 2.42 2.84 2.99 3.22 Rstio of earnings to fixed chstges and preferred dividend requirements...... 2.87 2.95 3.26 3.05 3.01 At year-end: Total assets............... $8,687,744 S8,136,725 S7,829,390 S6,990,332 $6,056,367 Long-term debt (including current maturities)...... S2,845,877 S2,908,277 $2,841,399 S2,573,602 S2,156,000 Capitalization: Common stock equity........ 48% 47% 46% 46% 47% Cumulative preferred stock. 7% 6% 6% 5% 6% Long-term debt (including 45' 47% 48% 49% 47% current maturities)...... Construction and nuclear fuel expenditures (excluding AFUDC).......... S 644,580 $ 712,418 $ 745,972 $ 904,076 $ 886,892 Percent of construction expsnditures financed internally from operations. 29% 35% 39% 37% 42%

                      . Item 7.                       MANAGEMENr'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Houston Lighting & Power Company-(HL&P) reported 1987 income after preferred 61vidends of $408.6 million, down $26 million from 1986 and $47 million from the reco'rd earnings of 1985. Allowance for funds usad 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 proj ects and is capitalized as part of the cost of the Decreases in AFUDC in 1987 vere primarily related to a assets being constructed. 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 i 4 construction without corresponding increases in the amount of construction included in rate base and earning a current cash return. The decline in HL&P's 1987 income is attributable 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. Earnings were positively affected by base rate increases allowed by the City of Houston and the Public U tility Commission of Texas (Utility Commission) in July and December 1986, respectively. Electric operating revenues increased 1% and declined 16% for the years 1987 and 1960, respectively. The increase in revenues in 1987 is primarily due to i higher base revenues from rate increases implemented in 1966. 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 te industrial customers on an interruptible basis, both of which provide minimal contribution to base electric revenues. Residential KVH sales increased by .5% in 1987 and declined 2.4% in 1986. Commercial KVH sales declined by 2.2% in 1987 and .5% in 1986. Industrial KVH sales, which account for approximately half of HL&P's overall sales, vere up

                      -4.8% and down 4.5% for 1987 and 1986,                                             respectively. However, most of the

! increase was due to sales made on an interruptible basis as described above. I Fuel expense increased $47 million in 1987 and declined $485 million in The increase in 1987 was primarily due to increased generation, partially 1986. 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 power during 1987 was 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 1987 increased 9% or $52 i million when compared to 1986. In 1986, operating and maintenance expenses decreased $33 million or 6% vhen compared to 1985. The increase in 1987 was due primarily to increases in operation and maintenance expenses related to Limestone and in administrative and general expenses. The decrease in 1986 vas primarily due to a reduction in transmission expenses, customer expenses and administrative  ! and general expenses.  :

e In January 1987, following thm Deccabar 1986 commancement of comm2rcial operation of Limestone Unit Nn. 2, HL&P filed a petition with the 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 project'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 expenses, taxes, depreciation and AFUDC related to Unit No. 1 is estimated to be $230 million based on HL&P's 30.8% interest (S290 million based on a 46.8% interest), none of which is reflected in electric rates. The Utility Commission has 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 vill be more severely impacted until similar regulatory relief is granted with respect to such unit. In prior years, BL&P's operating results were adversely affected by the lag in recovery 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. Liquidity 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 vas $639 million. Estimated expenditures for 1988, 1989, and 1990 are $495 million, S444 million and $366 million, respectively. These amounts reflect the modification of the scheduled in-service dates for the two lignite units at the Malakoff Electric Generating Station as discusser 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 comm>rcial operation date for Unit No. 1 of March 1, 1988). These amounts do not reflect the possible acquisition by EL&P of an additional 16% interest in the South Texas project present1/ ovned by the City of Austin (Austin), which vould increase the estimated construction and nuclear fuel expenditures by S205 million for the 1988-1990 period, $92 million of which is related to the reimbursement of costs incurred 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 generated 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 nev plant facilities, depreciation rates, recovery of operating expenses and the opportunity to earn a reasonable rate of return on its invested capital. It is presently estimated that during 1988, 10% tc 20% of HL&P's construction program can Le 'inanced through internally generated funds from operations. Internally generated funds for subsequent years vill be primarily dependent on the regulatory treatnant of HL6P's investment in the South Texas proj ce t . Tha belance of HL6P's construction program is expacted to ba fintnccd 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 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 Mortgage and Deed of Trust and was retired by the bond trustee in May 1987. In February 1988, S48 million principal amount of HL&P's 13 7/8% series first mortgage bonds 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 ect 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 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. HL&P's capitt.lization 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 affected 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 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 amuunt of AFUDC, a non-cash item of financial reporting income, as taxable income in determining the alternative minimum tax. These and 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.

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 becomes effective for fiscal years beginning after December 15, 1987. SFAS No. 90 requires the future revenue that is expected to result from the regulstor's inclus'on i of the cost of an abandoned plant in allovable costs for ratemaking 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 disallovance becomes probable and the amount of tue disallowance 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, SFAS 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 vould 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 brfore 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 vithin ten years of the 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 AFUDC 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 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 SFAS No. 96 but does not expect the nov pronouncement to have a material effect on its financial position or results of operations. HL&P presently anticipates adopting SFAS No. 96 in 1989. Item 8. Financial Statements. HOUSTON LIGHTING & POWER COMPANY STATEMENTS OF INCOME (Thousands of Dollars) Year Ended December 31, 1987 1986 1985 Op2 rating Revenues........................ $3,000,832 $2,959,740 $3,533,364 .0parating Expenses: Fuel.................................... 981,922 935,169 1,420,262 Purchased power......................... 379,497 421,893 442,802 Operation............................... 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 Other taxes............................. 151,667 , 146,791 140,185 Total............................... 2,541,358 2,493,802 3,037,481 Optrating Income.......................... 459,474 465,938 495,883 Other Income (Expense): Allovance for other funds used during construction.......................... 143,584 170,348 154,246 Other - net............................. (7,747) 7,236 5,023 Total............................... 135,837 177,584 159,269 Income Before Interest Charges............ 595.311 643,522 655,152 Interest Charges: Interest on long-term debt.............. 238,919 259,887 248,516 Other interest.......................... 25,432 24,258 16,654 Allovance 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 Nat Income................................ 439,987 461,744 482,506 Dividends on Preferred Stock.............. 31,406 26.817 26,602 Income After Preferred Dividends.......... S 408,581 S 434,927 S 455,904, See Notes to Financial Statements.

. a-s HOUSTON LIGHTING & POVER COMPANT STATEMENTS OF RETAINED EARNINGS (Thousands of DoU ars) Year Ended December 31, 1987 1986 1985 BALANCE AT BEGINNING OF YEAR............ $1,269,492 $1,128,547 $ 945,820 439,987 461,744 482,506 ADD - NET INC0ME........................ Tota 1............................. 1,709,479 1,590,291 1,428,326 DEDUCT - CASH DIVIDENDS: Preferred: 390 390 390

     $4.00 Series........................                                          1,680 S6.72 Series........................              1,680         1,680 3,760         3,760         3,760
     $7.52 Series........................                                          3,808
     $9.52   Series........................            3,808         3,808 3,632         3,632         3,632
     $9.08   Series........................

4,060 S8.12 Series........................ 4,060 4,060 2,712 2,712 2,712

     $9.04   Series........................
        "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 S2.60 (per share)....................... 304,868 293,982 273,177 336,274 320,799 299,779 Tota 1.............................

                                                 $1,373,205     S1,269,492   $1,128,547 BALANCE AT END OF YEAR..................

See Notes te Financial Statements.

                                            -2;-

i . HOUSTON LIGHTING & POWER COMPANT BAIANCE SHEETS (Thousands of Dollars) ASSETS December 31, 1987 1986 PROPERTY, 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 vork 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 7,642,44] CURRENT ASSETS: Cash and temporary investments................... 260 389 Vorking funds and special deposits............... 483 502 Accounts receivables Customers...................................... 110,741 Affiliated companies........................... 1,208 2,628 0thers......................................... 37,159 39,589 Inventory: Fuel oil and gas, at lifo cost................. 18,698 16,583 Materials and supplies, at average cost........ 90,946 80,044 0ther............................................ 11,661 11,731 Total current assets......................... 160,415 262.207 OTHER ASSETS: j Recoverable cancelled project costs.............. 36,129 43,382 i Unamortized debt expense and premium on l reacquired debt................................ 67,539 47,763 Deferred debits.................................. 154,307 140,931 Total other assets........................... 257,995 232,076 Total................................... $8,687,744 $8,136,725 See Notes to Financial Statements.

. a BOUSTON LIGHTING in POVER CONPANY BAIANCE SHEETS (Thousands of Dollars) CAPITALIZATION AND I.TARILITIES 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. . . . . . . . . . . . 341,319 341,319 Subj ect to mandatory redemption. . . . . . . . . . . . . . . . 99,055 Long-term debt................................... 2,844,918 2,865,105 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 affiliatmj companies......... 22,374 17,891 Taxes accrued.................................... 79,224 116,126 Interest accrued................................. 65,163 66,627 Accrued liabilities to municipalities............ 70,685 72,263 Current 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 COMMITMENTS AND CONTINGENCIES Total.................................. S8,687,744 $8,136,725 See Notes to Financial Statements. HOUSTON 1.IGHTING & POVER COMPANY ,

                                                                                                     'l STATEMENTS OF CAPITALIZATION (Thousands of Dollars)

December 31, 1987 1986 COMMON STOCK EQUITY: C:mmon stock, no par; authorized 200,000,000 shares; cutstanding 106,660,778 shares at December 31, 1987 cnd 106,515,383 shares at December 31, 1986.................. S1,602,097 $1,597,247 Rotoined earnings.............................................. 1,373,205 1,269,492 Total common stock equity.......................... 2,975,302 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
        $9.52  series,   400,000 shares...........................            39,372       39,372
        $9.08  series,   400,000 shares...........................            39,395       39,395
        $8.12  series,   500,000 shares...........................            50,098       50,098
        $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 Total..............................................           341,319      341,319 Subj ect to mandatory redemption:
        $8.50 series, 1,000,000 shares...........................             99,055 Total cumulative preferred stock...................           440,374      341,319 LONG-TERM DEBT:

First mortgage 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 4 POWER COMPANY STATIDENTS 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.................................. S 125,000 $ 125,000 8 7/8% series, due 2008.. ............................... 1?.5,000 125,000 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 Pollution 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 Matagorda County 1984 A-C series, Floating 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 Unemortized premium or (discount)-net...................... (4,427) (5,611) Capitalized lease obligations, average discount rate 13.8%. 1,181 4,353 Total.............................................. 2,845,877 2,908,277 Less current maturities............................ 959 43,172 Total long-term debt............................... 2,844,918 2,865,105 Total capitalization............................ $6,260,594 $6,073,163 See Notes to Financial Statements. HOUSTON LIGHTING & POWER COMPANY STATEMENTS OF CHANGES IN FINANCIAL POSITION (Thousands of Dollars) Year Ended December 31 1987 1986 1985 iourcac of Funds: Operations: N]t income........................................... S 439,987 $ 461,744 S 482,506 Ittcs not requiring current outlay of working capital: Dapreciation 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 Allowance for funds used during construction....... (212,401) (225,626) (204,209) Total............................................ 524,200 572,231 589,782 Dividsnds declared..................................... (336,274) (320,799) (299,779) Roinvastad funds from operations....................... 187,926 251,432 290,003 Finrncing: Sale of common stock................................. 4,850 136,274 Sale of preferred stock.............................. 99,125 49,021 Snla 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 offer........ 390,519 Chtnge in notes payable and temporary cash investments........................................ 482,126 474,628 (281,339) Total financing.................................. ' 104.494

                                                                       ,                713,131        379,214 Othse:

Decrease (increase) in vorking capital (exclusive of notes payable and temporary cash investments)...... (109,099) (59,036) 137,166 Rsclassification to current maturity of long-term dsbt............................................... (959) (43,172) (32,756) Proceeds from settlement of litigation............... 117,439 Othar - net.......................................... (7.367) (31,113) (90,875) Total other...................................... (117,425) (133,321) 190,974 Total............................................ S1,174,995 S 831,242 S 860,191 \pplication of Funds: Construction and nuclear fuel expenditures (net of allowance for funds used during construction)........ S 644,580 $ 712,418 $ 745,972 Rsacquired long-term debt.............................. 530,415 118,824 114,219 Total............................................ S1,174,995 S 831,242 S 860,191 (continued on next page)

BOUSTON LIGHTING & POWER COMPANT STATEMElffS OF CHANGRS IN FINANCIAL POSITION (Thousands of Dollars) (Continued) Year Ended December 31 1987 1986 1985 Changes in Components of Vorking Capital (exclusive of notcs payable and temporary cash investments): Incrsase (decrease) in current assets: Ca:h................................................. S (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 Tota 1............................................ (101,792) 400 (59,080) Incr:ase (decrease) in current liabilities: (45,409) Accounts payable..................................... (26,807) 29,569 Accounts payable to affiliated companies............. 4,483 8,445 1,679 Tsxes 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 Incr:::re (Decrease) in Vorking Capital (exclusive of notss payable and temporary cash investments).......... $ 109,099 $ 59,036 S(137,166) See Notes to Financial Statements. 35

HOUSTON LIGHTING & POVER COMPANT , i NOTES TO FINANCIAL STATEMENTS For the Three Years Ended December 31, 1987 s (1) Summary of Significant Accounting Policies ,

                                                                                   #              /

System of Accounts , . The accounting records of Houston Lighting & Power Company (HL&P) are - i maintained in accordance with the Federal Energy Regulatory , Commission's Uniform System of Accounts which has been adopted by the /i Public Utility Commission of Texas (Utility Commission). t ,7' / Electric Plant Additions to electric plant, betterments to existing property and replacements of units of property are capitalired at' cost. Cost includes the original cost of contracted services, direct labor and material, indirect charges for engineering supervision and similar overhead items and an allovance for funds used during construction (AFUDC). Customer advancec for construction reduce additions to electric plant. Maintenance of property and replacements and renewals ' 'of ){tems j determined to be less than units of property are charged to exper.se. The actual or average book cost of units of property replaced or renewed is removed from plant and such cost, plus removal cost liss ' salvage, is charged to accumulated depreciation. s h 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 regulatcry authorities. AFUDC vas computed using a gross rate of 20.7$% beginning in 1987 due to changes caused by the Tsx Reform Act of> 1986, which generally eliminates a current tax Jeduction for interest) during construction. This gross rate is applicable to all property except certain trancition 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 , ,

m  ; j ' J

                                                                                                                   /
                                                                                                                       ,          j
  /

through an energy component of bases e'Iectric rates. The energy component is established during a utility's seneral rate proceeding and is effective for a minimum of twelve months. The rules provide for a reconciliation of fuel ' rev'ntues, with any over- or under-recovery of fuel ensts to be consid' eced in establishing future

      ,                                    fuel cost recoveries.                    In February D1986, the Utility Commission adopted a rule that requires a monthlk; reduction of the fuel factor
                                   )       if      the Utility Commission determines that a utility has materially over-recovered, or projec ts that it vill over-recover allovable fuel costs under its existing' fuel factor. The rule also provides for any fuel cost             savings to be talunded as a one-time credit to customers'
                                                                        /

bills. I Federal Income Taxes , F Houstoo Industries Incorporated (Houston Industries) and its subsidiarias file a consolidated income tax return. HL&P' records as its current income tax expense an amount equal to the tax it vouli have to pay if it filed a separate return. HL&P follows a policy of comprehensive interperiod income tax allocation. TheTax[ReformAct of 1986 eliminated investment tax credits effective January.1, 1986, except with respect to certain transition properties, prihd! pally the s South Texas project. Investment tax credits are deferred and

    '                                      amortized over the estimated lives of the related property.

(2) Preferred Stock , , , i HL&P's preferred stock may be/ cedeck'd at the following per share prices, plus any unpaid accrued tividend/ to tre date of redemption: it

                                                                                                                                                             '         i
            -                              Not subject to mandatory redemption-                                                                                 p
                                                                                                                                                                  ,o P'

S4.00 Series: $105.00. <

                                                    $6.72 Series:        $102.51.

i S7.52 Series: $102.35. i ,A

                                                    $9.52 Series:         through September                   0, 1090 - $103.00; thereafter-$103.00to$101.00[.4 . /

1 ' S9.08 Series: through March 31, 1993. ./ S103.00; thereafter - S101.00. e S 8 . 12 Series: through November 30,'2292 - $104.25; thereafter - f $102.23.

                           ,3                       S9.04' Series:        through January 31, 1989 - $105.00;                                             'e a'          s<                 f thereafter - $103.00 to $101.00.                                                                   /'

Adjustable '?. ate Series "A": through March 31, 1989 - not

                                                                                                                                                                  ?

redcemahle; thereafter - $103.00 to $100.00. The dividend rate on this series, as of, January 1, 1988, is 7.75%. The rate is i adjustep quarterly, based ,on the yield on U.S. Trehsury

                                                                                            / >

, ,J secur(nes. through September 30, 1990 - Adjustable

• Rate Series "B"/ , ,

i not redeemable; thereafter - S103.00 to S100.00. The, dividend

                              ^j                        rateonthisseries,asofJanuar$,1,1988,is7.50%.                        ,

The rate

• is adjusted quarterly, based </ 1 the, yield on U.S. Treasur securities.

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                                                                                                                                        'f (

4 h i J. E I

r ;1 m j- y,

                                                                                                                 '       a
                                                               ,                        t il Subjcet to mtndatory redamption:
               $8.50 Series:         throtkh' May 31, 1992 - $108.50i thereafter -

S104.25 to $100.00; p?qvided that the $8.50 Ser,ies may noi be redeemed, directly or indirectly, prior to J.ine 1, 1992 from tne proceeds of any refunding through the incurrence of debt or through the issuance of preferred stock ranking equally with or prior to theSE..;0Seriesastodividendsorliquidation, where such debt has an effective interest cost, or such preferred stock has . lan effective dividend cost, of less than 8.50% per annum. Tb6 mandstory redemption provision requires HL&P to redeem 200,000 bhares, annually beginning June i,'1993. l - (3) Long-Tera Debt . At December 31, 1987, sloting or' improvement fund 'requirdments of HL&P's first mortgage bonos outstanding vill be approximately $36 million for each of the years 1988 through 1992. Of such requirements, approximately S17 million for each of the s paars 1988 through 1992 may be satisfied by certifica*. ion of property aoditions at 100% of the requirements, and the remainder through cestification of such property additions at 166 2/3% of tne requirements. Sinking or improvement fund requirements for 1987 and prior y ars have been satisfied by certificatico'of property additions. HL&P has agreed to expend an amount each year for replacements and  ; improvements in respect of its depteciable 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 t.y taking credit ror 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'ter&' debt and minimum capital lease payments are approximately S1 51111on in 1988, S55 million in 1989, no maturities in 1990, $48 million in 1991 and $78 million in 1992. See also Note 15. i ' l The issuable amount of HL&P's !;rst mortgage bonds is unlimited as to authorization, but limited 4; property, earnings, and other provisions of the Mortgage a d, Deed of Trust and the supplemental indentures thereto. Substant tal~y all properties of HL&P are subject to liens securing its long-tera Jebt. i \ (4) Short-Tera Financing I j The interim financing requirements of HL&P are net through short-term 5 bank loans and the issuance of commercia: pape' . HL&P had bank lines 1' of credit aggregating S6LO million at December G1, 1987 and 190'{, which 2.imit its total short-termsborrowings and provide for interest a w s

           .        s (v

4 k ,( it. mates gener$11y less thtn I the irime rate. Commercial paper ou t nanding was $549,796,000 at December 31, 1987. Bank loans and comaarcial paper outstandinc. vere $50,000,000 and O ' ': , M.s ,000, kespectively, at December 31, 1986. Commitment fees are required on

                              ; de undravn portion of the lines.

A Fouston Industries Finance, Inc. (Houston Industries Finance), a l wholly-owned subsidiary of Houston Industries, began purchasing l/ HLlo s customer accounts receivable in January 1987.

!/

1 (5) Retirement Plan m 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
                       ' s' 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 plati in .'985 are determined under the provisions of previous accounting pinciples. HL&P has a noncontribu sry 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 cupensation 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 y                              not meet H14P's funding obligations for past service costs. In 1987 j,                and 1986, 'however, as a result of the change in federal income tax R                 rates and the early retirement program, discussed belov, HL&P funded the maximum amount deductible for federal incoae 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 vere 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 i three years ja 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 tvn years). The early retirement incentive was accepted by 430 employees. Pension benefits are being paid out of hL&P's retirement plan assets an6 the supplemental benefits are being paid by HL&P. Upon the adtition of the early retirement plan, the projected benefit ob11Tations pertaining to HL&P's retirement plan and supplemental benefits vere increased by $17.5 million and $7.2 million, respectively. HL&P has deferred the costs associated with the increases in these projected benefit obligations and vill request recovery through electric rater :n its next rate proceeding before regulatory authorities, u Dece-ber 31, 1987, HL&P's orligation related to the supplemental oenefi'.s vas S5.8 millior.. I

Net pension cost includes the folle:. ting componentss Year Ended December 31, 1987 1986 (Thousands of Dollars) Service cost - benefits earned during the period S 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 S 13,954 $ 9,702 The funded status of the retirement plan was as foll ist December 31, 1987 1986 (Thousands of Dollars) Actuarial present value oft Vested benefit obligation S 180,118 $ 138,747 Accumulated benefit obligation S 207,859 S 167,116 Plan assets at market value $ 249,403 S 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) S (18,953) The proj ected benefit obligation was determined using ar. 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. The total pension cost of HL&P's retirement plan for 1985 vas $14,405,000.

(6) Commitments and Contingencies Significant co-_i:wents have been incurred in connection with ..'&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. Commitments in connection vith 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 vith 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 vith its cancelled Allens Creek nuclear proj ec t , and ordered that any tax savings associated vith the disallowed portion be passed through to customers. E f1e the Utility Commission purported to permit S195 million of expenditures for the project to be recovered over a ten-year period, the flov-through of tax savings on the disalloved 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 i Commission had found that the shareholders, and not the ratepayers, should bear the disalloved Allens Creek expenditures, the shareholders 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 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 viev of the then pending li*igation on such issues against the former arenitect-engineer. The District 1

C:urt also rulcd that th2 1982 rete ordsr h:d crrenscusly cnd 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 Writ of Error to consider certain points of error raised by the Utility Commission, as well as certain other points raised by BL&P. Although the Texas Supreme Court affirmed certain aspects of the lover courts' decisions, including a ruling to the effect that the Utility Commission had no statutory authority 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 Commission for determinction and implementation, subject to pending motions for rehearing and possible further appeals by HL&P. 2reviously 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 (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 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 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

rather than a judgment awarding condemnation damages. In addition, the court granted an injunction, pending appeal, that af fectively 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 February 27, 1986, the appellate court granted HL&P's requested relief from the injunction and directed the trial court to allov 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 vould grant the vrit 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 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.          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 reviev of the appeals court's decision. HL&F has filed a contingent Application for Vrit of Error to be considered in the event

• hat 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.

_s>_

Prudenc7 Review of Coal Supply Agreemento 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 V. A. Parish generating units is obtained, including the degree to which the chemical characteristics of coal from one of those suppliers led to HL&P's decision to upgrade existing pollution control equipment by installing baghouses on three of those generating units. The Utility Commission staff requested that, pending the outcome of the separate docket, BL&P be at risk for all costs associated with the installation of the baghouses (estimated to total $178 million excluding AFUDC) and for payments made -for coal in excess of the equivalent of a delivered price of $1.51 per million Btu's. As a result of the Utility Commission'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 Nor thern 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 motions 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. HL&P, Houston Industries and Utility Fuels appealed the trial court's decision to the Fifth Circuit Court of Appeals and continued to vithhold the amounts in dispute pending the outcome of the appeal. On October 7, 1987, the Fifth Circuit Court of Appeals 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 vere concluded on December 21, 1987, when amendments to both coal supply

r

                    . _ . . .           .   .   . _..........,_.__.~._..._.._..__a_____                  _ .,

4 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

       , stipulation, 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 vould be resolved without disallowance 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            tecision       in which he urged the Utility Commission to remand the matter for further evidentiary proceedings on certain points      in         the proposed stipulation which vere 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.

Vhile 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 materiai 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 vith the railroads. On February 13, 1987, vith the agreement of all parties, the Federal District Court in Beaumont. 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 s third party and the same railroads. HL&F and Utility Fuels have joined I

vith the railroads in requesting the Federal District Court in Houston to stay proegedings 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-Ovned Nuclear Plant. (8) Limestone Generating Units In December 1986, the second of two 720 megavatt, lignite-fired ger. era t ing 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 vovld 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 vas 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 -eferred to above are not allowed to be capitalized, then those costs would 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 9'mmission 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-Owned 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 participa ang interest in the 49-

proj ec t currently being 30.8%. As of December 31, 1987, HL&P's investments in the South Texas project and in nuclear fuel, including AFUDC, vere $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 ovners of the South Texas project, filed suit against HL&P and Houston Industries in the 98th Judicial District Court in Travis County, Texas (Cause N7. 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) 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 approximately $437 million expended by Austin to that date, and of all sums expended 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 vas 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 permit ted Austin to maintain its claim for S830 million under this theory of recovery if it could shov that the ownerr vould have cancelled the South Texas i project in 1976 and that Aurtin vould have built c coal plant in lieu

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            ,                                                  _.                                                     _                     .   =.    .=

of the South Texas project. Hovever, 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 $740 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 clair's are no longer subject to trebling under the DTPA. As a result, the maximum damage claim remaining in the case is an alternative claim for $811 million relating to Austin's claim that it > vas t;sudulently induced to enter into the South Texas project in 1973. The judge has not yet acted on HL&P's motion for summary judgment on this issue. On September 3, 1987, HL&P announced that it had 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. The Agreement in Principle provides that Austin vould convey to HL&P its 400 megavatt (MV) interest in the South Texas project, together with nuclear fuel and related property, in exchange for a 400 MV interest in HL&P's Limestone station, a lignite plant having a capability of 1,440 MV 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 MV 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 accordanco 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 remaining construction and fuel costs affective 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 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 portior 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 documents and other conditions have been satisfied, including approval by the Utility Commission and the Nuclear Regulatory Commission (NRC). J l i

In addition, the Agreement in Principle provides that it vould be necessary that the order of the Ut'.ity Commission, among other things, contain no findings, conclusions, reservations, or observations by a majority of the Utility Commission that 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 with the Utility Commission (Docket No. 7725) to reflect the exchange of ovnership of Limestone and the South Texas proj ect pursuant to the Agreement in Principle. The settlement 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, vaiving their rights 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 (CSV). 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 vith 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 vith respect to its actions or inactions as project manager under the Participation Agreement among the co-ovners of the South Texas project 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 no later than December 31, 1990. Unit No. 2 of the South Texas proj ec 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 week 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&P to serve the Third Party Petition on San Antonio, CPL and CSV vithout prejudice to the right of those parties to later assert that the Third Party Petition should be dismissed or severed for a senarate 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&P. HL&P has also filed an original complaint in the 130th District Court of Matagorda County against San Antonio, CPL and CSV requesting substantially the same relief. If the court in the Austin litigatior. doer not ! ultimately dismiss the Third Tart, Petition, presecutier of the l action in Matagorda County . 1; ce deferred.

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l 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 Matagorda 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 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 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 Principle is consummated, HL&P's construction and nuclear fuel expenditures vould 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 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 of a Motion filed by the Attorney General of Texas for Leave to File Petition for Vrit of Mandamus 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 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 Attorney General's petitions to intervene on behalf of the Texas state agencies. HL&P cannot be certain at this time as to the duration of the Texas Supreme Court's stay or 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 vill remain in effect until the Texas Supreme Court resolves this issue. Prudence Review of South Texas Project by Utility Consission. The Utility Commission has instituted 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. 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 based _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 Sl.1 to Sl.3 billion. According to the Report, such amounts do not include AFUDC or rate effects which the consulting firm concluded vould 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 nev 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 nev consultant or any other party vill utilize

the Report in that docket, however, remains unclear.

HL&P believes that the Settlement vith the former architect-engineer provided full compensation for any imprudent or inefficient planning or management during the period in question. HL&P vill 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. hile

                                                                         .      no definitive assurance        can be given tnat all amounts invested in the South Texas project         vill   be recoverable by HL6P through electric rates or     otherwise,   HL6P present% believes the ultimate resolution I
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of the Utility Cormission's prudsnee reviev vill not havo a catoric1 adverse effect on its financial position. Any amounts that are not recoverable vould have to be charged against earnings. A substantial vrite-off could adversely affect HL&P's ability to finance its capital program and meet other financial obligations. Request for Deferred Accounting Treatment. In July 1987, HL&P requested that the Utility Commission order an accounting treatment which vould allov HL&P to defer its portion of all operating and maintenance expenses, taxes and depreciation thst vould otherwise be expensed effective with the commercial operation of Unit No. 1 of the South Texas 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 hearings 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 significant lag time could occur between the commercial operation date of Unit No. 1 of the South Texas project and implementation of new rates reflecting such facility as plant in service. As a result of such lag time and without the requested accounting treatment re:ferenced above, HL&P's operating results vill be adversely af f ec :ed unless some other mitigative action by the Utility Commission is taken. In October 1987, HL&P filed supplemental testinony 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 vould reouce 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 tne South Texas project. Under this request, HL&P's 1988 financial results vauld be similar to those under the original deferral request. Revised Budget and Schedule. On September 17, 1987, HL&P presented a completior, estimate for the South Texas project to the management committee for the proj ec t , 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 vould be S5.28 billion, excluding AFUDC and net of the Settlement. The revised cont 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 ptoject. In August 1987, the NRC granted a lov pover operatinr license for Unit No. 1 of the South Texas project. In 1987, the Government l

Accountability Project (GAP), a citizens interest group, deaanded 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 vould varrant delay in the NRC's consideration of a full power license for Unit No. 1 of the South Texas project. In Tebruary 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 equ!pment problems identified during the testing process, which have been analyzed and 1 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 Tcxas proj ec t are subj ec t to continuing reviev 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 before Unic 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 recult 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 approximately S15 million 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 ovners of the South Texas project have obtained all nuclear property and nuclear liability insurance requirsd to date, and additional insurance coverage vill be purchased when the full pover 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.

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The ovners of the South Texas project currently maintain property damage insurance in the amount of S1.23 billion through American Nuclear Insurers (ANI) and-Nuclear Electric Insurance Limited (NEIL) and are planning to purchase an additional $165 million in limits from NEIL vhen the full power license for Unit No. 1 is obtained. The ovners are also considering the purchase of an additional $130 million in limits which has recently become 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, BL&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 accumulated funds 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 vould 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 te prevent any significant risk to the public health or safety. t.ny property insurance proceeds not already expended to placo the reactor in a safe and stable condition must be used first to complete decontamination operations that may be ordered by the NRC. The ovners 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-vide 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 licensea reactors and up to a maximum per reactor ovned of $10 million in any calendar year. HL&P and each of the other ovners are subject to such assessments, which HL&P and 1 _ _ . _ . - - _._ _ _ ._ _.~ -

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. Various proposals have been made to amend the Price-Anderson Act including amendments which vould increase the limit on liability. If enacted, such amendmen's could result in an increase in assessments or other charges to fur.d the resulting increased coverage. HL&P is unable to predict what action Congress might take regarding the Price-Anderson Act or what ef fect 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 Malakoff 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 lovered projections of future demand for electricity in the. Houston area. As a result of the modified schedule, all developmental vork 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 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 vith keeping lignite leases and other related agreements in effect.

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(11) Unrecovered Costs The Utility ~ Commission has allowed recovery of certain costs over a period of time by amorti ing 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: Unrecovered Amount Remaining Recovery Period at December 31, 1987 at December 31, 1987 (Thousands of Dollars) Allens Creek Project..... S36,129 60 months Other......... 4,525 11-106 months (12) Federal Income Taxes The current and deferred components of tax expenses are as follows: Year Ended December 31, 1987 1986 1985 (Thousands of Dollars) Current - charged to operations........ S 88,201 S 53,471 $101,509 Deferred - charged to operations: Liberalized depreciation............. 64,615 73,207 60,472 Investment tax credit - net.......... (885) 28,033 31,584 Applicable to AFUDC.................. 40,210 47,089 42,561 Other - net.......................... 3.275 20,481 26,431 Federal income taxes charged to operations........................... 195,416 222,281 262,557 Current - charged to other income (expense)............................ 48 Total federal income taxes............. S195,416 S222,281 S262.605 Ef fective federal income tax rates are lower than statutory corporate rates for each year as follows: Year Ended December 31, 1987 1986 1985 (Thousands of Dollars) Federal income taxes at statJtory corporate rate....................... S254,161 S314,651 S342,751 Reduction in taxes resulting from: AFUDC - other included in :.ncome. . . . . 57,434 78,360 70,953 Other - net.......................... 1,311 14,010 9,193 Total.......................... 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 follovs: Year Ended December 31, 1987 1986 1985 (Thousands of Dollars) Ad valorem............................. S 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 Tota 1.......................... S151,667 $146,f71 $140,185 Research and development costs charged to expense........................... S 15.317 S 14,462 $ 14,038 (14) Principal Transactions Between HL&P, Its Parent and Oth:r R31sted 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 S40,000,000 of 5 1/2% Convertible Debentures due 1985 issued by HL&P. In consideration thereof, HL&P issued Louston Industries a $40,000,000 5 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 S183,000 related to this debenture. HL&P issued 145,395 shares of cor - atock to Houston Industries in 1987 for a total consideration ',,850,000. No common stock of HL&P vas issued to Houston Industrir 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-Fuel in the accompanying Statements of Income for the years ended December 31, 1987, 1986 and 1985 includes S509,739,000, S468,274,000 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, 1985 and 1985 includes

                      $15,382,000, S9,139,000 and $3,455,000, respectively, of service fees,           reimbursable direct costs and shared costs charged by Hourton 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. 7 As part of the consolidated financing program, Houston Industries has i established a money fund through which subsidiaries can borrov or invest on a short-term basis. Other Income (Expense) in the j accompanying Statements of Income for the years ended December 31, 1987 and 1986 includes $133,810 and S3,634,000, respectively, of

interest income from Houston Industries through such money fund 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, i

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In January 1988, HL&P deposited $52 million with the bond trustee to redeem all of the 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 Mortgage and Deed of Trust. (16) Unaudited Quarterly Information The following unaudited quarterly financial information includes, in the opinion of management, all adjustments (which comprise oaly 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 "ariations in operating expense patterns. Income After Operating Preferred Revenues Income Dividends (Thousands of Dollars) March 31, 1986.......... $658,555 S 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.

                                      -0;-

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 included such tests of the accounting records standards and, accordingly, 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 changes in its financial position for each of the three years in the period ended December 31, 1987, in conformity with generally accepted accounting principles applied on a consistent basis. 4 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 l

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. , None PART III Ites 10. Directors and Executive Officers of the Registrant.(*) Item 11. Executive Compensation.(*) The following table shows, for the fisual year ended December 31, 1987, compensation data for the five most highly compensated executive officers of HL&P vhose 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(l) D. D. Jordan Chairman of the Board and $513,333 S130,600 Chief Executive Officer D. D. Sykora President and 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 33,632 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 group (7 persons, including those named above) $1,821,665 $364,290 (1) Other Cash Compensation includes vested portions of amounts earned under the Executive Incentive Compensation Plan, as described belov, and Board of Director and committee fees, whether received in cash or deferred The information related to Mr. Jordan also includes compensation earned in his capacity as President and Chief Executive Officer of Houston Industries. A description of the benefit plans of HL&P and Houston 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 the 1988 Annual Meeting of Shercholders of Houston Industrics. During 1987, HL&P contributed $501 each to the accounts and of Mr. Jordan, Mr. Sykora, Mr. S3,507 to the accounts of all Goldberg, Mr. Kelly and Mr. Turner; executive officers as a group (7 persons) under the Employee Stock Ovnership Plan of Houston Industries. Such amounts are not included 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 avard 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 Houston Industries Common Stock. Amounts equal to dividends paid on the Houston Industries Common Stock are credited to a participant's form of additional share equivalent units. The contingent account in the 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 ovns 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 avards made pursuant to the EICP are included in the Cash Compensation Table. The non-vested portions of such avards have been excluded from the table and are as follovs: $122,500 for Mr. Jordan; $70,875 for Mr. Sykora; S36,093 for Mr. Goldberg; $33,632 for Mr. Kelly; S27,890 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 follovs: Mr. Jordan, $11,415; Mr. Sykora, S7,720; Mr. Goldberg, S5,565; Mr. Kelly,

 $1,680; Mr. Turner,        S5,145;   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 vith HL&P. 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 I reported in the table. Ites 12. Security ownership of Certain Beneficial Owners and Management.(*) As of March 1, 1988 all directors and officers of HL&P as a group beneficially ovned 152,277 shares of Houston Industries Common Stock. Such ovnership constitutes .13% of the outstanding Common Stock of Houston Industries. Ites 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) vithin 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 Industries is a member of the Board of Directors of the registrant.

6t.

li . .

                                                                                                             .l1
                                                                                                            .. J
                                                                                                          ,.          t PART IV                                                               4 Ites 14. Exhibits, Financial Statement Schedules, and Reports on Forn 8-K
                                                                                                           \

(a) (1) Financial Statements. E.agg i E Statements of Income for the Three Years Ended December 31, 1987...................................... 31 Statements of Retained Earnings for the Three Years Ended December 31, 1987...................................... 32s 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 Decem. der 31,l,3987: V -- Property, Plant and Equipment.....'......'......... 68 g VI -- Accumulated Provision for Depreciatior., Depletion and Amortization of Property? Plant , and Equipment................................'.. 69

                                                                                ?./170 ('-

VIII -- Reserves......................................... IX -- Short-Term Borrovings..........................'.. .L' )

                                                                                                              ?

The following schedules are omitted because of the absence o't t).e - conditions under which they are required or because the required information is included in the financial statements: I, II, III, IV, VII, X, XJ, XII and XIII. (a) (3) Exhibits. See Index of Exhibits on page 73. , (b) Reports on Forn 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.

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I h~ scurssvLE V - PssorsRTT, P8 ANT 80UIP955T 1e~ Per the Three lears Baded ember 31, 1981

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Col. A / Col. 9 Col. C C,e l . D Col. E, Col. F j

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Otberg r N Dalam Additions Changel. - Balance Deghtpav ,et Retire- 'edd End , ( Classification of tsar Cost. monts' IDoduct) of Year

     \                                                                                                                                                                                    s                                         $

ror the Year Ended December 31, 1987:

• Produc. ion 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,'*42 1,845,614 ,1 General Plant................. .. . 431,048 44,913 - 16,557 $ (3,172) 456,232 ,

Plant Acquisition Adjustaents. 3.166 3,166 Plant Neld for Future Use..... .. 161,008' 13,396 (11) i 180,333 Total Plant . . .. . . 6,696,964 365,539 39,39% ( 3,2 4 :i ) 7.019,872 construction b ra on Progress. . 2,170,100j 486,373 18,391) 2,648,682 Nuclear Fue1............ . . 126,198 5.133 1 131.323 Total.. . . . .g. . .. $ 8 . 9 9.'. 854$ 851,04) 3 39.388 $ (11,634n $9.199,877 '

                                                                      ,                                                                                     .-..g m for the Year Ended December '1                               1986:

N+I$3.147,442 Production Plant......... $3,238,785 I 4 534.322 $ 25,665 TransmissionPlant.......[3..I...h.19 7 , )M .. ... 14.464 1,387 601,084 Di s t r ibu t t eo Pl a n t.. . . . . . . ^.'. / . O . i , 61 1, 4 J 7 105.296 22,767 1,7e7,216 G e n e r a l P W. . . . . . . . . . /. . . . . .^J , 414,611 ' 27,357 4.110 $ (2,756) 431,048

                                           'n Adjustrants......                                         3,166                                                                               3,166                                /

PlantAcquip.t}/utureUse.....) Plan

• Held for t

                                                                                ...                   28.531               140.502                    r                (31)            167.008 Total                                              .         5.935.699                   422.041                                 (2,747)         6,696,964                                      '

construction workPlant.......h. in Progres . 2.083,650 10 4 . 0 D / (20,MS) 2.170,700 Fuclear fuel. . ..........) . . 118.181 8,009 ' 128,190 Total............ i 3 131.53C 1 338.0U -{Q ~7,TU) $8.993,454 1

                                                           /

For the Year Endad December 31, 1985t i f Production Flant. .. ..... . . $2.370,568 8 921.177 $ 52,960 $3.238,785 Tranaatssten Flant. . ... .. 549.491 40.301 1,895 $ ', 587,907 g 1(s.501 Distribution Flant .. .. . 1,523,($5 21,451 6 1,664,687 General flant..... .. ... .. 373 N 4 6,215 (2,845) 414.617 3 .b e s" f [.9.963 /g Plant Acqutsition Adjustmente.... ' 1.1f6 .

           #     Flant Held f o r Futur e Us e . . .)                                                 30.114'               f3.577)                                                      26,53'7                                           I Total Flant....                     ..            .,      7.'85t,678                 1.114. N               88.521               (2,835)         5,935,699 corp. ruction Work in Progress.                                   ,          2.48v,944                  (231.282)                           (174,012)            2,083,650                           1 Nari* ear Fuel..             .... .. ...                                         113.t35                     1 146                                                    114.181           i ff                                Total..         . .... ....                               $7.452.d5?                L 9 50,3            $ 88.521           St176.841) 14,131.53 '                              y

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                                                                            $                                                                                                            r'               . .
                  .A:    Substantially all addatten's are                                  ortganally :horged to Construction wohs in Progress and transf erred to elettrac uttitty riant accounts upon completion. Additions, at cost give i
                                                                                                                                                                                                   .'/ #

effect to e W transfers. / (B) Additions atjost include non-cash charges for en allowance Ps!'..unds used during c on e,* ru c t . tCJ HL&Pionyu{an. res deptgesatten ustng the straignt-line method. The depretaation provtsions as a , percents.e of the sverage deprectable cost of plant were 3.4% fo 1947, 3.6% for 1986, and ' 3.8% for 1985.

                 'Di     ether changes in Plant Accounts include certain reclassiftestion of amounts a'. December 31, I?te, which do not affect toast Plant. Also ancluded, are inantes in capital leases.

tri constructson work in Progress was reduced by the amount of capitalised intelest eartra on funds held in trust in 198?. 198f, and 198! ano ty the Froceed' frop the settlement of littgetton in 1985. i tri Ad N ' ens te Construction W:r) in Trettes s an 19ti anclude the transfer of $!)? Fallaen an , te c onN r 198( for the costleted Lapestene Unat Nc. 2 tre;ert te produtt aen plant Addattens te Const'uetten Work in Pregress an 19f5 an:1ude tn. transfer cf $493 millier at D. comb.r 1985 for the ee=rleted u nestene Unat Nr 1 tro eet to rreauhier plant i (St Addit Vas te Flant Held ter Future Use at l, 4 t f ref;ert the e.*an-fer ef,814; r a .14 c t. an Eecember ',968 for the P.alake!! Tr:?ett f A 5E. I J i (>

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I s ' hl -! i f. ' SCHEDULE VI ACCUMULATED PROVISIt'N FOR DEPRECIATION, DRPLETION/ /f

                                                                                                                                                                                                                   ,\

AND AMORTIZATION OF PROPLTIT, PLANT AND EQtTPMENT ', ( , For the Three Years Ended Dece,ber 31, 1987 l (Thousands of Dollars) ., f< -,

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Col. C  ! aT L., 9 Col. - E ! L Col. A Col. B Additions Deductlyins from Reserve , Re ti rit@n ts ,

                                                                                                                                                                                                             ' i; f Charged                                                                                       Bahnee Balance at Charged                                                                ;    'Ren((als                                                                             .,

Beginning to to Other,/ .and at Close ;q of Period Income Accounts Replayinents Other of Description eriod'f __ 1_ 3 l' y -s ear Ended December 31, 1987~- , ' Dapreciation, depletion and { .

                                                                                                                                              /

teortization of property, ,, ( S1,530,543 plant and equipment...... $1,351,412 'S21V,501 $10,178 S:h,548 , (i Ystr Ended December 31, 1986 - j)/ ,, /f/ Dspreciation, depletion and

                                                                                                                                 /                                                              <

i. f < , j ,f s.mortization of property, S1,351,212 S11,830 S69,719 ll plant and equipment...... $1,203,039 $206,262 1  ;,t Year Ended December 31, 1985 - . /<

i\;t Dspreciation, depletion and amortization of property, $1,203,039 S 7,695 S95,167 plant and equipment...... $1,113,412 S177,099 l}

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                                                   ,                        SCIEDULE V!XI - RESERTES
                                                 <}                              1 For the Three Years Ended December 31, 1987
        /          ,

(Thousands of Dollars ) o'

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                                                         /,S Xe mesemosessowesessemer amaseme===eeeeeeeeeeeeeeeeeeeeeeeee==                                e meesesseess ee,sess eem am em me ssee
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, / / Additions Balance at Charged Charged from Balance Beginning t3 to Other Reserves at Close Description of Period Income Accounts (A) of Period Yea r Ended December 31, 1987: Accomulated provisione deducted from reisted assets on balance sheet: Unco 11ectible accounts. . .. $4,300 $ 4,300 3eserves other than those

                          -deducted from assets on bala*ce sheett Prsserty insurance.....                 .       43        $        28                                 119                  (48) injuries and damages..                . 4.723      ,
                                                                                             '2,611                               5,467                 1,867 Tear ended Decen.d r 31, 1986:

Accumulated provisions deducted from related assets on balance sheet: .( Uncollectible accounts. . $5,707 $11,493 $12,900 $4,300

  ~I Reserves other than those                                  4
                                                                                    \

deducted free assets on ( balance sheet: Property insurance.... (1,429' 238 5 1,234 43 In]urtes and damages.. 5.597 1 3,658 4,532 4,723

                     'ie a r Ende d Decembe r 31, 1985:

A: cumulated provisions deducted fror related assets on balan e sheet!  ! Unco 11eetible accounts. $t,04', 514,419 $16,753 $5,707 Reserves other than those deducted from assets or_ calance sheet: Property insurance. . . 372 1,801 (1.429) Injuries and damages. . 353 8,131 2,887 5,597 a

                     !?0T E S :

(A' Deductions from reserves represent lesses er expenser for which the respective reserves were created. Ir,:he :ase Of un el;ectable accounts reserve, such deductions are not of recovetter of areunts prevacusly writter. eff. I SCHEDUI.E II - SECRT-TERM BORROWIIDGS I I For the Three Years Ended December 31, 1987 (Thousands of Dollars) l I

                                                                             ........ ......... ...................       1 col. B              Col. C       Col. D        Col. E        Col. F Col. A Weighted        Maximum      Average       weighted Average        Amount        Amount         Average Category of Balance        Interest Rate    Outstanding   Outstanding  Interest Rate      l Aggregate at End of    During the    During the    During the        j Short-term         at End of Borrowings         Period (A)          Period         Pericd        Period          Period       I Description Ysar Ended:
                                                                                          $     685           7.50%

December 31, 1987... Bank Loans Comme r cial

                                          $549,796                8.15%     $549,796        357,883           7.14%

Paper Year Ended:

                                           $ 50,000               7.50%      $119,067     $ 1,093             7.91%

December 31, 1986... Bank Loans Comme rcial 14,100 6.354 247,381 79,589 6.57% Paper Ytar Ended: Dece mbe r 31, 1985...Cosmercial

                                                                             $ 60,000      $ 10,096             8.12%

Paper Notes (A) The Balance at End of Period excludes land and other notes (in thousands of dollars) of $1,211,

         $4,781, and $1,457 as of Decenber 31, 1987, 1986, and 1985, respectively.

l i i i 1

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston and State of Texas, on the 16th day of March,1988. HOUSTON LIGHTING & POWER COMPANY (Registrant) D. D. JORDAN (D. D. Jordan, Chattman) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons ou behalf of the registrant and in the capacities and on the date indicated. Signature Title D_a te Principal Executive 1 D. D. JORDAN Officer and Director ( D. D. Jordar., Chatrrr n ) Principal Financial J. S. BRIAN and Accounting Officer  ; ( J. S. Bnan. Vice President-Finance and Comptrouer)  ! I CHARI.Es E. BISHOP Director i, ( Charles E. Bishop ) SEARCY BRACEWELL Director (Scarcy 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) [1 HOwARD W. HORNE Director ( Howard W. Horne i JAMES R. LESCH Director ( James R. Lesch ) THOMAS B. MCDADE Director l (Ti,omas B. McDade 1 l 1.A.NAMAN Director I (l. A. Naman ) KENNETH L. SCHNITZER. SR. Director ( Kenneth L Schrutzer. St ) 1 l D. D. SYxOu Director ( D. D. Sykora ) J ACK T. TROTTER Director l f Jack T. Trotter) JOE C. WESSENDORH Director j < Joe C WessendorfD

                                                             ~:

l I )

HOUSTON LIGHTING & POWER COMPANT Exhibits to the Annual Report on Form 10-K For the Fiscal Year Ended December 31, 1987 INDEX OF EXHIBITS Exhibits not incorporated by reference'to a prior filing are designated by an asterisk 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 supplemented through August 8, 1985 (Exhibit T3A 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). 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). 4(a)(1) - Mortgage and Deed of Trust, dated as of November 1, 1944, between HL&P and South Texas Commercial National Bank of Houston '(Texas Commerce Bank National Association, as successor trustee), as trustee, as amended and supplemented by 20 Supplemental Indentures thereto (Exhibit 2(b) to HL&P'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) - Tventy-Second Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 2(d), File No. 2-62879). 4(a)(4) - Twenty-Third Supplemental Indenture to Exhioit 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) - Tventy-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. 1-31878-1). 4(a)(6) - Twenty-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).

 .      l INDEX OF RINTRITS (CONT'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) (Exhibit (4)(b)(9) to HL&P's Annual Report on Form 10-K for the year ended December 31, 1982; File No. 1-3187H-1). 4(a)(10) - Twenty-Ninth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4(b)(10) to Houston Industries' Annual Report on 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 Indenture 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.

l *24(a) - Consent of Independent Certified Public Accountants. l [ HL&P vill furnish to the Securities and Exchange Commission upon l request all constituent instruments defining the rights of holders of I long-term debt of HL&P not filed herevith as permitted by paragraph (b)4(iii)(A) of Item 601 of Regulation S-l'. 3 4

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                                                                                                                                                                                                                                                     'ud n San Antonio, the outlook remains optimis-I tic,           despite a regional economic attributed to declines in the petroleum indus-try. Although growth has been somewhat slower than a few years ago, the Alamo City continues to achieve steady economic progress and appears ready for further development as this decade draws to a close and the 1990s appear on the
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a% , A,. .=O "#filin ,

                                 ?-                              .

The traditional mainstays of the San Antonio economy - senices, the military and pc! , c: hE

                                                 +'

tourism - have been stabilizing influences while i [ g y.1 i the community looks to diversify into areas such (.,%, ) ! M j #l t . as biomedical technology. Meanwhile, multi-

                                                                              ! dSi L

t ,T* million-dollar projects under construction such

                                                                              'u                                                  "d                    as the Sea World of Texas marine life theme park, downtown's Rivercenter Mall (a large retail complex on the San Antonio River) and three new major hotels will steadily strengthen San Antonio's attractiveness as a tourist and convention center.

One of the keys to past and future progress is an adequate, reliable, cost competitive energy supply. The job of providing vital day to day natural gas and electric senice in San Antonio is readily accepted by City Public Senice (CPS). CPS meets the energy needs each day of historis pt dynamically modern San Antonio, 2

   ~             _

Highlights of the Year o Assets increased by

• 821 gas customers

       $485,154,000 to .                                              $3,639,018,000      were added to total .                   285,697 o City equity incrersed

• 167 miles of electric transmission

       $183,579,000 to.                                               $1,296,005,000      and distribution lines were added io total .                                8,262 o City payments were

! down $7,781,000 to . $ % ,191,000

• 51 miles of gas mains o Gross revenues decreased

       $64,615,000 to .                                               $ 804,218,000

• Amount of gas (MCF) saved through use of coal o Maximum electric system load for generation. 39,706,538 increased 246,000 KW to . 2,596,000
• Purchase of fuel, power and gas o 11,464 electric customers declined $81,163,000 to total.. . $ 316,251,000 were added to total . 458,037 Summary of Application of Revenue Gross revenue for 1986-87.. $ 804,218,000 Application of Revenue:

Fuel, purchased power and resale gas.. $ 316,251,000 Other operating and general expenses.. 69,003,000 Maintenance of the systems.. 32,761,000 Operating fund.. - For debt requirements.. .5218,407,000 tess interest charged to construction . 101,402,000 117,005,000 Payments to the City of San Antonio.. 96,191,000 Balance from operations available for construction.. 173,007,000 Total . . $ 804,218,000 Amount spent for replacements, improvements and expansion of gas and electric systems.. S 430,610,000 Amount provided for future construction.. 57,853,000

                                                                                                                          $ 488,463.000 Funds obtained from:

Bond Funds.. $ 200,159,000 173,007,000 I Operations . Contributions and advances in aid of construction. 7,018,000 Sale of property.. 5,000 Tax Exempt Commercial Paper.. 78,274,000 Litigation Settlement Proceeds.. 30,000,000 Total .. $ 488,463,000 3

cI;iC's. . CPS serves the nation's 10th largest city he number of new electric customers was and outlying areas electrically with facilities up 2.6% over the previous year as CPS throrghout Bexar County and portions of seven .B. made 11,464 additional connections to ELECTRIC CUSTOMERS adjoiniag counties - 1,566 square miles in all. the electric system. While this figure is less than

    *"""                           Natural gas service is available in the San                   increases in each of the past two years, it is still a
                   *I             Antonio urban area.                                            major influence on overall generation.
            ,       j                     The City of San Antonio has owned CPS                         Total power generated and purchased in
                 !                 since 1942 when it purchased the gas and elec-                 1986-87 reached the 1I billion kilowatt-hour i        i tric systems by issuing $33.9 million in revenue               (KWII) mark, an increase of 3.8% over 1985-            ,
                 - :               bonds. Almost a half-century later, CPS stands                86. Summer temperatures in San Antonio as one of the largest municipally-owned utilities              helped produce a record peak demand of                 l I!

in the country. 2,596,000 kilowatts and a 24-hoc consumption l

                                                                                                 C            '    ' 00 m W nn peak                   (

San Antonio's push forward is reflected represents an increase f 10.5% over the previous both in installation of new electri and gas I** facilities and in increasing customer demand. The fiscal year which ended January 31 proved The increase in new electric customers and

       """""                       to be another solid year of progress in CPS                   their demand on the sy em, pl; ' pr:parations operations.                                                   for future development, required the installation of 167 miles of electric transmission and distribu-p -{              - WWf                                                  tion lines. The total number of gas customers          {
                                  ?                                                              rose by 821 to 285,697, while gas main additions       )

2 amounted to 51 miles, increasing the system l total to 3,696 miles. During San Antonio's recent growth, CPS

                                    .          mum .                                         '

has provided an adequate, reasonably-priced elec-Y ' {~, ,i. 5 tric supply through fuels diversification. To con-tinue this successful program, CPS has deter-O ' ' ;4 mined the electric system will need to add 1,000 megawatts (MW) of generating capacity by the (~ . - e 1 -- - late 1990s.

                        .o                                                                              A combination of conservation and steady expansion of CPS' fuels base to include nuclear, x
                                                               ' '           /If.i m_            additional Western coal and lignite is seen as the best approach for meeting future electric needs.

Coal, already a steady performer in CPS' fuels mix, satisfied 36.9% of San Antonio's 1986-87 electric requirements, a lesser percen-tage than in previous years. This is due to avail-ability of less-expensive gas for generation, CPS purchase of 398.4 million KWH this year at a very favorable rate, and year-end modifications f to CPS' coal fired power plant which caused l 4,,,, . one unit to be unavailable during that time. Total i'uel savings by burning coal as compared g to higher priced natural gas since Deely Plant g / went on line in 1978 have amounted to $720.7 million. Reduced coal hauline costs also saved ratepayers $31 million compared to rates paid prior to a new transportation agreement with sea world of Texas is expected to draw more th"" Western Railroad Properties Inc. and the Union three million visitors in the park 'sfirstyear of opera. ,

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Pacific System m 1985. construction. 4 P

urthermore, in January, the CPS Board of The price of a kilowatt hour fell further in 1986-87 as natural gas prices for generation fuel F Trustees accepted a $111.5 million settle-ment offer from former coal-haulers Bur- declined to levels not seen since the mid-1970s. lington Northern (BN) and Southern Pacific CPS was quick to take advantage oflower fuel GROWTIIIN PEAK DEMAND (SP) railroads which ended a 10-year-old dis- costs by purchasing maximum permissible quan- *sma h g$2 {$ pute over the transportation fees BN and SP tities of low-priced gas in accordance with its e charged CPS for moving coal from Gillette, contractual agreement at prices as low as $1.44 , 1 Wyo., to San Antonio. per thousand cubic feet (MCF). Also, due to In March 1986, the Interr%e Commerce c mpetitive oil prices and availability oflow;er-cost enugy e th imucuned electne gnd Commission had ruled BN and SP violated a system, M was aW to oMas lown-mst gas price provision in the Loeffler Amer.dment to f r generation from subsidiary companies of the Staggers Rail Act of 1980 and thus over-charged CPS customers $40 miliion With 8'". "8Y TPorada, San Antomo's interest, the ICC decision amounted to $59 E""E*' E*8 5"I "' ' * "

• natural gas, electnc pWm fmm Ws fuel million. This decision covered only the period pur e acc ianted for 62.5% of total generation at from October 1980 to March 1981 and CPS a p-ice competitive with coal. The lower overall had filed with the ICC to cover a greater period fue est resulted in an 11.5% reduction in the of time. The railroads first appealed the ICC re:iden, sl cost per kilowatt-hour. Savings o u e u 33 finding; however, after negotiating with CPS, the dependen, on abundant, relatively low-priced parties decided to settle the entire matter out of gas may be Aort-lived as reports from energy court. The $111.5 million settlement is believed industry analya point to a probable turnaround to be the largest ofits kind in railroad trans-and rising prices l,r natural gas in the future.

portstion history. An initial installment of $31 million was used to reimburse CPS for an earlier payment to enV {* . the railroads, plus interest, which had been l ,, required by a U.S. Supreme Court decision. gg ~ That first installment also included certain legal jg. Le- a{ 4 j, fees relating to the railroad tariff case. The .-" remaining $80.5 million will be received in - , i seven annual mstallments. ,du .-, o

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• Reduced coal. hauling rates and a substantialsettlement mith CPS *former gy a s nl  : ~~~ r~s-~>ine <a -

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                                                      .,                    l                                         Coalhas prown to be a mise innstment
                                   ..%..                                                        L,                  for San Antonio. At CPS'Enstronmental Isb near the utility's coalplant, constant tests help assure coalis ensironmentally                                      )Y'T soundfor the city.                                                          3       >

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c Nid. Despite possible increases in gas costs, CPS In August, STP took a giant step closer to should be able to maintain stable ele:tric rates an operating license as the Atomic Safety and by burning coal and again expanding its fuel mix Licensing Board (ASLB) issued a 300-page GAS CUSTOMERS to include nuclear energy from the South Texas report stating STP can be completed properly r Project (STP) power plant near Bay City on the and operated safely. The ASLB document also k^jj[? Texas coast. CPS and three other utilities - Ilouston Lighting & Power, Central Power and brought STP licensing hearings to a close. hiajor testing of Unit i is scheduled for the Light of Corpus Christi and the City of Austin first quarter of 1987. Fuel load and further

                                               - are co-owners of the Project.

testing is then stated for the summer, and an Antonio also is counting on kilowatts commercial operation of the first of STP's twin j from STP to help meet the projected in. 1,250-MW units should commence in Decem- ' S crease in electric demand. At year's end, ber. Unit 2 is still on track for commercial the Project was within budget and ahead of operation by mid 1989. schedule, with Unit I at 97.9% complete, Unit 2 in conjunction with the 700 MW of power at 71.4% complete and the overall plant at 86.8% from the South Texas Project, CPS planners complete. Good construction progress during the have identified the need for additional genera-n u as s. 7 year plus favorable Nuclear Regulatory Commis- tion capacity by 1992 to keep pace with grow-l sion (NRC) findings helped prepare the Project ing electric demand. In the last five years, CPS for expected final licensing review in summer has added almost 103,000 new electric cus-1987. tomers and 685,000 KW to its peak load. New In the first hall of 1986, the NRC issued customer projections for the next five years are l favorable inspection reports dealing with STP in the 15,000 to 18,000 per year range and construction, safety and environmental impact. represent a steadily increasing need for more All of the voluminous studies found the Project electric energy. can operate "without endangering the nealth and The CPS staff recommendation for a new safety of the public." 500-MW coal unit to help meet capacity require-ments came after many months of study compar-ing numerous alternatives such as lignite and co-j generstion as well as factoring in the effects of

                                         ,. .             s conservation. The coal option became the clear Y *
                                                    .,J e '
                                                                      - i
                                                                                                  %.           choice because of projected reductions in rail transportation costs with increased tonnage, f       s
                                                                                ~
                                ..                                                                             lower market cost for Western coal, plus the fact Ap>                                                     that coal-handling facilities, water and a site
                                             ~.',.
                 ~
                                                                                        .                      already exist at CPS' present coal-fired plant.
              --- t                         

[ 4 - ,? W~ d PS has not abandoned lignite and co-pk f .. . generation possibilities, but revised their N[p~ s I g, m y'~ g - priority for consideration into the longer-range energy plan. Lignite reserves, which will N d.Q P* .3 _ G -s. , C continue to be acquired as they become avail-snyh NfFM@7 MW' . i : d ""'q p; 0 -

                                                                                                #              able near current holdings in the Bastrop-Elgin
                 , M , %a.,. r . *. *NM %

p. . .- .m . area 100 miles northeast of San Antonio, are y E* .w Wc> expected to be needed around the turn of the gy, i f[.. * # '

century. Cogeneration available to CPS, most of pg %d1.4C it natural gas-produced, likely will not be g;1- -

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                                                                                                =

ounted on in any large measure so long as other Sletting and surpassing construction schedules broughtfavorable reportsfrom STPin H86. forms of energy Continue to be less expensive. 6 { f L

Q v m U s n4\k CPS

• Ma:n Offwe renomtion added necessary office

                    ).t h . ' , ~ ~. ; ' s.Hy [\ + . . .                  ' , }, $:',                                     spacefor utility operation and attractin
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enhancement to thefamed San Antonio Rinrwalk. W'yWN'n mwwe

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3.-. , i CPS and City of San Antonio Public Works

staff members continued to study ar.other possi- N> *m, '

bility - a refuse-to-electricity project. Although '"j ". the incineration of garbage would reduce the , need for expensive city landfill sites, only slightly ',- i more than 1% of CPS' needs, or 36 htW of , power, would be generated. The utility and the city are continuing to study whether the $150 t, .. c, .

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                                                                               ! ('E                                            . Ah.

million project can benefit both CPS ratepayers ' pg']l$c . and the community. As part ofits ongoing effort to improve the garage will be added along with customer service to customers, City Public Service up- parking and a skybridge connecting the garage graded and added to current facilities during the to the hiain Office. With this new addition, year. current lease space in an adjoining building will

                                                .                             be eliminated.                                                                                              -

The CPS hiain Office renovation con- l cluded after two years of construction. CPS' 59- uring the year, CPS opened its third j year-old headquarters now has two new floors neighborhood Customer Service Center and a lower floor at river level of additional to provide for greater customer con-office space, in addition to r~oviding a more venience. In its first year of operation, the new productive work atmosphere, the renovation Westside Center posted the second-highest i features energy efficiency enhancements and an number of customer transactions, surpassed only overall reorientation of the building toward the by the downtown Center, scenic downtown River Walk along the San i Rim Customer convenience also took on a new j look as CPS developed a new design for gas and Upgrading of CPS' downtown facilities will electric bills. The improved bill format allows continue, as Trustees authorized the purchase of room for more customer information which the Navarro Parking Garage across from the provides a better understanding of daily energy h1ain Office. A ground lesel section beneath the use. A team of CPS employees researched, garage currently houses CPS' main Customer designed and implemented the new blue and .. Service Center, w hich will be renovated. In white bill form. , addition, three new floors of office space atop - I 7

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Three other projects begun in 1986-87 will In the downtown area, the upgrading of the mean major improvements to the electric and 10th Street Substation neared completion to gas systems. handle power requirements of central San Antonio's growth.10th Street serves about four At the coal-fired Deely Power Plant

                                                                                                                                                             .          and one-half square miles of the downtown area located m. southeast Bexar County, a $24-million including Rivercenter Mall, new hotels and                           .

precipitator conversion project got underway. j Itemisfair Plaza. CPS personnel designed, The electrostatic precipitators, which collect fly engineered'and constructed all phases of the ' ash after coal combustion, will become more 10th Street project. efficient and better able to meet environmental standards set forth by local, state and federal To the north in CPS' service area, the gas agencies. Furthermore, the conversion will distribution system is in the process of obtaining , eliminate costly plant shutdowns to remove accu- a third major supply point. A 12.9-mile,24-inch mulated ash. These shutdowns in the past have diameter pipeline will be constructed to tie into necessitated the substitution of more expensive Valero Energy's pipeline in northern Bexar fuels in electric production. County. The $8.5 million project should be com-pleted next year and will bolster the gas system's reliability. pp- ~ m ,-c. - w-_ ~- -my-77 1#

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                                                                                                                                                                                                                               =w ust as these three major construction jobs will provide greater operating efficiency, U other CPS initiatives this past year saved
                                                         " ~ ~ ~                                                                                      -

customers millions of dollars.

                                                        ' t Two advance refunding bond issues total-I           ing $712.4 million will save $130.0 million in J'^       -

interest for CPS customers over the next two

                                        ~ I"                                                                                                                            and a half decades. During the early 1980s,
                                     " ' " ~                                                                                                          ;
                                                                                                                                                               .        capital improvements bonds were sold at I

(- ' s '- various, higher-interest rates to pay for ongoing l , q construction. CPS took advantage of favorable

                                                                                        ,                        Sg%g~ , _ .                                            market con 6tions to refund bonds with rates as
                                            ,* _g g pg                                                                                         ,

high as 11.25'I and substantially reduced interest 8

= L m " pc 4% i  ;;if.[ if: : ,..: - T payments over the life of the bonds. The two q, . , , g.pq . . g! ....g g. .

                                                                                     . -{j> lWW                                                                                g                                                          D't- (. 'f refunding issues accomplished in 1986-87 plus
                                                                                                                                                                                                 , f.((

)hNl{f*y.(f.n , .,g, eg.f,. , M ? 'l an additional refunding in the previous fiscal , e

                                                                                                                                                                            !.fj'qytj%q'-

year will mean total interest savings of $139.4 - '

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(.,(..(k;7f'f. million by the year 2014. ,.. ;lg8fM ,. I aving energy dollars for San Antonio is an important objective in CPS' day-to-day

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7 = activities, and that conservation message is i . . . . ?J j . .'...:...c

 ,          relayed to customers through numerous
                                                                                                           '                    T~"                            [-                     i
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  '                                                                                                                                                                                                                                        Q.':'h programs.                                                                                                                                          ,

-5 City Public Service's Consumer Informa- , .

                                                                                                                                                                                                                                          ,/3" '>[c L            tion Division made more than 95,000 contacts j                           '
                                                                                                                                                                                             '                                             ['k; N '.;

L in the community this past year emphasizing the .:2

                                                                                                                                                                                  *p-'

i safe and efficient use of gas and electricity. The .f][. $.L . E contacts included Home Energy Surveys; school. - c .- l .d % [ business and community service presentations; $ J '

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and more than 50,000 telephone inquiries.  ; h '.*. . :'. S. {

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On the opposite page Riwrcenter Mallis a healthy 4 ( economic additionfor downtown San Antonio. ' :- & . . a. ..  ; ,; Scenesfor minus construction projects on this page .- Q demonstrate the Alamo City's continued outer.cury < -

q. .,

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b I c.. m m. A new type of energy survey was also initiated in 1986 to help area farmers and ranchers manage their energy consumption more efuciently.The Ruraland Agricultural Audit Program (RAAP) is designed to assess the cpecialized energy usage patterns of farms and ranches and suggest methods for controlling energy costs. CPS' agribusiness energy audit program was the first of its kind in Texas. Wise use of natural gas and electricity applies not only to energy efficiency but also to safety. CPS' Public Safety Awareness programs 4 ffc.7 .'Q.?7,N.Og> [j.c.tT .tig (.it.G.4..:",

                     .                                                                                          were presented to schools, civic and social
               . 1/M i;j.?.[.': ? :. :lf. M,7. fp i l'. -[..

f '[':.y.' . organizations, as well as City of San Antonio

                       ,-         r i ; ., .J. y.                            .c :: : "-. 1 5 ." M             and area fire departments.

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                                                                         ..-~~[.          k'Y$             }@y          PS employees not only demonstrated f

' 4. ' -, f , - h . ~N' their technical competence but also their Y; )%

[;.  : j~ 4 . community support by contributing more

                                                                  .(v d h..~,          ,.,o , { "; y I "j       , , _

than a quarter of a million dollars to the 1986

              . . ,      pg                                                                            ' -

United Way campaign. Per capita giving was up E '$ '.j' {

                          ,J'
                                                                 ,~                 Q##                         8.8% as both active and retired employees
                                 ..                                 ,, ,_       ' . y }.i. ..' ' 4 v

helped make 1986 the most successful year of

              \.J       ....
                        ' ~
                            ..4                              .: .9           m        ' V' .               s    United Way gising in CPS history. Without the
                 ',-                                         t                                      .

cooperation and dedication ofits work force, 4 - ' CPS would be unable to accomplish its essential mission of sersice.

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                                                                                                                      ?*]}                                                            A N N L' AI. RESIDENTI AL

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               ...; .- - : .pdp . .                                   ._                               -
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                                                                              , , ,        ,[ ,q : ..                                     At the staff level. Assistant General L;    ..'
                .                . 7.p                       -

j * * -[ ~ Nianager for Operations Jesse B Poston retired - [ / j i -C.1.p'f ~* A4 .4 di ) *^ /b after 38 years of sersice with CPS Poston led an F. W4 t ? - . .

                                                                                                                          .~
                                                                                                                           ..      ergineering team which introduced many tech-
                                                   Ap.?..                                                                      -

{' nological improsements to CPS and also sersed f r

                   - 3(w,.M M.[J.
                                              . Mr.a 7;~
                                                                                          , . ,., . .f . %      ;

as San Antonio's pnncipal representatne to the

                          #.            ,.                 o                                    .-              -

South Texas Project Y  %- R : N ^ : ':& .. . h ;r ._

• PS General Nianager J K Spruce. a past

h. :+. 7~.}.73N j er ,

                                                                                                           ,                    1          president of the American Public Power
                '.i                             $5h.u fp'                                      ,

h Association ( APPA), was named local W4IM## U arrangements chairman for the organization's " " " "  ; _ geh ON\ d f 1987 National Conference in San Antomo. 39VO T  %( Niore than 2 000 utihty officials from the U.S w

                                                       -             .r                                    -

C and Canada discused the challenges and = consumer benefits of public power City Public CPS Trustees and management staff also Sersice was honored to be the host utility and g distinguished themselm both locally and serses as a good eumple of a city-ownsj utility nationally-working for community progres3 . Or, as the

Board member Nia)or Henry Cisneros com. record indicates. CPS met the 1986-87 energy k

_ pleted a productne term as National I eague of challenges of this growing metropohtan area and E Cities (NLC) president. San Antonio hosted the kept consumer costs among the lowest in the NLC National consention which brought state and nation As for the future. CPS' outlook p together municipal leaders from around the nation. continues to be optimistic f CPS Board Chairman Glenn Biggs con- Sincerely. p cluded the second longest tenure as a Trustee in r CPS' 44-year history. Biggs. a member of the t ~ , i

                                                                                                                                                                     ~

[ Board for almost 13 years and Chairman the past sesen years, was instrumental in helping Glenn Biggs b i guide CPS dunng the stormy aftermath of the Chairman, Board of Trustees k 1970s energy crisis - Board Vice Chairman Earl C. Hill suc. t~ ceeded Biggs as Chairman, and Trustee Nirs I ila / Cockrell mosed up to the post Hill sacated J.K. Spruce Nirs. Cockrell also was elected to her second General Nianager b fise-sear term on the Board.

                        ~

l[ i; ( Ps ' commitment to eas and electric safet_s brines utslity personnelin cwrtact wrth thouwnds of san  ; A ntonians rwr> stav F [ u r b _ _ . . . . . . . .

_q l l i  ! b !. 1986-87 Financial Review he cost of fuel for electric generation CPS customers will realize $130.0 million in interest savings from the $320.6 million in T continued to decline in fiscal year 1986-

87. The average cost of coal fell 6% to refunding bonds delivered in March 1986, and

                 $29.38 per ton compared to $31.23 last              $391.8 million which were priced in January January. With the purchase of more than 22% of      and delivered in February 1987. These bonds, generation gas at spot market prices, the average   which were sold at interest rates of 7.835% and cost of gas declined 38% to $2.17 per MCF, as       6.837% respectively, replace bonds bearing compared to $3.48 last year. Overall, electric      interest costs of 8.9% to 11.25%. In addition, generation fuel costs dropped 27% when all fuel     $185 million in AA rated bonds were issued in sources are considered.                             July 1986, at an average rate of 8.765% to A CPS record was set on August 19,1986, when a system hourly peak of 2,596 MW was                  At the end of fiscal year 1986-87, CPS' reached, eclipsing the 1985-86 mark of 2,350        total assets exceeded 13.63 billion, increasing MW. Electric generation totaled 10.6 million        $485 million, or 15%, over last year. Utility MWII, about the same as the previous fiscal         plant stood at $1.48 billion, a 7% increase over year. liowever, an additional 398 million KWii      fiscal year 1985-86. Construction Work in Pro-was purchased, and when combined with genera.       gress rose to $1.78 billion, with the South Texas tica, power available for sale rose 3.8%. Natural   Project (STP) accounting for 96%, or $1.70 gas provided fuel for 62.5% of the electric genera. billion, of this total. Outstanding revenue bonds tion due to the availability of low priced spot     totaled $2.04 billion, with an average interest gas. This is the largest percentage of electricity  rate of 8.2% (excluding the 1987 Refunding fueled by natural gas since 1977-78. Electric       Bonds).The City of San Antonio equity in CPS generation from CPS' coal-fuel power plants         increased to $1.3 billion, growing 17% in fiscal provided 36.9% of requirements, with the            year 1986-87.

balance of 0.6% from fuel oil. CPS had record electric sales of nearly 10.4 billion KWil in fiscal year 1986-87. This was up 326.8 million KWII, or 3.3%, over last year. l FUELS & PURCIIASED POWER The average use per residential customer M m d Doaus exceeded the 10,000 KWii mark for the first a time and was up 2.1% over last year; however,

                           , .,     A                                 lower use per customer by commercial and 33               l                         industrial customers caused overall use per
                                 +                                    customer to decline by 1.1%. The number of elec-3 tric customers stood at 458,037 at year end.

Total residential electric sales rose 6 7% while

                                 !          ,                         commercial and industrial sales rose 3.8%. Gas sales of 25.0 million MCF decreased 4.9%, or l

j

                                 !         ;                           1.3 million MCF. Although there was a smallin-crease in the number of gas customers, usage per l

customer declined 5.84. Sales to all classes of gas customers fell, with residential sales declining i 5.3%. a3 a4 8s 8 l - . . _ . . - - - - _

                                                                                                                                                                          -t,          p.

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                                                                                                                                                                              ., y. F. -
                                                                                                                                                                                              ~

',_ Gross revenues for fiscal year 1986-87 operating revenue advanced $6.5 million, or .,

                                                                                                                                                                                        .. [

totaled $804.2 million, and were $64.6 million, 2.2%, to $301.3 milhon. . . -

                                                                                                                                                                                       ; n
                                                                                                                                                                             '^ _J or 7.4%, lower than the previous year. Electric

- Construction expenditures of $430.6 .L : . 4, revenues of $639.6 million dropped $60.7 mulion, .D milli n were down 1% from last year, as com-or 8.7%, and gas revenues of $127.8 mDlion fell

          $8.7 million, or 6.4%. A $112.3 mulion decline pledon of SU mars. Expeneures for San 4:j G Antomo's share of STP amounted to $322.3 in fuel cost recoveries was partly offset by $25.8 million from greater sales and $22.3 million in milli n, r 75%, of the total capital expenditures.                                                    [A      .g g          i added revenue from the January 1986, rate long-term debt was used to finance 46.5% of the                                                       g capital program, while 26.8% was from intern-                                                         G A.

b increase. Interest and other non-operating ally generated funds. Proceeds from the Brown 1 income rose 15.1%, or $4.8 million, to $36.8 and Root litigation settlement, Tax Exempt Com-

  >        million.                                                 mercial Paper Program and customer contribu-Both electric and gas operating expenses           tions prosided the balance of construction funds.

, declined sharply. Electric operating expenses Net interest and debt expense increased declined $73.1 million, or 19.4%, to $303.3 g million, as production fuel was $83.8 milhon

                                                                    $6.9 million to $64.6 million. Interest on long-                                                         -.                   .

_ term debt climbed to $160.8 million, up 12% W h C.d lower than last year. Partially offsetting were over last year; however, the Allowance for hdw g purchased power costs which increased $8.1 Funds Used for Construction of $101.4 million $ND million and electric distribution expenses which reduced interest chargeable to operations to $ 7 were up $3.1 million. Gas operating expenses $59.4 mulion. Amortization of debt expense was hk('; s declined to $113.2 million, a $5.0 million, or a  ? [. J '* , $3.3 million higher, as issue costs for the 4.2%, drop from fiscal year 1985-86. Resale gas 1 ". Refunding Bonds were included. y expense decreased $5.5 million due to 1.3% less t .. s. 4 gas being purchased at lower prices. The average Benefits and payments to the City of San (~. ' . # . g price of resale gas dropped to $3.52 per MCF Antonio decreased $7.8 million, or 7.5%, to 7,r: "g i from $3.69. Depreciation expense was $1.5 $96.2 million, and represented 12.0% of gross million, or 3.6%, higher than last year and revenue. Reduced benefits were the direct result [/.- w

-          tc ded $41.8 million. Net electric and gas                of lower fuel costs achieved during the year.                                                                      [

y.g =- MR 7 CPS REVENUES EM: E I!jy.@ g nm.. Sources Distribution .. . -- Payments to 4U E City of San Antonio Debt Requirements /

                                                                                                                                                                                          .]

Public Authorities Residential 596.2 = 12.0% 5117.0 = 14.5% 's 578.5 = 9.a% 5351.4 = 43.7% A$aGable ror I"'"'58 M"8 Other Construction Construction 563 2 = 7X4 5101.4 = 12M

571.6 = 8.9%

k-Other Operations /Slaintenance ( Commercial & Fuel Purchased Pome'

                                                                            & Resale Ga' En penses                                    .'{  - ;.

4 E- Industrial 5101.7 = 12.6% 1381.1 = 38.7% $316.3 = 39.4%

                                                                                                                      ..                                                       . 'N
                                                                                                                                                                                      .- - M1
                                                                                                                      ~ .xW
                                                                                                                   ' E5                                                          i              .;

ft- y. ' { TOTA 1. 5844.2 StiDions of Dogars :W W' ki6 .

  =                                                                                                                                                                    i3  1%: -,

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i; i i h,a d.

Balance Sheets January 31,1987 and 1986 ASSETS Notes . 1987 1986 (in thousands) (JTILITY PLANT- At cost: 1 Electric.. $1,221,198 $1,168,943 Gas .. 196,620 184,559 General. 60,956 28,390 Construction work in progress.. 7 1,675,726 1,361,134 Nuclear fuelin process.. 7 100,979 95,821 Total utility plant.. 3,255,479 2,838,847 Less accumulated depreciation.. 446,913 418.743 Utility plant - net.. 2,808,566 2.420.104 RESTRICTED CASli (Temporary cash investments and U.S. Government obligations - at cost which approximates market): 2 Bond Construction Fund. 41,335 65,678 Bond Reserve - Old Series Bonds.. 3 17,353 17,437 Bond Reserve - New Series Bonds.. 3 173,786 147,715 Improvements and Contingencies Fund.. 131,439 73,586 Other.. 1 5,150 8.123 Total restricted cash.. 369,063 312.539 CURRENT ASSETS: Cash, including temporary cash investments.. 19,045 22,362 Short-term investments.. 4 - 51,724 Customer accounts receivable,less allowance for doubtful accounts of $1,222,000 in 1987 and $1,151,000 in 1986.. 54,947 51,233 Other receivables.. 8 42,352 33,337 Inventories and supplies - at average cost: Materials and supplies.. 20,642 18,647 Fuel stock.. 42,089 33,644 Prepayments and other.. 8 1,859 27,964 Total current assets.. 100,934 238,911 LITIGATION SETTLEMENTS BENEFITS RECEIVABLE.. 7,8 205,500 165.000 DEFERRED DEBITS.. I ___74,955 17,310 TOTAL.. 53,639,018 $3,153,864 see nues sofInancialstasemena 14

LIABILITIES Notes 1987 1986 (in thousands) I LONG-TERM DEBT - Revenue Improvement Bonds- 2,3 J Old Series. $ 105,785 $ 115,220 New Series.. 1,903,425 1,676,500 Less Unamortized discount on New Series Bonds.. (20,812) (11,530) , l Net long-term debt.. 1,988,398 1,780.190 l l EQUTTY: Appropriated retained earnings: 2 i Bond Reserve - Old Series Bonds.. 17,353 17,437 Bond Reserve - New Series Bonds . 121,328 101,216 Improvements and Contingencies Fund.. 131,439 73,586 Total.. 270,120 192,239 Reinvested earnings.. 1,025,885 920.187 Total equity.. _1,296.005 1,112,426 CURRENT LIABILITIES: Current maturities of long-term debt . 3 34,820 32,350 Short-term debt.. 4 100,000 100,000 , Accounts payable and accrued liabilities _ 61,610 55,492 Litigation settlement benefits payable to customers . 8 834 - 10,984 +- Customer service deposits.. 14.079 Total current liabilities.. 211,343 198,826 DEFERRED CREDITS: Customer advances for construction.. 14,751 12,976 - Other. 1,965 6,340 Total deferred credits.. 16,716 19,316 , LITIG ATION SETTLEMENT BENEFITS PAYABLE.. 8 79,666 - CONTRIBUTIONS IN AID OF CONSTRUCTION 1 46,890 43,106 COMMITMENTS AND CONTINGENCIES.. 5,7,8 - - TOTAL. $3,639,018 $3,153,864 see mes wpnaviatsaw <= 15

  =w-wy.w.
!               1 L_

o..._....,._ d. Statements of Earnings and Application of Earnings Years ended Januarf 31, Notes 1987 1986 (in thousands) REVENUE: 1 5639,626 $700,371 l Electric.. Gas .. 127,814 136,500 Interest and other income.. 36,778 31,% 2 Gross revenue.. 804,218 868,833 EXPENSES: I j 316,251 397,414 Fuel, purchased power and resale gas.. Other operating and general.. 68,998 65,035 , Maintenance .. 32,761 33,379 Depreciation.. 41,811 40,351 Interest and debt expense.. 166,029 144,989 Allov.ance for interest used during construction.. (101,402) (87,2%) Payments to the City of Ssn Antonio.. 6  %,191 103.972 Total expenses . 620,639 697.844 NET EARNINGS.. 183,579 170,989 Add: Depreciation.. 41,811 40,351 Interest requirements on New Series Bonds (payable from Improvements and Contingencies Fund).. 153,411 135.235 AVAILABLE FOR APPLICATION.. $378,801_ $346.575 APPLICATION: To pay long-term debt requirements - Old Series Bonds: Principal payments . $ 9,000 $ 8,600 Bond reserve.. (84) (46) To reinvested earnings - Net gain on sale of assets.. 5 4 To improvements and Contingencies Fund: Minimum requirement (12%% of gror.4 revenue)... 2 100,527 108,604 Balance of available revenue.. 269.353 229.413 APPLICATION.. $378,801 $346.575 See nous tofnandalstawments 16

l-Stctements of Changes in Equity Years ended January 31, 1987 1986 (in thousamis) BOND RESERVE - OLD SERIES BONDS: Balance, beginning of year.. $ 17,437 $ 17,483 Deductions - transfer of earnings.. (84) (46) Balance, end of year.. $ 17,353 $ 17.437 BOND RESERVE - NEW SERIES BONDS: Balance, beginning of year.. $ 101,216 $ 89,713 Additions - from Improvements and Contingencies Fund . 20,112 11.503 Balance, end of year.. $ 121,328 $101,216 IMPROVEMENTS AND CONTINGENCIES FUND: Balance, beginning of year.. S 73,586 $ 80,068 Additions - from application of earnings: Minimum requirement (12%% of gross revenue). 100,527 108,604 Balance of available revenue.. 269,3E 229.413 , Total .. 443,466 418.085 Deductions: New Series Bonds: Additions to reserve.. 20,112 11,503 Payment of bond interest.. 153,411 135,235 l Payment of bond principal.. 23,350 21,440 Construction expenditures. I15,154 173,821 For working capital. - 2.500 Total. . 312,027 344.499 Balance, end of year.. $ 131,439 $ 73,586 f REINVESTED EARNINGS: Balance, beginning of year.. . $ 920,187 $754,173 ( Additions: From Improvements and Contingencies Fund: For construction.. I15,154 173,821 For New Series Bonds principal payments.. 23,350 21,440 For working capital.. - 2,500 From application of earnings: Old Series Bonds principal payments.. 9,000 8,600 Net gain on sale of assets.. 5 4 Total.. 147,509 206.365 Deduction - Depreciation.. 41,811 40.351 Balance, end of year . $1,025,885 $920.187 see notes sojsnancialsnasemena 17

ww,--~ - - - -, , .

 !                         )

i  ; d i chME. Statements of Changes in Financial Position Years ended January 31, 1987 1986 (in thousands) SOURCES OF FUNDS: Net earnings.. $ 183,579 $170,989 Add (deduct) amounts not affecting working capital: Amortization of New Series Bond discount.. 1,081 536 Amortization of deferred debts.. 4,140 1,461 Depreciation.. 41,811 40,351 Allowance for interest used during construction.. (101,402) (87.296) Working capital provided from operations.. 129,209 126,041 Contributions in aid and customer advances for construction.. 7,018 7,735 Sale of revenue improvement bonds.. 181,772 270,202 Sale of refunding bonds.. 310,242 113,301 Litigation settlement.. 111,500 210,000 Other.. - 1.281 Total. .. 739.741 728.560 APPLICATION OF FUNDS: Acquisition of utility plant - net of allowance for interest used during construction. 329,208 347,764 lacrease in other receivable.. 40,500 165,000 Retirement of bonds.. 32,350 30,040 Defeasance of bonds refunded.. 253,350 97,130 Increase in current maturities oflong-term debt.. 2,470 2,310 lacrease in restricted cash.. 56,524 59,821 Litigation settlement received. 31,000 - Excess of reaguisition amount over principal of bonds refunded in advance.. 57,649 15,978 Other.. 7,184 _ _ _ 498 Total.. 810.235 718.541 INCREASE (DECREASE) IN WORKING CAPITAL.. 5 (70,494) $ 10.019 CHANGES IN WORKING CAPITAL COMPONENTS: Increase (decrease) in current assets-Cash and temporary investments.. 5 (3,317) $ (7,569) Short term investments... (51,724) (21,874) l Customer accounts receivable.. 3,714 (4,405) Other receivables.. 9,015 28,458 loventories and supplies.. 10,441 679 Prepayments and other.. (26,106) 222 Decrease (increase) in current liabilities: Current maturities oflong-term debt.. (2,470) (2,310) Accounts payable and accrued liabilities.. (6,118) 10,894 Litigation settlement benefits payable to customers . (8M) 7,660 Customer service deposits.. (3,095) (1.736) INCREASE (DECREASE)IN WORKING CAPITAL. (70,494) 10,019 WORKING CAPITAL, BEGINNING OF YEAR.. 40.085 30.066 WORKING CAPITAL (DEFICIT), END OF YEAR . $ (30,40_9) $ 40.085 see noses notinanciat aumena

=- r i F I Notes to Financial Statements - January 31,1987 and 1986 L p 1. Summary of Sl ignificant Accounting Policies 2. Revenue Bond indenture Requirements 1 Basis of Accounting - City Public Service (CPS) uses the The Trust Indenture execusi by the City of San Antonio (the "City")in conjunction with the issuance of the revenue bonds , accrual method of accounting based upon the Uniform System of Accounts for Gas and Electric Utilities issued by the National dated February 1,1951 through August 1,1974,"Old Series Association of Regulatory Utility Commissioners. Bonds," contains, among others, the following prosisions: 5 Fiscal Year - The Scal year ended January 31,1987, is referred 1) all of the assets of the gas and electric systems, together with 5 to herein as 1987 and the year ended January 31,1986, as 1986, the net revenues of the systems, as defined, are pledged with the E Harris Trust and Savings Bank of Chicago, Illinois, as Cor-p Revenues and Expenses - Revenue is recognized as billed on a cycle basis. Rate schedules include fuel and gas cost adjustment porate Trustee, to secure the payment of the "Old Series Bonds." k " clauses that permit recovery of fuel and gas costs in the month incurred. CPS charges to expense the cost of eltetric production 2) Gross revenues of the gas and electric systems shall be applied i_ fuel as it is consumed and the cost of resale gas at the time of to:(a) expenses of operating and maintaining the systems;(b)

purchase. debt service and reserve requirements on the "Old Series 5

Bonds";(c) payment of an "in lieu of tax" amount to the City; . Utility Plant - These assets are stated at the cost of construction, (d) an amount equal to 12%% of gross revenues to the Improve-g including costs of contracted senices, direct material and labor, in-ments and Contingencies Fund; (e) additional benefits and pay- { direct costs, including general engineering, labor and material ments to the City to bring City benefits and payments to 14% of p overhead, and an allowance for interest used during construction gross revenues; (f) additional payments to the Improvements ("AIUDC"). CPS computes AIUDC using rates representing the and Continkencies Fuad until such fund equals 20% of the value g cost of borrowed funds on projects estimated to cost in excess of of fixed capital assets; and (g) balance to a surplus fund. one million dollars and expected to require more than one year to complete. Retirements of utility plant, together with removal cost 3) The following funds are established:(a) General Fund;(b) Im- -- less salvage, are charged to accumulated depreciation. The provements and Contingencies Fund;(c) Bond Construction b maintenance of property, and replacement and renewals ofitems Fund (containing the proceeds of revenue bonds);(d) Principal g determined to be less than a unit of property, are charged to and Interest Current Requirements (containing the monthly pay-a maintenance expense. General utility plant assets consist of land, ments of annual debt requirements); and (e) Bond Reserve buildings and equipment for general and administrative purposes Fund (containing an amount equal to the next fiscal year's prin-P that are used commonly in electric and gas operations. cipal and interest requirements). These funds may be invested E with authorized depository banks or in U.S. Govemment c r- CPS computes depreciation principally using the straight-line -4d securities. [ $ method over the estimated senice lives of the assets as determined pQ .' g g by periodic engineering studies. Depreciation as a percentage of average depreciable plant was 3.07% in 1987 and 3.16% in 1986. Beginning with the year ended January 31,1976, New Series Electric and Gas Systems Revenue Improvement Bonds ("New KMp Series Bonds") were issued. These bonds are junior and sub- ~J { Contributions in aid of construction are amortized over a period equal to the lives of the related assets. ordinate to the "Old Series Bonds." The bond ordinances authoriz- 'I )9 ing these issues provide that no further bonds or obligations will be Other Restricted Cash - These amounts consist primarily of authorized or issued under the terms of the Trust Indenture for , s funds being held in escrow as required under a contract with a gas "Old Series Bonds" and, at such time as the Trust Indenture supplier. becomes inoperative, the Trust Estate will revert to the City. While r any of the "Old Series Bonds" are outstanding, the "New Series E Deferred Debits - These amounts consist of the unamortized Bonds" are payable solely from the net revenues of the systems (1) k balance of bond issue expense, and the unamortized excess of the deposited and availatie for deposit in the improvement 3 and Con- .j reacquisition amount over the revenue bond principal refunded in tingencies Fund and (2) from funds payable to the City. At such 4 advance. Amounts are being amortized over the period during time as the Trust Indenture covering the "Old Senes Bonds"

                                                                                                                                                                            'da which the bonds will be outstanding.

becomes inoperative, revenues will be applied as follows:(a) for i maintenance and operating expenses of the systems;(b) for pay. - [;,9 4 E ments of the "New Series Bonds";(c) for the payment of any ob- pp E ligations inferior in lien to the "New Series Bonds" which may be MM

                                                                                        . . . .          .      _ _ .                                                   EmmMGM

c Nttes to Financial Statements issued;(d) for an amount equal to 6% of the gross revenues of the New Series 1986 Revenue Refunding Bonds. Although the systems to be deposited in a Repair and Replacement Fund;(e) for advance refunding resulted in reacquisition amounts in excess of cash payments and benefits to the City not to exceed 14% of the the bond principal amounts refunded of approximately gross revenues of the systems; and (f) any remaining revenues to $61,358,000, the issuance of refunding debt at interest rates lower the Repair and Replacement Fund. The funds created by the "New then the previous rates will cause aggregate debt senice payments Series Bonds" ordinance are similar to those set forth under the to be reduced by approximately $56,283,000. United States "Old Series Bonds" Trust Indenture. Government securities were purchased with the net proceeds of the 1986 issue and deposited in an irrevocable trust to satisfy scheduled principal and interest payments of the refunded issues.

3. Long-Term Debt The refunded bond issues and trust accounts of the New Series A summary of long-term debt is as follows: 1986 Refunding Bonds as well as previous refundings are not included in CPS financial statements. At January 31,1987, the j,^l,"[ Iollo portions of each respective bond series are considered g

Matunty Outr.andma Bonds 1987 1986 New senes 1984 A s91,400.000 W sem, New senes 1984-8 82.600.000 1 % 2 1974 198819c7 6 331 s 115.220 s 124.220 MW New senes 1982 48.145,000 197s-1986 199s-2014 8.244 l.928,810 1 699,8 % Total 8 205 2.044.030 1.824.070 Ims cumes matunua 34.820 32.3 % During January 1987, the City of San Antonio approved the Amounts due after one year s2,009,210 si,791.720 issuance of New Series 1987 Refunding Bonds in an amount of

                                                                                                                                        $391,780,000 to be delivered on or about February 19,1987.The Principal due (in thousands) for the next five years are:

proceeds from the bonds will be used to advance refund

                                                                         **'D"'                                                          $48,025,000 principal amount of New Series 1980 Bonds, "j                                                    NO""                            $34,825,000 principal amount of New Series 1980-A Bonds,
                                                                                                                                         $32,675,000 principal amount of New Series 1981 Bonds, 1988                      s 9.435                                              s2s.385                        $44,620,000 principal amount of New Series 1982 A Bonds, 19c iO$

10.945 I$ 42.120

                                                                                                                                         $8,300,000 principal amount of New Series 1984-A Bonds,
                                                                                                                                         $12,500,000 principal amount of New Series 1984 B Bonds, 1992                           it.sm                                            45.850                        $109,800,000 principal amount of New Series 1985-A Bonds, and      ;
                                                                                                                                         $38,125,000 principal amount of New Series 1985-B Bonds and to As of January 31,1987, bond reserve requirements for the Old pay costs and expenses related to the issuance of the New Serice Series Bonds and New Series Bonds have been met. Additional 1987 Bonds. Although the advance refunding resulted in bond reserve requirements of $6.0 million for the New Series 1986-A Bonds, were included in the amount borrowed and were                                                                        reacquiJtion amounts in excess of the bond principal amounts refunded of approximately $59,489,000, the issuance of refunding deposited in the Bond Reserve restricted cash fund in a Nmp sum debt at interest rates lower than the previous rates will cause in 1987. Similarly, additional bond requirements of ap;stoxi'nately aggregate debt senice payments to be reduced by approximately
      $18.8 million for the New Series 1985-A and 1985-B Bonds were
                                                                                                                                         $73,698,000. Also during January 1987 the City of San Antonio deposited in the Bond Reserve restricted cash fund in a lump sum I                                                                                                                                         gave notice ofits intention to issue New Series 1987 A Bonds in in 1986. Prior to the 1983-A Bonds, reserve requirements were gen-an amount of $160,000,000 to be delivered on or about March 26, ersted from earnings and deposited over a 61-month period as pre-1987. The proceeds from the bonds will provide funds for the viously allowed; beginning with the 1983-A Bonds, Bond Reserve purposes ofimproving and extending the electric and gas systems requirements have been furded from bond proceeds.

of the City. During the fiscal year ended January 31,1987, New Series 1983 A Bonds at coupon rates of 10.4% to 10.5%, New Series 1984-A

4. Short Term Debt Bonds at coupon rates of 11.0% to 11.25% and New Series 1984 B in November,1983, the City Council of the City of San Antonio Bonds at coupon rates of 10.75% to 11.125% in the principal authorized the issuance of $100 million in tax-exernpt commercial cmounts of $79,350,000, $91,400,000 and $82,600,000, paper (the "Commercial Paper") to assist in the financing of respectively, were advance refunded by issuance of $320,660,000 eligible projects, including fuel acquisition and capital improve-20

i, i ,1 I l l e 'i {}'I ] ments to the utility systems (the "Systems"). As of January 31, Actuarial present value of accumulated plan benefits as of t1.s erki 1987, $100 million in principal amount was outstanding, with a weighted average interest rate of approximately 3.85% and an of the plan year: h)7 '

                                                                                                                                                               /

average life outstanding of about 65 days. When available, D",*[ 3 "**' "' s s

                                                                                                                                             ~

proceeds remaining from the Commercial Paper have been placed g, ,% in short-term investments consisting of U.S. Government y ,g , obligations al cost, which approximates market. During 1987, all %g wn,% 3333 gm remaining proceeds were used for construction purposes. Tw. sous nis925 The Commercial Paper is equally and ratably payable from and is * * * ' " * * " ' ' ' "'# "" secured by (i) the Net Revenues of the systems and (ii) a lien on the sale and pledge of the proceeds from the sale of other Commer- An assumed rate of return of 8% was used in determining the s actuarial present value of accumulated plan benefits. cial Paper, the subsequent sale of bonds, and borrowings under the 1 Credit Agreement (as defined herein). Such pledge on Net Revenues in addition to providing pension benefits, CPS provides cef.n f b subordinate and inferior to the pledge securing payment of(i) health care and life insurance benefits for retired employees? 111 of the Old Series Bonds (ii) the New Series Bonds and (iii) any New CPS' employees are eligible for these benefits upon rei ueet from Series Boads to be issued in the future. The City and Texas Com-CPS. The cost of retiree health care and life insurance beneth merce Bank National Association have entered into a revolving funded by CPS and retired employee contributions,is rc6ogr!.ud credit agreement (the "Credit Agreement") pursuant to which such as an expense of CPS as employer contributions are madc to tle bank is obligated under the Credit Agreement to loan to the City programs. These costs approximated $734 Nu and $731,f % br i

                                                                                                                                                               'q an aggregate amount not to exceed $100 million for the purpose of      1987 and 1986, respectively,                                  fj paying amounts due on the Commercial Paper. Any borrowings                                                                                y

6. Payments to the City of San Antonio f under the Credit Agreement are equally and ratably secured by and payable from the above described sources pledged for payn,ent The Trust indenture provides for benefits and services to'aling 14%

of the Comrnercial Paper. There have been no borrowings under of CPS gross revenues, as defined, to be paid rt provided to the the Credit Agreement as of January 31,1987. City. The City has elected to accept benefits S aure less than 14%

5. Pension Plan Igr ss revenue. The reduction of City benefits has no effect on financial operations.

Prior to 1983, CPS had an insured nension plan under which insurance was purchased for each participating employee in an Payments to the City of San Antonio for 1987 :mb 1986 were as amount calculated to yield cash value at retirement sufficient to I N ** provide an annuity equal to prescribed benefits. To the extent bene- i,n i,%

                                                                                                                          ~~

fits represented amounts attributable to wage increases received after an employee reached age 60%, CPS assumed all of the incre.  ;" s mental cost. The incremental costs for these individuals are paid (" 57]

                                                                        %% ,,,                                                73 ,          79 % 7 directly to retirees by CPS.                                                                                                m oi       sio m 2 In 1983, CPS adopted a self-administered, defined-benefit con-tributory pension plan cosering substantial'y all employees. The       7. South Texas Project total employer pension cost (all funded), w hich includes amortiza-tion of past service costs over 30 years using the Unit Credit Cost    CPS is one of four participants in the South Texas Project PSTP"),

actuarial method, is summarized as follows: which consists of two 1,250 raeg watt nuclear genera'ing units under construction at a site in Matagorda County, Texas. The i,p i,4 other participants in the project are llouston Lighting & Power (m ,ww Company ("IILP"), the project manager: Central Power and Light raurepo rmrd emre>m . s tu s 7i2 Company ("CPL") and the City of Austin ("Austin"). Under the

 ^*a= *romba on ces                                                     terms of the STP participation agreement, each participant pro-vides financing for its share of construction expenditures with CPS *
                                                ====            -~

participatmg interest in the project beg M% or 700 megawatts. A comparison of accumulated plan benefits and plan net assets for Projected conrnercial operation dates rc December 1987 and CPS

• defined-benefit plan is as follows: June 1989 for Units 1 and 2, respemely.

21

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[ E F Notes to Financial Statements . . EE = in 1486, a sun involving the project wv settled on the agreemerc i . ra Iroad; $19.8 inillion bs for their services than the railroads of Brown & Root, the former .trchket/en ;ne and constructoi claimd was due under their .ariffs. This amount ($26.4 nillion) for STP, to pay the plaintiffs, CPS and the other participarts. $75P was pid and classified with Prepayments and Othet i.i tne 1986 mPlic,.t C PS commenced recei? t of its $219 millioc share of the balance sheet pending final ruling in related matteis, g EiE sec : ment with receipt of apprcxima?ly $l$ mi"kn ,n Januan I. U I'i December 1986 CPS approved a settlement c'Ter from the 1986, and $30 milF i in 1987. The re.aamder, .iti .intere[ in Ived railroad Sr all di3puted issues. Both partiu sought wdl be receised in l.5 million quarterly installmer, oser si . d6 missal of actions pending befo:e the ICC and in two Federal years pursuant to an unqualified cowEtual oblige a of Actna T-Dtstnct Courts. As a result, CPS receised a 3. I na 3 n payment Life Insurance Company. The remainn:g payments hw 'y., fr m the railroads in January 1987, most of w h will be used to f recorded as both current receivables and a.s ) .igatiin Settler nts eplace utdity funt used to make the $2t 4 mi fion court-ordered L' Benefits Receivable. mi tariff payn nts ar..' to offset legal expenses i .arred during the L The estimated total direct cost of tiie project is $5 A , bilhor, dispute. ic s'ition, CPS will recene annual payments ranging i, before consideration of the Brown & Root settlement. CPS from $10, 5 3 milh, n, total:ng $80.5 million, oser the next pi portion of .ne total costs for STP would be $2.2 billion for sesen yee ;m the tr ; ads, w hich ts expecte te ' e returned to r- construction snd intecest during construct.on a t ? 10 mdhon for customer 3 av , aymen are receised The remaha t amounts due g fuel to be pmnased r nor to commercial operation. CPS' share of hase beu rmrded as noth current receisables and Litiga..on

  ~

remainmg q.a is estimated to be $183.7 million for plant Settleme s De ents 6 ceivable. construction! < ~r the nen three years, exclusive of interest, nuclear fuei and / ser costs. These costs may sary from the estimated Othu - M is inwhN in unous legal proceedings reir/-d to alleged per+ ial and property damages. breach of contract, enuron-f amount d x 'o inflation, changes m equipment deinery and menta' ma'.crs, cotdemn tion appeals and uiscrimination cases. In constructic e chedule and re:pi:atory charges. ie opinion of managem.:n of CPS, the outcome cf such proceed-As of Jz.,s..ry 31,19E" t M n.T - ended approximately $1.699 ing aill art has e a material adserse effect on the financial pos.aon P billion in the project (net of the W, million settlement with a re alts of operations of CPS Brows

• Poot), including sterest ,anny rstrucnon of $381 h4 milliob .ad advance pv w.it <,n > ici of $10f edhoa Other pr.hase and construcuon commitments amounted to approt.nately $651 mdhon at January 21,1987. As of January A g Pnor to the initial load ig of nuclear fuel and operation of STP. an i'87, C3 has no signincant lease commitmentt g operating licena must ie h ued by the Nuclear Regulatory Com-g mission in order s ' nuet i . scheduled ia-senice date for Uni',1.

a liceil edor ftx" ' udmg a..J .oi power testing must be obtained m " k by Ji" / '87.' iearings before I.,e Nuclear Regulatory Comm;s- [ sion's At .ac Afety and Licm ,g Board hase been fasorably compfted and CPS anticipa ta that the hcense wdl be tssued by June l'Y':

r. . 'omrnitments a id Contingencies Coal Freighi N .' Dispute - For e pas'en years CPS has been engaged in continuous htigauon win, qvn railroads (Bw lington Northern, Inc and Soutkrn Pacific) t hicb prior to

[ p August 1985, transpomed subbituminous coal to the J T Dee) Stanon The question :nvahed tn nrger or lawfu' ,reip t r:te that CPS was legally required to , , m e railrr .ds for wal l transportanon seroces dunnp'he period 1 N wagn August 1985 In 9ecember of 1984, the Federal Dntnct Court isst d n orde-authoniing the railroads to collect the pr,x pal sum >f il 9 8 mdhon, p'us ir'..est of $6 6 mdhon from a N iary 9 iute insohing ,en months in l')R0 and 19xl dunng r Lhh ( i 5 paid 22

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                                                                                                                                                 )

E y y ) 9. Segment Information Segment information is as follows: , u f 1987 i986 s, fin thuk30']3) fl1 thok\Q*tdf) ,( Electric _ Gas Total _ ElectrQ__ __ Gas Total s REVENUE $ 639,626 S127,814 $ 767,440 $ 700,371 J_ 36,500 $ 836,871 . m EXPENSES: E Operating arid maintenance expenses at i13,194 418,010 377,654 118, 74 495,828 T 1 .

                                                                      ,           i1 5                   45 ,8 1              ,

12 , 5 6, 79 6 EARNINGS BEFORE INTEREST _ r AND DEBT EXPENSE, ALLOWANCE FOR INTEREST h CH ARGED TO CONSTRUCTION, - 1 AND PAYMENTS TO THE Cil Y P

                                                                                                                                                                              ~
                                                                                                                                                                        ~

OF SAN ANTONIO _$_. 298,309_ 9,310 $ 307,619 $ 287,282 $ 13,410 L _$_ _ _ _$ _300A_ _ _ _9 { CAPITAL EXPENDITURES UTILITY ASSETh L,409,090

                                                              $ 1.617.023 12'yJ
                                                                                $245,290 S           $ 430,610
                                                                                                    $ 1.862,313
                                                                                                                       $ 416,071
                                                                                                                       $ 1.476,729
                                                                                                                                          ! _18,989
                                                                                                                                           $220,180
                                                                                                                                                       $_41spg
                                                                                                                                                       $1+90.909 7           CONSTRUCTION WORK IN                                                                                                                                                 ~

PROGRESS _1 769,801 6,904 1,776,705 1,446,519 !Op_i _l,456,955 .t TOTAL ASSETS $3.386,824 _$;52,194 $3,639,018 $2,923,248 $230,6 s t $)AsM6_4 m w = Report of Certified Public Accountants l $ p Board af Trustees s City Public Seruce We hase examined the balance sheets of City Public Seruce at in our opinion, the stetements inentioned abos e prewni Sirly the [ - c January 31,1987 and 1986, and the related statements of earnings financial position of Cin Pubi,t Seruce at January 31,1987 and and application of earnings, changes in equity and changes in finan- 1986,and results of operations and changes in financial [ cial position for the years then ended Our examinations were w,ition fc the yers then ended, i conformity with generally .- y

'--       made in accordance with generally accepted auditing standards                   ac, .pted accounong 1 ir.ciples applied on a consistent basis dunng and, accordingly, included such tests of the accounting records and            ' h period such other auditing pro;edures as we considered necessary in the                                                                                                          -

circumstances. c c fI& ( -_l s r>r;; ' b* s*/ MV I k 3 s e

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Five-Year Financial Review pp ' Years ended January 31,

             .. -,                                                              s 1987              1986         1985         1984                   1983 (dolk.n in showands)

REVENUE AND APPLICATION Revenues: Electric sales..  !$ 639,62$ $ 700,371 $ 636,3M $ 544,125 5 521,435 Gas sales.. 127,814 136,500 133,301 147,890 140,283 Other income.. 36,778 31.962 34.589 23.452 25.975

                                                                                            $          i804,218 $          868.833 $    8N.254 $     715.467 $               687.693 Total revenu,e.t..

i Revenues applied: Cost of operating systems: Gas, electricity ar.d fuel purchased.. $ 316,251 $ ' 397,414 $ 394,321 $ 390,004 5 379,470 Other operating expanses a . s .. 69,003 65,039 57,392 50,861 49,085 32,761 Maintenance.. 33.379 28.164 25.432 25.423

                                                    . g. .

Total.. a. $ 418,015 $ 495.832 3 479.877 $ 466.297 $ 453.978 _ Operating Fund.. $ $ 2,500 $ S _ $ -0 Debt requirements for Old Series Bonds: 8,303 $ 8,696 $ Interest.._ $ 7,426 $ 7,875 $ 9,018 Principal requirements.. 9,000 8,600 8,195 7,835 7,540

   ,                  Reserve requirements..                          ,                                           (84)           (46)        (17)           25                      26 .

Debt expense . . a. L 14 12 12 13 13 Total.. . , . . $ 16.356 $ ._ 16.441 $ 16.493 $ 16.569 $ 16.597 Payments and set vices to City-Payment in lieu of taxes.. $ 7,799 $ 7,096 $ 6,401 5 6,028 $ 5,673 Refunds for senices.. 15,286 17,009 16,351 14,163 13,453 Additional payment.. _ _ , . _ 2.3_dO6, 79.867 72.755 61.502 59.696 Total.. S ' 96,191 $ 103.972 5 95.507 $ 81.693 $ 78.822 Debt requirements for New Series Bonds: Interest expense.. $ 153,411 $ 135,235 $ 110,165 $ 86,645 $ 73,504 Principal requirernents.. 23,35^ 21,440 19,730 18,120 14,825 Reserve requirements.. 20,112 11,503 6,049 15,298 20,378 Debt expense.. 5,178 1,867 229 119 113 Total.. $ 202,051 $ 170.045 $ 136,173 $ 120,182 $ 108.820 Allowance for funds used during construction.. (101,402) (87.296) (64.467) (48.439) (40.871) Additions to plant: Total expenditures for year.., $ 430,610 $ 435,060 $ 390,035 $ 259,083 $ 184,712 Lec construction funds provided by sources other than revenues . 315,456 261,239 259.677 187,852 115.091 Revenues used for additions to plant.. $ 115,154 $ 173,821 $ 130,358 $ 71,231 $ 69,621 Addition to Improvements and , Contingenues Fund.. 57,853 (6.482) 10.313 7.934 726 Total . $ _._173307 $ 167.339 $ 140.671 $ 79.165 $ 70.347 Total revenues applied.. $ 8N,218 $ S68.833 $ 804.254 $ 715.467 $ 687.693 BALANCE SIIEET DATA Utility plant at cost.. $ 3,255,479 $ 2,838,847 5 2,620,511 $ 2,236,613 $ 1,983,694 Annual constructic i additions . 4A,610 435,060 390,035 259,083 184,712 Accumulated depreciation.. 446,914 418,743 384,084 350,654 319,898 Araual depreciation allowance.. . i . . . (. . 41,811 40,351 37,837 35,918 34,953 Principal and imiwt coverage . 2,00x 2.15x 2.22x 2.05x 2.23x 24

                                         \
                                                                                     /

r h r Five-Year Operations Review Years ended January 31, 1987 1986 1985 19P' 1983 (dollars in thot, sands) OPERATING REVENUES 1 Electric:

  '-                                                            276,307 $       292,216 $             263,217 5           219,067 $                         208,969 Residential..                            $

Commercial and industrial . 266,747 295,158 268,950 230,528 214,096 - b Street lighting.. 7,781 8,241 7,990 6,864 6,637 Public authorities . 71,073 80,007 75,491 65,032 61,271 f g Other utilities.. 13,982 20,638 15,836 18,928 26,917 g hiiscellaneous.. 3,736 4.111 4.880 3.706 3.545

• Total electric.. $ 639,626 $ 700,371 $ 636,364 5 544,125 5 521,435

  ?        Ges:

Residential.. S 75,091 $ 79,346 $ 75,803 $ 85,716 $ 79,293 L Commercial and industrial . 44,357 47,957 48,452 52,388 50,955 Public authorities.. 7,442 8,153 8,031 9,324 8,923 3 Miscellaneous.. 924 1.044 1.015 462 1.112 g Total gas.. $ 127,814 $ 136,500 $ 133,301 5 147,890 $ 140,283 p SALES (000 OMITTED) L Electric - KWil: Residential.. 4,036,562 3,782,693 3, 31,219 3,139,333 3,084,901 Commercial and industrial.. 4,636,308 4,465,682 4,107,615 3,839,434 3,715,362 E Street lighting.. 78,732 78,445 76,565 78,034 78,508 Public authorities.. 1,358,027 1,300,515 1,246,417 1,197,944 1,175,742 Other utilities.. 257,848 41M81, 181,741 194.636 332.730 Total. . 10,367,477 10,040,716 9,103,557 8,449,381 8,387,243 E' Gas - MCF: F Residential.. 13,576 14,332 13,643 15,493 14,847 k Commercial and industrial . 9,770 10,206 10,152 10,677 10,752 Public authorities . 1,657 1.7 M 1.708 1.925 1.895 F 5 Total.. 25,003 26,302 25,503 28,095 27,494 PURCHASE FOR RESALE: Electric (1,000) KWil. 398,401 842 Gas (1,000) MCF.. 25,701 26,040 26,367 29,398 28,322 ELECTRIC GENERATION - = (1,000) KWii . 10,617,859 10,607,972 9,774,125 8,992,120 8,913,801 Electric Gen. Capacity, KW (Gas)*. 2,400,000 2,400,000 2,400,000 2,400,000 2,400,000 ,_. Electric Gen. Capacity, KW (Coal) . 836,000 836,000 836,000 836,000 836,000 ELECTRIC PEAK DEMAND - KW.. 2,5 % ,000 2,350,000 2,210,000 2,148,000 1,984,000 0 NUMBER OF CUSTOMERS: Electric.. 458,037 446,573 423,316 398,983 372,235 = 285,697 284,876 280,575 279,116 272,331 G as . . RESIDENTIAL AVERAGES: Electric-Revenue per customer.. $ 692.51 5 765.21 $ 724.92 $ 647.97 5 654.37 KWil per customer. 10,117 9,906 9,615 9.285 9,660 Revenue per KWii.. 6.84e 7.73c 7.54c 6.98c 6.77c Gas: Revenue per customer.. 5 284.45 5 303.34 $ 293.06 $ 337,11 5 317.26 MCF per customer. 51,4 54.8 52.7 60.9 59.4 Revenue per MCF.. S 5.53 $ 5.54 5 5.56 $ 5.53 $ 5.34

• oa rannaja une un anm u 2m.ooo xwtw usepow renoi

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u, _ . CPS Board of Trustees Management Staff

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                                   ,e                         k _g dh-                    Y Gene a          anager
     "                        Glenn Blogs                           Earl C.11111                               * . .

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Chair nan Vice Chairman

                                                                                                                                                                 . g.

G Vice Chairman of the Attorney at-Law l[ . Q Board, InterFirst Bank of , . 1_ San Antonio, N.A. ' . *

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                                                                        ,. , Qc,g. g J., /l; -           floward L                   Kenneth flart            Arthur son
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Freeman Assistant General Rowntus

   =                                                                                                                                 Manager for              Assistant General
                                                                     ,.f.!g .                       .; & Assistant General Manager for                 Administration           Manager for

,h Yd 'J. . 4 \, Fmance Planning and f: %? -; rl Development i .g- 4- y-

                                  ,p_.1.k                 s'.                 ....                .."    Department Managers Ruben M. Escobedo                    Lila Cockrell                        Jamie E. AnteB                              John J. leal Trustee                               Trustee                              Generation and                              Penonnel Admmistration
=_                                                                                                       Ensironmental Planning E                           Certified Public Accountant, President, Atkins Travel
                                       "

• I' N LE. Boulden Productbn and Power Company

] Materials and Transportation Plant Engmeering r

  =

'"' l i t *::-*n Bralmer Bob McCullough Admina.wtive Senxes Pubhc Relations Robert J. Costek Robert C. Mecke

  =

g Transmission a .J Construction Dtstabuuon Eagmeenns Janes W. Pettinos Franklin D. lisegelin Ope auons a Perwnnel Sernces IIenry G. Cisneros Donaki R. Schnitz F Ex Officio Trustee CeeG J. Ilenne Gas Engineenng and Fuels Customer Senices Mayor of San Antonio, Texas Stewart schooner Cy liutchinson legal and Eenefit Senices Data Processing Senwes Donald S. Thomas [ Fmancial Senices 'M 26

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PROSPECTUS SUPPLEMENT (To Prospectus dated May 21, 1987) v 1,000,000 Shares Houston Lighting & Power Company

                             $8.50 Cumulative Preferred Stock (Fixed Liquidation Price $100 Per Share)

Dividends on the 58.30 Cumulative Preferred Stock, without par value (58.30 Preferred Stock), are cumulativefrom the date oforiginalissue and are payable quarterly on January 1, April 1, July 1 and October 1 of each year, beginning October 1,1987. The $8.30 Preferred Stock will be redeemable at any time at the option of the Company, in whole or in part, at a redemption price of $108.30 per share prior to June 1,1999; at $104.25 per share on or after June 1,1992 andprior to June 1,1993; at $102.13 per share on or after June 1,1993 and prior to June 1,1994; and at $100.00 per share on June 1,1994 or thereafter; plus in each case accrued and unpaid dividends. Any redemption of the 58.30 Preferred Stock prior to June 1, 1992 will be subject to certain restrictions on refunding. See "Descrsprion of $8.30 Preferred Stock - Redemption Providons". The 58.30 Prefernd Stock will be entitled to a mandatory sinkingfund sufcient to retire on each June 1, beginning in 1993, 200,000 shares at $100.00 per share plus accrued and unpaid dividends. In addition, the Company has the noncumulative right to redeem thrvugh the sinking fund up to 200,000 additional shares on the same tmns and dates applicable to the mandatory sinkingfund n redemptions. The Company will have the option to satisfy the mandatory sinking fund requirement, in whole or in part, by crediting shares of the $8.30 Preferred Stock ndeemed () (other than thrvugh the Anking fund) or otherwise purchased or acquired. See "Description of $8.30 Pnferred Stock - Sinking Fund Provsdons". THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE. PROSPECTUS. ANY REPRESEhTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Price to Underwriting Proceeds to Public(1) Discount Company (2)

                                                               $100.00          5.873              $ 99.123 Per Share l $100,000,000      3873,000           $ 99,125,000 Total (1) Plus accrued dividends, sf any,from the date of origs'nalissue.

(2) Before deducting expenses payable by the Company estimated to be $163,000. The shares of $8.30 Preferred Stock are ofmd by the several Underwritm when, as and sfissued by the Company and accepted by the Underwrism and subject to their right to reject ordm in whole or in part. It is expected that delivery of the certifwates representing shares of $8.30 Preferred Stxk will be made in New York City on or about June 16,1987. The First Boston Corporation Kidder, Peabody & Co. Incorporated The date of this Prospectus Supplement is June 9,1987. r

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS hiAY OVER=ALLCT OR EFFECT TRANSACTIONS WHICH STABILIZE OR hiAINTAIN THE hiARKET PRICE OF THE

 $8.50 PREFERRED STOCK OFFERED HEREBY OR ANY OTHER SERIES OF THE PREFERRED STOCK OF THE COhfPANY AT LEVELS ABOVE THOSE WHICH hilGHT OTHERWISE PRE-VAIL IN THE OPEN h!ARKET. SUCH STABIL1 ZINC, U' COhihfENCED, hiAY BE DISCONTIN.

UED AT ANY TIhiE. DESCRIPTION OF SS.50 PREFERRED STOCK The description of the particular terms of the SS.50 Preferred S.ock, as set forth herein and on the cover page of this Prospectus cupplement, supplements the description of the general terms and provisions of the New Preferred Stock in the accompanying Prospectus under "Description of New Preferred Stock", to which reference is hereby made. Fixed Divider.d Rate The fixed dividend rate of the $8.50 Preferred Stock will be SS.50 per share per annum. Dividends on the $5.50 Preferred Stock will accrue from the date of issuance and will be payable on January 1. April 1, July 1 and October 1 of each year, beginning October 1,1987. Fixed Liquidation Price and Premium The fixed liquidation price of the SS.50 Preferred Stock will be $100 per share. There will be a fixed liquidation premium for the $8.50 Preferred Stock of $8.50 per share until June 1,1992; of $4.25 per share on June 1,1992 and thereafter prior to June 1,1993; of $2.13 per share on June 1,1993 and thereafter prior to June 1,1994; and of $0.00 per share on June 1,1994 and thereafter. Redemption Provisions The $5.50 Preferred Stock is not redeemable, directly or indirectly, prior to June 1,1992 from the proceeds of any refunding through the incurring of debt, or through the issuance of preferred stock ranking equally with or prior to the SS.50 Preferred Stock as to dividends or liquidation, where such debt has an effective interest cost, or such preferred stock has an effective dividend cost, to the Company of less than 5.50% per annum. The $5.50 Preferred Stock will otherwise be subject to redemption at any time at the option of the Company, in whole or in part, at $105.50 per share prior to June 1.1992; at $104.25 per share on or after June 1,1992 and prior to June 1,1993; at $102.13 per share on or after June 1,1993 and prior to June 1,1994; and at $100 per share on June 1,1994 or thereafter; plus in each case dividends accrued and unpaid to the date of redemption. Sinking Fund Provisions On June 1,1993 and on each June 1 thereafter so long as any shares of the $5.50 Preferred Stock remain outstanding, the Company will redeem from funds legally available therefor 200,000 shares of the $5.50 Preferred Stock, or such lesser number as is then outstanding, pursuant to a mandatory sinking fund at $100 per share plus dividends accrued thereon to the date of redemption. If the required number of shares is not redeemed on any such June 1, the unsatis6ed sinking fund oHigation will be cumulative until such obligation is discharged. In addition, the Company has the option to redeem pursuant to the sinking fund on each mandatory sinking fund redemption date, on a noncumulative basis, an additional 200,000 shares of $5.50 Preferred Stock at $100 per share plus dividends accrued thereon to the date of redemption. The Company may apply as a credit against the , number of shares of $5.50 Preferred Stock required to be redeemed pursuant to the mandatory smking fund obligation shares of such series that have been redeemed (other than through the operation of e the sinking fund) or otherwise purchased or acquired and that have not previously been used for any S-2

      . such credit. Unless the Company has satisfied its raandatory sinking fund obligations, (a) no dividends may be declared or paid on any Common Stock or any other stock ranking junior to the $8.50 Preferred
 /"'

(N )Stock purchased and (b) no acquired, or otherwise sharesnor ofmay such moneys stock, be paid ororanyset asideother for aseries of Preferred sinking fund for the Stock redemption, purchase or other acquisition thereof. Other The $8.50 Preferred Stock will have no exchange or conversion rights. UNDEP. WRITING The underwriters named below have severally agreed to purchase from the Company the following respective number of shares of $8.50 Prefened Stock: Number Name of Shares The First Boston Corporation . . . . . . . . . . . . . . . . . . . . . . . . .. ...... 390.000 Kidder, Peabody & Co. Incorporated . . . . . . . . . . . . . . . . .. ......... ... .. 390,000 Goldman, Sachs & Co. . . .. . . . .............. .

                                                                                                    ..... .             ..         .       40,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated. . . . . .. ...... . . .                                                   c),000 Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . .                             ...         40.000 Printon, Kane & Co. . . . . . .... ... ......... ...... ....                                        .           ... ..        20,000 Salomon Brothers Inc . . . . . . . . . . ....................                                     ....... .... .              40.000 Shearson Lehman Brothers Inc. . . . . . . . . . . . . . . .                       .... ..........                     ..      40.000 To tal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   ..     ... ... . .. . ...             1.000.000 The Underwriting Agreement provides that the obligations of the several Underwriters are subject O

v ot certain conditions precedent, and that the several Underwriters will be obligated to purc j the shares of $8.50 Preferred Stock if any are purchased. The Company has agreed to indemnify the l Underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended. The Company has been advised by The First Boston Corporation and Kidder, Peabody & Co. Incorporated, as Representatives of the Underwriters, that the Underwriters propose to oEer the shares of $8.50 Preferred Stock to the public initially at the osering price set forth on the cover page of this Prospectus Supplement and, through the Representatives, to certain dealers at such price less a concession of 3.50 per share: that the Underwriters an( such dealers may allow a discount of 3.375 per share on sales to certain other dealers; and that the public oEering price and concession and discount to dealers may be changed by the Representatives after the initial public osering. 1 O S-3 L

PROSPE CTUS p V Houston Lighting & Power Company Cumulative Preferred Stock (without par value) Houston Ls;rhting & Power Company (Company) may ofer from time to time, in one or more series, shorrs of i Cumulative Prrferred Stock, without par value (New Prrfr rrd Stuk), having an agregatefard liquidatim price of not more than $100 million, atprices and on terms to be determined when an agrrement to sell & made or at the time Thh Prospectus will be supplemented by one or more prospectus supplements of the sale, as the case may be. (Prospectus Supplement) which will refwet any agreement entered into by the Companyfor the sale ofsha New Preferred Stock and will setforth the series designation, number of shares, prvceeds to the Ceaupany, th initial public ofering price, dividend rwte (or method of calculation therrof), rrdemption prweions, sinkingfund orpurrhasefundprwsnons, sf any, and other specsfu terms of the series ofNew Preferrrd Stock in respect of which thh Prospectus b being deliverrd (Oferrd Stock). O THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURIT l AND EXCHANGE COMMISSION NOR HAS THE COMMISSION ANY REPRE- PASSED UPON THE f ACCURACY OR ADEQUACY OF THIS PROSPECTUS. SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The New Preferred Stock will be sold through the underwriten named below or an underwriting syndicate i represented by suchforms. The names of any other underwriten, the net proceeds to the Companyfro t of each ries ofNew Prefernd Stock and any applicable underwn' ting communons or dhcounts will be set forth in the Prospectus Supplement relating to such series. See "Plan of Distribution"for indemnsfwarion arrangements with underwn' ten. The First Boston Corporation Kidder, Peabody & Co. Incorporated The date of thh Prorpectus b May 21,1987. l i O m - - - , . .- -- , ,_,..v. . . . - - - - , , . , , , - . , - , - - . ~ . , . . . . . - - , . . . - - - - - . - - - - . - - . , - - - - , - - . . - , ,

AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, ,. as amended (Exchange Act), and, in accordance therewith, Bles reports and other information with the Securities and Exchange Commission (Commission). Information as of particular dates concerning directors and o$cers, their remuneration, the principal holders of securities of the Company and any , material interest of such persons in transactions with the Company is disclosed in reports and other I information of the Company Bled with the Commission. Such reports and other information can be l inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth l Street, N.W., Judiciary Plaza, Washington, D.C. 20549; and at the Commission's regional o$ces at the Everett hicKinley Dirksen Building, 219 South

Dearborn Street,

Chicago, Illinois 60604 and at the Jacob K. Javits Building,26 Federal Plaza, New York, New York 10007. Copies of such material can l also be obtained at prescribed rates from the Public Reference Section of the Commission at its l principal o$ce at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. INCORPORATION OF CERTAIN DOCUhiENTS BY REFERENCE l The following documents, which have been Bled by the Company with the Commission pursuant to the Exchange Act (File No.13187H 1), are incorporated by reference in this Prospectus and shall be deemed to be a part hereof: (1) The Company's Annual Report on Form 10 K for the year ended December 31,1956: (2) The Company's Quarterly Report on Form 10-Q for the quarter ended March 31,1987. All documents subsequently Bled by the Company with the Commission pursuant to Section 13(a),13(c),14 or 15(d) of the Exchange Act prior to the terminatinn of the offering made by this Prospectus shall be deemed to be incorporated herein by. reference and to be a part hereof from the I date of Eling such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modiBed or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently Bled document that also is or is deemed to be incorporated by reference herein modi 6es or supersedes such statement. Any such statement so modi 6ed or superseded shall not be deemed, except as so modiBed or superseded, to constitute a part of this Prospectus. The Company hereby undertakes to provide without charge to each person to whom a copy of this Prospectus has been delivered. upon written or oral request of any such person, a copy of any or all of the documents referred to above that have been incorporated by reference in this Prospectus (not including exhibits to the documents that are incorporated by reference unless such exhibits are speci6cally incorporated by reference into such documents). Written or oral requests for such copies should be directed to the Investor Relations Department, P. O. Box 4505, Houston, Texas 77210, telephone (800) 231-6406 (if calling from outside Texas) or (800) 392-4641 (if calling from inside Texas) (toll free in either case). IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS hiAY OVER. ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR hiAINTAIN THE hiARKET PRICE OF THE NEW PREFERRED STOCK OFFERED HEREBY OR ANY OTHER SERIES OF THE PREFERRED STOCK OF THE CONIPANY AT LEVELS ABOVE THOSE WlHCH Nf!CHT OTHERWISE PRE-VAIL IN THE OPEN hlARKET. SUCH STABILIZLNG,IF COhihfENCED, hiAY BE DISCONTIN. UED AT AST TIh!E. O 2 _ _ _ _ _ _ _ _ _ _ . _ _ _ _ _ . . _ _ x

                                                                           .,.<.r SUhihiAR't INFORMATION Thefollowing summary information is qualified in its entirety by. and should be read in conjunction with, the information appearing elsewhere in this Promeetus, or in any accompanying Prospectus Supplement, and in the documents incorporated herein by reference.

THE OFFERING 1s su er . . . . . . . . . . . . . . . . . . . . . . . . . ......... Houston Lighting & Power Company. Securities Offered . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative Preferred Stock, without par value, in the amount, not to exceed $100 million aggregate fixed liquidation price, and having the designa-tion, dividend rate, redemption provisions, sink-ing fund or purchase fund provisions, if any, and other speciBe terms to be set forth in a Prospec-tus Supplement hereto. THE COMPANY Business and Senice Area . . .. .... . Electric utility sening approximately 5.000 square miles of the Texas Gulf Coast Region, including Houston. Property, Plant and Equipment

          - Net (March 31,1987) . .                              .. ......               $7,796,208,000 Fuel for Electric Ger 7 ration (Twelve months ended March 31,19S7)                                 ...      Cas and Oil 56%; Coal and Lignite 44%

Twelve Months Ended

      )                                                                                         March 31 1967 December 31, 1986 December 31, 1985 (Unaudited)

(Amounts in Thousands except Ratios) Income Summ.'ry:

                                                                                               $2,939,53S           $2.959.740          $3.533,364 Operating Reunues . . . . . . . . . . . . . . . . . .                        .
                                                                                               $ 447,660            $ 465.93S           $ 495,863 Operating Incor.se . . . . .               ... .... .... . .. .

! Allowance for Fu.,ds Used During l $ 226,394 $ 225,626 $ 204,209 Con stru ctio n . . . . . . . . . . . . . . . . . . . . . . . .

                                                                                               $ 443,001            3 461,744           $ 482.506 l           Net Income Before Preferred Dividends. .. .

l Ratio of Earnings to Fixed Charges and Preferred Dividend Requirements . . . . . 2.93 2.95 3.26 Penent of ' March 31. Adjusted 1997 _As Adjusted' Capitalization * (Unaudited) (Thousands) Capitalization Summary:

                                                                                               $2,795.510           $3,023.510                47.9%

Long Term Debt (including current maturities) 341,319 441,319 7.0 Cumulative Preferred Stock . . . . . . . . . . . . . . 2.643.966 2.843.966 45.1 Common Stock Equity . . . . . . . . . . .. . . ..

                                                                                               $5.983.795           $6.305.795               100.0 %

Total Capitalization . . ... . .. . ..

• Adjusted to give effect to (i) the expected issuance in 1987 of the New Preferred Stock having an aggregate fixed liquidation price of $100 million, and (ii) the anticipated is

      )    with the Commission.

3

THE COMPAhT Houston Lighting & Power Company (Company) is engaged in the generation, transmission, distribution and sale of electric energy, serving an area of the Texas Culf 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 the Company's principal executive oHices is 611 Walker Avenue, Houston, Texas 77002 (telephone number (713) 228 9211). The Company is a subsidiary of Houston Industries Incorporated (Houston Industries) which j owns all of the Company's outstanding common stock. Houston Industries is a holding company as de6ned in the Public Utility Holding Company Act of 1935, but is exempt from regulation as a "registered" holding company under the Act except with respect to the acquisition of securities of I other public utility companies. Houston Industries owns all of the outstanding common stock of two l other principal operating subsidiary companies: Primary Fuels, Inc. and Utility Fuels, Inc. Houston ' Industries also owns all of the outstanding common stock of four other subsidiaries: Innovative

                                                                                                           ~!

Controls, Inc., KBLCOM Incorporated, Houston Industries Finance, Inc. and Development Ventures, l Inc. APPLICATION OF PROCEEDS The net proceeds from the sale of any New Preferred Stock offered hereby will be used to pay expenditures relating to the Company's construction program (as discussed in the documents incorporated by reference herein), including the repayment of short-term indebtedness incurred in connection therewith. Such short term indebtedness bears or will bear interest at Buctuating rates generally lower than the prime rate. Any proceeds not so.ueed will be used for general corporate purposes. The Company has registered with the Commission $225 million ofits First Mortgage Bonds. The proceeds from the sale of such First Mortgage Bonds may be used to fund the Co npany's construction program or for other general corporate purposes. The amounts, nature and timing of sales of the New Preferred Stock and any such First Mortgage : Bonds have not been determined. Pending future sales of such securities or sales of other securities, Snancing of that portion of the construction program not provided by funds internally generated will be obtained by the Company from short term bank borrowings and sales of commercial paper. DESCRIPTION OF NEW PREFERRED STOCK The information set forth below is summarized from the Restated Articles ofIncorporation of the Company, as amended, which are an exhibit to the Registration Statement of which this Prospectus is a part. The statements and descriptions hereinafter contained do not purport to be complete, and are quallBed in their entirety by reference to such document. All cumulative preferred stock issued or to be issued by the Company under the Restated Articles of Incorporation is referred to herein as "Preferred Stock." The Offered Stock The Prospectus Supplement relating to the Offered Stock will describe the following terms thereof: (1) the series designation; (2) the number of shares of such series; ! (3) the dividend rate or method of calculation thereof applicable to the series; (4) applicable redemption provisions; l (5) sinking fund or purchase fund provisions, if any; 4 l

m (6) the fixed liquidation price and Exed liquidation premium applicable to the series; and (7) the rate or basis of exchange or conversion into other securities or method of determina- [] s' tion thereof applicable to the series, if any, Issuance in Series Preferred Stock of the Company may be issued in series which may vary as to distinctive serial d:signations, rates of dividends, redemption prices, liquidation prices, liquidation premiums, conver-sion rights and :equirements as to any sinking or purchase fund The Board of Directors may fix such t;rms of any new series of Preferred Stock from time to time. The Company is authorized by its Restated Articles of Incorporation to issue 10,000,000 shares of Preferred Stock, without par value. A total of 3,447,397 shares of such stock other than the New Preferred Stock, represented by nine different series having an aggregate fixed liquidation price of $344,739,700, are currently outstanding. None of such nine outstanding series is entitled to the benefit of any sinking or purchase fund. Dividend Rights The holders of each series of Preferred Stock, including the New Preferred Stock, shall be entitled to receive,if and when declared by the Board of Directors, cumulative quarterly dividends at the rates per annum Exed for such series, respectively, payable on January 1, April 1, July 1 and October 1 in cch year (except for the $4 Preferred Stock, the dividend payment dates for which are February 1, May 1, August I and November 1), before any dividends, other than a dividend payable in Common Stock of the Company, may be paid or set aput for the Common Stock. In the event that more than one :,eries of Preferred Stock is outstanding and dividends are paid in an amount less than full cumulative dividends in arrears on all Preferred Stock, then the dividends shall be divided between the different series in proportion to the aggregate amounts which would be distributable to the Preferred i (7tock of each series if full cumulative dividends were declared and paid thereon. V Voting Rights No voting rights are conferred on any series of Preferred Stock except as set forth below and under "Restrictions on Corporate Action" and except as provided by the laws of the State of Texas. The holders of Preferred Stock of any series,in cases where they have a right to vote, are entitled to one vote for each share held, l Whenever dividends on Preferred Stock are in arrears in an amount equal to four quarterly dividends, the holders of Preferred Stock of all series shall have the right to elect one-third of the Board of Directors until such arrearages are cured, and whenever such dividends are in arrears in an amount equal to eight quarterly dividends, such holders shall have the right to elect a majority of the l Board of Directars. No dividends on Preferred Stock are in arrears. Liquidation Rights In the event of any liquidation, dissolution or winding up of the Company, or any reduction or decrease ofits capital stock resulting in a distribution of assets to the holder or holders ofits Common Stock other than by way of dividends out of the net profits or out of the surplus of the Company, the holders of the Preferred Stock shall be entitled to receive, from the assets of the Company available for distribution to shareholders, the fixed liquidation price established for the respective series plus, in case such liquidation, dissolution, winding up, reduction or decrease shall have been voluntary, the fixed liquidation premium for such series, if any, together in all cases with a sum equal to all accrued and unpaid dividends to the date payment is made available. If the assets distributable among the holders of the Preferred Stock should be insufficient to permit the payment in full of the preferential ounts fixed for all series, then the distribution shall be made among the holders of each series tably in proportion to the full preferential amounts to which they are respectively entitled. 5 1 l l

/ Redemption and Repurchase Provisions , Subject to restrictions on refunding applicable to certain of the Company's outstanding series of Preferred Stock and restrictions on any redemptions of the New Preferred Stock set forth in the Prospectus Supplement, the Company may at any time redeem the whole or any part of the Preferred Stock, or of any series thereof, upon notice mailed to the holders of the stock to be redeemed not less than twenty nor more than Efty days prior to the date Exed for redemption. The price at which the shares shall be redeemed is the Exed redemption price of the series of such shares together with the' amount of any dividends accrued or in arrears to the date of redemption. Ifless than all of any one series of the Preferred Stock is to be redeemed, then the shares to be redeemed are to be selected ratably or by lot. The Company may also repurchase any ofits capital stock of any class so long as it is not in arrears in the payment of any dividends on the Preferred Stock, and, ifit is so in arrears, may repurchase Preferred Stock (but not Common Stock) only pursuant to an offer made to all holders of Preferred Stock. All shares of Preferred Stock redeemed or repurchased assume the status of authorized but unissued shares. Sinking Fund or Purchase Fund The Company may determine to include sinking fund or purchase fund provisions for any series of tl e New Preferred Stock. Restrictions on Corporate Action The Restated Articles of Incorporation provide that the afBrmative vote of two-thirds of the outstanding shares of Preferred Stock will be required: (a) to create, authonze or issue any additional stock, or securities convertible into stock, ranking prior to the Preferred Stock as to dividends or liquidation nghts; (b) to alter or amend the Restated Articles of Incorporation in any manner prejudicial to the Preferred Stock; or (c) to issue additional Preferred Stock or stock of equal rank 3 unless (i) the total Exed liquidation price of all such stock and any stock of prior rank to be outstancing shall be equaled or exceeded by the capital represented by junior stock and (ii) for a period oitwelve consecutive months within the Bfteen months immediately pnor to such issuance the net earnings of the Company available for dividends shall be at least 2% times the annual dividend requirements on all such stock and any stock of prior rank to be outstanding after such issuance, and the earnings available for interest, amortization and dividends (after taxes and depreciation) shall be , at least 1% times the sum of such dividend requirements and the annual interest requirements on all { indebtedness of the Company. Miscellaneous None of the Preferred Stock that is currently outstanding has any preemptive or conversion rights. The New Preferred Stock when issued will be fully paid and nonassessable. 1 1 Transfer Agent and Registrar The transfer agent and registrar for the New Preferred Stock will be Houston Industries. l 6 O

4 RATIOS l The ratios of earnings to fixed charges and preferred dividend requirements for each of the Qmpany's fiscal years 1982 through 1966 were 1,94,3.01,3.05,3.26 and 2.95, respectively. The ratio of earnir.gs to fixed charges and preferred dividend requirements for the twelve months ended March 31, 1987 was 2.93. The Company's earnings used in the calculation of such ratios include the allowance for funds used during construction. The ratio for 1982 reDects an after tax charge against income of $16S million as a result of regulatory treatment of the cancellation of a nuclear generating project. Without such charge, the ratio for 1982 would have been 3.27. The pro forma effect of the issuance of the New Preferred Stock on the 1966 ratio would be less than 10% PLAN OF DISTRIBUTION The Company will sell the New Preferred Stock to The First Boston Corporation and Kidder, Peabody & Co. Incorporated or to an underwriting syndicate including and represented by such firms. The underwriters will be named in the Prospectus Supplement by which each series of New Preferred Stock is to be offered. Each Prospectus Supplement with respect to a series of the New Preferred Stock will set forth the terms of the offenng of such series and the proceeds to the Company from such sale, any underwriting discounts and other items constituting underwriters' compensation, the initial public offering price and the discounts or concessions allowed or reallowed or paid to dealers. The initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers may be changed from time to time. Shares of New Preferred Stock will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a td public offering price or at varying prices determined at the time of sale. The Company has deed to indemnify the underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933. The underwriting agreement will provide that the obligations of the underwriters are subject to cert. tin conditions precedent and that the underwriters will be obligated to purchase all of the shares of New Preferred Stock covered by the Prospectus Supplement if any are purchased. EXPERTS The Snancial statements and supplemental schedules of the Company included in the Company's Annual Report on Form 10 K for the year ended December 31, 1956, which is incorporated in this Prospectus by reference, have been examined by Deloitte Haskins & Sells, Independent Certified Public Accountants, as stated in their opinion appearing therein. Such financial statements and supplemental schedules are incorporated by reference in this Prospectus in reliance upon such opinion given upon the authority of that Srm as experts in accounting and auditing. . LEGAL OPINIONS Certain legal matters in connection with the New Preferred Stock are being passed upon for the Company by Baker & Botts Houston, Texas, and for the underwriters by Reid & Priest, New York, New York. Reid & Priest will not pass upon the incorporation of the Company and will rely as to all matters covered by their opinion governed by Texas law upon the opinion of Baker & Botts. 7

No dealer, salesman or other person has been authorized to give any information or to make any representations in connection with this oRering other than those contained in this Prospectus Sup-piement or in the Prospectus, and,if given or made, Houston LightinoO such information or representations must not be & power COmnanv r / relied upon as having been authonzed by the Com-pany or any Underwriter. This Prospectus Supple-ment and the Prospectus do not constitute an offer to sell, or a solicitation of an offer to buy, any of DeMaM 7 the securities oRered hereby in any jurisdiction to Company any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this Prospectus Supplement and the Prospectus nor any sale made hereunder shall, under any circumstances, create any implication 1,000,000 Shares that there has been no change in the affairs of the Company since the date of this Prospectus Supple-ment or that the information set forth berein is $8,50 Cumulative correct as of any time subsequent to the date bereof or the date of filing of any documents incorporated by reference berein. Preferred Stock (Fixed Liquidation Price $100 Per Share) O TABLE OF CONTENTS ) em  ; Prospectus Supplement PR OSPE C TUS SUPPLEMENT Description of 58.50 Preferred Stock S2 i Underwriting . . S-3 Prospectus Available information . 2 Incorporation of Certain Documents by Reference  : Summary Information 3 i The First Boston Corporation The Company 4 Application of Proceeds . 4 Description of New Preferred Stock . 4 Kidder, Peabody & Co. ' Ratios . 7 I"" 'P 'd Plan of Distribution. 7 Experts . 7 Legal Opinions 7 O 1

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                                                            $160,000,000 CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1988
 'i 3
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i MUNICIPAL BOND NEW ISSUE INSURANCE POLICY h 5 t t, I 7 4 i

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{. e I Bond Insurance i Concurrently with the issuance of the Bonds, Financial [ Guaranty Insurance Company ("Financial Guaranty") will issue

its Municipal Bond New Issue Insurance Policy (the "Policy")

C for the Bonds maturing in the year 2016 (the "Insured Bonds").

,             The Polley unconditionally guarantees the payment of that portion of the principal of and interest on the Insured Bonds
,             which has become due for payment, but shall be unpaid by reason of nonpayment by the City. Financial Guaranty will make such payments to Citibank, N.A., or its successor at its agent (the L              "Fiscal Agent"), on the later of the date on which such c

principal and interest is due or on the business day next

'.             following the day on which Financial Guaranty shall have L              received telephonic or telegraphic notice, subsequently
      ,       confirmed in writing,'or written notice by registered or certified mail, from an owner of Insured Bonds or the Paying Agent of the nonpayment of such amount by the City. The Fiscal Agent will disburse such amount due on any Insured Bond to its owner upon receipt by the Fiscal Agent of evidence satisfactory
  -           to the Fiscal Agent of the owner's right to receive payment of the principal and interest due for payment and evidence, including any appropriate instruments of assignment, that all
  ?           of such owner's rights to payment of such principal and
  ,           interest shall be vested in Financial Guaranty. The term "nonpayment" in respect of an Insured Bond includes any payment
  !.          of principal or interest made to an owner of an Insured Bond
  ^           which has been recovered from such owner pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance
  ,           with a final, nonappealable order of a court having competent jurisdiction.

The Policy is non-cancellable and the premium will be fully paid at the time of delivery of the Bonds. The Policy covers failure to pay principal of the Insured Bonds on their respective stated maturity dates, or dates on which the same shall have been called for mandatory sinking fund redemption, and not on any other date on which the Insured Bonds may have been accelerated, and covers the failure to pay an installment of interest on the stated date for its payment. Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation (the "Corporation), a Delaware holding company. The following investors or affiliates thereof own approximately 85% of the stock of the Corporation: General Electric capital Corporation, General Re Corporation, Lumbermens Mutual Casualty Company (affiliated with the Kemper Group), Shearson Lehman Hutton Inc. , J. P. Morgan & Co. Incorporated and Gerald L. Friedman. The investors of the Corporation are not obligated to pay the debts of or the claims against Financial Guaranty. Financial Guaranty is domiciled in the State of New York and is subject to regulation by the State of New York Insurance Department. As of December 31, 1987, the total capital and surplus of Financial Guaranty was approximately $350,500,000. l

5 n,. ,.. m e m .o a ,...,. <, EXIIIBII 1 O.a np.un m .,s, , FyGIC_ . New brL. New brk liktiti 12121OO?..ItMs0 Municipal Bond New Issue Insurance Policy I..uer: Policy Number: Control Number: Bonds: Premium: .

                                                                                                                                                                                     ]

3 Financial Cuaranty Im'urance Company ("F' e I Cou nty' s New York ock in>urance company. in concileranon n i p. ment thd emn and bi ec o th terms of this Policy, hereby unco un Ily an revoi- paytr .itih . t"), I !} rees F N.A.. or its suceeaar. as its a nt the- incel . h bene i of olders, that portion of the princi .a . i re, on el above de nbed le obli- ns (the "Bonds") which shall beco I ue for P ter but. all be np 'd b, re- of Nonpayment by the is.uer. eni toif Fi ra ty s 11 make such a al Agent on the'dme guch principal ori cres be n es Di for Paymer or ni siness Day nest following the day on s hic Fi cial unrei ihall ha r ed Notice of Nonpsyment, whichewr is later. he F en) I dii e to e Bondholder the face amount of principal and intemt 3

• ich i thei u o ut is unpaid by reason of Nonpayment by the luuer but on upu receip i the Fi> cal Agent in form reasonably satisfactory to it, of (i) evidence of i Boi ho nght to receive payment of the principal or interest Due for Payment and iil ence. including any appmpnaie instruments of anignment, that all of the

                   ]

Bo o der's rights to payment of such pnneipal or interest Due for Payment shall .. ihereupor vest in Financial Guaranty. Upon such disbursement, Financial Cuaranty shall

            .- 3 )l               become the owner of the Bond, appunenant coupon or right to payment of pnneipal or
                    /             interest on such Bond and shall be fully .ubrogated to all of the Bondholder's rights thereunder including the Ehndhnider's right to payment thereof.

This Policy is non cancellable for any reason. The premium on thii Policy is not refundsble ior any reason, including the payment of the Bonds prior to their maturity. This Policy does v.ot insure against loss of any prepayment premium *hich may at any time he payable with ree.pect to any Bond. As used hereia, it e term "Onndholder" means, as to a particular Bond, the person other

                        .         than the lauer who, at the time of Nonpaiement is entitled under the terms of such Bond to payment thereof. "Due for Payment" means, when referring to the principal of a Bond, the etwed maturity date thereof or the date on which the same shall have been duly called for mundatory sinking fund redemption and does not refer to any earlier date nn which payment is due by rea.on of call for redemption (other than by mandatory sinkinia fund redernption. acceleration or other adsuncernent of matunty and means, when refernng to
                                                                                                        $sJ Nrnise enerli uur.l hg fusenoel l'ge ' el 2   b..cin '80tsu                                             t.uaranas insuren , i;.wnpens un.ler 1,. en., (nan .4      perent
                                                                                                        . ..e npa n s. FG l( ' i 1.'T* *'*"'*a
                      -   - , , ,             , ~ . - - - . _ . -              -     --      _.

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{' ' lO - 4 Finsncul Currani, insurance

;                         C.unp nv 17.* Lier Street
                          %. brk. .W. Wrk 10n Di 212) oo7 .it m t
'            Munici al Bond New Issue Insurance Policy intere>t on a Bond, the stated date for payment of interest. "Nonpayment" in respect of a Bond means the failure of the issuer to have provided sufficient funds to the paying agent for payment in full of all principal and interest Due for Payment on such Bond. "Notic '

means telephonic or telegraphic notice, subsequently confirmed in writing, or w ' te notice by registered nr certified mail, from a Bondholder or a paying agent - ni Financial Cuaranty. "Business Day" means any day other than a San Sungia, ra s

day on which the Fiscal Agent is authorized by law to remain e i

in Winess Whereof. Financial Cuaranty has caused this oficy be af ed w i i curporate seal and to be signed by its duly su d offi in esimit o be me j s effective and binding upon Financial C by vi uei e eu niersig ture fio , i'_ authonred representative.

                   )W X 4 whPreside
                                                                             = =                            ,

ve Vice Prealdent

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i ecd *  : Authoeized Repeesentadve . Citi nk, . '. A nowledges that it has agreed to perform the duties of Fiscal Agent unde th' icy.

                 ,1                                                                                       M Authorized Omcer su sm.a .,6           ib,nn.m.:

Pase J of 2 Form wou0 Gv.rene, insurance n.rnp.n, undet licente from as perent mrnoen, FCIC CJewranan

c ADDENDUM TO 0FFICIAL NOTICE OF SALE AND OFFICIAL STATEMENT 5160,000,000 CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1988 The following information updates the Official Statement: b 1. At page 34 of the Official Statement, in the discussion of the South Texas

     . Project, reference is made to a January,1988, forecast by HL&P projecting that Unit I would reach its initial criticality by mid-February. That deadline was not met due to certain~ problems which included the need to repair an auxiliary feed

c. water pump. This correction will result in the delay of criticality into March, 1988. CPS cannot predict what other problems might be encountered or the eff ect -

they may have on the Project cost and schedule. I

2. In the litigation section on pp. 38-39, regarding the actions filed by HL&P against CPS and CP&L in Dallas County and Matagorda County State district courts.

CPS and CP&L have responded by submitting to HL&P on March 3, 1988, a call for arbitration, as permitted by the Louth Texas Project Participation Agreement. The

 -       arbitration call names one arbitrator each on behalf of San Antonio and CP&L, and
,        lists as the disputes to be arbitrated issues concerning (1) the extent to which y         HL&P has breached its obligations under the Participation Agreement to the City of San Antonio and CP&L and the amount of damages caused by such breach, and (2) that neither San Antonio nor CP&L is liable to HL&P for any portion of the damages alleged against HL&P by the City of Austin. The call for arbitration is binding upon the three Project Participants and should supersede HL&P's Matagorda and Dallas County actions against CPS and CP&L. HL&P has the right to name a third arbitrator, after which the arbitration may proceed, as governed by the provisions of applicable State and Federal statutes. The decision of a majority of the arbitrators so appointed is binding on all the Participants, and judgment may be entered in a court of competent jurisdiction confirming and implementing the final decision of the arbitrators. CPS has filed a pleading in the Dallas County case denying HL&P's allegations, seeking an order enforcing the arbitration, and, subject thereto, a counterclaim for damages.      CPS cannot predict the outcome of these proceedings.

3. CPS's retail electric service area includes 26 incorporated cities within Bexar County in addition to the City of San Antonio. CPS also provides retail gas distribution service to residents of fifteen of these cities. CPS's electric and gas distribution f acilities utilize streets, alleys, and public ways within these cities pursuant to f ranchise agreements with each city which provide f or payment by CPS to the cities of franchise fees equal to two percent of the gross revenues derived by CPS from the sale of electric and gas service within the cities' boundaries. Most of these agreements were negotiated in the early 1960's with 25-year terms, and despite ongoing renewal discussions, fourteen of the agreements have recently expired. New agreements have been negotiated with two of the cities on terms similar to those of the prior agreements. CPS is continuing to pay franchise fees at the two-percent rate, and is continuing discussions toward

                                                                                             . .. .. l

i di

.                                                                                               . l A00EN00M (New Series 1988)                                                              Page 2 negotiation of new agreements with uniform provisions. The cities with whom franchise agreements have not been renegotiated account for approximately 5.6 percent of the total billing revenues of the systems. These cities have formed a coalition for purposes of negotiating jointly with CPS and the City of San Antonio. The cities' primary interests appear to be in obtaining higher franchise fees and in negotiating with the City of San Antonio to share in the city payment which San Antonio receives as owner from the operation of the gas and electric systems. Although some of these cities have mentioned the possibi-lity of purchasing those portions of the CPS distribution system within their boundaries and the possible assertion of independent rate-making authority, CPS cannot predict whether these issues will be pressed if satisf actory franchise agreements can be negotiated. CPS will continue to pursue the negotiation of

franchise agreements which are f air and equitable to ratepayers of the entire system, but cannot predict what provisions will be contained in final agreements.

.. 4. At its monthly meeting held on February 22, 1988, the CPS Board of Trustees unanmously elected Dr. Frank Bryant, M.D., to fill the trustee vacancy lef t by the departure of Mr. Earl Hill, the former chairman, whose term expired at the end of January. ,

5. City Public Service has been notified that the following ratings have been assigned to this issue:

Moody's investor Services Inc. Aa Standard & Poor's Corporation AA Dated: March 4, 1988 CITY PUBLIC SERVICE BOARD OF SAN ANTONIO, TEXAS Howard Freeman, Secretary

 , w-. .              .    .....~
                                                 ~~        " - - ~ " ' -?

i OFFICIAL STATEMENT

                   $160,000,000 CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS l

REVENUE IMPROVEMENT BONDS, NEW SERIES 1988 i P l ( l Blds to be Opened Thursday, March 10,1988, at 11:00 A.M., C.S.T. l

 's ,. . . , ,,:                                                                     *s .I    ' O *"l' ~ %5 2 I###"=ik ,

CITY OF SAu ANToul0, TEEAS CITY COU#CIL Monry G. Cisneros, Mayor Walter Martine Tolande Vers Marie Antoniette terriorabal Robert Thompson Joe Webb Welcn Duteer Frank D. Wing Jones C. Nesslocher Nelson Wolff

                                                                                                                                   +

Weir Lebatt Louis Fox

• City Meneger Carl L. White, Jr.
• City Finance Otractor Norma Rodrigue
• City Clerk CITY PUBLIC SERVICE BOARD OF SAE ANToul0 Lite Cockrett, Chair (vocency) Pat Legen, Vice Chair Monry G. Cisneros, Mayor tuben M. Escobedo A. J. von Rosenberg
• General Manager Moward Freeman Assistent General Manager for Finance & Secretary / Treasurer CouSULTANTS Arthur Young & Company Cetthaws & Branscomb Audi tors Legal Advisors McCall, Parkhurst & Norton toten Moste Inc. and Pond Counsel Southwestern Capital Markets Inc.

Financlet Consultants 4 The date of this Of ficial Statement is February 4,1988. I

                                                                                                                                   .i

9'.M_ . . . . . .._ M -M L t,i - N _SIhq3, , 4 ' TA8LE Of CONTENTS Poet TBE B0508 Description of Bonds 1 Summary Statement 2 Authority and Purpose 2 Mistorical het Revenues and Coverage 3 Principal and Interest Requirements 4 Fund Balances 4 Outstanding Indebtedness Revenue Bond Indebtedness and Utility Plants & Commercial Paper Program 6 Bond Ordinance Provisions T Security 8 Rate Covenant 9 Application of Revenues 10 Issuance of Additional Parity Bondt 13 SAs ANTOW10 ELECTRIC AND SAS SYSTEMS Mistory and Management 20 Administration and operating Personnet 20 Electric and Gas Sales by Customer Category 21 Description of Physical Property 22 Territory served 27 Thirty Largest Gas and Electric Customers 27 Statement of Revenues Espenses, and het Income 28 Condensed Statements of Assets and Llobilities 29 Comparative Analysis of Electric and Gas Utility Operations 30 Record of Crowth

• Production of Electric Power 31 Five Year Forecast of Elect. lc and Gas Operating Data 31 1989 1993 Construction Program 12 South Temes Project 34 Environmental Matters 35 Fuet Supply 35 Energy Conservation Program 38 Litigation 38 tates 40 Electric customer Statistics 43 Typical Gas and Electric Bills of Sta Texas Cities 43 Ten Year Record of City Benefits free Systems 43 TAR EIEMPflou 44 APPEtDIE A
• City of San Antonio
• General Inforsetton A*1 APPfa0lx 5
• Financist Statements and Auditors' Report B*1 APPfuDit C
• CPSI Interin Financlet Statements (Unaudited) C*1 APPEtolt D
• Text of Certeln Indenture Prowlsions 01 APPEB0lt E
• CPSB Resolution Approving tend Ordinance E*1

g This Of ficial Statement does not constitute en of fer to sell Bonds in any jurisdiction to any person to whom it is untowf ul to make such offer in such jurlediction. No dester, salesman, or any other person hea been authorised to give any information or make any representation, other then those contained herein, b/ - connection with the offering of these Bonds, and if given or made, such information or representation must nwc be relled upon. The information and expressions of opinion herein are subject to change without notico except .# e1 as provided herein, and neither the delivery of this Of ficial Statement nor any este made hereunder shelt, under any circumstances, create any implication that there has been no change in the affairs of the City etnce the date hereof. In the opinion of Bond Counset, under existing statutes, reputations, pubtlahed rulings and court doc lsions, interest on the tomis is not includable in the gross income of the owners of the Bonds for federet income tax pu* poses. For a dicussion of Bond Counsel's opinion and a description of certeln collateret tax setters, including the application of the alternettve minleva tax to the Bonds, see "Tax Exemption." 0FFICIAL STATEMEuf NEW ISSUE S160,000,000 CITY OF SAN Auf0mlo, TEXAS  ; ELECTRIC AB0 GAS SY*TEMS REVENUE IlePROVEMENT 90#05, BEW SERIES 1968 Dated: March 1, 1988 Denomination: Multiples of 35,000 Interest on the $160,000,000 City of ten Antonio, Texas Electric ent) Ces Systems tevenue improvement gonds, New Series 1988 (the "Bonds"), is payable on February 1 and August 1 of each year connencing August 1, 1988. The Bonds will be lesued only as futty registered bonds in the denoelnetton of $5,000 or any integret muttlple thereef. Principal of the Bonds will be payable et the principal corporate trust of fice of The Frost National Bank of San Antomlo, San Antonio, Texas, the paying agent /regletrar (the "Psying Agent /Registrer"). Interest on the Bonds will be payable by check dated es of the Interest payment date, and set ted on each intcVest payment date by the Paying Agent /tegistrar to registered holders. Registered holders are those shown on the records of the Paying Agent / Registrar on the 15th calendar day of the month next preceding es;h Interest i payment date. AMOUNTS, MAfullTIES, thTEREST RATES, AND PalCES OR TIELD5 SEnlAL BotDS Due Interest Price or Due Intereof Price or Amoet 8 555,000 W1990 este _ 5.301 Yield

• 5.301 Amount 81,170,000 f eb. ,1 2000

_ tete . 7.501 _Yletd 7.501 580,000 1991 5.70 5.70 1,255,0 % 2001 7.60 7.40 705,000 1992 6.00 6.00 1,350,000 2002 7.70 7.70 750,000 1993 6.25 6.25 1,435,000 2003 7.75 7.75 775,000 1994 6.50 6.50 6,510,000 2004 7.80  ?.60 835,000 1995 6.70 6.70 7,045,000 2005 7.80 7.35 885,000 1996 6.90 6.90 7,630,000 2006 7.90 7.90 970,000 1997 7.10 7.10 8.255,000 2007 7. 00 7.95 1,025,000 1998 7.20 7.20 8,940,000 2008 8.00 8.00 , 1,080,000 1999 7.40 7.40 9,675,000 2009 f.00 8.00 I ( 898,575,000 8.00% Tera sonds due February 1, 20164 rice 100% l , (Accrued Interest to be Added) j Inittet of fering yleids as furnished by Beer, Stearns & Co. inc., for the Underwriters. REDEMPflos PROv!stous Mendetory Redesaption As previewsty indicated, bidders have the option to determine the maturity of ters boods, if any. If term bonds are designated by bidders they will be subject to mandatory redemption prior to materity on February 1 In each of the years and in the respective principal enounts as set forth In paragraph b page (II) in the Notice of Sale end Bidding Instructions (the particular bonds to be redeemed to be selected by the City by l l Lot), in each case as a redemption price equal to 100% of their principal enount plus accrued Interest to date of redemption. ( OptIonet IedeeptIon Bonds maturing on end after February 1, i999, will be redeemable, as a whole or in part on February 1, 1998, or en any interest payment date thereaf ter, et per and eccrued interest, plus the following premiumt February 1,1998 through January 31, 1999 at 102.0%; February 1, 1999 through January 31, 2000 et 101.01; February 1, 2000 and thereafter at 100.01. 1

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                                                                                      .                  \.upeMAtf STATENe1T    p i

t l The following contained elsewherematerial is quelif in this O!g te irg its entirety by the more complete informet.on and financtal statements i P.sist Statement. I TO ISSUER......................... City of San Ant oni o.- ['ex a s, a poll'Ical subdivision of ti;* .,ete of Texas, locateci 1.1 Bear County. TNE80tDS........................../ 8160,000,000 attectrici 7 n,d < 09 !!ste e tevenue Improvement Bonds, New Series 1988 (the "Son f.."). W ehl vil i mature on the dates and in the

                                            'a                                              amounts set forth in) thi* Le sie New Series 1988 Bonds" offitial                                   s It k',                                                                                          Statement.

f j f' AUTNORITY FOR Ils0A pE............. The Bonds will f>e issued under and in conformity with the Constitution i - N/ v' and Laws of Texas, particulariy Art *. tes 1111 et seq./ kad f tticle 2368a of Vernon's 5 ', Texas tev' sed Civil Statutes. Annotated, and Vursuant to a

                                                                                 >          Sond Ordinance            to be adopted by ee City Cour.cf( of, the City of San Antonio,   Texas.

f ,1 PURPOSE OF TNIS FlfANCINC.......... L e proceeds cf the Bonds will be used to pay certel* sf the costs of a f [ ,

                   )

1 UohaamI of improvements to and extensions of the City s electric and gas i i-avstesss (tu "Systems") and tc fwd de required reserve fund increase I c.pticeole to the Bonds. The sveralt .mprovement progree includes site

                                                          ,          !4                     development, construction of electrical sen* rating units, constraation of h

1 distribution end trec.tmission lines, addit tens and Oprovements' to the ses system and miscellaneous projvat Msts. ' h ese improieovate,

                                           /, '

extensions and additt3ns are in eccord mith the City's long range f devetopment and improvement plans. f

                                > s:

f SECURI TY. . ,'. i } . .'.y. /. . .j . . . . . . . . /. . . . / cld Se r i e s B onds wh i c h a re o f a s eni rIhe City o rank and are secured by a first i \ 5 mortgage against all re el p?operty, a security Interest in ett personal

                                                              ,,               g           property,       and a pledge of alt revenues of the City's electric and gas o

S i(j p systems. In addition, the City hea

                                                                                      ,' totalling $2,126,335,000 of New Series Bonds. The Bonds of fered herein outstanding    26   series
                            ) '.

j will constitute rpeclat obligations of the City on a perity with the af oremet toned $2,126,335,000 New Series Bonds, payable solely f r oe4 and

                                   '                                             I secured bij e lien on and pledge of the net rev6.iues of the City's electric and gas systems, subject to tM prior Lien of the pledge to the Old Series          Bonds,        all     as futty set forth                 in the ord' nance authorialng the Bonds.

ADDl110NALSTMDS......f...,.1... Additional bands en a perity with the Bonds mas co nssued, then soons I xk ether requiremerM , het tersnues of the ElectrtA and Gas Systems during the past year were at least 150S of the priximust innust debt service on j >, ' all bonds to be outstanding. Said het Rennues ma[oe' obj,sted to ,*9f tects Pte changes. The senior Llen of the Old Series Bon.. Is closed.

                                                                                            't RATE C0VENAWT... .................. Thi City has covenented to maintain Electric ard Gas rates and charges sufiltlant to pay att expenses of maintenance and operetto of the Systems, and to pay debt service requirements on ett bonda and to i;                      ,            (                       establish and maintain the regulred reserves.

P A T ME lf i R E M P . . . . . . , . . . . . . . . . . . . . The City of San Antonio has never def aulted on any of it.' lan.is. I LEGALITT...i..,....dy.............. The Attorney General of Texas and McCall, Patkhurst 8 Norton, 1

                                          '3                                             San Antonio, Temes.

SEL WEIT..$................. '., .. Ant {cipated oi ?r about April 7,1988 i k k t i

                                                                                         ,                        2 I

p. 1 g_ _ _

                                                                                   ,1v                     t                                                                          --

 ', N .A         n. .                                                   .         . ,__                 _.,                     c., ; 2 M D Q i g g g g g g g g 5
                                                                                                                ,          g 9         .

o BON 0 RATING 8....................... The follow!ng ratings have been assigned to the Bonds: Moody's Investors Service, Inc., "Aa" and Standard & Poor's Corporation "AA". An explanation of the significance of such ratings may be obtained upon request from Moody's Investors cervice, Inc. or Standard & Poor's Corporation. Only the opinions of' Moody's Investors Service, Inc. and Standard & Poor's Corporation are represented by such ratings and the City makes no representation as to (1) the appropriateness of such ratings or (2) Its ability or intent to meintain such ratings. i No assurance is given by the City that *' .-tings will be malntained for any specified period cf time, or i they will not change or be suspended or withdrawn by body's tr' . tors Service, Inc. or Standard & Poor's Corporation if, in the opinion of the rating agencles, changes in the circumstances of the City should so warrant. Any such change, suspensf on or with(rwal of thr pot:d ratings may have en adverse ef f ect onthemarketpricer]theBondt.. ,} MUNICIPAL BOND INSURANCE............FGIC has agreed to provide municipal bond insurance on the 2016 Term Bond. A statement of their polien ts included as a separate enclosure. GENERATING FACILITIES.............. The City's major generating facitlties include ?.1 units whf eh have a dependable combined capability on natLral gas of 2,400 MW and two 418 MW coal fired gener & ting units. All of these units are cepable of being operated on fuet olt. 3 CURRENT FUEL SUPPLY................ The City's electric'end gas system is supr #d wiW 82% of its natural gas by subsidiary n:banies of Valero (tergy Corp. with the balance from other suppliers. The Cf ty has received. all Mf the natural ses it has required to meet its needs, except in rere NLtences, during the past ten years. Fuel oil may be burned as required during curtallment periods, and current fuel ol! f eventories are equel to total f ust requirements for about 13 days. Coat'is pucchesed under a long term contract recently renegotiated as to price and present coat on hand In stockpf te is approximately 3.8 months supply. The current gas contracts are beleg renegotiated at present (see Fuel Supply).

                                                                                                                                                                                                      \
                                                                                                                                                                                                       'g l

HISTORICAL NET REVENUES Al} s C0VERACE (

Fiscal Years Ended 1 h . 1984 1985 1986 1987 1987 2

                                                                                                                        \

Gross Revenues $715,466,537 8804,254,379 *

                                                                                                                           $84A,833,321                     $804,218,205             $792,393,299 Maintenance &

Operating Expenses 3 466.297.794 479.875.730 495.832.215 393.02P.550 l h8.015.977 l Net Revenues $249,168,743 S324,378,649 $373,001,106 $386,202,228 $399,364,749 1 Actual Principal and l Interest Requirements: i Old Series sonds S 16,531,220 $ 16,498,031 S 16,475,985 8 16,425,945 S 16,391,826 l New Series pondsl L1,14 a 2( M f1 $129.894.634 $156.675.078 $176.761.411 $187.093.178 l Total All Bonds S G1,b.,614 S146,392,665 $173,151,063 $193,187,356 8203,485,004 ACTUAL C0VERACE 2.05x 2.22x 2 Af e s a 2.00x 1.96x

                                                                                                                                      /             ,N Maximum Principal and Interest Requirements on all Bonds, including                                                                      -

t h e N e w S e r i e s 19 88 B ond s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . /. . . . . . . . . . . . 5 2 31,5 2 4,2 66 i n 2 0 03 C0VERAGE 1.08x 1.40x 1.61x 1.67x 1.TD 1 3 Net of accrued interest and premium received on bond issues sold, s g 12 months vnding December 31, 1987. - 3 Includes interest on short term obligations. ,e

                                                                                                                                              \

f 3 (REVISED)

w h . .. 1-

                                                                                           ....'                 -. -           ' M. .^ ^ ^ -             .
                                                                                                                                                                                '      . > >-cipe4~ '

7. - _

Mhm j e;1} 4 f PRINCIPAL Aue INTEREST REQUIREMENTS

• I The following Series schedulethe Bonds, including reflects total principal New Series 1988 Bonds. and Interest requirteents on ett Old Series Bonds and New New Series Roads

                                                                        $160,000,000 New Series 1988 Bonds Year                  Old Ending               Series               Presently                                                                                                                                        % of h                 Jgyg@_                                                                                                          Total                                    Total        ?rincipal Outstandino                Prinefen.'                    Interest                _New Series                                   All Bonds       _ Retired 1988             16,388,725             191,372,571 1989             16,358,851 t                                 191,372,571                                207,761,296 189,245,399                                        11,575,046                    200,820,444 1990             16,312,100             201,874,004                                                                                                                 217,179,299
                                                                           $$5,000                12,627,323                    215,056,326                               231,368,426 1991             16,281.730             201,925,584                 580,000 1992 12,597,908                   215,103,491                                231,385,241 16,219,875          ' 201,910,251                  705,000                12,564,848 1993              16,156,975                                                                                             215,180,099                                231,399,974        10.108%

201,986,361 750,000 12,522,548 215,258,909 1994 16,109,700 202,066,919 231,415,884 775,000 12,475,673 215,317,591 231,427,291 1995 14,677,500 203,502,766 835,000 12,425,298 1996 14,587,500 216,763,064 231,440,564 203,612,881 885,000 12,369,353 216,867,234 1997 14,445,000 203,745,881 231,454,734 970,000 12,308,288 217,024,169 231,469,169 1998 218,213,019 1,025,000 26.229% 1999 12,239,418 231,477,436 231,477,436 218,244,371 1,080,000 12,165,618 231,489,989 2000 218,244,799 231,489,989 1,170,000 12,085,698 231,500,496 231,500,496 2001 218,254,321 1,255,000 2002 11,997,948 231,507,269 231,507,269 218,262,176 1,350,000 11,902,568 231,514,744 2003 2io,290,649 231,514,744 49.391% 1,435,000 11,798,618 231,524,266 231,524,266 2004 189,157,759 6,510,000 2005 11,687,405 207,355,164 207,355,164 164,498,346 7,045,000 11,179,625 182,722,971 182,722,971 2006 116,729,1*i6 7,630,000 2007 10,630,115 134,989,231 134,989,231 116,681,269 8,255,000 10,027,345 134,963,614 134,963,614 2006 116,612,544 70.551% 2009 8,940,000 9,375,200 134,927,744 134,927,744 116,589,069 9,675,000 8,660,000 134,924,069 2010 116,468,563 134,924.069 10,475,000 7,886,000 134,829,563 134,829,563 2011 116,419,806 11,340,000 2012 7,048,000 134,807,806 134,807,806 116,339,744 12,275,000 6,140,800 134,755,544 2013 116,248,619 134,755,544 89.825% 13,285,000 5,158,800 134,692,419 134,692,419 2014 85,654,294 14,385,000 2015 4,096,000 104,135,294 104,135,294 17,680,000 2,945,200 20,625,200 20,625,200 2016 19,135,000 1,530,800 20,665,800 20,665,800 100.000%

• Actual requirements.

other figures have betn'esunded Cents omitted,to the figures nearestendingdollar. with $0.50 have been rounded up to the next dollar, all FUNO BALANCES (At Decentwr 31, 1987)

                                                                                                \

Restricted Cash and Securities: 1 Old Series Bonds Reserve Account.................. '

                                                                                                                                                                                     .8    17,165,859 I mp r o v eme n t s a nd C on t i n g e nc i e s F und . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            ......$   161,154,460 Neu Series Bonds Reserve             Amount.......................................................                                                                     ......$   181,549,336 PROPERT[ 00!TIONS

) 6 (At Dec6uber 31,1987) i Additions, Improvements end Extensions to Electric and Gas Systems, 1942 1987........................................................ 83,923,220,910 S ond s l a s ued t o f i na nc a t h e s e P r o p e r t y A dd i t i on s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 82,456,560,000 Portion of Property Additions Financed by issuance of Bonds.................................... 62.6% 4 I I l [ 4

                                                   ~       _ , _ _ _ .                              ._ __ _ ____                                    .-_ _ _ _ _ _ _ _ _                           _        _

9 s OUTSTAN0 lug luCESTEONEss All' revenue bonds of the City payable from the net revenues of the Electric and Gas systems of the City and issued prior to 1968 have been retired. including the New series 1988 Bonds, the Clty will have outstanding Electric and Gas systems Revenue improvement Bonds in 31 series as follows: Effective 20 Bond original intarest Yield index Final Average Rate On Nearest Amount Maturity Life sale Date sale Date' OutstandineD Old Series Bonds Prior Lien (closed) series 1968 1989 15.6 years 4.463% 4.41% $ 4,010,000 series 1971 1992 14.7 years 5.166% 5.58% 14,220,000 series 1973 1994 15.8 years 4.763% 5.03% 21,980,000 series 1974 1997 17.3 years 6.896% 6.95% 65.575.000 subtotal (Old Series Bonds) 8 105,785,000 New series Bonds series 1975 1998 16.0 years 7.390% 7.48% $ 36,050,000 series 1976 1999 15.9 years 6.270% 6.98% 43,000,000 series 1976 A 1999 16.4 years 5.179% 6.78% 44,725,000 series 1977 2000 18.1 years 5.254% 5.78% 49,800,000 series 1977 A 2002 23.7 years 5.718% 5.64% 75,000,000 series 1978 2002 16.6 years 5.'55% 5.65% 58,575,000 series 1978 A 2003 16.5 years 3.978% 6.12% 59,650,000 series 1979 2003 16.7 years 6.153% 6.50% 61,725,000 series 1979 A 2004 18.3 years 6.048% 6.11% 87,325,000 series 1980 2005 18.4 years 9.383% 9.20% 18 500,000' series 1980 A 2005 17.8 years 8.823% 8.68% 42,000,000' series 1981 2001 13.3 years 9.956% 10.40% 29,380,000' series 1981 A 2005 16.5 years 12.675% 12.79% 5,795,000 8 Series 1982 2003 15.0 years 13.1521 12.71% 6,815,000 C series 1982 A 2003 15.1 years 10.350% 10.05% 26,325,000' series 1983 2005 17.3 years 8.857% 8.86% 94,925,000 series 1983 A 2013 21.9 years 10.451% 9.91% 35,650,000 d series 1984 A 2013 '2.0 years 11.270% 10.50% 25,300.000d ,e series 1984 B 2014 22.0 years 10.968% 10.36% 24,900,000d ,e series 1985 (Refunding) 2005 14.1 years 9.875% 9.21% 116,380,000 series 1985 A 2014 22.1 years 9.655% 9.75% 40,200,000' series 1985 8 2014 21.9 years 9.472% 8.95% 86,875,000' series 1986 (Refunding) 2014 21.9 years 7.835% 6.98% 320,660,000 series 1986 A 2014 22.6 years 8.765% 8.08% 185,000,000 series 1987 (Refunding) 2014 16.7 years 6.837% 6.54% 391,780,000 2014 22.1 years 7.013% 6.62% 160,000,000 series 1987;A 160.000.000 series 1988 2015 22.3 years subtotal (New series Bonds) 52.286.335.nR Total Bonds to be Outstarding, including the Bonds $2.392.120.000 a As pubtlshed by "The Bond Buyer." b As of February 1, 1988, and including the Bonds. c An additional amount of $48,985,000 series 1981 A Bonds and $48,145,000 series 1982 Bonds are outstanding but have been advance refunded by the New series 1985 Refunding Bonds, and are fully defeased. d An additional amount of $79,350,000 New series 1983 A Bonds, $91,400,000 New series 1984 A Bonds and

        $82,600,000 New series 1984 B Bonds are outstanding but have been advante refunded by the New series 1986 Refunding Bonds, and are fully defessed.

• An additional amount of 548,025,000 series 1980 Bonds, $34,825,000 series 1980 A Bonds, $32,675,000 series 1981 Bonds, 544,620,000 series 1982 A Bonds, 88,300,000 series 1984 A Bonds, $12,500,000 series 1984 B Bonds, $109,800,000 series 1985 A Bonds and $38,125,000 series 'i985 8 Bonds are outstandir.g but have been advance refunded by the New series 1987 Refunding Bonds, and are fully defeated.

I DateJ March 1, 1988. 5 1

REVEuut 5080 luSEBTE0 NESS ANO UTILITY PLANTS Debt as Date Reveaue Bond Electric and Gas Plant Eautoment a X of 1:111 Indebtedness At Coat Net (Decreciated) Net Plant 1960 $ 44,145,000 S 187,026,225 S 159,317,177 27.7 1965 54,190,000 279,053,625 226,794,522 23.9 1970 71,040,000 420,480,731 335,125,890 21.2 1975 201,195,000 677,114,390 542,919,917 37.1 1976 245,595,000 809,025,826 659,773,046 37.2 1977 358,110,000 954,207,395 790,396,043 45.3 1978 484,290,000 . 1,100,709,068 918,110,351 57 7 1979 622,975,000 1,265,232,510 1,056,105,552 59.0 1980 783,645,000 1,449,572,698 1,212,958,432 64.6 1,31 926,505,000 1,626,916,440 1,363,764,913 67.9 1982 1,041,105,000 1,804,344,072 1,515,056,423 68.7 1983 1,153,740,000 1,983,693,741 1,663,795,179 69.3 1984 1,342,785,000 2,236,612,812 1,885,959,134 71.2 1985 1,559,860,000 2,620,510,570 2,236,426,504 69.7 1986 1,824,070,000 2,638,847,230 2,420,104,511 75.4 1987 2,044,030,000 3,255,479,253 2,808,565,730 72.8 19871 2,266,940,000 3,602,808,133 3,132,662,667 72.4 1 As of December 31, 1987. ColutERCI AL PAPER PROGRAM on November 10, 1983, the City Council of San Antonio authorized the issuance of $100 million in tax exempt commercial paper (the "Commercial Paper") to assist in the financing of capital improvenerte to the Systems. The marketing of such Commercial Paper commenced on December 1,1983, and at present the City has $;8 million of its commercial Paper outstanding. The Commercist Paper Program will expire in November,1988, unless it is ren:ved or extended. The current plans are to extend the program. The Commercial Paper is equelty and ratably secured by and is payable from (f) the Net Revenues of the Systems, such pledge being subordinate and inferior to the pledge of Net Revenues securinS the New Series Bonds and the Old Series Bonds, (11) the proceeds f rom the sale of additional New Series Bonde or Commercial Paper, and (111) borrowings under and pursuant to the Credit Agreement (as hereinaf ter defined). The City and Texas Commerce Bank National Association have entered Into a revolving credit agreement (the "Credit Agreement") pursuant to which such bank is obligated under the Agreement to loan to the City an aggregate amount not to exceed $100,000,000 for the purpose of paying enounts due on the Commercial P ape r . Any borrowings under the credit Agreement are equally and retably secured by and payable from the above* described seurees pledged for payment of the Commercist Paper. l l l l 6 -- .. . . . . ~ . . . . . .

1 3050 CaOINANCE PROVISIONS FollowinB are direct quotes of certain provisions of the Ordinance authorlaing the Bonds (the "Ordinance"). SECTION 7: Definitions. Unless the context shall Indicate a contrary meaning or intent, the terms below defined, for all purposes of this Ordinance or any ordinance amendatory or supplementa! thereto, shall be construed, are used, and are intended to have meanings as follows: (a) "Additional Parity Bonds" Bonds or other obligations authorized to be issued under the provisions of Section 18 hereof, including refunding bonds, which are secured by a tien on and pledge of the Net Revenues of the Systees on a parity with Previously Issued Parity Bonds and the New Series 1988 Bonds. (b) "Board of Trustees," "Board," "City Pubtle Service Board," "Public Service Board" The City Public Service Board of San Antonio, Texas, existing and functioning pursuant to the Indenture er, subsequent to defensance of the Indenture, existing and functioning pursuant to this Ordinance. (c) "City" a the City of San Antonio, Texas and where apropriate, the City Council thereof. (d) "Commercial Paper"

• the presently outstanding "City of Sen Antonio, Texas, Electric and Gas Systees Commerclet Paper Notes, Series A", the issuance of which was authorized by the City Councl( of the City by ordinance adopted on November 10, 1983, originally authorized in the principal amount of $100,000,000, and the Revolving Note, as defined in sold ordinance, each of which are secured by a pledge of the Net Revenues of the Systees subordinate to the pledge of the Net Revenues securing payment of the Old Series Bonds and the New Series Bonds.

(e) "Depository" Such bank or banks at any time selected by the Board of Trustees to serve as depository of the funds hereinafter provided for with rotation to the Parity Bonds. (f) "Fiscal Year" The twelve month operational period of the Systems commencing on February 1 of each year and ending on the following January 31. (g) "Indenture" The Trust Indenture, dated February 1, 1951, together with eight supplements thereto dated August 1, 1953, February 1, 1957, February 1, 1960, August 1, 1962, February 1, 1968, February 1, 1971, February 1, 1973 and August 1, 1974, given as security for the Old Serles Bonds. (h) "Meintenance and Operating Expenses" Those expenses required by the Law ( Article 1113, V. A.T.C.S.) to be a first (f en on and charge against the income of the Systems, including the cost of insurance; the purchase and carrying of stores, materials and supplies; the purchese, manufacture and production of ges and electricity for distribution and resale; the payment of seteries; and the payment of all other expenses property incurred in operating and maintelning the Systems and keeping them In good repalr and operating condition (classed as a maintenance and operating expense as opposed to a capital expenditure under the Uniform System of Accounts adopted by the National Association of Regulatory Utility Commissioners). Deprecletion on the properties of the Systems shall not be considered or included as Maintenance and operating Expenses in the determination of Net Revenues of the Systems. (1) "Net Revenues" - All income and revenues f rom the operation of the Systems af ter the deduction of Melntenance and Operating Expenses. The term "Net Revenues" shalt also include any additional and further security f or the payment of the Parity Bonds as may be pledged therefor consistent with the then applicable laws of the State of Texas, provided that any such additional and further security is made equally and retably applicable as security for all outstanding Parity Bonds. (j) "New Series 1988 Bonds" or "Bonds" The bonds authorized by this ordinance. (k) Pold Series Bonds" - The presently outstanding City of San Antonio Electric and Gas Systems Bevenue leprovement Bonds, Series 1968, Series 1971, Series 1973 and Series 1974. (L) "Parity Bonds" or "New Series Bonds" The Previously Issued Parity Bonds, the New Series 1988 Bonds and

 >     eny Additional Parity Bonds.

(m) "Psying Agent / Registrar" - The bank, trust company, or other duty quellfled and legally authorized entity named f rom time to time as Paying Agent / Registrar f or the kew Series 1988 Bonds, and any Additional

• Parity Bonds hereafter issued in registered form.

(n) "Previously Issued Perity Bonds" The outstanding and unpaid bonds of the following series, to witt

       ' CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1975", dated August 1, 1975, and originally issued i the total principal amount of $50,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1976", dated February 1, 1976, and originally issued in the total principal amount of $60,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1976 A",          dated August 1, 1976 and originally issued in the total 7

principal amount of $60,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1977", dated February 1, 1977, and originally issued in the total principal amount of

    $60,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1977-A',    dated August 1, 1977, and originet ty issued in the total principal enount of $75,000,000; "CITY OF SAN ANTONto, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1970", dated February 1,1978, and originally issued in the total principal amount of S75,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE '!MPROVEMENT BONDS, NEW SERIES 1978 A", dated August 1, 1978, and originally lesued in the total principal enount of $75,000,000; "CITY OF SAW ANTONIO, YEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT B0NDS, NEW SERIES 1979", dated February 1, 1979, and originally issued in the total principal amount of $75,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1979 A", dated August 1, 1979, and originally issued in the total principal amount of $100,000,000; rCITY OF SAN ANTOWlo, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1980", dated February 1, 1980, and originally issued In the total principal amount of $75,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1980 A", dated August 1, 1980, and originally issued in the total principal amount of $85,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1981", dated February 1,                 1981, and originally issued in the total principal amount of $75,000,000; "CITY OF SAW ANTONto, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IT.PROVEME NT BONDS, NEW SERIES 1981 A", dated October 1, 1981, and originally issued in the total principal amount of $60,000,000; "CITY OF SAN ANToulo, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1982", dated February 1, 1982, and originalty issued in the total principal amount of $60,000,000; aCITY OF SAN ANTONIO, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1982 A", dated August 1, 1982, and originally issued in the total principal amount of $75,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1983", dated April 1, 1983, and triginally lesued in the total principal enount of $100,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE IMPROVENENT BONDS, NEW SERIES 1983 A", dated November 1, 1983, and originally issued in the total principal amount of $115,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1984 A", dated June 1,1984, and originally issued in the total principal enount of $1?5,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1984 B ", da t ed Oc t obe r 1, 1984, and originally issued in the total principet enount of $120,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE REFUNDING BONDS, NEW SERIES 1985", dated January 15, 1985, and originally issued in the total principal amount of $116,380,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1985 A", dated April 1, 1985, and originally issued in the total principat amount of $150,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1985 B",                dated October 1,  1985, and originally issued in the total principal amount of $125,000,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE REFUNDING BONDS, NEW SERIES 1986", dated February 1, 1986, and originally issued in the total principal amount of
    $320,660,000; "CITY OF SAN ANTONIO, TEXAS, ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1986 A", dated April 1, 1986, and originally issued in the total principal arount of $185,000,000; "CITY OF SAN ANTONto, TEXAS, ELECTRIC AND CAS SYSTEMS REVENUE REFUNDING BCNDS, NEW SERIES 1987", dated January 1, 1987, and originalty issued in the total principal amount of $391,780,000; and "CITY OF SAW ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1987 A", dated February 1, 1987, and originally isst.ed in the total principal amount of $160,000,000.

(o) "Systees" The entire electric light and power plants and systems and gas distribution system and all property of every kind appurtenant to and used or acquired In connection with said electric light and power plant and systems and gas distribution system owned by the City and described in and covered by the Indenture, together with att property of every kind now and hereaf ter owned or acquired by the City as a part of or for use in the operation of the City's electric light and power plants and systems and gas distribution system. SECTIOel 8: Pledge. The City hereby covenants and agrees with the holders of the Parity Bonds that (a) Until such time as the terms, conditions and provisjons of the Indenture become Inoperative and the eTrust Estate" conveyed by the Indenture reverts to tne City free and clear of the encumbrance created thereby, the Parity Bonde shall be and ere hereby declared to be payable solely from and equatty secured by an i frrevocable pledge of and Lien on that portion of the Wet Revenues of the Systems deposited and avellable for l deposit in (1) the "Electric and Gas Systema Improvements and Contingencies Fund" established pursuant to , Section 6 of Article V of the Indenture and (11) the General Fund of the City pursuant to Sections 5 and 6 of l Article V of the Indenture. (b) At such time es the terms, conditions and provisions of the Indenture become inoperative and the "Trust ' Estate" conveyed by the Indenture reverts to the City f ree and clear of the encumbrance created thereby, the Net Revenues shett be and are hereby irrevocably pledged to the payment of principal of and interest on (including the establishment and enintenance of a reserve, as provided in Sections 12 and 18 (e) of this ordinance) the Parity Bonds, and it is hereby ordained that at such time all Parity Bonds and the interest < thereon shall constitute a first Lien upon the Net Revenues of the systems, l 1 SECTIcel 9: Rates ard Charges. The City hereby agrees and reaf firms its covenents to the holders of the Parity ) Bonds that it will at all times maintain rates and charges for the sale of electric energy, gas or other I servf ces furnished, provided, and supptled by the Systems to the City and at t other consumers which shall be l reasonable and nandlocriminatory and which will produce income and renveues sufficient to pay l l 8 l _. _ .. - . _ .. _ ..,... . _ _.=, - ,----- -,.,,_ . . ~ ,

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(a) Att Maintenance and operating Expenses; depreciation, replacement, and betterment expenses; and other costs as may be required by law (Article 1113, V.A.T.C.S.); (b) The Interest on and principal of all Old Series Bonds, as and when the esse shall become due, and maintain the Funds and Accounts created and established for the payment and security of the Old Series Sonds; (c) The Interest on and principal of all Parity Bonds, as and wnen the same shall become due, and provide for the establishment and maintenance of the Funds and Accounts created for the payment and security of the Parity Bonds; (d) To the extent the same are reasonably enticipated to be paid with "Avellable Revenues" as defined in the ordinance authorialng the Coomercist Paper, the interest on and principal of all "Notes", as defined in sold ordinance, and the "Agreement", as defined in said ordinance; and (e) Any legal debt or obligetton of the Systems as and when the some shall become due. SECTION 10: General Account. The City, acting through the Board of Trustees, hereby reaf firms its covenant to holders of the old Series Bonds and hereby covenants with respect to the holders of the Parity Bonds, that ett revenues of every nature received through the operation of the Systees shall be depostted as received in the "CITY OF SAN ANTOW10 ELECTRIC AND CAS STSTEMS GENERAL ACCOUNT" (hereinaf ter referred to es "General Account"), which shall be kept separate and sport from et t other funds of the City. Revenues received for the Generet Account shall be deposited from time to time as received in such bank or banks as say be selected by the Board of Trustees in accordance with applicable tows relating to the selection of City depositories. SErtION 11: Flow of Funds. The City, acting through the Board of Trustees, hereby agrees and reaf fires its covenant to the holders of the Parity Bonds that (a) Until such time as ett the terms, conditions and provisions of the Indenture shall become inoperative and the "Trust Estate" conveyed by the Indenture reverta to the City free and clear of the encumbrance created thereby, funds in the General Account shalt be pledged and appropriated to the following uses in the order of precedence shown:

• FIRST: For the payment of operation, maintenance, repairs, and extensions of the Systees provided for in Article 1113, V.A.T.C.S., and Section 3 of Article V of the Indenture; g

SEcoup To the payment uf the principal of and interest on the Old Series Bonds, and to the "Ben Antonio Electric and Gas Systems Bond Reserve Account" for the benefit of the Old Series Bonds in the manner and to the extent required in Section 4 of Article V of the Indenture; TNIRD: To the payment of the annust sue to be deposited in the General Fund of the City in accordance with and to the extent set out in Section 5 of Article V of the Indenture; FOURTN To the payment of the annual sum (equal to not less then 121/2% of the gross revenues of the Systems) to be deposited in the "Electric and Gas Systems Improvements and Contingenclet Fund" in accordance with Section 6 (as amended) of Article V of the Indenture; FIFTN: To the payment of the annual sum to the Generst Fund of the City for reimbursement of gas and electric services of the Systems used by the City for municipal purposes and amounts expended for additions to the street and traffic lighting system (such payment, together with the annual sum to be deposited in the General Fund of the City, in accordance with Section 5 of Article V of the Indenture, to total en enount equel to in of the gross revenues of the Systems for the current Fiscal Year), as provided in Section 6 (as amended) of Article V of the Indenture; SIXTN To the "Electric and Gas Systems leprovements and Contingencies Fund" until there is on deposit therein en amount equal to 20% of the value of fixed capital assets as shown by the audited statement as of the end of a Fiscal Year, as provided in Section 6 (as amended) of Article V of the Indenture; and SEVENTN: To the "Electric and Gas Systems surplus Fund" in the manner and to the extent funds are evallable, as required )y Section 6 (as amended) of Article V of the Indenture. In further en tanetton of sold flow of f unds as to the payment and security of the Parity Bonds, the Net Revenues deposited in the "Electric and Gas Systems Improvements and Contingencies Fund" shall be first appropriated evi pledged to the "City of San Antonio Electric and Ges Systems Parity Bond Retirement Account" (heretofore created for the payment of principal of and interest on Parity Bonds and reaf firmed in Section 12 of this ordinance); and to the extent necessary, all sums payable to the General Fund of the City from the Net Revenues pursuant to Sections 5 and 6 (as amended) of Article V of the Indenture shall be first appropriated and pledged to sold "City of San Antonio Electric and Gas Systems Parity Bond Retirement Account." 9

1 l (Note: The following schedule is ret a part of the Ordinance) ACTUAL APPLICATICE OF REVENUES UNDER TRUST IIIDENTURE AND SECTION 11 (a) 0F BEW SERIES SOED OtelBANCE i (Fleu of Funds) Fleest Year Ended January 312 1984 1985 1986 1987 19874 OPERATING REVENUES l Electric $544,125,191 S634,364,073 8700,371,599 S439,625,682 S423,670,233 l Gas 147.890.056 133.301.552 136.499.691 127.814.360 128.922.984 1 Tstel 692,015,247 769,665,625 836,871,290 767,440,042 752,593,217 OPERATING EXPENSES Electric 325,642,247 357,235,968 376,396,173 303,302,679 281,925,086 Gas 140.381.157 122.222.706 _118.173.906 113.193.837 107.621.282 Total 466,023,404 479,458,674 494,570,079 416,496,516 389,546,368 Net Operating Income 225,991,843 290,206,951 342,301,211 350,943,526 363,046,849 Non Operating Income (Net) 23.045.003 33.930.519 28.821.710 36.778.162 39.800.080 Net Revenues $249,036,846 $324,137,470 $371,122,921 $387,721,688 S402,846,929 Interest During Construction 48.439.378 64.467.070 87.295.643 101.402.372 106.491.190 Revenues Available for Application M gg M MM ALLOCATION OF AVAILABLE REVENUES

1. Operating Funds (To increase working capital), and S *0- S 0- S 2,500,000 $ 0- S 0-Payment of debt Principal & Interest 1 16,531,219 16,498,031 16,475,985 16,425,945 16,391,826 Reserve Fund Reqats.1 24.415 (16.249) (46.276) (83.983) (51.992)

Total Payment of Debt 1 16,555,634 16,481,782 18,929,709 16,341,962 16,339,834

2. Payments to General Fund of City in lieu of taxes 6,028,200 6,400,800 7,095,600 7,798,800 8,850,400

3. To improvements and Contingencies Fund.

Minfeue Requirements 89,433,317 100,531,797 108,604,165 100,527,276 99,049,162

4. Payment to General Fund of City as reimbursement for electric and gas services used by City during year 14,162,624 16,351,404 17,009,419 15,286,097 15,549,451

5. Additional payment to City to bring benefits to14%ogGross Revenues 61,501,705 72,755,528 79,867,247 73,105,722 72,834,416

6. Salance transferred to Improvements an tingenciesFundgCon- 109.794.744 176.083.229 226.912.424 276.064.203 296.714.856 Total Allocations MM S458.418.564 $489.124.060 M Footnotes

• 1 Old Series Bonde.

I New Series Bonds principal Interest and New Series Reserve payments made free the Improvements and Contingency Fund for the years as shown above were as follows: Principal 18,120,000 19,730,000 21,440,000 23,350,000 25,215,416 Interest 86,645,393 110,164,634 135,235,078 153,411,411 161,877,762 Reserve 15,298,928 6,048,979 11,502,666 20,112,307 10,492,360 3

        ' Annual amounts shewn are less than 14% because of voluntary reduction by the City.

12 months ending December 31, 1987. l l I l 10 l

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The following continues quotettons from the ordinance. SECTIOE 11 Flow of Funds (b) At such time as all the terms, conditions, and provisions of the Indenture shalt become Inoperative and the "Trust Estate" conveyed by the Indenture ruerts to the City free and eteer of the encumbrance created thereby, funds in the General Account shall be pledged and appropriated to the following uses and in the order of precedence shown: FIRST: To the payment of reasonable and proper Maintenance and Operating Expenses of the Systees upon approval by the Board of Trustees; SEcomo To the payment of Parity Bonds, including the establishment and maintenance of the reserve therefor; I l .TBIRD: To the payment of "Prior Lien Bonds" (se defined in the ordinance authorizing the Commerclel Paper), ! If any, including the establishment and maintenance of a reserve therer; i FoueTN To the payment and security of the "Notes" and the " A g reuent" (as defined in the ordlnence C iorizing the Commercist Paper); l FIFTN: To the payment and security of obligettons hereinaf ter lesued which are inferior in lien to the l l Parlty Bonds and the Notes; l

                      $11T5: To the payment of an annual enount equal to six percent (6%) of the gross revenues of the Systems to be deposited in the Repair and Replacement Account, hereinafter provided for in Section 13 of this ordinance; SEVENTN: To the payment of the annual scount due the General Fund of the City of San Antonio, as provided j

in Section 14 of this ordinance; and EIGNTN: Any remaining Net Revenues of the Systems in the General Account, to the Repalr and Reptocement Account, in accordance with section 13 of this Ordinance. l SECTION 12 Parity Bond Retirement Account. For purposes of paying the principal of and interest on the Parity Bonds, when and as the same shall become due, and providing a reserve to prevent a def ault in the payment of such principal and Interest on Parity Bonds, the City, acting through the Board of Trustees, hereby reaf firms the creation and establishment of a special account known as the "City of $sn Antonio Electric and Gas Systees Parity Bond Retirement Account * (hereinafter referred to es "Retirement Account"), which account shall continue to be kept separate and apart from all other funds or accounts of the Systems or of the City. The City hereby reaffirms its covenant that the Retirement Account shall be established and kept at such Depository as the Board of Trustees shall designate and funds deposited therein shalt be used only for the purpose of paying the principal of and interest on the Parity Bonds. l From the Net Revenues pledged to the payment and security of the Parity Bonds (identified in Section 7 of this ! Ordinance), the Board of Trustees shall cause to be paid in the Retirement Account such enounts as ultl be fully sufficient to (1) promptly pay, when due, att principal of and interest on the Parity Bonds (hereinaf ter sometimes ref erred to es the "Interest and sinking fund portion" of the Retirement Account) and (11) establish and maintain in the Retirement Account a reserve amount (hereinaf ter sometimes referred to es the "Reserve Amount" or "reserve fund portion") equal to not less then the average annual principal and interest requirements of att outstanding Parlty Bonds (calculated on a Fiscal Year basis as of the date the ! Last serlas of Parity Bonds were authorized). In addition, all suas received f rom the purchasers of Parity Bonds constituting accrued interest and premium, if any, shall be placed in the Interest and sinking fund portion of the Retirement Account. In addition to the deposits required to be made in the interest and sinking fund portion of the Retirement Account to pay the annual debt service requirements of the Previously issued Parity Bonds, the City Public Service Board is hereby directed to deposit in said Account the following enounts to pay the principat of and Interest on the New Series 1988 Bonds, to witz (a) Deposits for payment of Interest on or before the 15th day of the first month to occur following the

 .              date of delivery of the New Series 1988 Bonds to the purchasers thereof and on or before the 15th day of each following month through July 15, 1988, an equal encJnt of money with such deposits totating not less then the enount of the instettaent of interest coming due on the Bonds on August 1, 1988, and beginning on or before August 15, 1988 and on or before the 15th day of each following month, until the New Series 1988 Bonds are no longer outstanding, an amount of money equal to not less then one sixth (1/6) of the next semiennuet Instatteent of interest to become due on the New Series 1988 Bonds; provided, that to the extent there are moneys avellable in the Interest and sinking fund portion of the Retirement Account to pay interest on the New Series 1988 Bonds on August 1, 1988 or February 1, 1989, such deposits may be reduced by the enount of the aforesold moneys avaltable to pay sold Interest on the New Series 1988 Bonds.

11

(b) Depcsits for payment of principet on or bafore February 15, 1989, and on or before the 15th day of each following month, until the New Series 1988 Bonds are no longer outstanding, an amount of money equal to nst less than one twelf th (1/12) of the next annual principal payment to become due on sold New Series 1988 Bonds (exclusive of Tern Bonds), and during each of the 12 month periods preceding the dates the Tore Bonde nature or are required to be redeemed prior to maturity not less then oni -twelf th (1/12) of the principal amount required herein to be paid at maturity or to be redeemed prior to scheduled maturity. In compliance uith the provisions of the ordinances authorf Ing the issuance of the Previously Issued Parity Bonds and this Ordinance, the Board of Trustees shall cause to be accumulated and maintained in the Retirement Account a Rtserve Amount equel to not less than the average annual principal and interest regulrements of the Previously Issued Parity Bonde and the New Series 1988 Bonds, such Reserve Amount to be determined on the basis of cash on deposit and the book vetue of securities in which moneys in the reserve fund portion of the Retirement Account are invested, and to be in addition to the amount on deposit in the Retirement Account for purposes of paying the annual debt service requirements of the outstanding Parity Bonds. The City Public Service Board shall cause to be deposited into the reserve fund portion of the Retirement Account f rom the proceeds of the Weis series 1988 Bonds, if necessary, an amount sufficient, together with moneys accumulated in the reserve fund portion of the Retirement Account, to cause the Reserve Amount to equal not less than the everage annual

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principal and interest requirements of the Previously Issued Parity Bonds and the New Series 1988 Bonds. Whenever the amount in the reserve fund portion of the Retirement Account equals less then the total amount required to be on deposit therein in accordance with the provisions of this ordinance monthly deposits in an enount equal to the sue of the monthly deposits required under the provisions of the ordinances authorialns the Previously Issued Parity Bonds ind this ordinance shall be resumed and continued to be made on or before the 15th day of each month until the total enount required to be on deposit in the reserve fund portion of the Retirement Account has been fully restored. In the event there are insufficient funds available in any month to permit the required monthly deposits in the Retirement Account for purposes of paying the annual debt service requirements on the Parity Bc,nds and accumulating and maintelning the Reserve Amount, either or both, amounts equivalent to such deficiencies shall t>s set apart and paid into the said Account from ths first available and unaltocated Net Revenues pledged to the payment of the Parity Bonds in the next following month or months, and such payments shall be in addition to the monthly amounts otherwise required to be paid into said Account during such month or months. Accrued interest and premium, if any, received from purchasers of Parity Bonds which is deposlted in the Interest and sinking fund portion of the Retirement Account and income and profits received from the investment of funds in the Retirement Account may be taken into consideration and reduce the monthly deposits which would otherwise be required to be placed in the interest and sinking fund portion and reserve fund portion of the Retirement Account from the Net Revenues. SECTIou 13: Repair and Replacement Account. At such time as the provisions of the Indenture become  ; inoperative, the City reaffirms its covenant with the holders of Parity Bonds that a specist fund or account shall be created and established to be known as the "City of San Antonio Electric and Gas Systems Repalr and Replacement Account" (hereinafter called "Repair and Replacement Account") at such Depository as may be d1signated by the Board of Trustees. Moneys on deposit in the Repair and Replacement Account shall be used for the following purposes, to witz (i) providing extensions, additions and improvements to the Systems; (11) to meet contingencies of any nature in connection with the operations, maintenance, improvement, replacement or restoraticn of properties of the systems; and (111) the payment of bonds or other obligettons for which other funde tre not avellebte, or for any or all of such purposes, as, from time to time, may be determined by the Board of Trustees. From the Net Revenues remaining in the General Account efter payment and provisions for payments and additions to the Retirement Account in accordance with the provisions of Section 12 hereof, there shall be paid into the Repair and Replacement Account en annual sua equal to 6% of the gross revenues of the Systems for the then current Fiscal Year. This annual payment to the Repair and Replacement Account shall be accumulated each Fiscal Year by monthly installments, such monthly Installments to be based on each month's gross revenues to the extent funds in the General Account are evallable each month; provided, however, should the total annual payment to the Repelr and Replacement Account in any Fiscal Year exceed 6% of the gross revenues of the systems, as shown by the Systems' audited annual financial statement, proper year end adjustments shell be cade (on or before the March 1 following the close of each Fiscal Year) by causing any excess amount deposited therein to be transferred to the General Account. No deposit in excess of 6% of the annual gross revenues of the Systems shall be made to the Repair and Reptocement Account (as provided in the preceding paragraph of this section) unless and until complete and full payments, or provisions f or such payments, shall have been peld over or credited to the General Fund of the City in accordance with section 14 of this ordinance. Af ter complete end futt payments, or provisions for such paysents, shall have been paid over or credited to the General Fund of the City to the full extent required in Section 14 hereof, additional deposits may be made to the Repair and Replacement Account; and at the close of each Fiscal Year, all Net Revenues remaining in the General Account af ter full and complete payment to the General Fund of the City has been made (except such amounts as may be required to meet unpaid j accounts and obligettons which have accrued or are payable during the year to insure continued operation of  ; the Systems), shall be deposited in the Repair and Reptocement Account. l t 1 12

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SECTION 14: Payments or Credits to the General Fund of the I,?ty. In accordance with the provisions of the ordinances authorizing the issuance of the Previously lesued Parity Bonds and at such time as the provisfons of the Indenture shall become Inoperative and af ter the payments to the Retirement Accour; and the Repair and Replacement Account (for purposes of acemulating therein an amount equal to 6% of the unuel gross revenues of the Systems) have been made in full in accordance with the provisions of Sections 12 and 13 of this ordinance, there shall be paid over or credited to the General Fund of the City (for general purposes of the City), to the extent Wet Revenues are avaltable in the General Account and in monthly instatteents, en amount in cash not to exceed 14% of the gross revenues of the Systees for the month next preceding the month in whfch the sonthly deposit is made, less the value of gas and electric services of the systees used by the City for municipal purposes and the amount expend?d for additions to the street iishting systee for the month for which such payment is being made. The maximum amount in cash to be transferred or credited to the General Fund of the City from the Net Revenues during any Fiscal Year shall not exceed 14% of the gross revenues of the Systems less the value of gas and electric services of the systees used by the City for municipal purposes and the amounts expended during the Fiscal Year for additions to the street lighting system. The percentage of gross revenues of the Systems to be paid over or credited to the General Fund of the City each Fiscal Year shall be determined (within the 14% limitation) by the governing body of the City. SECTION 15: Investments. In accordance with the provisions of the ordinances suthorizing the issuance of the Previously Issued Parity Bonds and thls ordinance, funds on deposit in the Retirement Account and the Repair and Replacement Account may be, at the option of the Board of Trustees, invested in direct obligations of the United States of America; obligations which in the opinion of the Attorney General of the United States are general obligations of the United States and backed by its full f aith and credit; obligations guaranteed by the United States of America; evidences of indebtedness of the Federal Land Banks, Federal Intermediate Credit Banks, Banks for Cooperatives, Federal Mome Loan Banks, Federal National Mortgage Association; Participation I Certificates in the Federal Assets Financing Trust; and Certificates of Deposit of ariy bank or trust company ( which are fully secured in the manner and to the futtest extent required by the laws o* the State of Texas for t the security of public funds. Any obligations, or evidences of ownership of said obligatlons, in which funds I on deposit in the aforementioned Accounts are so invested shall be kept in escrow in the respective Depository j' for such Accounts and auch investments shall be promptly sold when required and the proceeds of the sale applied to the making of payments required to be made f rom the Account from which the investment was made whenever such payments are necessary to be made. ALL income and profits received from the investment of funds in the Repair and Replacement Account shall be transferred and credited to the General Account. During the period of time the Reserve Amount in the Retirement Account totals not less than the total amount required to be on deposit therein, all income and profits received f rom the investment of such funds shall be transferred to the interest and sinking fund portion of the Retirement Account, thereby reducing the amount required to be deposited therein, to meet the debt service reputrements of Parity Bonds; otherwise income and profits received froe investments of the funds constituting the Reserve Amount shall be retained as a portion of the Reserve Amount. Income and profits received from investments of funds on deposit in the Interest and sinking fund portion of the Retirement Account shall be used only for the purposes of paying the principal of and interest on the Parity Bonds, as and when the same shall become due. SECTION 16: Transfer of Funds to the Paying Agent / Registrar. On or before an interest or principal payment date of any Parity Bonds, the Treasurer of the City Public Service Board shall make transfer of funds on deposit in the Retirement Account to the paying agent, or paying agents, (including the Paying Agent / Registrar) in the amounts calcu'ated as fully suf ficient to pay and discharge promptly, as due, each installment of interest and principal pertaining to the Parity Bonds then outstanding. In the event Parity Bonds may be cet ted for redemption prior to maturity, the Treasurer of the City Public Service Board shall cause amounts calculated as suf ficient to pay and dische'ge the Parity Bonds (including accrued interest and premium, If any) so catted for redemption to be transferred to the paying agent, or paying agents, (including Paying Agent / Registrar), as applicable, on or before the Ate fixed for the redemption of such bonds. l SECTION 17: Security of Fmds. All moneys on deposit in the special Funds or Accounts for which this ordinance makes provision (except any portions thereof as may be at any time properly invested) shall be secured in the j manner and to the fullest extent required by the laws of the State of Texas for the security of public funds. SECTION 18: Issuance of Additional Parity Bonds. In addition to the right to issue obligations of inferlor llen, as authorized by the laws of the State of Texas, the City reserves the right to lesue additional revenue obligations payable from the same source and equally secured in the same manner as the Previously lasued Parity Bonds and the New Series 1988 Bonds and such additional revenue obligations, the Previously Issued Parlty Bonds and the New Series 1988 Bonds shalt in all respects be of equal . dignity. The amount of additional revenue obligations for Systems' improvements and extensions to be issued from time to time shall be based upon the dif f erence between the estimated costs of planned extensions and improvements and the total I. of the funds avaltable and estimated to be avaltable for extensions and improvements to the systees; and it shall be the duty of the Board of Trustees to request the City Council to authorize and provide for the issuance and sale of additional revenue obligations in the amount necessary to meet the cost of such planned extensions and improvements, such request to be evidenced by resolution of the Board of Trustees; and upon receipt of such request, it shall be the duty of the City Council to review such request and to provide for l the issuance and sale of such Additional Parity Bonds as the City Council may deem necessary in order that the planned extensions and leprovements may be made. It is hereby covenanted and agreed that no additional revenue bonds or other obligations shall be issued or incurred on a parity with the New Series Bonds unless and until the fotLowing conditions can be satisfied and met: l 13 l

E 4 (a) Until such time as the Indenture secur( 7 payeent of the Old Series Bonde shall have terminated, the Brard of Trustees by resolution shall have cor.aented to the issuance of such Additional Parity Bonds and the payment thereof from the Net Revenues, and shall have further agreed to comply with all of the terms and l previsions of the ordinance authorizing such Additional Parity Bonds with relation to the operation of the systems and the disposition of revenues of the Systems. l (b) The Treasurer of the City Public Service Board shalt aava executed a certificate stating that the City is not in default as to any covenant, obligation or undertaking contained in any ordinance or other document relating to the issuance of any obligettons then outstanding which are payable f ree and secured by a tien on and pledge of the Not Revenues, and that each of the Funds and Accounts created and established for the sole purpose of paying the principal of and interest on such obligations contains the amount then required to be on d! posit therein. (c) The Board of Trustees shall have secured from en independent certified public accountant a certificate evidencing his determination that the Net Revenues (including earnings from the investment of Systems' funds) were, during the test completed Fiscal Year or for any consecutive 12 month period during the test 15 . ccosecutive months prior to the month of adoption of the ordinance authorizing the issuance of the additional obligations, equal to at least one and one half times the maximum annual principal and interest requiremente on the then outstanding Old Series Bonds and Parity Bonds and the Parity Bonds then proposed to be issued. For the purpose of making such determination, the certified public accountant may adjust the Net Revenues to include a proper allowance for revenues arising f rom any increase in electric and ges rates which has become effective prior to the issuance of the proposed Additional Parity Bonds, but which during att or any part of the past Fiscal Year, or other 12 month period used for determining said Net Revenues was not in effect, in en amount equal to the amount by which the bittings of the systems to customers for such Fiscal Year or 12 month period would have been increased if such increase in rates had been in ef fect during the whole of such Fiscal Year or 12 month period. (d) The Additional Parity Bonds are to mature on February 1 or August 1, or both, in each of the years in thich they are scheduled to mature. . (e) The ordinance authorizing the issuance of the Additional Parity Bonds provides that the amount to be accumulated and maintained in the Retirement Account as the Reserve Amount shall be an enount equal to not less than the everage annual requirements for the payment of principal of and interest on all Parity Bonds

• which will be outstanding after giving effect to the issuance of the Additional Parity Bonds then being Issued; and provides that any increase to the Reserve Amount in the Retirement Account shall be accumulated within five years anc' one month from the date of passage of the ordinance authorizing the issuance of the Additional Parity Bonds.

Provided, however, that Parity Bonds may be issued f rom time to time (pursuant to any law then ovellable) for purposes of refunding outstanding Old Series Bonds and Parity Bonds upon such terms and conditions as the governing body of the City and the Board of Trustees may deem to be in the best interest of the City and, if Less than all outstanding Parity Bonds are refunded, or if Parity Bonds are issued to refund outstanding Old Series Bonds, the proposed refunding bonds shall be considered as "Additional Parity Bonds" under the provisions of this Section, but the certificate required in paragraph (c) of this Section shall give effect to the issuance of the proposed refunding bonds (and shall not giva ef fect to the bonds being refunded following their cancellatlon or provision being made for their payment). Parity Bonds and Old Series Bonds shalt not be censidered to be "outstanding" (under the provisions of this ordinance) when provision has been made for their payment in the manner and to the extent permitted by the laws of the State of Texas applicable at the time such provision is made. Ard provided, further, that any obligations hereafter issued which are junior and subordinate in att respects to the Parity Bonds may (without impairment of the obligation of centract of the Parity Bonds) be refunded as Perity Bonds by meeting all the terms and conditions for the issuar.ce of Additional Parity Bonds; and such Junior Lien obligations may achieve the status of and become, for all purposes Parity Bonds when the following conditions can be met and upon the happening of the following events, to witz (I) the Board of Trustees shall have caused to be filed with the City Clerk of the City a certified written report of an independent certified public accountant demonstrating that the Wet Revenues, during the last completed Fiscal Year or for any 12 consecutive months during tne test 15 months prior to the month of filing such report, were equal to at least one and one half times the maximum annual requiraments for the payment of principal of and interest on the then outstanding Old Series Bonds, Parity Bonds and for the bonds then proposed to achieve the status of Parity Bonds; (11) the Treasurer of the City Public Service Board shall have filed with the City Clerk of the City a certificate stating that the City is not in default as to any covenant, obligation or undertaking contained in any ordinance or ether document relating to the issuance of any obligations then outstanding thich are payable from and secured by a tien on and pledge of the Wet Revenues, and that each of the Funds and Accounts created and established for the sole purpose of paying the principal of and interest on such cbligations contelns the amount then required to be on deposit therein; (111) the obligations proposed to achleve the status of Parity Bonds nature on February 1 or August 1, or o I=. each of the years they are scheduled to meture; and (iv) the Reserve Amount required to be e- 4r then on deposit in the Retirement Account equals not less then the everage annual requireme. n. payment of principal f.f and interest on att Parity Bonds which will be outstanding ef ter giving uis t ta the bonds then proposed to achieve the status of Parity Bonds. 14 - .. y . . - . . ~ . . - . . . . . . . . . . . . , . _ . . . _ -

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SECTIDs 19: Bo oblisetton of Lien Superior to that of the Parity Bonde. The City will not hereaf ter issue any additional bonds on a parity with the Old Series Bonds under the terms of the Indenture or create or issue evidences of indebtedness for any purpose possessing a tien on Wet Revenues superior to that to be possessed by the Parity Bonds. The City, however, retains the right to create end issue evidences of Indebtedness whose Lien on Wet Revenues shall be subordinate to that possessed by the Parity Bonds. SECTIou 20: llenagement of the systems. In accordance with the provisions of the ordinances authorizing the Pre d ously Issued Parity Bonds and this Ordinance, the City hereby agrees, convenants and reaffirms thats (a) Until such time as the terms, conditions and provisions of the Indenture become Inoperative and the

          ' Trust Estate" conveyed by the Indenture reverts to the City free and clear of the encumbrance created thereby, the management of the systems and all of its properties and af f airs shall be conducted, operated and controlled in the manner and to the some extent es set forth in the Indenture to which reference is hereby made for a specific description thereof.

(b) At such time as the terms, conditions and provisions of the Indenture become Inoperative and the "Trust Estate = conveyed by the Indenture reverts to the City f ree and clear of the encumbrance created thereby and during such time as any Parity Bonds issued hereunder are outstanding and unpaid, the complete management and control of the Systems, pursuant to the authority contained in Article 1115, v.A.T.C.S., shall be vested in a Board of Trustees consisting of five citizens (one of whoe shall be the Mayor of the City) of the United States of America permanently residing in Bexar County, Texas, to be known as the "City Pubtle Service Board of San Antonio, Texas". Those persons serving as appointed members of the Board of Trustees at the time defeasance of the Indenture occurs shall continue in of fice until their respective terms as established under Article VI of the Indenture have expired. The Mayor of the City shell be a voting member of the Board, shalt represent the City Council thereon, and shall be charged with the duty and responsibility of keeping the City Council fully advised and informed at att times of any actions, deliberations and decisions of the Board and its conduct of the management of the Systems. All vacancies in membership on the Board (excluding the Mayor of the City), whether occasioned by falture or

• refusal of any person previously named to accept appointment or by expiration of term of of fice or otherwise, shall be filled in the following manner a nominee to fill such vacancy shall be elected by the majority vote of the remaining members of the Board of Trustees, such majority vote to include the vote of the Mayor. The nome of such nominee shall then be submitted by the Mayor to the vote of the City Council, which by a majority vote of the members thereof then in of fice shall, as evidenced by ordinance or resolution, either confirm or reject such nominee; provided, however, if the City Council f alls to act upon such nomination within 30 days af ter submission to it of such nominee, such failure to do so shall be considered as a rejection of such noelnee and another nominee shall be selected by the Board. If a vacancy occurs and the reaalning members of I the Board (including the Mayor) fall to elect a nominee to fill such vecency within 60 days af ter the vacancy l

occurs (or fell to select another nominee within 60 days af ter rejection of a nominee by the City Council), I the City Council, by a majority vote of the members thereof then in of f'.ce, shall elect a person to fill such vacancy and shall oppoint such Trustee by resolution or ordinance. In the event the City rejects or falls to confirm three consecutive noelnees of the Board to filt a vacancy on the Board, the City Counell shall, within 30 days after the third rejection, appoint a temporary Trustee to filt such vacancy. The appointment of a temporary Trustee by the City Council shall constitute the nomination of such oppointee as the permanent Trustee to fill such vacancy. Unless the remaining members of the Board, by a majority vote, reject the noelnee selected by the City Council within 30 days af ter his appointment as a temporary Trustee, the appointment shalt become final and the temporary Trustee shall automatically become the permanent Trustee to flit such vacancy. In such vote, the vote of the Mayor shall automatically be cast as a vote in favor of the confirmation of such Trustee, whether cast by the Mayor or not, if the noelnee of the City Council is rejected by a majority vote of the reaalning Trustees, the remaining Trustees shall within 30 days ef ter such rejettion elect another nominee to fill such vacancy. Such nominee shall be considered by the City Council and if approved shall become the permanent Trustee. If such nominee is rejected by a majority vote of the members of the City Council then in offit , or in the event the City City Council fails to act upon such nomination within 30 days after the nomination is presented to the Council, the temporary Trustee theretofore appointed by the City Council shall automatically become the permanent Trustee to fill such vacancy. The term of offlee of each member oppointed to the Board shall be five years. A person who has served as an appointed member of the Board for a single five year term shall be eligible for reappointment for one additional five year term and one only. A member who is appointed to the Board to serve out en unexpired portion of a retired member's term shall not be considered to have served a "terna unless the unexpired portion of the term so served is three years or more. Permanent removal of residence froe Beter County by any appointed member of the Board shall vacate his of fice as a member of the Board, or any member (other than the Mayor of the City) who shall be continuously attent f rom all meetings held by the Board for a period of four consecutive months shatt, unless he shall have been granted leave of obsence by the unanimous vote of the remaining members of the Board, be considered to have vacated his of fice as a member of the Board. Any member of the Board, other than the Mayor of the City, say, by unanimous vote of the remaining members of the Board be removed from office, but only for adequate cause. 15

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Notwithstanding any of the foregoing provisions as contained in this Section 20 (b) or in any other section of this Ordinanca pertaining to the appointment or selection of Trustees to the Board upon the defeasance of the Indenture securing payment of the old Series Bonds, the City Council reserves unto itself the absolute right at anytime upon passage of an ordinance approved by a majority vote of its members to change the method of selection of and appointment to the Board of Trustees to direct selection by the City Council, with such change of method to direct selection being at the sole option of the City Councit without approvet of any persons, party, holder of Parity Bond or Board. Except as otherwise specifically provided in this ordinance, the Board of Trustees shall have absolute and complete authority and power with reference to the control, management and operation of the Systems and the expenditure and application of the revenues of the Systems subject to the provisions contained in this ordinance, all of which shall be binding upon and shall govern the Board of Trustees. In connection with the management and operation of the Systems and the expenditure and application of the revenues therefrom, the B:ard of Trustees shall be vested with all of the powerr of the City with respect thereto, including all poWrs necessary or appropriate for the performance of all of the covenants, undertakings and agreements of the City contained in this ordinance, and shall have full power and authority to make rules and regulations governing the furnishing of electric and gas service to customers and for the payment of the same, and for the discontineance of such services upon f ailure of customers to pay therefor, and, to the extent authorized by law, shalt have full authority with reference to making of extensions, improvements and additions to the Systees and the acquiring by purchase or condemnation of properties of every kind in connection therewith. The Board of Trustees in exercising the management powers granted herein, will ensure that policies adopted affecting research, development and corporate planning will be consistent with Council policy, and polleles adopted by the Board of Trustees pertaining to such matters will be subject to Council review. The Board of Trustees shalt elect one of its members as Chairman and one as Vice Chairman of the Board and shall appoint a Secretary and a Treasurer, or a Secretary Treasurer, who say, but need not be, a member or members of the Board. If a member of the Board of Trustees is not appointed as Secretary or Treasurer, or Steretary Treasurer, then en employee or employees of the Board whose duties in the operation of the Systems

• require performance of similar duties may be appointed as Secretary or Treasurer or Secretary Treasurer. The Board of Trustees may follow and adopt such rules for the orderly handling of its affairs as it may see fit and may manage and conduct the af f airs of the Systems with the same f reedom and in the same manner ordinarily employed by the Board of Ofrectors of private corporations cperating properties of a similar nature. No member
• of the Board of Trust (es, however, shall ever vote by proxy in the exercise of his duties as a Trustee.

The Board of Trustees shall appoint and employ all of ficers, employees and prof essional consultants which it may deem desirable, including without limitation, a General Manager of the Systems, attorneys, engineers, architects, and other advisors. No of fi:er or employee of the Board of Trustees may be employed who shall be related within the second degree of consanguinity or affinity to any member of the goard of Trustees. The Board of Trustees shall obtain and keep continually in force an employees' fidelity and indemnity bond of the so called "blanket" type, written by a solvent and recognized indemnity company authorited to do business in the State of Texas and covering losses to the amount of not less than one Nundred Thousand Dollars ($100,000). The members of the Board of Trustees, other than the Mayor of the City, shall receive annual compensation in the minimum amount of Two Thoucand Dotters ($2,000.00), except that the chairman of the Board shall receive annual compensation in the minimum amount of Two thousand Five Mundred Dotters ($2,500.00). Such compensation may be increased from time to time by the majority vote of the City Council then in office. The members of the Board of Trustees and adelnistrative officers shall not be personally liable, either individually or collectively, for any act or omission not willfully fraudulent or in bad faith. SECTIce 21: Method of Amendment. The City hereby reserves the right to amend ordinances authorizing the issuance of Parity Bonds subject to the following terms and conditions, to wit: (a) The holders of Parity Bonds aggregating in principal amount sixty six and two thirds (66 2/3%) percent of the aggregate principal amount of then outstanding Parity Bonds shall have the right from time to time to approve any amendment to this ordinance which may be deemed necessary or desirable by the City; provided, housver, that nothing herein contained shall permit or be construed to permit amendment of the terms and conditions of this Ordinance or in the bonds so as to (1) Mate any change in the maturity of outstanding Parity Bonds; (2) Reduce the rate of interest borne by any of the outstanding Parity Bonds; (3) Reduce the amount of the principal of, or redemption prealue, if any, payable on any outstanding Parity Bonds; (4) Modify the terms of payment of principal or of interest or redemption premium on outstanding Parity Bonds or any of them or impose any condition with respect to such payment; (5) Af f ect the rights of the holders of less than all of the Parity Bonds then outstanding; or (6) Change the minimum percentage of the principal amount of bonds necessary for consent to such amendment. 16 - . n .. ~ . .~ ...v _ _ .- .

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(b) If et any time the City shall desire to amend this Ordinance under this Section, the City shall cause notice of the proposed amendment to be published at least once in a f!nenclat publication published in The City of New York, New York. Such notice shalt briefly set forth the nature of the proposed amendment and shall state that a copy thereof is on file et the office of the City Clerk of the City for inspection by att holders of Parity Bonds then outstanding. (c) Whenever at any time within one year from the date of publication of such notice the City shall receive en instrument or instruments executed by the holders of et least sixty six and two thirds (64 2/3%) percent in aggregate princlpet amount of all Parity Bonds then outstanding, which instrument or instruments shall refer to the proposed amendment described in said notice and which shall specificetty consent to and approve such amendment in substantially the form of the copy thereof on file with the City Clerk of the Cith the City may adopt the amendatory ordinance in substantially the some form. (d) Upon the adoption of any amendatory ordinance pursuant to the provisions of this section, the ordinances authorizing the Parity Bonds then outstanding shall be deemed to be modified and amended in accordance with such amendatory ordinance, and the respective rights, duties and obligettons of the City and all holders of outstanding Parity Bonds shall thereafter be determined, exercised and enforced, subject in all respects to such amendment. (e) Any consent given by the holder of a bond pursuant to the provisions of this section shall be irrevocable for a period of six months f rom the date of the publication of the notice provided for in this Section, and shall be conclusive and binding upon all future holders of the some bond during such period. Such consent may be revoked at any time af ter six months from the date of the publication of sold wtice by the holder who gave such consent, or by a successor in title, by filing notice with the City Clerk of the City, but such revocation shall not be effective if the holders of sixty six and two thirds (66 2/3%) percent aggregate principet amount of the then outatending Parity Bonds as it,this Section defined, have, prior to the attempted revocation, consented to and approved the amendment. (f) Except as provided in (g) below for the Registered New Series Bonds, for the purposes od establishing ownership of Parity Bonds, the fact of the holding of Parity Bonds by any bondholder, the enourit and numbers of such bonds, and the dates of their holding such bonds, may be proved by the affidavit of the person claiming to be such holder, or by a certificate executed by any trust company, bank, or any ot ter depcsitory wherever situated showing that et the date therein metioned such person had on deposit with such trust company, bank, or other depository the bonds described in such certificate. The City may conclusively assume that such ownership continues until notice to the contrary is served on the City. (g) For the purposes of establishing ownership of the Registered New Series Bonds, the C'ty sheLL rely solely upon the registration of the ownership of such bonds on the Registration Books kept by the appropriate Paying Agent / Registrar, as provided in the ordinances authorizing the New Series 1983 A Bonds, the New !sries l 1984 A Bonds, the New Series 1984 B Bonds, the New Series 1985 Bonds, the New Series 1985 A londs, the New l Series 1985 B Bonds, the New Series 1986 Bonds, the New Series 1986 A Bonds, the New Series 1787 Bonds, the New Series 1987 A Bonds, or this ordinance. (h) The word "Outstanding" when used in this Ordinance with respect to Parity Bonds means, es of the date

of determination, all Parity Bonds theretofore issued and delivered except (I) Those Parity Bonds theretofore concetted by the Paying Agent / Registrar or delivered to the Paying Agent / Registrar for cancellation; (11) those Parity Bonds for which payment has been duty provided by the City by the irrevocable deposit with the Paying Agent /Registrer of money in the amount necessary to futty pay the principal of, premium, if any, and interest thereon to maturity or redemption, as the case may be, provided that, if such Parity Bonds are to be redeemed, notice of redemption thereof shall have been duty given pursuant to the ordicance authori Ing the issuance of such Parity Bonds or irrevocably provided to be given to the satisfaction of the Paying Agent / Registrar, or waived; (111) those Parity Bonds that have been mutilated, destroyed, lost, or stolen and replacement Bonds have been registered and delivered in lieu thereof; and (iv) those Parity Bonds for which the payment for the principal of, prealum, if any, and interest on has been duly provided by the City by the deposit in trust of money or Government Securities, or both.

SECTION 22: tecognition of Provisions of Indenture. It is speelfically recognized and af firmed that until defessence of the provisions of Article V of the Indenture, the pledge of revenues herein for the payment and security of the Parity Bonds is inf erior to the pledge of revenues therein to the payment of principal of and interest on the Old Series Bonds and to the maintenance of the "San Antonio Electric and Gas Systems Beserve Account" thereunder. All terms, conditions, covenants, agreements, stipulations and trust provisions whatsoever of the Indenture, providing and constituting the means of securing and providing for psynent of the Old Series Bonds, including, but not limited to, the provisions of Article V thereof relating to application of revenues, are hereby recognized and affirmed and shall be given futt force and effect in ELL respects until (1) the conditions for def essence of the Indenture (set forth in Section 1 of Article XIV) have been fulfilled in such menner and to such exteat as wllt have caused the "Trust Estate" to revert to the City free of the encumbrance thereof; or (ii) the Indenture has been omended in such manner as would permit the PerIty Bonde to occupy a position of parity with the Old Series Bonds, in which event et t such bonds will become Parity Bonds;

or (iii) e def easance of the Indenture has taken place by operation or application of the law.

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SECTIosi 23: Tranettion of Funds Upon Defessence of the Indentures in accordance with the provisions of the erdinances authorizing the issuance of the Previously Issued Parity Bonds, and at such time as the conditions, provisions and terms of the Indenture shall become inoperative and the "Trust Estate" conveyed by the Indenture reverts to the City free and clear of the encumbrance created thereby, any funds remaining in the "San Antonio Electric and Gas Systems Bond Reserve Account" (created and established in Section 4 of Article V of the Indenture) shall be transferred and credited t s the Reserve Amount on deposit in the "Retirement Account," and all moneys and funds remaining on deposir in the "Electric and Ces Systems improvements and Contingencies Fund" and the "Electric and Gas Systems Surplus Fund" (created and established in Section 6 (as amended) of Article V of the Indenture) shall be trannferred and credited to the Repair and Replacement Account. SECTION 24: Maintenance and operation - Insurance. The City hereby agrees and reaffirms that the Systees shall be maintained in good condition and operated in an ef ficien? manner and at reasonable cost. So long as any of the Parity Bonds are outstanding, the City, acting by and t hrough the Board of Trustees, agrees to maintain insurance of a kind and in an amount which usually would be rarried by private companies engaged in a similar type of business. SECTIou 25: Records - Account 6 - Accounting Reports. The Clu acting by and through the Board of Trustees, hereby agrees, covenants and reaffirms that so long as any ' arity Bonds, or any interest thereon, remain outstanding and unpaid, a proper and complete set of records and accounts pertaining to the operation of the Systems shall be kept and maintained separate and apart from all other records and accounts of the City, in thich complete and correct entries shall be made of all transactions relating to the Systems as provided in Article 1113, V.A.T.C.S., and that the holder or holders of any of the Parity Bonds or any duly authorf red agent or agents of such holders shall have the right at all reasonable times to inspect all such records, accounts and data relating thereto and to inspect the Systems and all properties comprising the same. The Board of Trustees shall, so far as practicable and to the extent consistent with the provisions of this ordinance, keep its books and records in the manner prescribed in the Uniform System of Accounts adopted by the National Association of Regulatory Utility Commissioners. It is further agreed that as soon after the close of each Fiscal Year as may reasonably be done, the City (acting by and through the Board of Trustees) , trill cause en annual audit of such books and accounts to be made by an independent firm of certified public accountants. Each such audit, in addition to whatever other matters may be thought proper by the accountants, shall reflect the revenues and expenses of the Systems for acid Fiscal Year, and the assets, liabilities and financial condition of the Systems (in reasonable detail) at the close of such Fiscal Year. , Expenses incurred in making the audit above referred to are to be regarded as Maintenance and Operating Exptnses and paid as such. Copies of the aforesaid annuet audit shall be inmediately furnished to the Executive Ofrector of the Municipal Advisory Counell of Texas at his office in Austin, Texas, and to the l original purchaser of a series of Parity Bonds and any subsequent holder thereof at his written request. At l the close of the first six months' period of each Fiscal Year, the Treasurer of the City Public Service Board is hereby directed to furnish a copy of an operating and income statement in reasonable detall covering such period to any holde, upon his written request therefor received not more than 30 days af ter the close of said six months' period. Any bondholder shall have the right to discuss with the accountant making the annual audit the contents thereof and to ask for such additional information as he may reasonably require, provided such bondholder shall have offered to the Board of Trustees sufficient indemnity to pay any costs, expenses and liabilities which may or might be incurred in providing such additional information. 4 l SECTios 26: Remedies in the Event of Def ault. In addition to all of the rights and remedies provided by the lors of the State of Texas, it is specifically covenanted and agreed particularly that in the event the City (I) defaults in the payments to be made to the Retirement Account as required by this ordinance, or (11) d3 faults in the observance or performance of any other of the covenants, conditions or obligations set forth in this ordinance, the following remedies shall be available (a) The holoer or holders of any Parity Bonds shall be entitled to a writ of mandamus issued by a court of proper jurisdiction, compelling and requiring the City, its of ficers, the Board of Trustees, and/or all of ther, to observe and perform any covenants, conditions or obligations prescribed in this ordinance. (b) No delay or omission to exercise any right or power accruing upon any def ault shall impair any such right or power, or shall be construed to be a waiver of any such default or acquiescence therein, and every j such right and power may be exercised from time to time and as often as may be deemed expedient. The specific remedies herein provided shall be cumulative of all other existing remedies and the specifications of such remedies shall not be deemed to be exclusive. SECTIou 27: Special Covenents. The City hereby further covenants as follows: (a) The City has secured from the Board of Trustees a resolution acknowledging its duties, responsibilities and obligations under this ordinance and agreeing to fully comply with alt its terms and provisions, including the administration and operation of the Systems and the disposition of revenues of the Systems, 1 i l 18 l

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i (b) It has the lawful power to pledge the revenues supporting this issue of bonds and has lawfully exercised said power under the Constitution and laws of the State of Texas, including said power existing under Articles 1111 et seq., Y.A.T.C.S., that the Bonds issued hereunder, the Previously Issued Parity Bonds and Additional Parity Bonds, when issued, shall be retably secured under said pledge of income in such eenner that one bond shall have no preference over any other bond of said Issues. - (c) Other than for the payment of the Bonds herein authorized, the Previously lesued Parity Bonde, the previously issued Old Series Bonds, and the Commercist Paper, the rents, revenues and income of the Systees have not in any manner been pledged to the payment of any debt or obligation of the City or of the Systees.

 ~

(d) So long as any of the Parity Bonds or any interest thereon remain outstanding, the City will not sell or encumber the Systems or any substantial part thereof, provided that this shall not be construed to prohibit the sale of such machinery or other properties or equipment which has become obsolete or otherwise unsulted to the ef ficient operation of the Systems; and, further, with the exception of the Additionel Parity Bonds expressly permitted by this ordinance, the City will not encumber the Net Revenues unless such encumbrance is made junior and subordinate to all of the provisions of this ordinance. (e) No free service of the Systems shall be allowed and should the City or any of its agents or instrumentalities make use of the services or facilities of the Systees, payments for services rendered by the Systees should either be made by the City or amounts equal in value to the services rendered by the Systees shall be deducted f rom the annual payment due the General Fund of the City f rom the Net Bovenues as provided in Section 14 hereof. (f) To the extent it legally may, the City further covenants and agrees that, so long as any Parity Bonds or any interest thereon are outstanding, no franchise shall be granted for the installation or operation of any competing electric or gas system other than that owned by the City, and the operation of any such systems by anyone other than the City is hereby prohibited. SECTion 28: Bonds are Speclet obligations. The Bonds authorized by this ordinance are special obligations of the City payable f rom the pledged Net Revenues and the holders thereof shall never have the right to demand payment out of funds raised or to be raised by taxation. SECTion 34: ordinance to Constitute contract. The provisions of this Ordinance shall constitute a contract between the City of San Antonio and the holder or holders f rom time to time of the New Series 1988 Bonds and af ter the issuance of any of said bonds, no change, verlation, or alteration of any kind in the provisions of this ordinance say be made, unless as herein otherwise provided, until att of said bonds leeued hereunder shall have been peld as to both principal and Interest. SECTIou 31: Approvat by Attorney General and Registration by the Comptrotter of Pubtle Accounts. The Mayor of the City and Treasurer of the City Public Service Board are hereby authorized to have control and custody of the New Series 1988 Bonds and all necessary records and proceedings pertaining thereto pending the sete of the New Series 1988 Bonds and the delivery thereof to the purchasers, and the Mayor and other officers and employees of the City and the City Pubtle Service Board are hereby authorized and instructed to make such certifications, execute such Instruments and perform such acts as may be necessary to assure the proper investigation, examination and approvst thereof by the Attorney General of the State of Texas, and their registration by the Comptroller of Pubtle Accounts of the State of Texas, and to accomplish delivery of the New Series 1988 Bonds to the purchasers thereof. (End of Ordinance excerpts froe the Ordinance) 19

SAN ANTONIO ELECTRIC AND GAS SYSTEMS MISTORY AND MANAGEMENT San Antonio acquired its gas and electric utilities in 1942 from the American Light and Traction company which had been ordered by the Federal Government to sell properties under provisions of the Molding Company Act of 1933. The total funds required for the purchase were raised by the sale of $33,950,000 first mortgage revenue bonds. The Trust Indenture securing the Old Series Bonds establishes management requirements and provides that the complete management and control of the electric and gas systems, white the Old Series Bonds are outstanding, shall be vested in a Board of Trustees consisting of five citizens of the United States of America permanently residing in Bexar County, Texas, to be known as the "City Public Service Board of Sen Antonio," sometimes also referred to herein as "Board" or "CPS." The Mayor of the City of San Antonio is a permanent ex officio member of the Board. The term of Earl C. Mill expired January 31, 1988, and his replacement has not been named. The present members of the Board are: MRS. LILA C0CKRELL, CHAIR President Atkins Travel By Design PAT LEGAN, VICE CHAlt Legen Properties, Inc. BUBEN M. ESCOBEDO (Vacancy) HENRY G. CISNEROS Certified Mayor, Public Accountant City of San Antonio Escobedo and Co. (Ex officio Member) While the CLd Series Bonds are outstanding, vacancies in membership on the Board are filled by majority vote of the remaining members. No person who is related within the second degree of consanguinity or af finity to any B: erd member or any person who has been a member of the Board within a period of five years prior to the election shall be eligible f or election as a member of the Board. The members of the Board are ellalble for reelection at the expiration of their first five year term of of fice to one additional term only. The Board is vested with all of the powers of the City with respect to the management and operation of the systems and the expenditure and application of the revenues therefrom, including all powers necessary or apprtpriate for the performance of all covenants, undertakings and agreements of the City contained in the Trust Indenture, except regarding rates and issuance of bonds, notes, or commercial paper. The Board has full porer and authority to make rules and regulations governing the furnishing of electric and gas service and full authority with reference to making extensions, improvements and additions to the Systems, and to adopt rules for the orderly handling of its affairs. It is empowered to appoint and employ all of ficers and employees and must obtain and keep in force a "blanket" type employees' fidelity and indemnity bond covering losses in the amount of not less than $100,000 The ordinances which authorize the issuance of the New Series Bonds, and which will control efter the Old Series Bonds are no longer outstanding, contain similar management provisions. The management provisions of this Ordinance, which are set out in full in a previous section, add, among other things, the requirement that nem Board oppointses must also be approved or in certain cases appointed by a majority vote of the City Council and grants the City Council aJthority to review Board action with respect to research, development and planning. ADMINISTRAfl0N AND OPERATING PER$0NNEL Leng time career service is typical of CPS employees, who presently number 3,549. All executive and supervisory positions are held by individuals who have been thoroughly schooled and trained in the utilities field. CPS employees have a full range of fringe benefits including a pension plan augmented by Social Security, group life Insurance, hospitellration and major medical and other benefits. Generally good working conditions have produced a stable, well qualified, highly motivated work force which for the past year recorded the very low turnsver rate of 0.49% per month. Principal executive personnel are as follows: Mr. Arthur von Rosenburg, General Manager; Mr. M.L. Freeman, Assistant General Manager for Finance; Mr. J.K. Merz, Assistant General Manager for Administration; Mr. R.J. Costello, Assistant General Manager for Operations; and Ms. J.E. Axtell, Assistant General Manager for Planning and Development. Mr. von Rosenberg has been an employee of CPS since 1959 and served as Manager of Planning and Development, Assistant General Manager for Planning and Development and Associate General Manager prior to becoming General Manager in 1988. Mr. Freeman has been en employee of CPS since 1959 and served as Superintendent of Customer Accounting, Chief Accountant and Controller prior to becoming Assistant General Manager for Finance in 1976. Mr. Marr has been an employee of CPS since 1953 and served as Superintendent of Of fice Services, and Manager of Customer Service, Financial Services and the Personnel Group prior to becoming A.ststent General Meneger for Administration in 1983. Mr. Costello has been an employee of CPS since 1957 and was Superintendent of Olstribution Operations and Manager of Transmission and Olstribution Engineering prior to becoming Assistant General Manager for Operations in 1987. Ms. Antell has been en employee of CPS since 1969 and tres Superintendent of Generation Planning and Manager of Generation and Environmental Planning prior to becoming Assistent General Manager for Planning and Development in 1987. 20

a . . l ELECTRIC AND GAS SALES BY CUSTOMER CATEGORY Flacet Years Ended January 31: 1984 1985 1986 1987 19871 ELECTRIC SYSTEM SALES IN KWM Residentlet 3,139,333,099 3,491,218,510 3,782,692,779 4,036,562,109 4,103,275,281 Commercial & Industrist 3,839,434,236 4,107,615,198 4,465,681,626 4,636,307,715 4,627,851,043 Street Lighting 66,907,453 65,413,345 67,305,833 67,548,785 68,394,283 Public Authorf tles 1,197,943,925 1,246,417,066 1,300,515,232 1,358,027,225 1,459,559,119 other Utilities 194,636,220 181,741,040 413,380,690 257,848,431 235,088,938 ANSL 11.126.116 1'.152 '34 11,139.960 11.182.429 11.203.816 8,449,381.049 9,103. 5 5 7, P9] 10.040,711.112 10.367,476.694 10,505,372.480 Total Sales in KWM AVERAGE NUM8ER OF CUSTOMERS Residentist 338,092 363,100 381,878 398,992 404,122 Commercial 8 Industrist 37,670 40,688 43,073 44,935 44,890 Street Lighting 33 31 42 43 56 Pubtle Authoritles 2,883 2,927 2,994 3,088 3,544 other Utilities 4 4 4 5 5 ANSL 7,162 7.092 7.012 7,039 7.068 Total Customer 6 385.844 413.842 435,003 454.102 459.685 GAS SYSTEM SALES IN MCF Residentist 15,492,622 13,642,964 14,332,095 13,576,261 14,512,380 Commercist 7,616,372 7,175,096 7,462,211 7,283,761 7,372,773 Industrist 3,061,115 2,977,367 2,743,495 2,484,467 2,433,904 Public Authorities 1.924,712 1,707,67. 1,764.F48 1.636,517 1.891.738 25,503.290 26,302,' 49 25,003.006 26.210,795 Total Sales in MCF 28.094,821 AVERAGE NUMBER OF CUSTOMERS Residential 254,267 258,664 261,571 263,991 263,905 Commercist 17,977 18,130 18,183 18,361 18,205 Industrist 258 244 227 222 212 1.953 1.984 2,156 Pubtle Authorities 1.986 1.981 284,558 284,478 Total Customers 274,488 279,019 281,934 KWW SALES PER CUSTDMER Residential 9,285 9,615 9,906 10,117 10,154 Commercist & Industrist 101,923 100,955 103,678 103,178 103,094 MCF SALES PER CUSTDMER

j. Residentist 61 53 55 410 51 397 55 405 Commercial 424 396 I 12 months ending December 31, 1987.

l

i DESCelPTICE OF PgTgICAL PgcPEgTY ELECTRIC gTSTEM Senerating Plants . Th3 electric generating systen optra*ed by the soard consists of six stese electric generating stations with step up substation systems. The J.T. Deely Plant, located at Cateveras Lake, southeast of the City, is equipped to burn either cost or fuel oil. Unit No. I was pieced in vervice in July,1977 and Unit No. 2 has been in commerclat operation since August, 1978. These two units will csrry over 505 of the systee lood for the near future on coat, which is less expensive and more consistently evellable than oil or gas. Ales located at Calaveras Lake and sharing its cooling capability is the 0.W. Sommers Plant, composed of two units which are capable of operating on either natural ges or fuel olt. The V.N. grounig Plant is located on grounig Lake, also southeast of the City. It has three units which operate on alther natural gas or fust oil. esth Cateveres Lake and grounig Lake have additionet space and cooling capability for future generating units. A new 500 megewett cost-fired unit is to be constructed at Calaveres Lake. These lakes, which cover approximately 5,000 surf ace scres, are man made and utilize treated sewage ef fluent and runof f waters. CPS was a pioneer in the use of poorer quality water for cooling purposes, thereby se"Ing the highte polity und:rground water for other uses. White the above plants now generate most of the load, there are three older plants which are held in reserve. Th:y are the W.g. Tuttle, Mission Road, and Leon Creek Plants. They can burn either natural gas or fuel ott tnd are cooled by water recirculated through cooling towers. CPS owns 810 raltroad cars which are used in unit trains to haut coal f rom eines in Wypelng to the Deely Plent. CPS also performs its own required car maintenance and servicing et its car maintenance shops located at the Deely Plant. Details of instatted units at CPS generatif.g stations are as follows: Year Capability Generatina Statiya Fuel Instetted MV* J.T. Deely Plant Cost /Olt 1977 418 Coal /oll 1978 418 0.W. Sommers Plant Ges/0ll 1974 430 Ges/0!L 1972 430 V.M. grounts Plant Ges/Oll 1970 400 Ges/oll 1968 230 Ges/0ll 1966 220 - W.g. Tuttle Plant Ges/0lt 1963 160 Ges/Olt 1961 100 Ges/0lt 1956 100 Gas /0lt 1954 65 Leon Creek Plant Gas /Cil 1959 100 Ges/Oll 1953 65 Mission Road Plant Ges/Olt 1958 100 Total Active Capability '3,236

• For the ges/olt fueled Units the capability shown are the gas retings.

Transelssion System CPS maintelns a transmission Line network for the movement of targe blocks of electric power from the generating stations to the various parts of the service area and to or f rom neighboring utilltles as required. This is composed of 69,000 vatt, 138,000 volt and 345,000 volt lines with transformers and switching stations to provide the necessary flexibility in the movement of bulk electric power. 22 l

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{ Substation l Central GEO System Control Power Plants M Service Centers ! Transmission Lines l 345,000 volts 138,000 volts l 69,000 volts 23 I ( _ _ - . _ _ _ _ _ _ _ _ _ _ _ .

Intercerviected System Th2 San Antonio System is integrated with approximately 75 other utilities, municipalities and electric cooperatives in Texas to form the Electric Rettability Council of Texas (ERCOT), which covers a large portion of Texas. CPS, along with the ten utilities listed below, form the major generating and transmission entitles in Texas. West Texas Utilities (WTU) Mouston Lighting & Power Company (NL8P) Central Power and Light Company (CPL) Texas Utilities Electric Company (TUEC) Lower Colorado River Authority (LCRA) City of Austin, Texas, Municipal Utilit.es (Austin) Texas Municipal Power Agency (TMPA) gratos Electric Power Cooperative (gEPC) South Texas Electric Co op/Medina Electric Co op (STEC/MEC) City of grownsville Public Utility goerd (CO3) These Interconnections, through . operating agreements between the several utilities, provide standby power in cess of outages as well as emergency fire power in the event cepecity deficiencies occur at a particular Lccattty within the area. The arrangements serve to reduce the standby capacity which each utility would oth:rwise ne td. Pursuant to e power brokerage system, these Interconnections have also been utilized to transport economy energy between utfiltles, thereby allowing utilities to benefit from lower cost generation when avellable. Membership in ERCOT provides CPS with a high levet of electric service reliability. Pursuant to a 1982 Order of the Federal Energy Regulatory Commission (FERC) agreed to by alt members of the Texas Interconnected Systems (TIS), and a subsequent order of FERC lesued in 1987, two direct current ties connicting ERCOT with the Southwest Power Pool (SWPP), which is located to the north and east of ERCOT, are authortred. The northern tie beceae operational in December, 1984, and its capacity is being expanded; construction of en eastern tie is pending. The direct current nature of the ties is intended to permit schsduled energy transfers between ERCOT and SWPP while preserving the compact site of ERCOT and protecting ettetric utilities within Texas f rom power disturbances outside ERCOT. These DC ties will be owned by ML&P and by Central & Southwest Corporation ("CSW"), the parent of CP&L, WTU, and ef filletes, and by TUEC, Austin, and possibly others. Distributlen System The Of stribution Systee is supptled by 62 substations strategically located on the high voltage (69 KV and 138 KV) transelssion system. The central business section of San Antonio le served by elght underground network systems, each consisting of four primary f eeders operated at 13 KY, transf ormers equipped with network protectors, and both a 4 wire 120/208 volt secondary grid system and a 4 wire 277/480 volt spot grid system. This system is well designed far both service and reliability. There are over 7,001 miles of pole lines and over 512 miles of underground duct ilnes in the distrl>ution systee. The overhead lines etso carry secondary circuits and street lighting circuits. Presently there are over 48,824 street lighting units in service, with the vast majority of these being modern, high intensity units. Many of the subdivisions added in recent years have beta served by underground distribution systems. TOTAL TRANSFORMER CAPACITY INDICATING NET ANNUAL INCREASE KVA F Y Ended 1 31: Overhead Undercround Total 1972 2,007,134.5 199,781.0 2,206,915.5 1973 2,183,263.5 203,781.0 2,387,044.5 1974 2,337,149.5 202,856.0 2,540,005.5 1975 2,563,716.0 204,331.0 2,768,047.0 1976 2,731,886.5 205,081.0 2,936,967.5 1977 2,915,456.0 205,581.0 3,121,037.0 1978 3,120,524.5 213,581.0 3,334.105.5 1979 3,383,280.0 214,081.0 3,597,361.0 1980 3,616,038.5 230,181.0 3,846,219.5 1981 3,863,965.5 227,656.0 4,091,621.5 1982 4,135,528.0 236,531.0 4,372,059.0 1983 4,380,618.5 245,381.0 4,625,999.5 1984 4,721,050.5 256,881.0 4,977,931.5 ( 1985 5,185,880.0 265,725.0 5,451,605.0

1986 5,649,781.5 270,375.0 5,920.156.5 j 1987 6,077,171.5 311,500.0 6,388,671.5 19871 6,403,932.0 354,600.0 6,758,532.0 1

Period ended Decee6(- 31, 1987. 24

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CENTRAL GEO .. - SGTEM CONTRCL

     ,               8 SERVICE CENTERS l                         @           CAS REWLATING SWON
                         $           GAS DELIVERY STATON GAS SUPPLY LINES
                     ---- %LERO CAS SUPPLY OASIS GAS SUPPLY PLANNED SUPPLY LINE 25

GAS SYSTEN Sas Delivery Natural ges Is transported to CPS by Valero Transmission Partners, L.P., successor to Valero Transmission Company, a subeldlary of Valero Energy Corporation. Gas transported by Valero le purchased and metered at two City Gate Stations and at the 0.W. Soaners and V.M. Braunig Power Plants. Completion of CPS' 17.5 mile transmission line by the utddle of this year will also allow gas to be dellvered by Casts Pipeline Co., a subsidiary of Enron Corp. This pipeline will provide a new dellvery point through which CPS can purchase gas. Out'r Sgply Line System CPS has constructed 54.3 miles of 24 and 30 inch lines to form en outer loop supply line system between the t:0 existing City Gate Stations. A new 17.3 mile 24" transmission line is currently under construction to etnniet the outer loop supply line system with Valero's West Texas 30 inch transmission line and Casis Pipeline's 36* inch transmission line to the north of the city. Twin one mile lengths of 20 inch line connect the V.M. Braunig Plant to Valero's transmission Line. Gas is brought to 0.W. Sommere. Power Plant through 3.2 cites of 16 inch and 4.5 miles of 24 inch line giving that station a feed from two dif ferent Valero transmission lines. Controtted Supply Line Systee A network of approximately 140 miles of mains, ranging from 4 to 20 inch, supplies gas at high pressures to regulator Installations located at strategic points throughout the distribution system. The controlled supply line system operates at pressures of from 25 to 145 psi. These pressures are maintained and controlled through the use of remote control equipment at many locations. Distribution Systee The controlled supply line system f eeds into the distribution system operating at an intermediate pressure of 7 pel consisting of over 3,504 miles of 2 to 16 inch mains, together with the necessary pressure control equipment, valves, gauges, service lines, service regulators and meters. Cathodle protection f or mitigation of carrosion has been completed for substantially ELL of the gas distributton system. A high moleculer weight polyethylene pipe has been used for distribution mains and service through 4 inch sizes since 1974. GENERAL PROPERTIES Operation Control Systee The nerve center of CPS operaticns is the Gas & Electric operations (GEO) System, u ch is located at the Jones Avenue f acility. This Is a computerized monitoring and control system and was designed by CPS personnet. ALL substations, power plants ard major gas regulatlag points are continually monitored and displayed on one line diagrams on video screens. Any abnormality reWisters an storm and the system operator can bring up on another screen any detalt of the control points and, with a light pen, operate the various switches and valves as required. In addition to the control capability, the system gathers data which Is recorded on the computer for various reporting needs, such as loads, peaks, and BTU content. Support Facilities The operating systems are supported by modern shops for the maintenance of such items as meters, transformers, communication equi pent, vehicles, raltroad cars and heavy construction equipment. These shops, together with t'arehouses, supervisory of fices, service centers and vehicle storage, are strategically tocred throughout the area to minimize driving time to work locations. Generat Offices The general offices are located at the Intersection of Neverro and Vittita Streets in the central business district of San Antonio. The adelnistrative, financial, business data processing and engineering functions are handled at this location. The renovation of the general office was completed in 1986 with three additional f Lscrs added to provide 11 floors of modarn, ef ficient of fice space with en adjacent parking garage. The CPS Customer Service Center is located across the street on the ground tevel of a parking garage which CPS has recently acquired. CPS is undertaking the construction of three floors of additional of fice space over this f acility, along with beautification of the exterior areas. At the Customer Service Center, customer contacts are handled either in person or by telephone. Information concerning any custceer account is available to contact personnet in a matter of seconds from the computer system by use of video date terminate. Other Customer Service Centers are located approximately one mile south of the downtown eres, on the eastern edge of San Antonio, and on the west side of the service areas. These three additional centers were established to 26 I ~m .w m . . .. . - . _ . . . - . . .

                                                                                     -_..._.........~.n.ww_.

provide the same services as the originet center but more convenient to the customer's home and in a tocation more accessible to the freeways, without the downtown traffic congestion and with emple parking. Assembly Building

 .          The Villite Assembly Building is located near the General Of fice Building and is evellable for CPS aponsort.

settings or may be used by civic, cosanunity and non profit orgentzetions to promote the growth and improvement of the city. It has a capacity of 2,000 persons as en auditortue or 1,200 for dinner. Vehicles and Work Equipment CPS owns a complete fleet of automobiles, trucks and work equipment. Minor maintenance le pe* formed on the equipment et decentrattred facilities and major maintenance is handled at a central parage. TEttlTORT EERVED The electric system serves a territory consisting of substantletty all of Bexar County and small portions of the adjacent counties of Comet, Guadalupe, Atescose, Medina, sendere, Wilson and Kendall. Certification of this service eres has been approved by the Texas Pubtle Utility Commission, in addition to the eres served at retell, electricity is sold at wholesale rates to the City of Floresyllte Electric Light and Power System, City of Mondo Utilities and the City of Castroville for resele. CPS has contractual arrangements for wheeling of power through the CPS system between several other electric utilities in Texas. CPS participates in the Texas Brokerage Syster, e computer assisted program which fetilltetes interruptible economy energy purchases and setes between Texas electric utilities. The CPS gas system serves the City of San Antonio and its environs, although there is no speelfled certificated CPS gas service area. In Texas there is no legislative provision or procedure for certificated gas service areas. O TMIRTY LARGEST CUSTOMERS l Excluding Government Bassa and City of San Antonio (Based on Sales for Calendar Year of 1987) e Get Customers Electric Customers I Annual l Annual MF Customer Name KWN Customer We=e Lone Star Energy Corporation 484,141.3 Capitol Cement Company 72,424,000 Peart Brewing Company (Brewery) 194,048.6 Alamo Cement Company 63,652,398 The Colotex Corporation 171,590.0 United Service Auto Association 57,657,600 Roegelein Provision Co. 136,136.1 Advanced Micro Devices 46,879,000 Frito Ley Inc. 126,998.7 Southwest tesearch Institute 44,268,000 Sunshine Laundry 92,015.2 U.T. Meelth Science Center if S.A. 43,394,400 Sente Rose Mospital 81,696.1 Pearl Brewing Company 31,698,800 SW Research Inst. 1 79,999.3 S.W. Bet t Telephone Company (E. Martin) 27,856,000 Southwest Texas Methodist Mospitet 75,803.4 Southwest Texas Methodist Mospital 24,566,400 M.E. Butt Grocery Company 72,869.6 Sente Rosa Mospital 23,762,400 UTSA Thermal Energy Plant 70,651.2 M.E. Butt Grocery Co. (Main Warehouse) 23,092,800 Am<rican Comper.y Inc. 68,357.6 University of Texas San Antonio 22,019,200 Lone Star Brewing Company 65,759.2 Messer Griesheim ind inc. 21,203,200 Aztec Ceramics Corporation 64,709.3 City Water Board (Wurzbach Road) 20,966,400 Mowell Refining Company 64,331.1 S.W. Bell Telephone Co. (N. St. Marys) 19,353,600 Gebhardt Chill 63,702.2 City Water Board (Commerce Street) 19,248,000 septist Memorlet Mospital 60,126.5 Frost Wattonal Bank 19,166,560 Peart grewing Company (Can Plant) 54,862.1 North Star Matt 17,768,400 l l K 0 Steel Casting Inc. 56,757.5 Lone Star Energy Company 17,778,000 SA State Hospital 52,055.8 Amerleen Can Company Inc. 16,925,760

   -        Colonial Cake company                    51,638.1               Ingree Part Mall ($1 mon Melvin Assoc.) 16,895,040 City Water Board (Commerce Street)       49,662.3               M.E. Butt Grocery Company PDC Whees       15,801,600 SA State TB Mospital                     49,227.9               Trinity University                        15,750,000 47,698.1               Audie Murphy Veterans Mospital            15,731,100 SW Research Inst. 2
    -       Friedrich Ref rgl. Inc.                  46,194.9               City Water toerd (Basin St.)              15,556.800 Gaylord Container company,               44,825.9               Bexer County Mospital District            14,689,600 Advanced Micro Devices                   42,112.7               M.E. Butt Grocery Co. (Ice Cream Ptnt5 14,547,640 37,256.7               aoegeteln Company                         13,795,600 SW Foundation Res Ed                                                                                      13,288,000 Treasure Chest Advertising               36,885.7               Saint Marys University Martin Linen supply                      36,299.9               Redland Worth Corporation                 13,005,600 l

l l 27

STATElIENT OF REYENUES, EXPEbSES ANO NET INCOME Fiscal Years Ended January 31: 1984 1985 1986 1987 1987' ELECTRIC DEPARTIIENT BILLED REVElIUES n:l'eni't'8inou.tri.i i!! *!!!li!!ll!! '!!!li!!!!! '!!!ll2!!!t }!!!!! init! Mtu'?!d.'"" "" '!i!l"it?lHi ril!hMi! 88lit?:Hi 7Nilt!! '!!!l?!!l?!?

                                                                                                                                        ~

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                                              '!: :              '!:!!!!!!!         '!:tHiIt!          '!!?!U!!         7!l!!!l!!!

Total Revenues 544,125,191 636,364,073 700,371,599 639,625,682 623,670,233 OPERATICE & 14AINTERANCE EXPENSE on 88 Distribution 15,917,857 16,293l834

                                                                          ,         17l l442 8

20,549lh 2

                                                                                                                ,823            ,

8 21l6,310l367 E h b o $e!!on 3'$0'09 5 3 4' O 3 95 6 ret"It'i: u' ' """ '!l:iUl01:!n'?!!!!!!!! '!,: l lit

                                                                                                       '!,1!!lh9

:l?! '!l!!!l!i1 Tetet Expenses 325,642,247 357,235,968 376,396,173 303,302,679 EM Operating Income Electric 218,482,944 279,128,105 323,975,425 336,323,003 341,745,147 GAS DEPARTMENT BILLED REVENUES a$8 Industrial 8 2l28 26 'Oh

u^"'"*' 388' 82'dH ml@ 4d'l7@ 7:'5,H W 'ldu Total Revenues 147,890,056 133,301,552 136,499,d91 127,816,160 128,922,984 OPERATIOI & MAf uTENANCE N u etened 100, ,760 96,08 ,341 581 90,497l993 83,741,488 Distributton 122l 7 ' 597134

                                                        ,713 8,        293
                                                                          ,825 72 8l96,825,218 171        267 396 9l442,950 Customer Accounts                               2.       ,         2,                  2                 8l376334 3                3 kNln$re             eYGNoral                    6,66_Q_3 8o54                           8,h 0l,5M 22      9,0 0 288             9 7 Payrott Taxes                                                        'h '91}
                                                                    ,8 73                               1,005,946        91 099.557 Tatet Expenses                                140.381,157      J 22.222. 706        118,173,905       MW                107,621,282 Operating Income Gas                            7,508,899         11,078,846         18,325,785         14,620,523       21,301,702 e    e     e                    _!! 5!         90    3:!88        4     3        2'!3         I 8                80 h8 Tetal                                       249,443,133       324,795 709         374,263,242        387,721,688      402,846,929
      !            a     f Debt Expense and Other Interest                          406,287            658,235         3,140,321         6,710,672       11,712.071 Net Revenues                                297,476,224       388,604,540         458,418,564        482,413,388      497,626,048 f        e!           ns                       95          613  118, 7,649          143          063   160 837,356      168 870 838 DhNlsto                                         5917!0           $h: 66!             ko          Chh         8 Ih8        3!!6 h9 Total other Deductions                      212,951,812       251,812,004         287,434,404        298,838,564      309,372,094 Net Earnings 2                             S 84,524,412      S136,792,536        g                  $183,574,824     S188,253,954
 ' 12 months endine December 31 1987.

2 Excludes gain (loss) on sale,of essets. [3

  - . . . -               .   .~....,.n..

Cou0ERSES STATEleENTS of ASSETS AND LIABILITIES < January 31, 1977 to December 31, 1987

                                                                                                                                   /.as.

Assets 213,5t and tautoment Accounts current Assets Accumututed & Construction other

             . Date          A Qt; t                          Deprecletion                 Net             Funds                 Asg. gig,,_           fotet      )

1 31 77 8 9M ,2t> 7,395 8 163,811,352 8 790,396,043 $ 82,349,961 S 19,912,542 8 892,728,546 1 31 78 1,101,71 P,064 182,598,717 918,110,351 100,666,917 24, g47,407 1,043,664,675 1 31 79 1,26',,232,510 209,126,958 1,056,105,552 132,666,709 32,174,890 1,220,947,151 1 31 80 1,44',572,698 236,614,266 1,212,958,432 161,031,242 71,261,778 1,445,251,452- 11 1 31 81 1,62t;.,916,4 4 0 263,151,527 1,363,764,913 176,159,247 81,869,611 1,621,983,771 1 31 82 1,804,344,072 289,287,649 1,515,056,423 178,2b3,823 95,108,151 ' 1,788,448,397 1 31 83 1,983,4;3,741 319,898,562 1,663,795,179 210,479,667 112,335,118 s 1,986,609,964 1 31 84 2,236,*'2,812 350,653,678 1,885,959,134 297,995,798 148,293,506 2,332,248,438 13185 2,620,1'0,570 384,084,066 2,236,426,504 354,312,821 144,101,056 P.,734,840,381 1 31 86 2,838,6'7,230 418,742,719 2,420,104,511 3 P ,989,194 340,769,913 3,153,863,618 1 31 87 3,255,49,253 446,913,523 2,808,565,730 .45,966,285 404,485,746 3,639,017,761 12 31 87 3,602,808,133 470,145,466 3,132,642,667 452,396,145 503,852,158 4,088,910,970 LieblLities Ceferred Contributions Current Credits In Aid Of City Equity Revenug e Bonds Liebilitiest and Reserves _ Construction In Plant Tots ( 8 892,728,546 1 1- S 358,110,000 8 48,142,063 8 3,158,921 8 18,529,474 8 464,788,088 0 484,290,000 40,651,961 2,075,149 20,367,567 496,279,998 1,043,664,G75 1 31 78 51#,223,462 1,220,947,151 1 31 79 622,975,000 54,035,211 2,538,062 22,175,416 783,645,000 59,596,985 34,346,140 24,261,647 543,401,680 1,445,251,,452 1 31 80 585,946,424 1,621.983,771 1 31 81 926,505,000 47,497,568 35,353,271 26,681,508

• 1,041,105,000 44,706,131 35,782,030 28,694,186 6'fa,1F. 030 1,788,448,397 1 31 82 ,

1,986,609,964 1 31 83 1,153,740,000 $2,309,397 33,706,094 30,439,051 716,49 ,422 1,342,785,000 114,504,518 37,258,566 33,714,618 803,05,736 2,332,248,438 1 31 84 941,437,891 2,T34,843,381 1 31 85 1,555,671,161 181,471,737 18,141,551 38,118,041 1,812,539,954 163,410,651 22,381,630 43,105,511 1,112,425,872 3,153,863,618 1 31 86 1,296,005,570 3,369,017,761 1 31 87 2,023,218,210 170,210,052 102,693,539 46,890,390 2,241,879,350 165,142,782 98,421,345 52,105,636 1,531,361,857 4,088,910,970 12 31 87 l i Lacludes current maturities of long ters debt. 2 Includes unemortised premiums and discoents and current naturities of Lonw term debt. l f l l. 1 l 29 l

i N 7N , ( l,

                                                                       \                                                                                                           !

CoplPARATIVE ANALYSIt OF El.ECTRIC AND GAS UTItITY OPERATIONSI (DelIsr A.ounte in Thousands.RyainseV),

                                                                                                                         ,'.         .(               s I
                                                                                                                                                        \_
                                 ,,                                        Fiscal Years Endine Januery 31t                                                                '

Increase

                                       ,,                                                                                                     i

_,1979 5 1979-U60 1981 1982 1983 1984 1905 1986 19fj?,,j, 19874 1987' DOLLARS tevenu) $343,25/ V47,3' 05 544t. 030 $525,777 8687,691 8715,457 t804,254 8868,833 $804,218 $792,393

• Operating Espense 131%

Balance Avellettobtt, ,,2 L i,g}, ,,)f,2 Jj.} 295.906 l' M 454,104 466,429, J80,117 . 497,710 _423,207 . 401,258

                                                / \

73% Fcr Debt Service 111,5~2 12/,097 148.124 179,990 233,587 249,038 324,137 371,123 381,011 391,135 251%

   ) Depreciation O pense 27,502 ,,,,M.J,71 M? d,l t. MQi 34,953 35,918 37,837 40,351 41,811 43,267 q E:rstings Before                       ,         <       .
                                                                 ?i 57%

/ It.terest Expense 84,070' 92,823 118,023}148,906 196,634 213,120 286,300 330,772 339,200 347,868 Interest on Bondo 314%

34,362 44,216 ' 55,798 69,131 82,521 95,342 118,457 143,111 160,837 164,871 Payments and 391% Borofits To City 2 19,631 43,310 l'2,570 61,88% g 78,822 81,693 95,507 103,972 f 96,191 97,234 f f,3% ( Interest Constructlot Net Income Dur%g J '

                                  ' , (12.867)d it,70)_,f/2,746) (34,316)_(40,871)_(48,439) (64,467)_ (87,296)(101,6                                                                            '
                                 $ 22.944 2 24,081 2 42,421 $_!2,19 4 Sgtg S 84.54 5136,793 8170,o85 S183,574 - }188,254                                                                     720%

1. PitCENTAgES ' ' ( ) 22verv.o ,, , , 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% ' 10'.).00% 100.00% 103\ M 100.00% OperpIng Expense _67.50% , 64.76% 66.64% 65.77% ,,_fid E _,1}. 1%. 59.70% < Oilu.c") Avellable 57.29% ,,,,,, L Q] 50.64%

                                                                                                                      /

Fit Debt servica 32.50% 33.24% 33.36% 34.23% 33.97% 34I J1% 40.30% 42.71% DeprecicylonExpense 8.01% 7.97% 6.78% 5.91% 47ptX 49.36% ' Earnings Jefore 5.06% ,,,,, 5.02% _ 4.70% 4d4.5 5.e04 5.46%

                                                                                                               '<              s Interest Empense             24.49%          25.27%      26.58%       28.32%             28,89%             29.Affs 3'i.60%                         38.07%     42.18%     43.90%

Interest on Bonds 10.01% 12.04% 12.57% 13.15% 12.00% 13.33% 14. 73 % 16.47% 20.00% ' Payments and 21.31% 8enefits To City 2 1?.55% 11.79% 11.84% 11.77% 11.46% 11.42% 11.88% 11.97% interett During 11.96% 12.27% Construction (3.75%) (5.11%)_ (7.38%) (6.53%), (5.94%) (6.77%)--- (8.02%) (10.05%),,,10) (13.44%) NotEarnirgsi T'mes sontti .);.orest 6.68% 6.555 _ 9.55% J 3 , J g g g ,1 17.017 19.68% 22.8bt 23.76% x '

   ' s uvet!                          3,25              2.76       2.65        2(0                  2.83'             2.61              2.74                  2.59      2.37         2.32 Number 4f Customers                                                                                n (A tige For'ylod)

Ele arte 4 300,860 315,487 333,187 349,697 63,947 385,84/. 413,842 435,003 454,102 459,685 53% Gas 245,335 252,279 259,786 266.,569. t!9,997 174,488 276,019 281,934 284,558 284,478 14-

                 '                                                                        j           . r;
          \

S . i Footnotest , t i

                                                                                                                                                                                                     \       (,
                                               .I
    , ) The only changes in rates durths the 9 year brlod shown here *3 creases of 7.4% for ses in September, 1979; 5.4%

l., far electric in October, 1979; 6.0% on the tatah bilt In /une. ,1981; 5.1% in Nay, 7;d2; 7.3% in January,1984; 4.26% in Deceabor, 1984; 2.751 in January, 1987 , dI Oscs not include streat Light Construction. '

                                                                                                                    'j' 3    Excludes gain (toss) oe, sale of asseta.                                                                   '

4 ' 12 months ending December 31, 1987.

                +      ,

9 I i

                                          't
                                          * '                                       \           $.                                                                                    ',

4 + Y , ,

 )                                                                                                                        'g                                .        s I

30

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                                                                                      - ~ _ , ~ . , _ _ .                                - - _ _ . ~_

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                                                                                                              \             \

CITY PUgLIC SERVICE 80ARD f" **W *WTONIO \ RECORD OF GROWTP 7R00VCT104 ' s,!RIC POWER A 7Y Ended Net KWM Percent Maximum , ' Percent Average l Percent 1 31: Generation Increase KV pen . jn r 1 KW nd* Load Factor 1966 I,'811,697,900 6.66 664, 0 . 6 ~d , 48.34 , 1967 3,107,039,900 10.50 759,000 14.31 ,562,000 46.73 1968 3,512,454,400 13.05 8 A 000 10.67 625,000 47.60 1969 1,930,310,100 11.90 941,100 12.02 689,000 47.55 1970 4,524,422,200 15.12 1,107,000 17.64 786,000 46.66 1971 4,827,311,000 6.69 1,144,000 3.34 834,000 48.17 1972 5,334,120,600 10.50 1,274,000 11.36 964,000 47.67 1973 5,884,186,800 10.31 1,364,000 7.06 1,060,000 49.11 1974 5,784,500,600 (1.69) 1,4th,000 3.74 1,059,000 46.67 1975 5,806,029,700 .37 1,412,000 (.21) 1,031,000 , 46.94 1976 6,071,902,600 4.58 1,493,000 5.74 1,089,000 1 46.42 1977 6,211,489,100 2.30 1,560,000 4.49 1,078,000 / 45.33 1978 6,691,908,500 7.73 1,641,000 5.19 1,133,000 46.55 1879 7,267,236,400 8.60 1,688,000 2.86 1,203,000 49.15 1980 7,453,424,800 2.56 1,707,000 1.13 1,265,000 49.84 1981 8,079,949,500 8.40 1,950,000 14.24 1,363,000 47.17 1982 8,505,723,900 5.27 1,911,000 (2. M) 1,442,000 50.81 1983 8,913,765,200 4.80 1,984,000 3.b1 1,522,000 51.29 1984 8,992,119,700 .88 2,148,000 8.27 1,572,000 47.79 1985 9,774,125,100 8.70 2,210,000 2.89 1,723,000 50.35 \( 8.53 2,350,000 6.33 i 1,790,000 I / 51.53 \ 1986 10,607,971,200 1987 10,617,859,300 .093 2,596,000 10.47 1,894,000 46.69 i, 19872 gg,g4g,gg4, goo 4,96 2,551,000 (1.73) s 1,881,000 49.86 i I Average of Monthly Peak Demands. ,  ! i 2 12 months ending December 31, 1987. l. l 3 391,201,000 KVM were purchased thls flacal year; for comparablity, totel[ M generated and purcheted of r 11,009,060,300 KWM increased 3.8% over previous year. Generation for t%12 eth period ended December l 31, 1987, compared to ger,erated and purchased power Last year, increased 7? n. i i ( FIVE YEAR FORECAST OF ELECTRIC AND GAS OdERATING DATA (Dollars in Thousands) Fiscal Yor(s Ended 1 31: 1989 _1990 1991 1992 1993 Gross Revenuesi $771,454 8817,878 $920,384 S1,014,814 81,074,299 Totet operating Espenses 376,497 389,208 427,726 474,685 528,426 l j Avellable fot Debt Service $394,957 $428,670 8492.658 8540,129 8 545,873 Anticipated Bond lesues $160,000 $270,000 4185l000' s 95,000 8 105,00* , t Annual Debt Service Requirements $217,704 8243,170 S;l ,438 8274,052 S 282,536 Estimated Debt Service Coveregs 1.81x 1.76x 1.88x 1.97x 1.93x l $ t 10,948 11,527 12,049 12,654 13,283 l EstimatedKWM$9es(000,000) Revenue per KWM

                                                                                    )

l

   .      Total (cents)                               5.81                 5.97                  6.45                         6.77                  6.78 Residentist (cents)                         6.63                 6.84           4      7.36                         7.70                  7.71

! Estimated Peak (MW)

l. 2,638 2,769 2,377 3,C04 +3,127 l 1 The foregeing estimates assume future basic rate increases in the following fiscal years: 5.1% 'n 1989; l 6.01 in 1990; 3.0% in 1991; 0.01 in 1992; and 0.01 in 1993. White annual rate increase requests are l currently forecasted, there is no assurance that the enounts will be requested or that current and fleure P.ity Councils will approve any particular rate increase requested. (See Rete Increases). ,

l

                                                                                                                                                            /

i r/' l

                                                                          ,                                              .                          -.             - _                          =

TNE 1999 - 1993 Com8TsucTIDe PgosaAN A comprehensive program of planning and construction to meet current and future electric and gas needs is continually being reviewed, updated and extended. To reduce time required and maximise accuracy, CPS utit taes computer based mathematical models for its foreceJting process. CPS bases its near term construction and operating needs on a five year forecast, which is a port of a twenty five year development and electric g:r,eration plan that is maintelned. The (?S generstfan plan includes completion of the South Texas Project (the "Project" or "$TP") generation units. The CPt. att re of this Project is 350 MW from each unit, scheduled for operation in 1988 and 1989, respectively. Sep "South Texas Project". The long range plan also includes additional generating capacity for - operation in f PFE. In June,1986, the CPS staf f reJommended to the CPS trustees that these generation needs be met by a 500 MW coal fired Generating station to be constructed by summer,1992, at CPS's calaveres Lake site in gemar County near the exfsting coal and gas fired generation plants at that Location. The staff likewise recommended expansion of CPS's conservation progree and energy management plan with the target of eticinating the need for one 400 500 MW unit by 2000, reassessment and refurbishment of CPS's older natural ges* fired units, and completion of the present acquisition progree for lignite in the North gestrop prospect, to be held for future development. The staf f recommendation followed several months of study comparing power plant fuels including natural gas, western coal, lignite, municipal solid weste, and renewable energy sources, as well as staff analysis of cogeneration proposals received and evaluated in a two tier solicitation and evaluation process. Western coal was evetuated as the favored option based on the econoele advantages ii ,T provided by reduced rett transportation rates, lower capital cost compared to tignite and other options, lower Lif e time revenue requirements compared to other alternatives, and fuel diversification considerations. Estimated capital cost for the coat plant at the Calaveras site, including interest during construction, is

                $1,160 per KW. The City Council passed a resolution in September,1986, endorsing the CPS staf f's coat plant r ec ommenda t ion. In connection with its review of all reasonable alternatives to CPS built coal fired generating capacity prior to final commitment, and in response to various unsolicited proposeta received, CPS published notice of a solicitation of proposals in December, 1986, for turn key electricity generating capacity or package units. Professional engineering consultants were hired to review the proposets subaltted.

In May,1987, the consultant recommended the package unit proposet subaltted by a consortium of M. 3. Zachry, ' CoaLattien Engineering and Utility Engineering Corp. The CPS goard of Trustees authorised staf f to enter into contract negotletions with this group, and a contract was executed in December,1987. Long range plans also Indicate the need for additional capacity in 1997 and 1999, which could be fueled by CPS

• Lignite resources. CPS presently owns or leases approximately 261 million tons of (fenite reserves, which cculd fuel 2,000 MW of generating < apacity, depending upon the mineebility of the lignite. (See Fuet Supply Lignite.) Ff nel commitment to inste t these units will depend on future lood growth developments and econoele considerations after full evaluation of the alternatives available. CPS engineers estimate that the etnstruction costs of a lignite fired unit, if built in 1999, would be $1,805 per KW.

l Ristorically, peak demand on the CPS electric system increased about 11 percent per year between 1950 and ' 1972. gesinning about 1972, the growth rate of peak demand declined sharply because of rising energy prices, fuel shortages, and conservation efforts. Since that time, CPS has conducted extensive reviews of changing neonoelc, demographic, and energy supply considerations, and produced annual forecasts of electric growth. The totest forecast projects a peak demand growth rate averaging 3.9 percent per year over the 1988 2012 period. The CPS staff continually monitors growth trends in order to identify changes in time for appropriate l modification of long range system plans. l 1 CPS continues to review alternettve forms of power generation which include both conventional alternatives and non conventional, v}orging technologies. Within the CPS system, the primary conventional alternatives are nuclear, coat, gas, oil and lignite. Among the non conventional technotogles are municipal solid weste, co-gen:retton, compressed air storage and seter. Primary Indications are that refuse fuel uitL be evellebte in sufficient quantitles to produ:e about 36 MW of generation. CPS, in conjunction with the City, has considered construction of a mass burn facility at the Leon Creek Plant having an estimated cost of $154,000,000. Currently CPS and the City are still discussing the econoelc benefits of such a plant. If the project provides en econoele benefit, the joint project could be in operation in late 1991, to have a 25 year life and to burn en estimated 1,800 tons of weste per day. While CPS and the City intend this project to be a joint venture, the actual sharing of project costs and responsibilltles for project implementation have not been established. In Eddition, CPS has agreed to limited participation with gesic Resources, Inc., a subsidiary of the Texas Utl(itles Electric Company, and purchase of power from a six MW plant to be located in Lee County a nd fueled by tientte easification. Arrangements for such project are not yet final. CPS's it.frent five year forecast cetta for construction expenditures of $1.668 billion. The $160 alltion which will be rejsed by tha gonds will suppty certain of the required funds, as will revenues f rom operations. The d', next sale of additir*C New Series gonds is tentatively scheduled for early 1989, except for any refunding bonds which may be 4.aed for interest savings. Currently propos g i - ut tal expenditures for fiscal years 1989 1993, based upon detailed estimates which include Interest /vciag construction, are shown in the following table 32 l

  ,s._..                _ . _ . _ _ . . . _ . . . . , . _
                                                                                                                                                               ----.,-,e, , - - - - - . , , , -     -c,   - - -
    -- - - - -                 - , - - , - - - - ,   ,--.-,,,-,nv._,,,,-     , , , , , , , , - - - - _ _ _ _ _- _ , ,       - - . , - . , , , - - ,    , - , ,

s -. _..m ~.._...._ _ n F- . ESTIMATED CAPITAL EXPENDITURES FOR TNE CONSTRUCTION PROGRAM (Thousands of Dotters) Flacat Yeara Endina 131 1989 1990 1991 1992 1993 SAS S 17,379 8 15,825 8 17,086 S 17,510 S 18,721 ELECTRICS Olstribution $1,905 47,981 71,324 70,145 74,987 Transelssion 12,943 11,202 11,312 13,299 25,469 Production (Power Plants): 3,658 4,502 4,442 South Texas Project 191,215 30,199 Acquitition of Additional Fuel Reserves 2,540 4,308 6,108 6,912 10,099 Tools and Equipment 2,750 1,125 1,174 1,233 1,429 Raltroad Car Purchase end Reptocement (350) (364 ) (379) (396) (415) 0 0 0 0 11,463 Railroad Cars (Unit Train Additions) J,335 3,449 1,146 1,208 speclet Projects 5,751 1,338 0 0 0 0 Cycling Conversion J.T. Deely 1992 Generating Plant Site 781 4,939 1,470 1,559 435 177 224 234 383 2, 64 7 Initi a Lignite Mine Lignite I, Plant Site A (1999) 0 0 0 0 7,604 Lignite I, Unit 1 (1999) 0 0 0 0 2,892 85,890 199,780 171,511 96,212 20,982 Cateveres Unit #5 Coat (1992) 0 3,263 34,828 Calaveras Unit 86 Coal (1?97) 0 0 Resource Recovery Facitt'y (1992) 2,000 33,712 59,150 51,828 4,376 i 356,960 357,441 329,011 250,086 206,446 Total Electric 25,375 14,790 16,520 12,392 12,420 GEhERAL PROPERTY TOTAL CONSTRUCTION BUDGET $ 399,714 S 388,056 8 362,617 8 279,988 8 237,587 ANTICIPATED 30hD ISSUES S 160,000 S 270,000 $ 185,000 $ 95,000 S 105,000 Total expenditures over the five year fiscal period 1989 1993 are shown in the following tabte: Percent ($000) of Total 8238,016 14.2% STP . .......................... 37.3 Coat Units #5 & #6. . . . . . . . . . . . . . . . . . . . 621,650 Resource Recovery Fac tity. . . . . . . . . . . . . . . . 151,066 9.0 Lignite . . . . . . . . . . . . . . . . . . . . . . . . . 46,128 2.8 443,084 26.6 AlL other electric. . . . . . . . . . . . . . . . . . . . 4.9 i Ceneral property. . ................... 81,497 i 86,521 5.2 Gas........................... T o t a l . . . . . . . . . . . . . . . . . . . . . . . . 51,66 7,96 2 100.0% The electric utility industry in generet is currently experiencing difficuttles in a number of areas, incl uding avaltability and high cost of capitet, exposure to concettation and penalty charges on new generating units under construction, fuel evaltability, uncertainties in predicting future toed requirements, litteetton and preposed legislation designad to deley or pre ~.ent construction of generating and other i. f acilities and to Limit the use of existing f acilities, compliance with environmental regulations, licensing ' and other delays af fecting the construction of new f acilities and the ef fects of conservation on the use of electric en&rgy. Any of these f actors say require modification of facilities and in some cases delay construction with resulting increases in construction and operating costs and may require modification of the i. plana and estimates described above. l l l 33 l-

SOUTE TENAB PROJECT Approximately 14% of the scheduled 1989 93 construction program is for completlng construction of the two unit nuclear generating station at the South Texas Project, (the "Project" or "$TP"). In June, 1973, CPS agreed to participate in the Project, which involves the construction of two 1,250 MW units in the Patectos say City area on a 12,000 acre site near the Texas Gulf Coast. Participants in the Project and their share therein are

• as fofIows:

Houston LfghtIng & Power Company (NL&P) 30.8% City Public Service Board of San Antonio 28.0% Central Power and Light Company (CPL) 25.21 City of Austin (Austin) 16.0% 100.01 The required construction permits approving the Project were awarded by the Nuclear Regulatory Commission (WRC) In December,1975, and extended in April,1982, to include the currently scheduled completion dates. San Antonfo's share of tP 2 two 1,250,000 KW units 13 700,000 KW. NL&P is the Project Manager for design, engineering, construction, licensing, and operation of the Project. The estimated capital expenditures for CPS 8 Interest in the STP are based upon en estimated total direct cost of both units of the Project of approximately $5.278 bit tion, or $2,111 per kilowatt, after consideration of the Brown & Root settlement (referred to below). The above total Project cost is based upon a review ctncluded in September, 1987, by ML&P, Bechtel Energy Corporation (Bechtet) and Ebasco Constructors incerporated (Ebasco) called the "Completion Assessment." The Completion Assessment was based on projected commercial operation commencing in February, 1988, and June, 1989, for Units 1 and 2, respectively. A subsidiary of Bechtel Power Corporation, Bechtel Energy Corporation,. le the architect engineer and etnstruction manager of the Project. Bechtel was retained in September,1981, to replace Brown & Root, Inc. (Brswn & Root) following protracted engineering and construction delays. In February, 1982, Ebasco Ctnstructors, Inc., a subsidiary of Ebasco Services Incorporated, was retained as the new constructor

• fottowing Brown & Root's withdrawat as constructor in November,1981. For a descriptf on of the settlement of litigation relating to Brown & Root see Note 8 to Financlet Statement in Appendix B.

The Completion Assessment described above reflects an increase in tLe total cost to complete both Units of S300 mitLlon over previous estimates and contains an allowance to cover contingencies. Based upon this estimate and a subsequent projected delay into June, 1988, for commercist operation of Unit 1, the total cost of the CPS share of the Project would be $2.1 billion for construction and interest during construction and $115 mittlen for fuel purchases prior to commercist operation of each unit, in Janupy, 1988, the Project Man ger's projection for Unit 1 commercial operation was for 3 to 5 months following initlet criticality forecasted f or mid February, 1988, with Unit 2 projecte6 to remain on schedule with commercial operation expected in June, 1989. If these estimates and projections prove incorrect, the Project cost and schedule teculd be adversely affected. Through December, 1987, CPS has expended approximately $2.0 bit t f on on the Project including interest during construction and advance payments for fuel af ter consideration of the Brown & Rsot settlement. An operating license authorizing the toeding of fuel and operation of Unit 1 of the STP at power levels up to $1 of rated thermal power was issued by the NRC on August 21, 1987. The Project Manager loaded fuel shortly thereaf ter and commenced an initial startup test program. As mentioned above, a January, 1988, forecast by WL&P projected that Unit 1 would reach its initial criticality by mid February, and ML&P expects thereafter to sesk authoritation from the NRC to proceed with its test program up to full power operation. The NRC commenced an on site investiertion on January 18, 1988, to review and evaluate potentist concerns regarding constr.4ction quality received from the Government AccLuntability Project (CAP), a citizens Interest grcup. In 1987, CAP demanded that the NRC establish a special task force to investigate atteged safety defects at the STP. The group claimed to have evidence of defects but refused to turn over the information untit late in 1987. Although no of ficial notification has been received f rom the NRC regarding the detalla of the CAP attegations, the Project Manager believes that any concerns that alght have been raised by GAP have been previously investigated and addressed. On January 26, 1988, GAP filed a Petition with the NRC claiming that the investigation of its allegations was inadequate and requesting delay in NRC voting on a full power operating License until a "through" investigation is completed and its results publicly released. While the NRC has not restricted the approach to initlet criticality during investigation of the GAP attegations, CPS cannot predict whether this investigation or other activities may affect the cost and scheduled commercist operation dates of the STP Units. In a January, 1985, crder in a NL&P rote proceeding, the Pubtle Utility Commission of Texas (ths "PUC") directed that its staf f "docket a proceeding to gather the best current evidence concerning the economic viability of Unit 2 of the South Texas Project." That proceeding is pending before the PUC. White CPS believes that the economic viability of Unit 2 can be supported in the proceeding, it cannot predict PUC action regarding STP rate treatmsnt of ML&P and CPL, nor the effect which such orders alght have on the Project. By January, 1988, ML&P had been notified that the NRC was considering ' potential enforcement actions" against STP as a result of operations in violation of the operating License Technicet Specification and breakdowns in the STP Security Program subsequent to the issuance of the operating license. On february 12, the NRC l n

                                                                                                             - . _ . . . - . . . . ~ . . . _ _ ~ ~ ~ -

announced that it would impose a 875,000 fine in connection with the two Technical Specification vietations. CPS cannot predict whether further enforcement action will be taken or further civit penettles will be imposed, nor whether such actions may adversely ef fect the schedule for requesting authoritetton for f ulla

              , power operation of Unit 1.

On November 3, 1981, the City of Austin, Texas, conducted a public referendum on whether its City Council - l' should be authorized to sett all of Austin's 16% interest in the South Texas Project. A majority of those voting on the referendum voted to give the Austin City Council such authority. To date, Austin has been urable to sett all or part of its share in the Project, and has filed suit egelnst ML&P seeking to "reform" and/or "rescind" parts of the Participation Agreement to, in effect, require ML&P to assume ownership and financlet responsibility for Austin's there. While the court has granted summary judgment against the "reformation / rescission remedies", Austin has amended its petition to seelt substantial desages against ML&P, including the trebling of such damages under certain circumstances, for mismanagement of the Project, and other clelas. The case is presently set for trial in Dettes, Texas, in September, 1987, Austin end NL&P announced en agreement in principle to settle the litigation on terms which, among other things, would result in a transfer of Austin's interest in STP to ML&P. The settlement is contingent on negotletion of definitive documents to inclement the agreement in principle, which is continuing. CPS is unable to predict if, when, to whom or upon what terms Austin's share of the South Texas Project may be sold, or transferred, the outcome of Austin's litigetton with HL&P, or the ef f ect on the Project. In January, 1984, ML&P brought suit egelnst CPS, CPL and its parent Central and South West Corporation (CSW) In Matagorde County and also sought to join them as third party def endents in the Dettes suit brought by Austin. See "Lt.tigetton" for e more detailed description of these suits. l ENVIgosMENTAL MATTEg8 l I CPS is subject to extensive regulation with respect to air and water quality, solfd weste disposal and other environmental matters by various federal, state and local authorities. Environmentet standards have been !' established by the Texas Air Control goard, the Texas Water Commission and the Environmental Protection Agency l (EPA). CPS has permits f rom EPA and the Texas Water Coeselssion for Liquid weste releases for att exf sting CPS I power plants in gener County. Operating permits for the J.T. Deely cost plant are expected to be lesued when the retr "'t project ref erred to below is completed and following en adequate demonstration period. CPS has demonstr. .ed compliance with all federal and state air estesion standards with the exception of the 20% opacity limitetton applicable et its J.T. Deely coal plant. Pursuant to e relief order issued by the Texas Air Control goerd in December,1985, CPS is authorized to operate the plant at 35% opecity so long as the existing particulate control equipment is in use. A request for slalter relief has been submitted to EPA, whic*i has in the past granted such relief to other utilities. CPS has recently completed the process of retrofittlng

• both units with new cold side particulate control equipment. Although coortlance tests ire not yet complete, these retrofits are expected to allow operation of the plant in compliance with the 2GX standard on a more economica'. and reliable basis.

In accordance with The National Environmental Policy Act, The Clean Air Act, The Clean Water Act and their counterparts et the state levet, CPS has submitted on Environmental Information Document and ett applicable permit applications to the responsible authorities in conjuction with the proposed 1992 new coal unit. These permits and authorizations for construction are required to be in hand as a prerequisite to commencement of construction. FUEL SUPPLY COAL in May, 1974, CPS signed a 20 year contract for the purchase of coat from the Sun oil Company, which contract has been assigned to and is being performed by its of fillete, Cordero Mining Company. The contract provides e total 55,450,000 tons of low sulfur coat comitted to CPS f rom substantial reserves held in Campbell County, Wyoming. The 1986 coal cost everaged $7.16 per ton and $4.50 per ton f or 1987. Ef f ective January 1,1987, CPS served a notice of terminetton of the contract on the supplier, as permitted by the contract, based on a significant discrepancy between contract and market price, and thereafter entered into discussions with the supptler to renegottete the contract price. In July, 1987, the parties agreed to set the capital segment of the contract price et S.80 per ton for a minimum three year period, but agreed that, if in any calender year the contract price is less then $4.55 per ton, the capitet segment will be increased for that year by one half the dif ference between the contract price and $4.55. The parties also revised contract provielons relating to the heating value of the coal as a function of contract price in order te reduce the upward ef f ect on price of high STU value coat. This amendment to the 1974 agreement evolds terminetton of the contract and effectively lowers the base price. During the third quarter of 1983, CPS negotiated a secondary cost agreement with the supplier allowing CPS to pay a tower price f or ett cost purchased in excess of the contract quantity. This agreement, as currently amended, will terminate at the end of 1988, and provides for a secondary cost price of

                  $3.25 per ton with adjustment for eTU content as provided for in the 1987 emendment to the main coal supply agreement.

Followine a solicitation of competitive bids in the Spring of 1985 for a long term rett transportation contract for delivery of its coal, CPS ewarded a 20 year term contract to Western teltroad Properties, Inc. ("WRPl"), a corporation formed by Chicago North Western Transportetton Company together with the Union Pacific Railroad. The rate is presently $20.74 per ton for CPS' current shipment volumes. CPS c ommenc ed taking 35

I l 1

                                                                                                                                               .                 . I dettveries under this contract in August, 1985, following completion of trackage arrangements. These rates are significantly less then rates paid to CPS' prevlous carriers, surlington Northern Inc. and Southern Pacific, tehich transported CPS' coat pursuant to filed Interstate Commerce Commission (l.C.C.) tarif f s between 1976 and 1985.                                                                                                                                                       i In December, 1986, the CPS goard approved a settlement offer from its f ormer coal carriers (surtington                                                         l utrthern and Southern Pacific) which settled all disputes between CPS and the carriers erf sing froe or                                                         {

relating to the transportation of coal occurring prior to December 23, 1986. The settlement provided for CPS i to dismiss actions brought by It before the I.C.C. and the United States District court in San Antonio, Texas  ! and for surlington Northern and Southern Pacific to dismiss the Law suit filed by them in the U.S. District 1 Court in the Fort Worth, Texas. Following the entry of orders dismissing both the Commission proceeding and . the United States District Court San Antonio Division action, surlington Northern and Southern Pacific paid to CPS their respective share of $31 million. On January 4, 1988, en additional $10 mit tion was received by CPS and over the next six years surlington Northern and Southern Pacific will make additional annual payments ] ranging froa $10.5 million to $13 mit t f on to CPS. Total payments to be made by gurtington Northern and j Southern Pacific under the settlement agreement amount to $111.5 mittion. The initial payment was applied by CPS to roolace utility funds previously advanced to make court ordered roll tarif f payments and to pay legal expenses related to the dispute. Subsequ6nt installments are being returned to customers ce they are received. For the 12 months ending December 31, 1987, CPS burned 2.75 mittion tons of coal at en average price of $27.70 per ton to produce electricity from the J.T. Deely Plant. Approximately 38 percent of the electricity provided during the period was f rom the coal fueled units. The CPS coal in stock as of December 31, 1987 was 884,535 tons, or approximately 3.8 months supply, and has an inventory cost of about 619.2 mit tloa. NATUgAL GAS CPS's primary natural gas supply has been provided under a five year contract with Valero Transmission Partners, L.P. (Valero) successor to Valero Transmission Company, a subsidiary of Valero Energy Corporation. This current contract, which espires in June, 1988, requires Valero to provide CPS requirements ' for burner tip and electric generation needs at Vatero's weighted avsrage cost of gas plus a cost of service factor set by the Railroad Commission of Texas (The Rt Commission), and requires CPS to purchase its requirements f rom Valero, with the option to buy from others, and transport through the Valero systee, up to 41,500 MCF of gas per day, or approximately 16% of CPS' 1967 requirements. CPS has been generatty successful

• In acquiring the futt volume of "transport ges" delivered to San Antonio at substantially tower prices then the current Valero weighted averags cost of gas plus the cost of service f actor, in addition, because CPS may otherwise purchase energy from others at f avorable prices which would result in substantially reduced natural gas usage in CPS's power plants, vetero has made evallable large quantitles of natural gas from its effiliates at favorable prices under similar terms for une in CPS power plants.

Following solicitetton of bids for a new gas scpply, to comence af ter espiration of the current Valero contract, the CPS trustees, on December 21, 1987, accepted the bids of Valero Natural Gas Partners, L.f. for at least 80 percent of CPS's gas requirements and of Mouston Pipeline Company for at least 15 percent of CPS's ses requirements, subject to negotiation of satisfactory terms and conditions, including assurance of a reliable gas supply. Negotiations toward final contracts with these suppliers are proceeding. The prices for gas under both Valero and Mouston Pipe Line bids will be based on spot gas prices plus markups. Under a 1979 order of the at Commission, CPS pays Valero for delivery of natural gas et Valero's weighted everage cost of gas plus 15 cents per MCF. Vatero's estimated cost of gas for the month of December, 1987, was

      $4.30 per MCF. The average estleated cost of "transport ges" during December was approximately $2.78 per McF.

The everage actual cost for all natural gas purchased by CPS during November, 1987, including additionat vslumes made avaltable by Valero effiliates for power plants, was about $2.07 per MCF. The Vstero rate is subject to review and revision by the Rt Conwalssion, and the future price of naturet gas cannot be predicted accurately. Under the at comission's order of December 22, 1980, Valero must interrupt naturet gas deliveries to its customers in periods of supply shortages in accordance with priorities set in that order. In generat, delivery of natural gas for ses distribution systems is interrupted test, for electric generation next, od large industrist use first. These priorities are subject to tt Commission review and revision. Valero and its predecessor have generally been able to meet all natural ges requirements of CPS except for minor curtallments on certain peak days. In 1987, Valero Energy Corporation f ormed a timited partnership to which it transferred its natural gas pipeline and other natural gas assets. Valero Energy retained a 49% interest in the partnership and it or its , subeldieries serve as the generet partner to manage and operate the partnership assets. The reorgenlaation included the transfer of Valero Energy's gas supply and setes contracts to the partnership. The reorganisation has had no adverse effect on the performance of the gas contract, which is guaranteed by Yatero Energy Corporation, or upon the jurisdiction of the at Comission under curren* Law. As part of a 1979 settlement of CPS ctales against Its then naturet gas supplier, predecessors of Valero, and the suppt f er's then parent Coastel Corporation (Coastal), Coastal undertook a gas search program requiring e cinimum expenditure by Coastet of S180 mlL Llon over 15 years to develop new gas reserves to be comaltted to Valero's predecestor with a discount from market prices to be passed through to CPS and other settling customers. in January, 1986, Coastat filed a suit in State District Court in Midalgo County, Texas seeking a 36

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declaratory Judgment es to Valero's predecessor, the Settlement Trustee, w.J the settling customers, including CPS, that Coastal's obligation under the get search progree had terminated. A settlement of this cult was approved by the required number of settling customers having an interest in the ses search program, and by a State Olstrict Court In Travis County, Texas, in June, 1987. The settlement terminated the program and substitutes the opportunity for settling customers to purchase their ehere of 40,000 MCF per dey of gas f rom Coastal for six years at prices discounted f rom a defined fluctuating market everage price. CPS' settlement Interest obtains 7,550 MCF per day from Coastet, commencing September, 1987. The cost for the month of November, 1987 was $1.52 per MCF. The supply fulfills about 3.0% of CPS' requirements.

• BUCLEAR The supply of fuel for nucteer generating facilities involves the acquisition of uranium concentrate, its conversion to urentum hexailouride, enrichment of gaseous uranium hexaflouride, and febrication of nucteer fuel assemblies, f ollcwing use of the nuclear fuel assembtles, they must either be disposed of or reprocessed to recover remaining fuel value.

Westinghouse Electric Corporation (Westinghouse) has contracted to provide the South Texas Project participants with at least 7,377,000 pounds of uranlue concentrate, which, together with additional uranium provided by Chevron USA, Inc., is expected to support the operation of both STP units through the late 1990's. Options are held under these supply contracts to purchase additional urenlue concentrate subject to the development of additional uranlue reserves. Contracts with Westinghouse and others for conversion services will support the operations of both STP units through the early 1990's. Contracts for enrichment services provide coverage for up to 30 years operation. Westinghouse has also contracted to furnish fuel f abrication services for the inittel core and 16 years of reloads for both units. LIGalTE CPS is continuing to acquire lignite reserves sufficient to make up a mining block for possible future generation use. Lignite reserves of about 100 mittlon tons would be required to meet'the long term, base load t'- needs of a 500 MW Qenerating unit. CPS presently owns approximately 174 alltion tons of lignite reserves located in Lee and gastrop Counties, approximately 90 miles f rom San Antonio. CPS has leased reserves of approximately 87 alltion tons adjacent to its owned reserves, resulting in a total of 261 alllion tons of reserves. CPS etso owns an undivided 35% interest in certeln lignite leases in North gestrop County adjacent

 ,        to its other properties. CPS is continuing reserve mapping and negotiation for the acquisition of additional

• lignite reserves in the imedi a t e area of its present reserves. See "Litigetton" for discussion of an administrative proceeding effecting the development of CPS Lignite reserves.

Pursuant to requests filed by CPS and the Lower Colorado River Authority ("LCRA"), the sureau of Land l Management ("BLM") has indicated that it will hold a competitive lease sale for Ligailte reserves under Camp l Swift Military geservation in gestrop County, Texas, tocated near existing CPS Lignite reserves. glM

l. has determined that a suppleerntal Environmental Impact Statement (Els) is required as 6 preregulsite to the i, lease sate. LCRA is funding preparation of the Supptamentet Els, which is expected to be evaltable in mid-b 1989, with a lease sale tentatively scheduled for 1990. The sete is restricted by f ederal statute to publicly owned power generating entitles. Pursuant to a coal exploration license application granted to CPS by gLM, CPS has conducted exploratory drilling on Camp Swif t to assist it in developing an accurate bid. LCRA and Austin are other potential bidders for the Camp Swift reserves.

FUEL OIL CPS has the capability of using fuel oft to supplement natural gas as an input fuel to generate electricity. Total fuel ott consumption by CPS emounted to 24,856 barrels (No. 2 fuel olt, used for startup and flame stabiltration in the coal plent), for the 12 months ending December 31, 1987. CPS has e usable oil storage capability of 1.4 million barrels. As of December 31, 1987, the oil inventory was 786,262 barrets. Very Little fuel ott is currently being burned since the replacement price of oil is higher then the natural gas equivalent. FUEL SUPPLY

SUMMARY

l !. Periods of prolonged cold weather, during which natural gas supply may fall short of demand, may necessitate the curtellment of gas use for bolter fuel. The Natural Gas Policy Act, in addition to its pricing provjelons, subjects intrastate gas, including ses intended for boiler fuel use, to Presidential emergency purchese authority and emergency allocation authority to assist in meeting interstate naturet gas requirements for high priority uses. Several years ago, CPS completed essentist conversion of its existing gas fired generating units for oil firing to provide greater input fuel flexibility. However, the current price of oil, egelnst the price of l competing natural ges supplies, makes its use f or other than emergency needs impractical at the present time, in December, 1987, the price of fuel used by or evellebte to CPS was as follows: 37 l' l

Valero $4.17 per mittien gTU (estimated) Valero transport gas $2.78 per alttlon gTU (estimated) Special power plant gas from St.72 to $1.85 per million gTU of t $3.61 per million gTU (0.4% No. 2 fuel Oil

• Delivered by pipeline) 82.96 per million BTU (Inventory)

Coal $1.59 per million gTU (Inventory price)

• Far the long term, CPS plans call for diversification of the electric generating system to emphasite the use af cost, riuclear and lignite as the fuels for base load capacity. CPS plans to maintain the purchase of an adequate fuel supply for the two existing coal fired units and its planned new coal unit at the most -

competitive prices. Under the terms of agreement with Westinghouse, along with other contracts entered into, s veral years' requirements of nucteer fuel for the South Texas Project will be fulfilled at known tow costs, which confirm the economic feasibility of the City's participation in the Project. ENERGT CouSERVATIcel PgoGaAm Far many years, CPS has been encouraging voluntary conservation of electricity and natural gas usage. CPS continues to inform att customers of the verlous methods evallable by which customers can reduce energy consumption through the use of conservation measures and by the elimination of unnecessary weste of energy. The results of the voluntary conservation programs and the ef f ect of increasing utility prices have been reflected in the previously mentioned decline in the growth rate of peak demand. In September,1983, the CPS giard of Trustees authorized the establishment of three additional programs that provide direct incentives for customers who install energy conservation measures and appliances. The appliance rebate program provides for incentive rebate payments to be made to customers who purchase high ef ficiency air conditioners and heat pumps. The weatheritetton toen program funds low cost loans to quotifying customers for the installation of energy saving enhancements to existing homes. TLe weatherlaation materlats program provides weatherlaation materlate to residentiel customers based on the results of home energy audits conducted by CPS energy surveyors. The economics and energy conservation potentist of existing programs as well as alternative or ' edO Monal demand side management initiatives are periodically reviewed to ascerteln the need and justification for such programs in the CPS service area. Conservati on trends are carefully studied in the development of CPS plant expansion requirements. CPS le subject to the provisions of the National Energy conservation Policy Act (NECPA). This 1978 federal energy legislation established certeln residential conservation standards and required all electric and/or ses utilities classified as a "covered utility" to follow a plan for implementating the standards under the Residentist Conservation Service (RCS) program. CPS is one of 22 covered utilities included in the RCS plan of the State of Texas. The Texas PCS Plan was approved by the Department of Energy and was implemented on October 3,1981. NECPA standards require utilities to of fer to conduct en on site energy audit of the residentist customer's dwelling, Inform customers of projected cost savings, and inform the customers of the cost of instelling conservation measures. CPS was also included in a proposed Texas State plan for a sicitar audit program directed at apartments and small commercial customers, called the Commercial and Apartment Conservation Service (CACS). The Conservation Service Reform Act of 1986, however, essentially amends NECPA by repeating the requirement for CACS sudits and extends the requirements f or RCS sudits until June 30, 1989. In 1987 the Energy Management Center (EMC) of the Texas Governor's office assumed responsibility for administration of the State RCS program from the Pubtle Utility Consission of Texas. The ET.C has issued proposed wording changes to the State RCS Plan to incorporate provisions of the Conservation Service ReDra Act. All proposed changes to the plan are administrative in nature and it is enticipated that precedures associated with providing CPS energy audits will not be affected. LITICATION CPS is involved in verlous tegel proceedings rotated to alleged personst and property damages, breach of contract, condemnation oppeals and discrimination cases. In the opinion of management of CPS, the outcome of such proceedings will not have a materiet adverse effect on the financial position or operations of CPS. On January 7, 1988, Nouston Lighting & Power Company (ML&P), Project Manager of the South Texas Project, filed suit egelnet CPS, Cytral Power and Light Company (CPL) and CPL's parent, Central and Southwest Carporation (CSW), in State Olstrict Court in Metagorda County, the site of STP. Suit was also filed by NL&P against these parties in the Delles County Olstrict Court in which litigation by the fourth STP participant. Austin, agelnst ML&P is presently pending, seeking to have CPS and CPL /CSW brought into the Austin litigation as third party defendants. The causes of action asserted by MLLP against CPS and CPL /CSW are basically the some in both suits. ML&P continues to deny Austin's clefes based on breech of contract, including cismanagement, in connection with ML&P's performance es Project Manager, but asserts that it is entitled to indemnity and contribution f rom CPS and CPL /CSW to the extent any liability is leposed on ML&P for these or Austin's other ctalme in the Deltas litigetton, which include fraudJtent inducement and breach of obligation by NLLP to furnish Project information. Austin's suit egelnet ML&P alleges various elements of damages ranging from 8406 million to approximately 8938 million, to which could be added at teged penet tles, costs and attsrneys' fees. ML&P alleges that it did not act unlisterally in connection with verlous Project actions asserted by Austin es a basis for liability because decision making and actions were undertaken by the entire STP Management Conselttee, including representatives of CPS, CPL and Austin. ML&P requests in both suits that the courts defer trist of any claim arising out of STP and direct the implementation of alternate methods of 1 38 .._4._. , , ~ . . , . ~ . -

      +--
                                                                                  . --. -- . . _ m.e_ ~ ~dm dispute resolution, including nonbinding arbitration, as authorf red by Texas statutes, and also seeks the entry of declaratory judgements determining that NL&P has no llability to the other participante. The Austin suit has been set for trial the first week of June, 1988, and will not include ctales among CPL, CPS and NL&P.

CPS does not believe there is any balls for liability to NL&P for Austin's damages or otherwise and will timely answer opposing NL&P's causes of action and may include appropriate counterclaims against NL&P aseking

• recovery of damages attributebte to acts and omissions of NL&P as Project Manager. CPS cannot predict which court or en alternative dispute resolution procedure will be the forum for adjudication of these claims, or the outcome of such actions.
• In late 1987, CPS was added as a defendant in a sult brought by the state of Texas in a Nueces County State Olstrict Court atteging violations of the Texas Solid Weste Disposal Act and other Texas statutes in connection with certain lead and PCg contaminated waste disposal altes and adjacent tracts in Nueces County, Texas. The suit, originally filed in 1981, names 28 def endente, including past and present owners of the tracts, entlties which used the tracts for weste disposal, operators of waste disposal operations on the tracts, and three utilities, including CPS, who are alleged to have ahlpped PCB contaafneted electrfc transformers to the sites for cosimercial disposal, salvage or recteestion by the operators during the 1970's.

CPS is also alleged to have furnished certain lead waste materials for disposet at the sites. The suit atteges that the sites are an unauthorized disposal f acility to wr.ich wastes were shipped in vlotation of the Texas Solid Weste Disposal Act and adelnistrative regulations and that the wastes were shipped without proper record keeping as required by state Law. The suit, seeks civil penalties in amounts ranging from $50 to $25,000 for each act of violation and day of vlotation under applicable statutes, without specifying aggregate clef as agalnst any defendant, and attorneys' fees and costs on behalf of the State. The suit also seeks to have the defendants submit and implement a sampling and testing plan for the sites and a closure plan providing for removal or impoundment of all wastes. Studies done by other def endants in the litigation estimate the costs of cleanup of PCes and closure of these sites to be approximately $1 mitllon, which is proposed to be attocated among CPS and other solvent defendants as part of a proposed settlement. The extent of contamination of the sites by lead wastes is presently not known, and the cost of cleanup and closure for these wastes cannot presently be estimated. CPS has answered the suit and will vigorously defend clatas against it, but cannot predict the ultimate outcome or magnitude of liability to which it may be subject. In August, 1983, two petitions to declare large areas of gastrop and Lee Counties unsultabte for surf ace lignite mining were filed with the surfaca Mining Division of the tallroad Commission of Texas (the at

    '       Coanission) by landowners in these areas. The petitioners claim that surface mining could have adverse or irreversible effects on several specified aquifer systems and related re charge tones in the designated I         areas which encompass virtually all of CPS' lignite reserves. The RR Commission declared the petitions complete in September, 1983, and a public hearing was held in July, 1984, as to the leeues raised. The examiner's report and proposal f or decision based on the hearing evidence has been released and recommends i          designating no lands unsultable. A final ruling by the at Commission is expected during 1988. Under its rules, the at Coanission is required to designate Lands as unsultable based on the record developed in this proceeding, if it determines that reclamation is not technologically and econoelcally feasible. Furthermore, it may designate Lands untultable if it finds that mining operations (I) will be incompatible with exf eting local tend use plans, (11) can result in substantial loss or reduction of Long range productivity of water supply, or (111) will have other specified adverse effects. CPS, in conjunction with other owners of llenite reserves in the area, has opposed the designation of the tends as unsultable in this proceeding. See "San Antonio Electric and Gas Systems       Fuel Supply   Lignite".

i i e 39 l l l

RATES Aue REGULATIDE Und:r the Texas Public Utility Regulatory Act (Article 1446c), significant original jurisdiction over the ratcs, services and operations of electric "public utilities" is vested in the Texas Pubtle utility Commission. The tallroad Commission of Texas has parattel jurisdiction over "ges utilities" under sieller prsvletons in the Texas Gas Utility Regulatory Act ( Article 1446e). These Acts generetty exclude from their ' ctvsrege

• municipally owned utilities," such as CPS. CPS le subject to appellate but not original rate rCoulatory jurisdiction by the two regulatory entitles in unincorporated areas in which it serves. Also, CPS is subject to less stringent electric certification requirements for service area and f acilities expansion than are public utilities, and is not liable for the annual gross receipts fee payable by public utilities. '

The San Antonio City Council exercises general original rate regulatory jurisdiction over the CPS service area, including unincorporated areas served by CPS. To date, no appeal of CPS rates has been taken to either of the regulatory entitles by residents outside the municipal limits. KATE INCREASES The City is obligated under the Trust Indenture and the New Series Bond Ordinance to establish rates and collect charges in an enount sufficient to pay all electric and gas systee operation and maintenance expenses, to service att of the outstanding Bonds, and to make all other perments prescribed in the Indenture and New Series Bond Ordinance. Rate changes over the past decade have consisted of increases of 7.4% for gas in September, 1979; 5.4% for electric in October, 1979; 6.0% on the total bill, in June, 1981; e 5.1% combined gas and electric rate increase in May, 1982; a 7.3% combined gas and electric rate increase in January,1984; e 4.26% combined gas and electric increase in December,1984; a 2.75% combined gas and electric rate increase ef fective January 2,1986; and a 4.2% combined gas and electric rate increase ef f ective January 4,1988. In November, 1984, the Board approved revisions to certain miscellaneous service charges ef fective December 1985. In the summer of 1986, the Board approved revisions to the CPS Electric Line and Gas Main Extension Pallcles ef fective August 1, 1986. In the fall of 1987, the Board opproved revisions to the CPS Rules And Regutettons Applying To Gas And Electric Service, ef fective January 1,1988. ' ELECTRIC ADO GAS RATE SCNEDULES The principal electrle rates ef fective January 4,1988, are es follows: MouTMLY RATE Residential Service Bats 83.70 Service Availability Charge Enerny Charne C0.0627 per KWM for att KWM Peak Caoselty Charne'

$0.0118              Per KWM for all KWH in excess of 600 KWH

• Peak Capacity Charge is applicable only during the summer bltting period (June September)

Residential All Electric Service

$3.70                Service Availability Charge Enerav Charae Svaner IIL ting (June September)
$0.0627              Per KWN for ett KWM Non summer Billing (October May)                                                                      ,

S0.0627 Per KWM for the first 600 KWM S0.0517 Per KWM for all KWM in excess of 600 KWN Peek Capacity Charne* . 50.0118 Per KWW for all KWN in excess of 600 KWH

• Peak Capacity Charge is appilcable only during the summer billing perlod (June September) 40

~r _ _. :-. ~ _ , . - _ -. . . - - - - - - - - - - -

General Service Sete 83.70 Service AvalleblLity Charge Enerav Cherme

    *      $0.0644  Per KWM for the first 1600 KWM*
           $0.0330  Per KWM for ELL additional KWM Peak Cecacity Cheese Summer Billing (June

• September) 80.0110 Per KWM for at t KWM in excess of 600 KWM Non Suomer Billing (October
• May) 80.0068 Per KWM for att KWM in excess of 600 KWM
• 200 KVM are added for each KW of Bllting Deeend in excess of 5 KW. Bitting deoend fres October through May may not be toss then 80% of highest measured demand from the greviousJunethroughSeptember.BittingdemandfromJunethroughSeptemberlethe ighest measured demand Large Ligk and Power

           $100.00    Service Avellability Charge Demand Cheese Summer Bit ting (June          September)

$ 6.30 Per KW for att KW of Bliting Demand' Non Suomer Billing (October

• May)

S 6.00 Pe r KW f or a t t KW of B i t t i ng D emand*

l.

• Enerav Cherne Summer Billing: (June September)

80.0415 Per KWM for the first 50,000 KWM

.          80.0391  Per KWM for att additional KWM Non Suomer Bitting (October

• May) 80.0387 per rWM for the first 50,000 KWM

           $0.0373  Per KwM for att additional KWM ce not be less then 80% of highest demand free
                    *BillingdemandfromOctoberthroughMakil the previous June through September.                 ng demand may not be less then 100 KW.

Extra Large Power

           $700.00  Service Avaltability Charge Demand Cherne Summer Bit ting (June - September)
           $6.85    Per KW for aLL KW of Bltting resand*

Won Suomer tilling (October

• May)

S6.25 Per KW for ett KW of Illting Demand

• Enerav Charae

     .               Summer Billing: (June

• September) 80.0391 Per KWM for the first 250 KWM per KW of Bllting Demand 80.0335 Per KWM for att additionet KWM i* Mon Summer Bittings (October May) 80.0360 Per KWM for the first 250 KWM per KW of Bitting Demand 80.0335 Per KWM for ELL edditional KWM
• Billing demand f ree October through May may not be less then 80% of highest demand f rom the previous June throug5 September. Bltting desond may not be Less then 1000 KW.

41

Th2 principal gas rate schedules are: MONTNLY RATE Generet Service Bet 9 83.35 Service Avellability Cherse 80.490 Per 100 cubic feet for att cubic feet

• Industrist Class A Rete

$24 00                   Service Ave' lability Charge                                                                 '
$0.$6Y                   Per 100 cub t feet for the first 200 000 cuble feet 80.48D                   Per 100 cub'c feet for att additional cubic feet Industrial Class e Ret) 823.00                  Service Avellebility Charge 80.455                   Per 100 cubic feet for the first 600 000 cuble feet 80.428                   Per 100 cubic feet for ett additional cubic feet

• Minimum altl will be 8300.00 for any customer whose monthly billed consumption equels or exceeds 1 consecutiv,000,000 e months. cubic feet in any month. This enount will be continued for eleven FUEL ABO GAS COST q DJu?TMENT The foregoing rate schedules conteln a fuel cost adjustment clause in the electric rates and a gas cost 6djustment cteuse in the gas rates which allow the recovery of monthly fuel and gas costs that very above or below the costs which are included in the beste rates. Electric basic rates are subject to en adjustment of plus cr minus the enount of change in the price of fuel above or below a basic cost of 80.02 per KWM sold excipt that during the summer months of June through september, residential electric usage of 300 KWM or less +

le exempt f ree positive fuet adjustment charges and residentist usage of 301 KWM to 600 KWM is charged 50% of the standard fuel adjustment. The ses basic rates are subject to en adjueteent of plus or minus the enount of change in the price of gas sold above or below a basic cost of $3.00 per MCF sold. 42

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I ELECTRIC CuliCIeEt STATISTICS Flacet Years Ended January 31: e 1979 RRRR 1984 RRXM

 .          RESIDENTIAL Average Monthly KWM/

Customer 735 706 799 773 805 774 801 826 443 846 Average Monthly Bill / Customer S 32.53 S 32.29 8 39.60 S 42.66 8 54.53 $ 54.00 $ 60.41 $ 63.77 8 57.71 855.50 Average Monthly Revenue /KWM S .0442 8 .0456 8 .0496 8 .0552 S .0677 8 .0698 S .0754 S .0773 S .0685 S0.0656 CoeNettCIAL Aue luDUSTRIAL Average Monthly KWM/

  .          Cuetoner                          8,675    8,610     9,092   9,021    8,928     8,494 8,413    8,640    8,598          8,591

Average Monthly BitL/

r Customer $308.25 S318.49 S368.32 S413.66 8514.46 8509.97 8550.84 8571.05 S494.69 S471.16

 )          Average Monthly Revenue /KWM                    S .0355 8 .0370 $ .0405 S .0459 8 .0576 S .0600 6 .0655 S .0661 S .0575 80.0548 ALL CUST0 SEERS e         Average Monthly KWN/
 !           Customer                          1,894    1,848     1,908    1,893    1,920    1,825 1,833     1,871    1,903         1,904 1            Average Monthly Bill /

i Customer Average Monthly S 70.98 8 72.13 8 83.05 8 92.62 $118.58 $116.72 S127.16 S133.39 S116.69 $112.23 7* q Revenue /KWM S .0375 8 .0390 S .0435 $ .0489 S .0617 8 .0640 $ .0699 8 .0701 8 .0613 $ .0589 1 12 months ending December 31, 1987. ({* I TYPICAL RESIDENTIAL GAS AND ELECTalc BILLS OF SIX TEEAS CITIES

   ---                             Usages: 500 Kilowatt hours for Electric, 5,000 Cubic Feet for Gas t City                      Electric B(tl         Gas sitt         Total B(It
 !l I                                   Austin                        $23.22              829.69           8 $2.91

SAN ANTONIO 33.58 23.90 57.48 Corpus Christi 33.80 28.15 61.95 Mouston 37.12 26.92 64.04

' Oettes 38.66 28.05 66.71 Fort Worth 38.66 30.35 69.01 ( 1 Based upon January 1988 rate schedules including Fuel and Gas Cost Adjustments. I San Antonio 8s typical residential usage for December 1987 was 666 KWM and 6,500 Cf. TEN TEAR RECORD OF CITY OF SAN ANTOW10 BENEFITS FROM CITY'S ELECTRIC AND SAS UTILITY SYSTEMS Teer Ending Increase in City's Totet Annvet Paymentg Eaulty in System _ Benetits to City 1 31r_ To City 1978 8 36,996,987 8 31,491.910 $ 68,488,897 1979 39,557,154 22,943,464 62,500,618 1980 43,310,425 24,178,218 67,488,643 1981 52,569,716 42,544,744 95,114,460 1982 61,688,193 52,214,626 114,102,819 1983 78,822,089 79,746,561 158,568,650 1984 81,692,529 84,554,135 166,246,664 1985 95,507.732 140,468,334 235,976,066 3 4 1986 103,972,266 170,987,951 274,960,247 1987 96,190,619 183,579,693 279,770,317 19872 97.234,267 188.980.487 P86.214.754 I Totals $78).741.977 S1.021.690.156 S1.n09.432.135 1 Payments to City include cash payments and refund of charges for furnishing City electricity and gas. 2 12 months ending December 31, 1987. 43

TAX EXElsPflos In the opinion of McCatt, Parkhurst & Norton, Bond Counset, under existing statutes, regulations, published rulings and court decisions (a) Interest on the Bonds is not includable in the gross income of the owners of the Bonds for federal income tax purposes and (b) none of the Bonds will be a "private activity bond" the Interest on which is treated as a specific itee of tax preference for purposes of the alternative minimum tem prcvisions of the Code. Interest on the Bonds will be included, however, in "adjusted net book income" for ' taxable years beginning in 1987, 1988 and 1989, And in "adjusted current earnings" for taxable years beginning tnereaf ter for purposes of calculating :he alternative minimum tax feposed on corporations. In caprest ng its opinion, Bond Counsel will rely on the City's no arbitrage certifleste, and will assume ' compliance by the City with certain covenants contained in the ordinance relating to the use of the Projects, the use and investment of the proceeds of the Bonds and payments to the federal government of certain enounts carned - f roe the Investment of the proceeds 2f the Bonds. Falture by the City to comply with its rcpresentations and covenants may cause the interest on the Bonds to become includable in the gross income of the owners of the Bonds or to become a specific item of tax preference for purposes of the atternative minlaus tax retroactively to the date of issuance of the Bonds. Except as stated above, Bond Counset expresses no opinion as to any other federal income tax consequences of acquiring, carrying, owning or disposing of the Bonde. Although Interest with respect to the Bonds is not includable in gross income, receipt or eccrust of such Interest may otherwise af f ect the ten liability of an owner of a Bond. The tax consequence of receipt or accrual of interest with respect to the Bonds will depend upon the tax status of the owner of the Bond and such owner's other items of income or deduction. Prospective purchasers of the Bonds should consult their own tax advisors with respect to the effect that ownership of the Bonds may have on their particular tax situation and other matters not specifically addressed herein. The law upon which Bond Counset have based its opinion is subject to change by the Congress and the Department of the Treasury and to subsequent judiclat and adelnistrative interpretation. There con be no assurance that such law or the Interpretation thereof will not be changed in a manner which would adversely effect the tax ' treatment of ownership of the Bonds. REBISTRATION A50 00ALIFICATiou 0F touDS FOR SALE The sete of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in rellence upon the exemption provided thereunder by Section 3 (a)(2); and the Bonds have not been qualif ted und3r the Securities Act of Texas in retience upon various exemptions contained therein; ett have the Bonds bein quellffed under the securities acts of any jurisdiction. The CPS Board and the City assume no ecsponsibility for quellfleetion of the Bonde under the securities laws of any jurisdiction in which the Bonde may be sold, assigned, pledged, hypothecated, or otherwise transf erred. This disetalmer of responsibility for quellfleetion f or sale or other disposition of the Bonds shalt not be construed as an interpretation of any kind with regard to the evallability of any exemption from securities registration provisions. LEGAL luYESTisENTS ABO ELIGIBILIT1 To SECURE POSLIC FUNOS IN TEXAS The Bonds constitute negotlebte instruments, and are investment securities governed by Chapter 8, Texas Uniform soamercist Code, notwithstanding any provisions of law or court decision to the contrary, and are legal and authorized investments for banks, saving banks, trust companies, building and toen associations, savings and loan associations, insurance companies, fiduciaries, and trustees, and f or the sinking fund of citics, towns, villages, school districts, and other political subdivisions, or pubtle agencies of the State of Texas. The Bonds also are eligible to secure deposits of any pubtle funds of the state or any political subdivision or public esency of the state, and are lawful and suf ficient security for the deposits to the extsnt of their market watue, when accompented by any unnatured coupons attached to the bonds. No review by the CPS Board or the City has been made of the laws in other states to determine whether the bonds are legal i investmente for verlous institutions in those states. LEGAL OPlul0NS Abe to LITIGATION CERTIFICATE The City will furnish a complete transcript of proceedings had incident to the issuance and authorization of the Bonds, including the unquellfled opproving legal opinion of the Attorney General of the State of Texas, to the ef fect that the Inittel Bond (for which the Bonds will be exchanged and substituted) is a valid and legally binding obligation of the City, and based upon examinet t on of such transcript of proceedings, the unquellfled leBet opinion of Bond Counset to the effect that the Initial Bond, and all Bonds, duly registered, authenticated, and delivered in accordance with the Ordinance, are valid and legatty binding obligations of the City, and'to the effect that the interest on the Inittel Bond and such Scnds is excludebte from gross income f or Federal income tax purposes under existing law and that the Bonds are not private activity bonds to the extent described under Tax Exemption. the customary closing papers, including e certificate to the effect that no Litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Initial Bond, or which would ef f ect the provision made for its payment or security, or in any 44

       -mwy           --m..,

w . - r-- _--

_, , ,as.Au wn s qqqgwEeuw t 4 manner questioning the validity of said initial Bond will also be furnished. Bond Counsel was not requested to

      ,           participate, and did not take part, in the preparation of the Notice of Sale and Bidding Instructiono, the of ficist Bid Form and the of ficial Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verif y any of the information contained there!n, except that, In its
    '             cepecity as Bond Counsel, such firm ht t reviewed the information describing the Initial Bond and the Bon:Is in the Official Statement to verify that such description conforms to the provisions of the Bond ordinance. The legal f ees to be peld Bond Counset for services rendered in connection with the issuance of the Initial Bond are contingent on the sale and delivery of the Inittel Bond. The tesal ooinion will be erinted n,i the arwie RATINGS The following ratings have been assigned to the Sonds: Moody's Investors Service, Inc., "Ae" and Standard &

Poor's Corporation "AA",. An emplenetton of the significence of such ratings may be obtained from the coopery i furnishing the rating. The ratings reflect only the respective views of such organitettons and the CPS Board and the City make no representation as to the appropriatianess of the retings. There is no assurance that such ratings will continue f or any given period of time or that they will not be revised downward or withdrawn entirely by either or both of such rating companies, if in the judgment of either or both companies, circumstances so warrant. Any such downward revision or withdrawal of such ratings or either of them, may have

         ;       en adverse effect on the market price of the Bonds.

7 F. - IRJulCIPAL 8050 INSURANCE FCIC has agreed to provide municipal bond lesurance on the 2016 Tera Bond. A statement of their policy is included as a separate enclosure. 0FFICIAL STATElsENT 3 i Properation toten Mosle Inc. end Southwestern Capital Markets, Inc. are employed 6s Financial Advisor to the CPS Board on a contract providing f or a f ee based on a percentage of the f ace enount of each separate issuance

    ,s of bonds, such fee to be contingent upon the bonds actually being issued, sold and delivered. Although Roten 4                Moste Inc. and Southwesten Capital Markets, Inc. performed en active role in the draf ting of the NOTICE OF SALE and BIDDlWG thSTRUCTI0t$ and 0FFICIAL STATEMENT, they have not independently verified all of the f.

y information set forth herein, the information contained in this 0FFICIAL STATEMENT has been obtained primarily b f rom CPS and the City records and f rom other sources which are believed to be rellebte, including financial I records of CPS and the City and other entitles which may be subject to interpretation. No guarantee Is made as Q to the accuracy or completeness of any inf ormation obtained f rom sources other then CPS and the City. No person, therefore, is permitted to raty upon the participation of the Financial Advisors as en implicit or

 .,*,             explicit expression of opinion as to sold completeness and accuracy. All of the summerles or excerpts of D                constitutional provisions, statutes, ordinances or other documents do not purport to be complete statements of some and are made subject to all of the provisions thereof. Ref erence should be made to such original sources in ett respects.

Certification as to of ficist Statement At the time of payment for arv delivery of the Bonds, the CPS Board

    '             will furnish the successf ul bid <'er J certificate, executed by a proper officer or officers of the CPS Board Lu                 acting in their official cepecities, to the effect that to the best of their knowledge and belief s (a) the y1                 descriptions and statements of or pertelning to CPS contained in its 0FFICIAL STATEMENT, es supplemented and g'                 amended, on the date of such 0FFICI AL STATEMENT, on the date of sale of the Bonds and the acceptance of the l                  best bid therefor, and on the date of the delivery of the Bonds, were and are true and correct in att material l-respects; (b) insofer as CPS and its affairs, including its financial affairs, are concerned, such 0FFICIAL s.

STAffMENT, as supplemented and amended, did not and does not contain en untrue statement of a material fact or L ontt to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstancet under which they were made, not misleading; (c) insofar as the descriptions and statements, including financial data contained in such 0FFICIAL STATEMENT, as supplemented and amended, of or pertaining to entitles other than CPS and their activities are concerned, such statements and date have been obtained f rom sources which the CPS Board believes to be ret table end thes the CPS Board has no reason to e believe that they are untrue in any meterial respect; and (d) that there has been no adverse change in the financlel condition of CPS sinct the date of the last audited financial statements of CPS. This 0FFICI AL STATEMENT has be+n duty approved by the City Council of the City of San Antonio, Texas, and by the CPS Board, and adopted for use in solicitetton of bids on the Bonds. CITY OF SAN ANTOWIO, TEXAS CITY PUSLlc SEtvlCE 80Ato 0F SAu ANToulo

                           ^             ^

y1

                              *7 Menry C. Cisneros Lite Cockrell Meyor, City of San Antonio, and                                   Chair, Board of Trustees Em Officio Member, Board of Trustees 1

1 45

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APPENDIX A CITY OF SAs ANToulo, TEXAS

• OENERAL luf0RNATION This Appendix contelns a brief discussion of certeln economic and demographic characteristice of the area in V- which the City is located. Corteln Information in this Appendix was obtelned f rom sources {dentifled with f respect to the information given and is balleved to be reliable, although no investigation has been made to verify the accuracy of such Information.

DEMOGRAPNIC A80 EC080MIC DATA Location and Population The city of Son Antonio is located in south central Texas approximately 75 miles south of the state capitet in Austin, 140 miles northwest from the Gulf of Mexico, and 150 miles northeast from the Mexican border cities of Del Rio, Easte Pass and Laredo. The tend area of the City covers 328 square miles. . The City was founded in the early eighteenth century and was incorporated by the sepublic of Texas in 1837, and is the County seat of Bezer County. The City of San Antonio Planning Department cites the City's 1986

 #        populatlon to be 921,693 making it the third largest city in Texas end, according to the Bureau of Census Statletics, the ninth largest in the United States.
.,        The following table provides, et the dates shown, the population of the City, gemar County, and the San Antonio SMSA, which includes sexer, Comal and Guadalupe Countles.

9 City of Bexar Sen Antonio County Tc K1920 San Antonio 161,399 202,096 SMSA 238,639 s 19301 231,542 292,533 333,442 1940I 253,854 338,176 376,093

• 19501 408,442 500,460 542,209 19601 587,718 687,151 736,066 19701 654,153 830,460 888,179 19801 786,023 988,800 1,071,954 19822 819,021 1,047,668 1,130,100 19832 821,181 1,047,668 1,130,100 19842 349,500 1,111,900 1,207,700 19852 897,500 1,138,600 1,223,600 a* 19862 921,693 1,166,509 1,268,809 19873 936,000 1,186,000 1,292,400 i Source: U.S. Census of Poputetton, 1920 1980 as of April 1 of the year shown.

  ;         2 Source: City of San Antonio " Planning Department es of December 31 of the year shown.

3 tource: City of San Antonio ' Planning Department as of October 31 of the year shown. Econcele Factore The City of $sn Antonio, the County seat of sexer County, and as indicated in the foregoing sociton, {s included in the three county San Antonio Standard Metropoliten Stettstical Area. San Antonio has a diverstf f ed economic base which is composed of agribusiness, manuf acturing, construction, tourism, the South Texas Medical Center complex, and is the site of the largest concentration of allitary instaltettons ln the United States. The City's proximity to Mexico provides f avorable conditions for international business rotations with Mexico in the areas of agriculture, tourism, manufacturing, wholesete and retatt markets for citizens of Mexico. Industry ranges f rom the manuf acturing of apperet, food products, aircraf t, electronics ord pherseceuticals to fron and steet products and oil well equipment. San Antonio is etso e major insurance center in the southwest, serving as the headquarters for several insurance companies, including United Services Automobile Association, the nation's 6th targest private automobile Insurer and the 10th largest homeowners insurer. Educational facilities in the City include ten cotteges and universities with a combined total enrottnent of 54,030 for the felt semester 1987. Military Instattetions The military presence in gener County is a principet component of the eres economy. As of October 1,1986, approximately 43,339 octive duty mitltary personnel and 34,163 octive duty civitten personnel were located in the County, according to the Greater San Antonio Chamber of Commerce, having a combined active military / civilian ennual payrott of $1,402,129,721. The mejor lnetettettons tocated in the County include fort Sam Houston, the U.S. Army Nealth Services Ccamand, Randolph Air Force Best, Brooks Alr Force gase, the sen Antonio Air Logistics Centar, and the Air Force Military Tretning Center et Locktend Air Force gese. A1

                                                                                                           ..+.m.n.

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      '.TM . . a                                                  :.. a ..~ . w                                                .g Agriculturat neceipts The followin8 table shows the total amount of receipte received free crope and livestock in Sexer County for

' the years Indicated , gr Croos Livestock Total ivre 8 9,828,000 823,271,000 833,099,000 1977 12,232,000 22,841,000 35,073,000 1978 12,276,000 28,639,000 40,915,000 1979 17,179,000 33,968,000 51,147,000 1980 16,620,000 24,136,000 40,756,000 1981 21,971,000 26,843,000 48,814,000 1982 19,408,000 30,353,000 49,761,000 1983 30,021,000 34,801,000 64,822,000 1984 27,223,000 34,843,000 62,066,000 1985 31,075,000 28,164,000 59,239,000 Source: Texas Crop and Livestock Reporting Service. ?- Construction Activity a Set forth below is a table showing building permits issued for construction within the City at December 31 for the years indicated. 5: Residentlet l Resider.tlal 9- Sinnie Femtly Multi Familytil Othert21

   -                         er     Permits        vetustion           Permits      Vetuation     Permits _      _ Ve tuet' on 1,492        831,529,001            184       811,757,998     12,015        8115,500,444 1976       2,025         48,568,523            149         10,298,267    10,980         104,997,735 1977       2,935         71,971,872            194         17,937,023    11,110         123,742,635 1978       2,550         68,551,313            320        31,751,780     11,405         138,132,132 1979       2,265         68,976,660             529        70,665,934    10,059         220,036,943 1980       2,376        114,756,432             135        77,102,937    13,210         252,110,675 1981       2,145          78,478,521           470        65,124,807     13,100         398,908,483 1982       2,315         84,439,470          1,012       157,979,723     12,001         319,917,718 1983       3,197        124,386,595            961       140,556,050     13,905         301,295,089 1984      3,128        117,820,951          1,018       164,277,022     15,237         580,154,298 1985      2,933        105,492,933             528        62,837,623    10,520         479,555,475 1986       1,886         81,020,617            344        36,325,227    10,023         537,422,729 1987       1,472         65,122,904             43        27,618,978     8,984         452,264,504 til Includes two f amily duplex projects.

121 Includes commercist building permits, commercist ed31tions, improvements and extensions, and certain residentist improvements. Source: Department of Housing and Inspections, City of San Antonio. Convention Statistics The City's climate and recreational f acilities make San Antonio a f avorable convention site in the southutst. The following convention statistics were complied by the San Antonio Convention and Visitors Bureau Calendar Number of E st imated Teer Conventions Room Widhts Coller Vetue 1975 415 323,440 $29,247,850 1976 465 308,396 27,783,600 1977 434 287,910 29,613,980 1978 488 329,816 34,129,800 ., 1979 689 378,387 16,215,420 1980 733 432,702 41,413,908 1981 671 512,479 49,049,365 1982 721 531,142 55,913,000 1983 832 595,377 68,951,000 1984 791 614,802 73,500,000 1985 899 599,645 71,730,000 1986 954 578,392 125,400,000 1987 858 534,650 115,900,000 A2

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  'J
        .                                                    Nodical and Research Facilittee l'           The City continues to ptey a significant role in expending medleal service, research and development.

CompItation of the most recent statistice et January 1, 1987, show=J that in addition to the 25 hospitets

 .$            serving the City, the South Texas Medical Center employed en estimated 16,000 people, and included a totet of p' ~         30 major f acilities plus support f acilities valued et approximately 8557,332,900 and had en annual budget of s             $577,871,105. At January 1, 1987, construction in progress was valued at approximately $108,902,000 and C            planned new construction was estimated at $173,960,000 f or a total in excess of $282,662,000. The southwest
     '.        Research Center is one of the largest and most respected orgenttettons of its type. With a staf f of over 2,253 t'          and en annuet budget over $104 million, Southwest Research Center specializes in Biological growth and
     .         Development, Reproductive Physiology, Microbiology and Inf ectious Diseases. Environmental Neelth Scienc e, Engineering, and Applied Research.

Buelness Establishments With 500 or Nore Employeen Manufacturing Fles Product / Service h,p-Advanc61 Micro Devices Production of electronic components Coca Co's Bottling Company [ - of San Antonio Soft drink manufacturer y Datopoint Corporation Computers and peripherals Dee Moward Co. Jet modification i f airchild Alrcraf t Corporation Aircraf t manuf acturer Fineellver Manufacturing Co. Men's, youths', and boys' clothing

      ,               Friedrich A/C and Refrigeration Co.                                                                 Air conditioning unite end products

• Lewis Strauss & Company Women's weer and youthwear
• Mllter Curteln Company Curtains and Drapes Motorote, Inc. Truss Components Peart Brewing Company Mat t beverages Redland Worth Corporation Rock manufacturing toegelein Company Meet processing

      ,.              San Antonio Express News b                        Corporation                                                                       Newspaper
     ,                San Antonio Light                                                                     Newspaper Structural Metals Inc.                                                                Reinforcement steel bars Tesoro Petroleum Corporation                                                          Petroleum products
      -               Turbine Support Division                                                              Jet engine repair Valero Energy Corporation                                                             Petroleum products West Point Pepperret t                                                                Linens and fabrics Wholesete Flem                                                                                              Product / Service Fleming Co. Inc.                                                                      Grocerles Nolly Farms Poultry                                                                   Poultry products setelt Fire                                                                                              Product / Service L                      Albertson's Food & Drug                                                               Supermarket N.E. gutt Grocery Company                                                             Supermarket

, Cafeteries, Inc. (Luby's) Cefeterle l Discond Sheerock Refining gasoline outlet and marketing

Dillard's Department Stores Department store Fox Stanley Photo Products, Inc. Photo processing and photographic equipment Frontier Enterpelses testaurent i

Frost Bros., Inc. Speeletty store Mandy Andy, Inc. Supermarket l Mandy Den Improvement Centers Building meterials l l Joske's of Tense Department store l Kercher, Cert Enterprises testaurent 1 Mervyn's Department store l Miller, Bill, Bar B.Que Fast food cheln ! Montgooery Ward & Company tetell merchandise J.C. Penney & Company Department store Sears, toebuck & Company Department store l l A3 l

.+ 8even Eleven Corporation Convenience store Stopan Go Markets Convenience store Wendy's Internet tonal Fest food cheln Winn's Stores Inc. Verlety store fransportetton, Communication and utilities Fire Product / Service City Pubtle Service Board Municipal ses and electric utility City Water Board Water utility Missourt Pacific Ballroad Shipments Rogers Cebtesystems of Texas Inc. Cablevision Southern Pacific Transportet ton Company f renoport et t on Southwestern Bell Telephone Company f atephone utility VIA Metropoliten Transit Pubtle transportetton Servicte Ftra Product / Service Atemo Community College District Educationet institullon ARA Living Centers Nursing homes Baptist Memorlot Hospital System Mospitet Bemer County Mospital District Mospitals (Robert B. Green and Medical Conter) East Central Independent School District Pubtle school district Edgewood Independent School District Public school district Mariendale Independent School District Public school district Judson Independent School District Public school district Numana Nospital Metropoliten Nospital Numana Mospitet sen Antonio Mospital Mystt Regency ten Antonio Notel Kelly Services, Inc. Temporary help services Le Guinte Motor Inns, Inc. Motor inn Murphy, Audie L., Memor t el V. A. Mospital Federal hospital North East Independent School District Public schoot district Northside Independent School District Public school district River Notel Co. (Merriott Notet) Notel San Antonio Independent School District Public school district ten Antonio State Nospital Nospitet Sente Rose Medical Center Mospital South San Antonio Independent School District Public school district Southwest Independent School District Public school district Southwest Research Institute Wonprofit research Institute Southwest femas Methodist Mospital Nospital Stanley Smith Securities, Inc. Security service Trinity University Educationet institution University of Teses et sen Antonio Educationet institute University of Texas Mealth Science Center et sen Anyonto fetching and heetth care institution Finance, insurance and teel Estate Flem Product / Service Ellison, Rey, Industries Developer Frost National Bank Banking Gill Compentes Insteltoent finance National Bank of Commerce Banking San Antonio Savings Association Banking United Services Automobile Association insurance A4

                                                                                                          ...,,c,-

_ , , , , , - _ n -- . _ . . _ , , , - _ -ir%i ~ LQ; p .

• Contract Construction

      ~

Fire Product / Service N.B. 2echry Ceepony Generet contractor Source Lar8est taptoyers Of rectory, Econcalc Development Department of the treeter San Antonio theeber of Commerce, July, 1985. Esployment Stettatise City of Sen Antonio Labor Force Stettetics November November 1986 1987 Total Employed 384,639 423,195-5 Unempteyed _35.959 38.934 2 Total Labor Force 420,598 462,129 Percent of Unemployment 8.51 8.41 T San Antonlo SMSAi Average Annual Labor Force Stettatice b

 $*                                                                      hovember                                November 1986                                      1987
&             Total Employed                                             522,300 -                               579,800 R.            Unemployed                                                  45.000-                                  4 b               Total Labor Force                                       567,300                                 6     ,

Percent of Unemployment 7.9% 7.8%

   *f Nonegriculturet Employments i.

Manufacturing 47,200 46,700 Mining 2,600 2,500 Cons t ruc t Ion 31,800 31,100

'(i             Transportetton, Comununication
,.l                end Utttitles                                          17,900                                   18,000
 ;,              metelt and Wholesete Trade                              127,200                                 132,500 Finance, insurance and Rest Estate                       37,300                                   39,200 118,700
   '.            Serviee                                                 110,300 110.100 s               coverql nt Tota                                                  g                                         99 I includes Bezer, Coset, and Guadalupe Counties.

' > 2 Totet job count.

b source: Texas Employment Commission. Senk Deposite s. Deposite in coassercist son Antonio banks et December 31 for the past ten years are shown below. Total Total Number Deposits Teer of tanks (000's) 1977 42 3,190,248 1978 44 3,435,396 1979 44 3,812,173 1980 46 4,271,610 1981 45 4,391,160 1982 47 5,719,169 1983 59 6,545,426 1984 71 T,621,638 1985 75 8,267,343 1986, 82 9,187,996 1987 68 8,395,801

• As of September 30, 1987.

A*5

. .. _ p .. . -.y ~ mem - %%

F. I, . n. d IEMitCIPAL 00VEtu8 TENT,' INDESTEDGESS Aa0 RELATED luf0RIGATIOu

 ~

CITT GOVERRIIENT The City has a Counell Manager form of government in which the Mayor end ten council members serve as the Lesletative body. These eleven of ficiate are elected for two year terne. The present term of office for att clected of ficists expires in April,1987. The City Manager is oppointed by the City Council and serves as the chief administrative officer of the City. SupetARY FIBANCI AL STATEleEuf RELATigt TO CITY SEBERAL OSLl8ATION B0uel 1987 Assessed valgation (100% of Actual)* S23,783,375,122 Less: Exemptions 1.581.122.205 1987 Net Asse*. sed V&testion, S22,202,252,917 Generat obligation Bond Debt (At 10 01 87) 420,244,819

• Less: Applicable Interest & Sinking Fund 36.804.325 met Generet obtisetton Debt (At 10 01 87) $ 383,440,494

_ Soyrce: City Controtter. At October 1, 1987 PRIhCIPAL TAXPATEtt The ten largest City of San Antonio taxpayers as of Doctober 16, 1987 as listed on the City's tax retts are shown below: Assesstd value'

1. Southwestern Bell Telephone Cooper,y 8390,502,590

2. United Services Automoblie Association 262,740,550

3. Nenry E. Butt and Company 149,602,950

4. Numana Nospital Corporation, Inc. 94,968,240

 .               5. Rey Ettison Industries                                                              66,660,426

6. M. B. Zachry 84,323,960

7. Melvin Simon 8 Associate *, Inc. 81,973,100

8. North Star Matt 78,337,360

9. Gulncy Lee / Joint venture 77,042,435

10. National Bank of Commerce 68,508,700 1 Assessed valuation at 100% of Market Value.

CITY REVENUE B050 IIIDERTEDBESS Information concerning the City of $sn Antonio revenue bond and note indebtedness payable from electric and gas, water, sewer, and airport systems operations is shown below. Total Fund Outstandina Balances 1 Electric 2 82,266,940,000 S198,715,195

                     .s Gas Systems Revegue sonds                                                        18,960,601 Water tevenue Bonds and Notes                                    191,375,000 Sewer Revenue Bonds 3                                            351,825,000                    19,105,957 Airport nevenue Bonds 3                                            97,795,000                   11,043,179 I includes att required interest and sinking, and reserve fund betences of each system.

2 At December 31, 1987 3 At October 1,1987 A6

    .'      ;;:. a .                                                                             . . . . . . ,,,,2if   *              ^"* *Mh % '"                 5O ---

r[ 1.: F Susuna ry statements of operations of the City's Water, Sewer and Airport Systems for the past two years, showing historiest coverage of actual revenue bond and note debt service requirements are as follows: A

.s                                                               City of San Antente nieteriserke Systee

$.y V Fiscal Years Ended 12 31r 1985 1966 Gross tevenues $51,032,325 ST3,013,370 Current Expenses .25.622.275 6 Met Revenues $25.410.050 Y Actual Principal and Interest Requirements 815,160,349 $14,183,113 i F COVERAGE 1.68 3.25x M a x t ous P r i nc i pa l and I nt e r e s t R equ i r emen t s ( 1987 ) . . . . . . . . . . . . . . . . . . . 818,028,658 k-; COVERAGE 1.41x 2.56x City of San Antonio Sewer System (>

   'A                                                                                                        Flaeal Years Ended 9 30 1986                                                    1987 i,J                  Gross Revenues                                                       $74,912,609,                                           $76,532,396 38.096.256                                             30.221.77, Current Expenses

,s

                                                                                                                                                       $46.310.62' y,

d' Net Revenues M Actual Principal and Interest Requirements $23,445,057** 826,078,668 COVERAGE 1.57x 1.77x 7 M ax l eve P r i nc i pe t and I nt e re s t R equi r ement s (1993 ) . . . . . . . . . . . . . . . . . . . 833,618,768

     -                     COVERAGE                                                                     1.10x                                                  1.37x Includes $8,957,943 for loss on refunding advance debt.

Excludes $48,100,000 for sewer refunding bonds. City of San Antonio Airport Systee k'

.s l:

Fiscal Years Ended 9 30 1986 . 1987 Gross tevenues $27,027,354' S26,798,922 Current Eapenses 10.127.493 .10.890.950 Net Revenues $16.899.861 815.907.972 Actual Principal and Interest tequirements $10,223,015 810,204,453 COVERAGE 1.65x 1.56x M ax leve Principa l and Int e r es t R equi rement s (2006) . . . . . . . . . . . . . . . . . . . 810,493,113 1.61x 1.52x COVERAGE Includes 82,036,643 for recovery of prior year cost of refunding bonds. A7

     .                                                     .    ,             a. n hmsw.wsiasw                       c_ _ _ ,

S CostPARAflVE AtsuAL STATISTICAL DATA Browth Indices Calender Main Electric Gas Water Years. -Telephanes _ Custoeers Customers Customers i 1969 243,764 232,952 ~199,749 146,089 1970 256,287 239,599 204,327 148,452 1971 270,337 248,739 210,632 151,200 1972 288,690 260,632 219,127 154,513 1973 301,016 267,443 224,084 159,012 1974 311,925 269,500 227,923 161,100 1975 322,607 272,586 230,042 162,627 1976 337,343 279,587 234,337 164,454 1977 353,663 290,904 240,566 167,633 1978 376,949 307,705 249,391 172,185 1979 398,860 321,130 255,042 178,707 1980 420,299 338,727 263,012 183,084 1981 442,250 353,998 264,451 188,969 1982 454,727 369,631 271,393 201,370 1983 472,053 383,615 273,922 207,908 1984 500,853 411,813 278,898 214,595 1985 525,445 433,064 281,575 222,672 1986 541,800 453,146 284,489 227,598 1987 541,815 4>9,685 284,478 227,946 i City Water Board only. Suelnese Indices Calender Bank Building Poetett Yeer Cleerinne Permite . Receipts-1969 810,884,022,753 8 85,904,537 m/A 1970 10,014,836,330 103,210,207 N/A 1971 11,547,764,451 131,182,026 17,695,000 1972 13,312,759,105 223,749,000 18,681,000 1973 16,304,437,765 226,710,152 22,702,000 1974 17,475,520,274 183,520,814 23.914,000 1975 18,249,836,385 158,795,443 26,407.000 1976 20,323,429,838 163,864,525 29,818,000 1977 22,537,211,921 213,651,530 38,062,000 1978 25,745,461,776 238,435,225 43,000,000 1979 29,443,679,652 359,679,537 50,187.000 1980 33,863,636,207 443,970,044 54,906,088 1981 35,027,132,517 499,420,910 63,167,802 1982 40,291,709,241 607,140,132 79,465,772 1983 42,355,874,732 566,237,734 90,417,238 1984 46,955,097,401 862,261,221 101,815,579 1985 46,113,193,838 647,886,931 113,883,976 1986 45,096,118,C59 654,768,5T3 125,694,443 1987 43,571,644,019 521,332,564 121,627,504 I On flecal year beels, ending September 30. A8

         . .                                                          ..    .. atidOA'UGOWkNJ vwherWw                   1 4

s * {. u mmicipal Satu Tea co!!ections L The followin8 statistics show e comparative record of municloat sales tax cettections for ind. ten tarsest Tomas cities based upon the 1980 Census, f. h- Sales Taxes Not 1983 1984 1985 1986 1987 ( Artington 811,471,417 814,452,554 817,141,794 817.055,674 817,153,924 Ameritto 10,508,862 11.234,589 11,730,239 11,996,168 11,440,833 Luthock 11,561,552 12,450,682 13,283,933 12.959,730 12,602,790 Corpus Christl 15,146,788 15,977,496 17,081,745 16,161,843 15,381,555 EL Paso 15,944,125 18,295,666 21,059,510 22,545,811 22,600,731 Austin 28,625,014 37,271,562 44,014,004 41,797,456 38,120,152 fort Worth 26,571,867 30,579,368 34,154,412 34,602,039 32,193,724

$'           SAW ANTONIO                42,591,152      49,467,890        56,242,528      56,504,214        54,043,662
.            Dettes                     85,655,818      99,227,785       112,475,312     106,444,284        99,681,108 Nouston                   138,142,189     144,953,635       150,395,557     141,375,017       134,762,363 c-

'l

     }

A9

                                                                     ~
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. ,_,, . . . . . , ~..w daL%' man &-&+n44=L' op~ 6 t s S 9_ a b t 6. [. n (THIS PAGE LEFT BLANK INTENTIONALLY) 5 L' f.. e 4 4 4 4 A

                                                                                                  ;            -        ~

I' . t y APPENDlX B 3 f CITY PUBLIC 8ERVICE FINANCIAL STATEMENTS FOR THE YEARS ENDE0 JANUARY 31,1987 and 1966 AND AUDITORS' REPORT h A MEMBER OF ARTHUR 'iOUNG INTERNATONAL Arthur Young n',".= ne'S=too Telephone: (512) 3401000 ls t r E. \ G g 5 REPORT OF CERTIFIED PUBLIC ACCOUNTAFTS W N 9 /, } 's

  .                                                                                       L The Board of Trustees City Public Service We have examined the balance sheets of City Public Wervice at January 31, 1987 and 1986, and the related statements of earnings and application of earnings, changes in equity and changes ja financial position for the years then ended. Our' examinations were
  ,        made in accordance with generally accepted audicing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the s           circumstances.

In our opinion, the statements mentioned above present fairly theI financial position of City Public Service at January 31, 1987 and 1986, and the results of operations and changes in financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis during the period. .,  ; i s

h. L -- f 7  : 'y'] ,'

March 2, 1987 i B1

                                                                                                 )
                                        - - - -              _                _ _ _ _ _      1             " m"mm"'-

  .        L t .~ .                                              yn.            $ ^. . .....      45bJA % d.C A"At.,

1: tt j(

                                                               %                                      f e
                                        /

A t.

  .),                          k. c: A                ,g                                                  k.

K 1/( CITY PUBLIC SERVICE N

BALANCE SHEETS, JANUARY 31, 1987 and 1986 v

x N ( j ASSETS NOTES 1987 1986

                                               ,d                                                             (in thousands) v                  ,'

i ., UTILITY FLANT - At cost: 1 t Electric q $1,221,198 $1,168,943 o Gas 106,620 ,184,559 v General , j* , A N 60,956 28,390 c 4 i , Construction work in progress 7 1,675,726 1,361,134 Nuclear fuel in process 7 100,979 95,821 N Total Dillity plani 3,255,479 2,838,847

     ,             Less accumulated depreciation                                                          446,913            418,743
 .$                Utility 'lant p    - net                                                            2,808:566           l2,420,104 RESTRif [ED CdSH (Temporary cash
    ~                                                                                                                                            '

i. investments and U. S. Government oblig'ations - at cost which c

  ;                   approximates market):                                             2 s                                                                                      \

Bor.d Construction Fund , s j'41,335 4l 65,678 Bond Reserve - 01'd Series Bonds 3 17,353 17,437 B62d Reserve - Npw Series Bonds. , 3 173,786 147,715

   .               Improvements andg Contingencies Fur,r,                                                 131,439        >\   73,586 Other                                                      h'        1                     5,150            '8,123 Total restricted cash                                                                 369,063 ' __ 312,539 CURRENT ASSETS; Cash, including temporary cash investments                                                                            19,045           22,362 Short-term investments                                               4                         -           51,724 Customer accounts receivable, less allowarce for doubtful accounts of bl,222,000 inl1987 and $1,151,000 in 1986                                                                 54,947           51,233 Other receivables                                                    8                   42,352            30,337 Inventories and supplies - at average cost:

Waterialq.End supplies 20,642 18,647 Fuel stock / , 42,089 33,644 Prepayments and otht- 6 1,859 27,964 '. 4 Total current assets [ 180,934 238,911 LITIGATION SETTLEMENTS BENEFITS RECEIVABLE 7,8 205,500 165,000 DEFERRED DEBITS 1 , 74,955 17,310 l TOTAL };.639.018 $3.153.864 B2

a s m w i n n c ,. w a g g ;d. g .:

  '         G-                                    , I !. ~         , _ w.ga

}'f+

                                                                                                  .e b.

p i 1986 ' LIABILITIES NOTES 1987

  .                                                                                (in thousands)                 (
                                                                                                            'I LONG-TERM DEBT - Revenue                                                               '

Improvement Bonds: 2,3 Old Series $ 105,785 .$ 115,220 New Series 1,903,425 1,676,500

    .              Less: Unamortized discount on                                                                    ~'

1 New Series Bonds / (20,812) (11,530) 7 k Net long-term debt g 1,988,398 1,780,190 Fy0ITY: i Appropriated retained earnings: g, ] Bond Reserve - Old Serirs/ Bonds ?7,353 17,437 < f 101,216 Bond Reserve - New Series Bonds 121,328 Improvements and Contingencies Fund 131,439 73,586 Q

}i               Total                                                         270,120          192,239 Reinvested earnings            1 1,025,88f;,         920,187 Total equity                                               1,296,00'3        1,112,426

[ CURRENT LIABILITIES: i j Current maturities of long-term debt 3 34,820 32,350 j'" Short-term debt 4 100,000 100,000'I Accounts payable and accrued

       ~

liabilities 61,610 55,492.7 Litigation settlement benefits 't payable to customers 8 834 ~/ Customer service deposits 14,079 10,984 Tott1 current liabilities 211,343 198,826 le - DEFERRED CREDITS: Customer advances for construction 14,751 12,976 Other 1,945 6,340 Total deferred credits 16,7'16 19,316 r i LITIGATION SETTLEMENT BENEFITS l PAYABLE 8 79,666 - l l E CONTRIBUTIONS IN AID OF CONSTRUCTION 1 46,890 53,106 f' l COMMITMENTS AND CONTINGENCIES 5,7,8 - - l-TOTAL $3.639,018 $3.153.864 I

Seesnotes to financial statements.

B-3 ,

                                                ~
      --w....--                                                                    Q : A .03RGiWGhXMG5if[ ]

p: - I; \ [ CITY PUBLIC SERVICE l [ STATEMENTS OF EARNINGS AND APPLICATION OF EARNINGS FOR THE YEARS ENDED JANUARY 31, 1907 and 1986 J NOTES 1987 1986 l '. (in thousands) ? REVENUE: 1 Electric $639,626 $700,371 Gas I, , 127,814 136,500 1 3 Interest and other income 36,778 31,962 I L p Gross revenu I> , 804,218 868,833 ,

v. / l f, EXPENSES: , 1 l f: Fuel, purchased power and resale gas 316,251 397,414 if Other operating and general 68,998 65,035 Maintenance 32,761 33,379  ;

Depreciation 41,811 40,351

 ,;             Interest and debt expense                                                         166,029     144,989
'(
 .              Allowance for interest used during                                            ~

l, construction (101,402) (87,296) j- Payments to the City of San Antonio 6 _ 96,191 103,972

  !             Total expences                                                                  _S20,639      697,844 NET EARNINGS                                                                      183,579     170,989 l

ADD. i Depreciation 41,811 40,351 L., Interest requirements on New Series Bonds (payable from Improvements and,Oontingencies Fund) 153,411 135,235 7' , , AVAILABLE FOR APPLICATION $378.801 _$_34 6 . 57 5 ! APPLICATION: L. To pay long-term debt requirements - Old Series Bonds: Principal payments $ 9,000 $ 8,600 1 Bond reserve (84) (46) f To reinvested, earnings - Net gain on l sale of assets 5 4 l To Improvements and Contingencies Fund: I Minimum requirement (12-1/2% of gross revenue) 2 100,527 108,604 ( Balance of available revenue 269,353 __229,413 APPLICATION $378.6,01 $346.575 See notes to financial statements. B-4

                                                           , .. 24 m ~ :w.L.;;im%titw.a k                 .

CITY PUBLIC SERVICE STATEMENTS OF CHANGES IN EQUITY j, FOR THE YEARS ENDED JANUARY 31, 1987 and 1986 y 1987 1986

;'                                                                        lin thousands)

BOND RESERVE - OLD SERIES BONDS: Balance, beginning of year $ 17,437 $ 17,483 Deductions - transfer of earnings (84) (46) Balance, end of year $ 17.353 $ 17.437 BOND RESERVE - NEW SERIES BONCS: e Balance, beginning of year $ 101,216 $ 89,713 , Additions - from Improvements and Contingencies Fund 20,112 11,503 Balance, end of year S 121.328 ,%101.216 IMPROVEMENTS AND CONTINGENCIES FUND: Balance, beginning of year $ 73,586 $ 80,068 IJ Additions - from application of earnings:

;l                   Minimum requirement (12-1/2% of gross L                      revenue)                                         100,527       108,604

- Balance of available revenue 269,353 229,413 I' Total 443,466 418,085 Deductions:

New Series Bonds: Additions to reserve 20,112 11,503 Payment of bond interest 153,411 135,235 Payment of bond principal 23,350 21,440 Construction expenditures 115,154 173,821 For working capital - 2,500 Total 312,027 344,499

~.                 Balance, end of year                              $  131.439      $ 73.586 REINVESTED EARNINGS:

Balance, beginning of year $ 920,187 $754,173 Additions: From Improvements and Contingencies Fund: For construction 115,154 173,821 For New Series Bonds principal payments 23,350 21,440 For working capital - 2,500 From application of earnings: Old Series Bonds principal payments 9,000 8,600 Net gain on vale of assets 5 4 Total 147,509 206,365 Deduction - Depreciation 41,811 40,351 Balance, end of year $1.025.885 $920.187 See notes to financial statements. B5

• wrly)La ce Lty r== '

CITY PUBLIC SERVICE STATEMENTS.OF CHANGES IN FINANCIAL POSITION

 . FOR THE YEARS ENDED JANUARY 31, 1987 and 1086 1987         1986 (in thousands)

SOURCES OF FUNDS: Net earnings $ 183,579 $170,989 Add (deduct) amounts not affecting working capital: Amortization of New Series Bond discount 1,081 536 Amortization of deferred debits 4,140 1,461 Depreciation 41,811 40,351 Allowance for interest used during construction (101,402) (87,296) Working capital provided from operations 129,209 126,041 Contributions in aid and customer advances for construction 7,018 7,735 Sale of revenue improvement bonds 181,772 270,202 Sale of refunding bonds 310,242 113,301 Litigation settlement 111,500 210,000 Other - 1,281 Total 739,741 728,560 APPLICATION OF FUNDS: Acquisition of utility plant - net of allowance for interest used during construction 329,208 ~347,764 Increase in other receivable 40,500 165,000 Retirement of bonds 32,350 30,040 Defeasance of bonds refunded 253, 50 97,130 Increase in current maturities of long-term debt 2,470 2,310 Increase in restricted cash S6,524 59,821 Litigation settlement received 31,000 - Excess of reacquisition amount over principal of bonds refunded in l advance 57,649 15,978 Other 7,184 498 Total 810,235 718,541 INCREASE (DECREASE) IN WORKING CAPITAL $ (70.494) $ 10.019 i B6 _ _ _ ---------------------- )

w ,....... . .....,.~e " 54senL-wkl'~nW$sGuda.aa

'P CITY PUBLIC SERVICE STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED JANUARY 31, 1987 and 1986 1987 1986 (in thousands) CHANGES IN WORKING CAPITAL COMPONENTS: Increase (decrease) in current assets: Cash and temporary investments $ (3,317) $ (7,569) Short-term investments (51,724) (21,874) Customer accounts receivable 3,714 (4,405) Other receivables 9,015 28,458 Inventories and supplies 10,441 679 Prepayments and other (26,106) 222 Decrease (increase) in current liabilities: Current maturities of long-term debt (2,470) (2,310) Accounts payable and accrued liabilities (6,118) 10,894 Litigation settlement benefits payable to customers (834) 7,660 Customer service deposits (3,095) (1,736) y. i INCREASE (DECREASE) IN WORKING CAPITAL (70,494) 10,019 WORKING CAPITAL, BEGINNING OF YEAR 40,085 30,066 WORKING CAPITAL (DEFICIT), END OF YEAR $(30,409) S 40,085 9 t See notes to financial statements. B7

                                                                                    . mm . .

CITY PUBLIC SERVICE NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1987 and 1986

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES j Basis of Accounting - City Public Service ("CPS") uses the l accrual method of accounting based upon the Uniform System of Accounts for Gas and Electric Utilities issued by the National Association of Regulatory Utility Commissioners. Fiscal Year - The fiscal year ended January 31, 1987 is re-ferred to herein as 1987 and the year ended January 31, 1986 as 1986. Revenues and Expenses - Revenue is recognized as billed on a cycle basis. Rate schedules include fuel and gas cost adjust-ment clauses that permit recovery of fuel and gas costs in the

 -               month incurred. CPS charges to expense the cost of electric production fuel as it is consumed and the cost of resale gas at the t ime of purchase.

are stated at the cost of Utility Plant - These assets construction, including costs of contracted services, direct material and labor, 1-direct costs, including general engineer-ing, labor and material overhead, and an allowance AIUDC for interest used during construction ("AIUDC"). CPS computes funds on using projects rates representing the cost of borrowed estime.ted to cost in excess of one million dollars and expected to require more than one year to complete. Retirements of utility plant, together with removal cost lessmaintenance salvage, are of charged to accumulated depreciation. The property, and replacement and renewals of items determined to be less than a unit of property, are charged to maintenance of land, General utility plant assets consist expense. buildings and equipment for general and administrative purposes that are used commonly in electric and gas operations. CPS computes depreciation principally using the straight-line estimated service lives of the assets as method over the determined by periodic engineering studies. Depreciation as a percentage of average depreciable plant was 3.07% in 1987 and 3.16% in 1986. in aid of construction are amortized over a l Contributions period equal to the lives of the related assets. Other Restricted Cash - These amounts consist primarily of funds being held in escrow as required under a contra"t with a gas supplier. I i B8

u:. . , ,

                                                           .... y s M c e q g & & M 2 Q W in Zi~Tiz
  ;  +

i CITY PUBLIC SERVICE ( NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1987 and 1936 F 1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (continued) Deferred Debits - These amounts consist of the unamortized l balance of bond issue expense, and the unamortized excess of l the reacquisition amount over the revenue bond principal refunded in advance. Amounts are being amortized over the

 -                     period during which the bonds will be outstanding.
  ?

2. REVENUE BOND INDENTURE REQUIREMENTS The Trust Indenture executed by the City of San Antonio (the

   !                   "City") in conjunction with the issuance of the revenue bonds
 ~,                    dated February 1, 1951 through August 1, 1974, "Old Series
 -                     Bonds," contains, among others, the following provisions:

o f 1) All of the assets of the gas and electric systems, together with the net revenues of the systems, as defined, are

 -                         pledged with the Harris Trust and Savings Bank of Chicago,

• Illinois, as Corporate Trustee, to secure the pa yment of the "Old Series Bonds."

2) Gross revenues of the gas and electric system shall be

, f, applied to: (a) expenses of operating and maintaining the ! systems; (b) debt service and reserve requirements on the "Old Series Bonds"; (c) payment of an "in lieu of tax" amount to the City; (d) an amount equal to 12-1/2% of gross revenues to the Improvements and Contingencies Fund; (e) additional benefits and payments to the City to bring City benefits and payments to 14% of gross revenues; (f) addi-s tional payments to the Improvements and Contingencies Fund until such fund equals 20% of the value of fixed capital assets; and (g) balance to a surplus fund.

3) The f ollowing funds are established: (a) General Fund; (b)

Improvements and Contingencies Fund; (c) Bond Construction Fund (containing the proceeds of revenue bonds); (d) Principal and Interest Current Requirements (containing the monthly payments of annual debt requirements), and (e) Bond Reserve Fund (containing an amount equal to the next fiscal year's principal and interest requirements). These funds l may be invested with authorized depository banks or in U. S. Government securities. Beginning with the year ended January 31, 1976, New Series Electric and Gas Systems Revenue Improvement Bonds ("New Series Bonds") were issued. These bonds are junior and subordinate to the "Old Series Bonds." The bond ordinances authorizing these B-9

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                                                 . u. u E unn A % w w 4 m s N % ,;..

CITY p0BLIC SERVICE NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1987 and 1986

2. REVENUE BOND INDENTURE REQUIREMENTS (continued) issues orovide that no further bonds or obligations will be author A' or issued under the terms of the Trust Indenture for "Old Secies Bonds" and, at such time as the Trust Indenture becomes inoperative, the Trust Estate will revert to the City.

While any of the "Old Series Bonds" are outstanding, the "New Series Bonds" are payable solely from the net revenues of the systems (1) deposited and available for deposit in the Improvements and Contingencies Fund and (2) from funds payable to the City. At such time as the Trust Indenture covectog the "Old Series Bonds" becomes inoperative, revenues will be applied as follows: (a) for maintenance and operating expenses of the systems; (b) for payments of the "New Series Bonds"; (c) for the payment of any obligations inferior in lien to the ! "New Series Bonds" which may be issued; (d) for an amount equal to 6% of the gross revenues of the systems to be deposited in a Repair and Replacement Fund; (e) for cash payments and benefits to the City not to exceed 14% of the gross revenues of the systems; and (f) any remaining revenues to the Repair and Replacement Fund. The funds created by the "New Series Bonds" ordinance are similar to those set forth under the "Old Series Bonds" Trust Indenture.

3. LONG-TERM DEBT A summary of long-term debt is as follows:

Weighted-Average Interest Final Rate on Out- Unpaid Principal Maturity standing Bonds 1987 1986 (in thousands) Old Series, 1962-1974 1988-1997 6.33% $ 115,220 $ 124,220 New Series, 1975-1986 1998-2014 8.24% 1,928,810 1,699,850 Total 8.20% 2,044,030 1,824,070 Less current maturities 34,820 32,350 l Amounts due after one year $2,009.210 S1.791.720 l l l B-10 l

      . 6-                                     . . . . . - - . - . .er    -www - ~:        , , ,m i

CITY pUBLIC SERVICE NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1987 and 1986

3. LONG-TERM DEBT (continued)

Principal due (in thousands) for the next five years are: Principal Due Old Series New Series Bonds Bonds 1988 $ 9,435 $25,385 1989 9,905 27,535 1990 10,375 38,725 1991 10,945 42,120 1992 11,500 45,850 As of January 31, 1987, bond reserve requirements for the Old Series Bonds and New Series Bonds have been met. Additional bond reserve requirements of $6.0 million for the New Series 1986-A Bonds were included in the amount borrowed and were { deposited in the Bond Reserve restricted cash fund in a lump sum in 1987. Similarly, additional bond requirements of approximately $18.8 million for the New Series 1985-A and 1985-B Bonds were deposited in the Bond Reserve restricted cash

 ;                 fund in a lump sum in 1986. Prior to the 1983-A Bonds, reserve requirements were generated from earnings and deposited over a 61   month   period  as previously       allowed;      beginning with    the 1983-A Bonds, Bond Reserve requirements have been funded from bond proceeds.

During the fiscal year ended January 31, 1987, New Series 1983-A Bonds at coupon rates of 10.4% to 10.5%, New Series 1984-A Bonds at coupon rates of 11.0% to 11.25% and New Series 1984-B Bonds at coupon rates of 10.75% to 11.125% in the principal amounts of $79,350,000, $91,400,000 and $82,600,000, respectively, were advance refunded by issuance of $320,660,000 New Series 1986 Revenue Refunding Bonds. Although the advance refunding resulted in reacquisition amounts in excess of the bond principal amounts refunded of approximately $61,358,000, the issuance of refunding debt at interest rates lower than the previous rates will cause aggregate debt service payments to be reduced by approximately $56,283,000. United States Government securities were purchased with the net proceeds of the 1986 issue and deposited in an irrevocable trust to satisfy scheduled principal and interest payments of the refunded issues. The refunded bond issues and trust accounts of the New Series 1986 Refunding Bonds as well as previous refundings are ! not included in CPS financial statements. At January 31, 1987, I the following portions of each respective bond series are considered defeased: B 11 mww I

  .J
                                                        ,,,,,,,,,,;ju h M h M Esh2 @ Q ,            ,

l I CITY PUBLIC SERVICE I 1 NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1987 and 1986

3. LONG-TERM DEBT (continued)

New Series 1984-A $91,400,000 New Series 1984-B 82.600,000

                'New Series 1983-A                                  79,350,000 New Series 1982                                    48,145,000 New Series 1981-A                                  48,985,000 the City of             San Antonio approved          the

- During January 1987, issuance of New Series 1987 Refunding bonds in an amount of

          $391,780,000 to be delivered on or about February 19, 1987.

The proceeds from the bonds will be used to advance refund 1980 Bonds,

          $48,025,000     principal       amount        of    New     Series
          $34,825,000 principal amount of                   New     Series     1980-A   Bonds, amount       of    New     Series     1981   Bonds,
          $32,675,000     principal
          $44,620,000 principal amount of                   New     Series     1982-A   Bonds, amount of              New     Series     1984-A   Bonds,
          $8,300,000 principal
          $12,500,000     principal     amount of           New      Series    1984-B   Bonds,
          $109,800,000 principal amount of New Series 1985-A Bonds, and
          $38,125,000 principal amount of New Series 1985-B Bonds and to pay costs and expenses related to the issuance of the New Series 1987 Bonds. Although the advance refunding resulted in reacquisition amounts in excess of the bond principal           the amounts issuance     of refunded of approximately $59,489,000, refunding debt at interest rates lower than the previous rates will cause aggregate debt service payments to be reduced by approximately $73,698,000. Also during January 1987 the City of San Antonio gave notice of its intention to issue New Series 1987-A Bonds in an amount of $160,000,000 to be delivered on or about March 26, 1987. The proceeds from the bonds will provide funds for the purposes of improving and extending the electric and gas systems of the City.

4. SHORT-TERM DEBT In November 1983, the City Council of the City of San Antonio tax-exempt the issuance of $100 million in authorized commercial paper (the "Commercial Paper") to assist in the financing of eligible projects, including fuel acquisition and capital improvements to the utility systems (the "Systems").

As of January 31, 1987, $100 million in principal amount was outstanding, with a weighted average interest rate of about approxi- 65 mately 3.85% and an average life outstanding of days. When available, proceeds remaining from the commercial paper have been placed in short-term investments consisting approximates of U. S. Government obligations at cost, which market. During 1987, all remaining proceeds were used for construction purposes. B 12 , 1

            ' ~ '                                        ....._ m w w e

• CITY PUBLIC SERVICE NOTES TO FINANCIAL STATEMENTS

k. JANUARY 31, 1987 and 1986

    !               4. SHORT-TERM DEBT (continued)

The Commercial Paper is equally and ratably payable from and is secured by (i) the Net Revenues of the systems and (ii) a lie., on the sale and pledge of the proceeds from the sale of other Commercial Paper, the subsequent sale of bonds, and borrowings under the Credit Agreement (as defined herein). Such pledge on Net Revenues is subordinate and inferior to the pledge securing payment of (i) the Old Series Bonds (ii) the New Series Bonds and (iii) any New Series Bonds to be issued in the future. The City and Texas Commerce Bank National Association bave entered into a revolving credit agreement (the "Credit Agreement") c pursuant to which such bank is obligated under the Credit

  ",                    Agreement to loan to the City an aggregate amount not to exceed
                        $100 million for the purpose of paying amounts due on the Commercial Paper.      Any borrowings under the Credit Agreement iF                     are equally and ratably secured by and payable from the above-i                      described sources pledged for payment of the Commercial Paper.

There have been no borrowings under the Credit Agreement as of January 31, 1987.

5. PENSION PLAN i Prior to 1983, CPS had an insured pension plan under which insurance was purchased for each participating employee in an amount calculated to yield cash value at retirement sufficient to provide an annuity equal to prescribed benefits. To the represented amounts attributable to wage

     '-                 extent   benefits increases received after an employee reached age 60-1/2, CPS

... assumed all of the incremental cost. The incremental costs for these individuals are paid directly to retirees by CPS. In 1983, CPS adopted a self-administered, defined-benefit contributory pension plan covering substantially all employees. The total employer pension cost (all funded), which includes amortization of past service costs over 30 years using the Unit Credit Cost actuarial method, is summarized as follows: 1987 1986 (in thousands) Paid directly to retired employees $ 711 $ 712 Amounts deposited in the CPS Employees' Pension Trust 9,136 8,500 Total $9.847 $9.212 I' B 13

                                                                                     -..,c,c....

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CITY PUBLIC SERVICE NOTES TO FINANCI AL STATEMENTS JANUARY 31, 1987 and 1986

5. PENSION PLAN (continued)

A comparison of accumulated plan benefits and plan net assets for CPS' defined-benefit plan is as follows: Actuarial present value of accumulated plan benefits as of the end of the plan year December 31, December 31, 1986 1985 (in thousands) Vested benefits $104,751 $ 89,572 Nonvested benefits 33,105 26,351 Total $137.856 $115.923 Net assets available for plan benefits $132.075 $109.118 An ass umed rate of return of 8% was used in determining the actuarial present value of accumulated plan benefits. In addition to providing pension benefits, CPS provides certain health care and life insurance benefits for retired employees. All of CPS' employees are eligible for these benefits upon retirement from CPS. The cost of retiree health care and life insurance benefits, funded by CPS and retired employee contri-butions, is recognized as an expense of CPS as employer con-tributions are made to the programs. These costs approximated

        $734,000 and $731,000 for 1987 and 1986, respectively.

6. PAYMENTS TO THE CITY OF SAN ANTONIO The Trust Indenture provides for benefits and services totaling 14% of CPS gross revenues, as defined, to be paid or provided to the City. The City has elected to accept benefits that are less than 14% of gross revenue. The reduction of City benefits has no effect on financial operations.

Pa ymen t s to the City of San Antonio for 1987 and 1986 were as follows: 1987 __ 986 1

                                                                  $     7,799    $     7,096 In lieu of taxes Refund gas and electric services                           15,286       17,009 73,106        79,867 Additional payments
                                                                  $ 96.191       $103.972 8 14

4A.. . _ _._e M 6sas,h% CITY PUBLIC SERVICE NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1987 and 1986

7. SOUTH TEXAS PROJECT CPS is one of four participants in the South Texas Project

("STP"), which consists of two 1,250 megawatt nuclear generat-ing units under construction at a site in Matagorda County, Texas. The other participants in the project are Houston Lighting & Power Company ("HLP"), the project manager, Central Power and Light Company ("CPL") and the City of Austin ("Austin"). Under the terms of the STP participation agree-ment, each participant provides financing for its share of construction expenditures with CPS' participating interest in the project being 28% or 700 megawatts. Projected commercial operation dates are December 1987 and June 1989 for Units 1 and 2, respectively. In 1986, a suit involving the project was settled on the agreement of Brown & Root, the former architect / engineer and constructor for STP, to pay the plaintiffs, CPS and the other participants, $750 million. CPS commenced receipt of its $210 million share of the settlement with receipt of approximately

                $15 million on January 1, 1986, and $30 million in 1987.                 The remainder, without interest, will be received in $/.5 million quarterly      installments     over six years pursuant to an unqualified contractual         obligation       of Aetna Life Insurance

,l Company. The remaining payments have been recorded as both i current receivables and as Litigation Settlements Benefits [ Receivable. 1 The estimated total direct cost of the project is $5.495 billion before consideration of the Brown & Root settlement. l .. CPS' portion of the total costs for STP would be $2.2 billion for construction and interest during construction and $110 million for fuel to be purchased prior to commercial operation, CPS' share of remaining costs is estimated to be $183.7 million u l for plant construction over the next threeThese years, exclusive of costs may vary interest, nuclear fuel and other costs. from the estimated amount due to inflation, changes in equip-ment delivery and construction schedules, and regulatory changes. As of January 31, 1987, CPS has expended approximately $1.699 billion in the project (net of the $210 million settlement with Brown & Root), including interest during construction of $381 million and advance payment on fuel of $101 million. Prior to the initial loading of nuclear fuel and operation of STP, an operating license must be issued by the Nuclear Regulatory Commission. In order to meet the scheduled B-15

- :.....  :..~.wl0hn5h&%ub.$EnN. e l 1 CITY PUBLIC SERVICE . 1 NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1987 and 1986

7. SOUTH TEXAS PROJECT (continued) in-service date for Unit 1, a license for fuel loading and low l

power testin~ must be obtained by June 1987. Hearings before the Nuclear hegulatory Commission's Atomic Safety and Licensing  ; Board have been favorably completed and CPS anticipates that j the license will be issued by June 1987. j

8. COMMITMENTS AND CONTINGENCIES Coal Freight Rate Dispute - For the past ten years, CPS has been engaged in continuous litigation with certain railroads (Burlington Northern, Inc. and Southern Pacific) which, prior j to August 1985, transported subbituminous coal to the J. T. ,

Deely Station. The question involved the proper or lawful l freight rate that CPS was legally required to pay these railroads for coal transportation services during the period i 1978 through August 1985. In December of 1984, the Federal District Court issued an order authorizing the railroads to collect the principal sum of $19.8 million, plus interest of $6.6 million from a subsidiary dispute involving ten months in 1980 and 1981 during which CPS paid the railroads $19.8 million less for their services than the railroads claimed was due under their tariffs. This amount ($26.4 million) was paid and classified with Prepayments and Other in the 1986 balance sheet pending final ruling in related matters. In December 1986, CPS approved a settlement offer from the involved railroads for all disputed issues. Both parties sought dismissal of actions pending before the ICC and in two Federal District Courts. As a result, CPS received a $31 million payment from the railroads in January 1987, most of which will be used to replace utility funds used to make the

                $26.4 million court-ordered rail tariff payments and to offset legal expenses incurred duricz the dispute.         In addition, CPS will receive annual payments ranging from $10 to $13 million, totaling $80.5 million, over the next seven years from the railroads, which is expected to be returned to customers as payments are received. The remaining amounts due have been recorded as both current receivables and Litigation Settlements Benefits Receivable.

B 16 i l

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                                                                      . ,aidWwsiAMCS CITY PUBLIC SERVICE NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1987 and 1986

8. COMMITMENTS AND CONTINGENCIES (continued)

Other - CPS is involved in various legal proceedings related to alleged personal and property damages, breach of contract, environmental matters, condemnation appeals, and discrimination cases. In the opinion of management of CPS, the outcome of such proceedings will not have a material adverse effect on the financial position or results of operations of CPS. Other purchase and construction commitments amounted to approximately $65.1 million at January 31, 1987. As of January 31, 1987, CPS has no significant lease commitments.

9. SEGMENT INFORMATION Segment information is as follows:

1987 1986 (in thousands) (in thousands) Electric Gas 'Ibtal Electric Gas 'Ibtal REVDUE $ 639,626 $127,814 $ 767,440 $ 700,371 $136,500 $ 836,871 EXPENSES: Operating and naintenance expense 3(M,816 113,194 418,010 377,654 118,174 495,828 Depreciation 36,501 5,310 41,811 35,435 4,916 40,351

          'Ibtal                        341,317      118,504      459,821     413,089     123, @ 0     536,179 EARNI?GS BEFTE INIIREST AND DET l              EKPENSE, AUD'AE FOR INIIREST OWEED
             'IO GESIRUCTION, AND

PAYMENIS 'IO 'lHE CI'IY OF SAN AVIWIO $ 298.309 $ 9.310 $ 3rr7,619 $ 287.282 $ 13.410 $ 300.s 2 l

CAPITAL EXPENDIRRES $ 409.090 $ 21.520 $ 430.610 $ 416.M1 $ 18.989 $ 435.060 LTPILI'lY ASSEIS $1,617,023 $245,290 $1,862,313 $1,476,729 $220,180 $1,W6,909 CNSTRUCTICN 10RK IN f 1,7 8 ,801 6,904 1,776,705 1,446,519 10,436 1,456,955 Pf0GRESS

          'IOTAL ASSEIS              $3.386.824 $252.194 $3.639.018 $2.923.248 $230.616 $3.153.864 B-17

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                                                                            'o m ,. b: piMWM%s6 APPENDIX C CPSB luTERIN FINALCIAL STATENENTS Comparative Balance Sheets at October 31 (In Thomands) unaudited Assets 1987                        1986 S 3.077.606               S 2.696.876 Net Utility Plant Restricted Cash:                                                                 S             0-          S        97,480 Bond construction Fund                                                                196,703                    183,254 Bond Reserve Fund                                                                      71,507                     71,334 Bond Fund Current Requirements                                                       201,176                    128,0I4 Improvement and Contingencies Fund                                                     10.894                       9.109 Other                                                                         S      480.280            $       489.201 Total                                                                  S      183.000            S       142.500 Litigation Settlement Benefits Receivable (Net of Current Maturities)

Current Assets: S 41,232 S 14,626 Cash and Temporary Investments 42,436 43,056 Customer Accounts Receivable (Net) 46,120 33,133 Note and other Receivables 20,640 19,730 Materlats and supplies 21,964 36,665 Fuel Stock (162) 101.102 Prepayments and other S 172.230 $ 248.312 Total S 126.830 S 2 6111 Deferred Debits S 4.039.946 $ 3.579.662 TOTAL ASSETS L;>bilities Long Term Gebt: S 115,220 S 124,220 Old Ser(6s 2,151,720 1,952,160 New Series (25,317) (21,090) Unamortired Premium /(Discount) 34.820 _ 32.350 Lsss Current Maturities 5 2.206.803 $ 2.022.940 Total S 1.485.647 8 1.298.400 Earnings Reinvested in Plant Current Liabilities: S 34,820 $ 32,350 Current Maturftles of Long term Debt 98,000 100,000 Short term Debt 57,806 43,493 Accounts Payable and Accrued Llobilities 16.010 13.434 Customers' service Deposits S 206.636 S 189.277 Total Deferred credits: S 14,976 S 14,308 Customer Advances for Construction 2.3 19 7.337 Other S 17.365 S 21.645 Total S 72.160 $ 0-Litigation Settlement Benefits Payable S 51.335 $ 47.400 Contributions in Aid of Construction S 4.039.946 S 3.579.662 TOTAL LIABILITIES C1

    .f                                                                     ......a                                '

tC hso. CITT PUGLIC SERVICE BOARD OF SAN ANTONIO Statement of Revenue and Application of Revenue (In Thousanda) Unsudited

 >                                                                                         Period Endina 10 31 87 Quarter                 Twelve E nded                 Months TBE REVENUE FROM OPERATION WAS:

Electric Sales 8 188,140 $ 620,535 Gas Sales 16,829 131,754 Interest and other 8,639 42,284 TOTIL REVEhUE  % 213,608 $ 794,573 TNE REVENUE WAS APPLIED AS FOLLOWS: FOR OPERATIONS AND MAINTENANCE: Fuet, Gas, and Purchased Power S 65,678 S 292,258 operating and General Expenses 19,505 70,839 Maintenance 9,629 35,816 Subtotal S 94,812 S 398,913 FOR OPERATING FUso ADDITIous: $ 0- S 0-FOR DEST REQUIREMENTS: Interest and Debt Expense S 44,913 $ 176,623 Retirement of Bonds 8,705 34,202 Additions to Bond Reserve Fund 2,963 13,449 Attowance for Funds Used During Construction __11},182) (105,665) Subtotal 8 30.299 8 118.609 FOR PATMENTS AND SERVICES TO TNE CITY OF SAN ANToul0: S 28,077 8 94,727 FOR ADolTIONS TO UTILITT PLANT: Total Expenditures S 96,915 S 422,650 l Additions to Improvements and Contingencies Fund 34,139 73.151 Subtotal S 131,054 S 495,801 Less Funds from Bonds, Brown & Root, TECP, Contributions, etc. S 70,634 S 313,477 Totat Revenues Avaltable for Plant S 60,420 $ 182,324 TOTAL REVENUE APPLIED S 213,608 8 794.573 ( ) Represents decrease l l l l l C2

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APPENDIX D TEXT OF CERTAIM INDENTURE ?ROVISIONS The provialons of the Old Series Bond Trust Indenture, except as pertain to the issuance of parity bonds, will continue . to remain in futt force and effect, and will also govern insof ar as the New series Bonds are concerned as long as any of the old Series Bonds remain outstanding. The Trust Indenture as amended includes among other Articles and Sections thereof the following: ARTICLE II SPECIAL COVENANTS SECTION I. The City is duty authorized under the laws of the State of Texas to create and issue the bonds and to execute and deliver this Indenture and to mortgage and pledge the property conveyed and mortgaged hereunder tnd to pledge the revenues pledged hereunder, and att necessary action on the part of the City and its soard of Commilssioners for the creation and issue of the bonds and the execution and delivery of this Indenture has been duty and effectively taken, and the bonds in the hands of the holders thereof are and will be valid and enforceable obligations of the City in accordance with their terms. eee SECTION 5. The City will not, except as specifically permitted by the provisions of this Indenture, create or voluntarily permit to be created any debt, tien or charge which would be on a parity with or prior to the tien of this Indenture on the trust estate or any part thereof or on the income to be derived from the trust estate and f rom the operation of the City's complete electric light and power system and oss distribution system or any part thereof; and will not do or omit to do or suffer to be done or omitted to be done any matter or thing whatsoever whereby the Lien of this Indenture or the priority of such tien or the bonds at any time hereby secured might or could be lost or impaired; and that it will pay or cause to be paid or will make adequate provision for satisf action and discharge of all lawful claims and demands for labor, materials, supplies or other objects which if unpaid might by law bethereof given precedence or the income to or an profits and equality with this thereef; Indenture provided thatasnothing a tien or charge upon the trust estate or any part in this section shalt require the City to pay, discharge or make provision for any such tien, charge, claim or demand so long as the validity thereof shall be by it in good faith contested, unless thereby, in the opinion of the Corporate Trustee, the trust estate or same materiet part thereof will be lost, forfeited or materlatty endangered. The provisions of this section are subject to the exception that the Board of Trustees may borro time on a purely temporary basis, such I siellar business in connection with current operations, and expected to be paid and retired f rom current l revenues received during the fiscal year in which such sums are borrowed. e ee SECTlou 8. The City, acting through the Board of Trustees, will maintain, preserve and keep the trust estate in a state of good repair, working order and condition and will not dispose of the trust estate in whole or in , part except in the manner and upon the terms provided in Article VII hereof. SECTION 9. The City, acting through the Board of Trustees, will duty and punctually keep, observe and perform each and every term, covenant and condition on its part to be kept, observed and performed, contained in this Indenture, and will punctuelty perform att duties with reference to the trust estate required by the the State of Texas, including particularly the making and collecting of such Constitution and laws of rates and charges for electricity, gas and services supplied by its electric light reasonable and sufficient to the City and to att other consumers, adjusting and power plants and system and gas distribution system, at the same such rates and charges from time to time in such manner as will render the same agreed that such rates and charges will be soand fixed that the the various fundsrevenues as provided in derived this principal maturities, and to maintain the Bond Reserve Account Indenture, and to f ut ty carry out att of the agreements contained in this Indenture and any supplemental Indenture hereto. SECT 10N 10. To the extent the City may legatty so covenant, the City agrees that it will not grant a franchise for the op' ration of any competing electric system or gas system in the City of San Antonio until att bonds issued hereunder shalt have been retired. D1

n..- .a . . .w.vA&$ida?Sdi&NT-WLW ARTICLE III ACCOUuTS ANO RECORDS SECTION 1. The City, acting through the Board of Trustees, shall keep full and proper books of record and account, in which full, true end proper entries will be made of att destings, business and affairs of the City which in any way af fect or perteln to the operation of the trust estate and the City's electric light and power plants and system and gas distribution system, and will furnish to the Corporate Trustee and to such bondholders as may request such statement, at toast onca every six months and at such other times as the Trustees may reasonably request, statements in reasonable detall showing the earnings and expenses of the City's electric light and power plants and system and gas distribution system, including the trust estate end the application of funds in the General Account hereinatter established, for the preceding six months' period. sold Board will also furnish to the Trustee from time to time such other data as to the plants, properties and equipment comprising a part of the trust estate as the Corporate Trustee shell reasonably request. SECTION 2. As soon after the close of each fiscal year es may reasonably be done, said soard of Trustees will furnish to the Corporate Trustee and to all bondholders who sey so request full audits and repcrts covering the operations of the Systems for the preceding fiscal year, and showing the earnings and expenses of the properties and the disposition made of all revenues for said fiscal year, the amounts avellable for the purposes set forth in Article V hereof, and, In such detall as the Corporate Trustee may request, the assets, liabilities and financlet condition of the systems at the close of such operating year. The Board of Trustees at the same time shall furnish to said Trustee en estimate of earnings and expenses for the ensuing year in sufficient detall to Indicate the probable total net income f rom operations and knounts evallable for the several funds and accounts established herein. If any such audit discloses any discrepancies or cisapplication of funds, the Board of Trustees shall be charged with the duty of rectifying such cisapplications as f or as possible and of remedying any deficiencies in payments hereunder f rom the first funds avellable for such purpose. I' SECTION 3. The Board of Trustees will, out of revenues of the trust estate, upon written request of the giverning body of the City or either of the Indenture Trustees, permit the governing body of the City and the Indenture Trustees, or either of them, at att reasonable times, by their egents, engineers, accountants and attorneys, to examine and inspect the plants, property, books of account, records, reports and other data relating to the trust estate and take copies and extracts therefrom, and will af ford a reasonable opportunity to make any such examination and inspection and will furnish the Indenture Trustees and the governing body of the City any and all such other information as they =ey reasonably request. The Indenture Trustees shall be l. ' under no duty to make any such examination unless requested so to do by the holders of twenty five per cent in principal enount of the bonds at the time outstanding and unless such holders shall have of fered the said Trustees security and indemnity settsf actory to it egelnst any costs, expenses and liabilities which might be incurred thereby. SECTION 4. The Board of Trustees shell, so far as practicable and to the extent consistent with the provisions of this Trust Indenture, keep its books and records in the manner prescribed in the Uniform System of Accounts for Electric Utilities adopted by the National Association of Rollroad and Utilities commissioners on November 10, 1936, and in the Uniform system of Accounts for Gas Utilities adopted by sold Association on November 10, 1936. ARTICLE IV INSURANCE SECTION 1. The City covenants and agrees that at all times It will Insure and keep insured through the Board of Trustees att properties subject to the Lien hereof which are of a character usually insured by private corporations and cities operating like properties, such insurance to be written in good and responsible insurance companies, against risks customarily insured agelnst by private corporetions and cities engaged in slalter business activities, and in the some manner and to the same extent, all toss therefrom (except any single loss which does not exceed $25,000) being payable to the Corporate Trustee by the customary mortgagee or trustee clauses to be attached to or Inserted in the policies. The riard of Trustees shall furnish to the Corporate Trustee a list of such policies, showing the character of the insurance, the property and risk covered, the name of the insurance company, and other pertinent details, and shalt keep said Trustee fully informed of any change in or addition to such List. Upon the written request of sold Trustee such policies ullt be deposited with it. Sold Trustee, subject to the provisions of Article IX hereof, shall be under no obligation or duty to obtain any such schedute and shall have no duty or responsibility with respect to the sufficiency or effect of any of such policies of insurance, the renewet thereof, or the responsibility of the insurers, or with respect to any such schedule or the matters shown therein, except to display any such schedule to any holder of bonds desiring to inspect the same, in case of loss or damage to any of the Insured property, the proceeds of any such Insurance on any one loss enounting to not more than $25,000 shall either be promptly apptled by the Board of Trustees to the repair or replacement of the property destroyed or damaged, or otherwise to the improvement of the mortgaged property, er if not so apptled within two years of the date of receipt thereof by the Board of Trustees, such proceeds shall be deposited and used for the redemption of bonds as en addition to redemption funds provided for in Section 6 of Article V hereof. In any case where the proceeds of any such insurance shall amount to a sum in excess of $25,000 on account of any one toss, att such moneys shall be promptly deposited with the Corporate Truette and shall be paid out from time to time to the Board of Trustees upon written request of the Board, 02

-ac.n.L ... . - -wad 4MA [ha[MMa I signed by its Chairman or Vice Chairman and Its Secretary, and accompanied by a certified copy of the resolution of the Board directing such request, and specif ying that certain expenditures have been made or incurred in repairing or replacing the property so impaired or destroyed, and the enount thereof, and requesting the payment by sold Trustee to the Board of Trustees of an enount not in excess of the amount of such expenditures. If in the judgment of the Board of . Trustees and of a licensed engineer selected by the Board of Trustees and approved by the Corporate Trustee, the Interests of the City and the bondholders will be best served through the application of ett or part of such insurance proceeds to improvements to the mortgaged property which do not constitute the repair or replacement of the property f or the destruction or impairment of which the insurance proceeds are so pald, the enount of such proceeds, to the extent permitted by law, may be opptled by the Board of Trustees to the making of such improvements, and payment thereof shall be made to the Board of Trustees by the Corporate Trustee and expended in the manner provided in the last preceding sentence hereof. The Corporate Trustee may in its discretion require such additional proof of the matters certified in such resolution as it may consider necessary or desirable. Any insurance proceeds not so paid out j by sold Trustee within a period of two years from the date of the receipt thereof shall be added to the J redemption fund provided for in Section 6 of Article V hereof and used for the redemption of bonds as therein , provided. l l Any adjustment of any loss under any policy of insurance made by the Board of Trustees may be consented to by the Corporate Trustee without investigetton as to the fairness thereof. ARTICLE V APPLICATloel 0F REVEBUES SECTioel 1. During the time any bonds issued under this Indenture remain outstanding, the properties constituting the City's electric generating, transmission and distribution system and gas distribution system (including all the properties and facilit6es of every kind constituting the "Trust Estate") shalt be operated on the basis of a fiscal year commencing on February 1 of each year and ending on the following January 31st. SECTION 2. All revenues of every nature received through the operation of the systems shall be deposited as received in a general fund or account to be known as the "City of San Antonio Electric and Gas System General Account," hereinafter referred to as the "General Account". Revenues received for the General Account shall be deposited from time to time as received In such bank or banks as may be selected by the Board of Trustees as the depository or depositories of funds received and administered by the Board of Trustees, such bank or banks being hereinafter collectively referred to es the "Depository". The bank or benks in which such funds are kept on deposit shalt at all times be a bank or banks located in the City of San Antonio unless there is no bank in the City of San Antonio quellfled and willing to serve as depository, in which case the Depository may be any bank or banks in the Statu of Texas selected by the Board of Trustees. The Board of Trustees shalt advise the Corporate Trustee of the names of the bank or banks selected as Depository from time to time. If for any rilson, in its sole discretion, the Corporate Trustee shall disapprove the oppointment of any bank or banks for such purpose end shall so advise the Board of Truste(s, the Board of Trustees shall promptly oppoint some other bank or banks which meet with the approval of the Corporate Trustee. SECTION 3. Funds in the General Account shall be used f ree day to day and aonth to month to pay the current expenses of operating, maintaining and repairing the systems, including the cost of Insurance, the purchese and carrying of stores, material and supplies, the purchase, manufacture and production of gas and electricity for distribution and resale, the payment of salaries and the payment of all other expenses properly incurred in operating and maintaining the systems and keeping them in good repelr and operating condition. The system of acLounts referred to in Section 4 of Article 111 hereof shall govern in determining whether any particular expenditure represents en operating and maintenance expense or a capitet expenditure for extensions and additions to the systems. In the event that et any time hereaf ter taxes of any nature shall be lawfully imposed on the systems, or any part thereof, or any income or revenues thereof, by the United States of Amerles or any governmentet body or taxing subdivision other than the City of San Antento, and such taxes are paid under the provisions of Section 7, Article !! hereof, att such payments shall be made from the General Account as an expense of operation under the provisions of this section. All funds used prior to the date of this Indenture for the carrying of stores, materiets and supplies shall be permanently retained in the General Account for such purpose and additional funds shall be added thereto out of revenues from time to time to the extent necessary for carrying such stores, materiels and supplies, and there shall be retained in the General Account et the end of each fiscal year funds in such an amount es may be required to meet unpaid accounts and obligations which have accrued or are payable during the year, as necessary operating funds to insure the continued operation of the systems. SECTION 4. Af ter providing for the cost of operations, maintenance and repeles and extensions provided for by Article 1113 Revised Civil Statutes of Texas as amended, and the retention of necessary operating funds and f unds f or carrying stores, materiets and supplies in accordance with the provisions of section 3 of this Article V, the next available funds in the Generet Account shall be used for and the same are hereby pledged to the payment of the principal and interest on bonds issued hereunder and the maintaining of a reserve for such purpose, and the Board of Trustees shall cause to be paid to the Corporate Trustee in due time in each year such enounts as will be fully sufficient to promptly pay att principal of and Interest on bonds issued hereunder whlch will become due on August 1 of such year, and February 1 of the next succeeding fiscal year. The funds in the "San Antonlo Electric and Gas Revenue Bonds Reserve Account" held by the Corporate Trustee under the Indentura dated August 1, 1942 shall become and constitute upon the ef fective date of the Trust Indenture the "$sn Antonio Electric and Gas Systems Bond Reserve Account" hereinaf ter referred to es the D3

a. , .

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tReserve Account") under this Trust Indenture to be used by the Corporate Trystee actely for the payment of principal and interest on bonds secured hereby falling due at any time when there would be a default if funds in the Reserve Account were not used for such purpose. During any period of time when the total amount of funds in said Reserve Account is less than the enount which would be suf ficient to pay all principal and Interest on bonds theretofore issued hereunder which will become due during the fiscal year (sumedia t ely succeeding the close of the current year, the Board of Trustees shall pay to the Corporate Trustee an additional amount for addition to sold Reserve Account equel to twenty per cent of the total payments otherwise to be made to the Corporate Tre ue to meet interest and principal accruing and payable during the fiscal year on all bonds then outstandir; .'d unpaid. Such added payments for said Reserve Account shall cease then said fund has reached the said one ral year's requirements as above provided. The payments required to be made to the Corporate Trustee in thee section sheLL be made as nearly as possible in equal monthly installments in each flacal year on or before the tenth day of each month, provided that if the tenth day shall fall on a Sunday or holiday the payment may be made on the next succeeding secular day. The "Reserve Account" and the monthly payments to meet next maturing interest coupons and bond naturttles shall be kept as separate accounts. The funds necessary to meet maturing interest coupons and bonds shall be forwarded by the Ccrporate Trustee to the paying agent just prior to each maturity. SECTIou 5. From the next avaltable funds in the General Account after the payments, provisions for payments end additions to funds and accounts to the full extent required in Sections 3 and 4 of this Article V have been made, there shall be paid into the General Fund of the City of San Antonio, for general City use, the sum of $531,000, as e reimbursement for the loss of taxes which the City would receive were the Systems privately owned, for the fiscal year ending January 31, 1952, and a like payment shall be made in each flacal year thereafter as hereinafter provided. Said payment of $531,000 for the first fiscal year is based upon the value of fixed capital assets of the Systems located within the city limits of the City of San Antonio es of January 31, 1951, being $35,000,000 and the payment to be made in each fiscal year after the first fiscal year shall be in said sum of $531,000 increased or decreased by the retto by which the value of fixed capital assets uithin the city limits of the City of San Antonio is increased or decreased above or below the said

      $35,000,000 as at the end of the preceding fiscal year. The term "value of fixed capitat assets" as used in this Section 5 and in Section 6 of this Article y shalt mean the original cost of physical plant, including real estate and equipment, constituting the electric and gas systems (but excluding all cash funds and secounts) after deducting, at original cost, at t actual retirements of property and all accrued depreef etion at rates established in conformity with the accounting provisions contained in Article lit of this Trust Indenture, and all questions of cost, property retirements and depreciation shall be determined by the accounts and records kept by the Board of Trustees in accordance with sold Article 111 of this Indenture.

To the extent such remaining funds as provided above are sufficient, such payments in lieu of taxes shall be made in equal monthly instattments. The obligation to pay such annual sums into the General Fund of the City shall be cumulative and if in any fiscal year the money in the Generet Account after meeting att requirements of Sections 3 and 4 of this Article V shalt be insufficient to pay in full the sums so due for such year, so much thereof as may be avellable shall be paid and the deficiency shall be peld from the first available funds in the succeeding fiscal year or years after meeting att prior requirements of Sections 3 and 4 of this Article V. SECTION 6. That from the next available funds in the General Account after the payments, provisions for payments and additions to funds in full accordance with the provisions of Section 3, 4, 5 of this Article V shall be made there shall be paid into a fund to be known as the "Electric and Gas System leprovements and l Centingencies Fund" (hereinafter called the "Improvements and Contingencies Fund") an annual sua equal to not less than twelve and one half (121/2%) per cent of the gross revenues of the systems to be used, as permitted by Article 1113 Revised Civil Statutes of Texas, as amended, for the purposes: (a) extensions, additions and improvements to the Systems (b) to meet contingencies of any kind in connection with the operation, maintenance, improvement, replacement or restoration of property, and (c) the payment of bonds or other obligations for which other funds are not evallable. To the extent money in the General Account is sufflclent for meeting the provisions of Paragraphs 3 to 5, inclusive, of Article V of the Indenture, the transfers or payments into said Fund shall be made in monthly installments. Af ter setting aside and providing for said cinimum amount of twelve and one half (121/2%) per cent of gross revanues of the systems to be placed in said l Fund as above specified, there shall be paid into the Generet f und of City, to the extent evallable froe l remaining revenues in the General Account as of the end of each fiscal years (a) a sua sufficient to reimburse i the City for att amounts paid to the Board during the. year for gas and electric services of the Systems used by the City for municipet purposes during such fiscal year and to the extent such remaining funds are found to be sufficient, such reimbursements may be made currently in monthly installments; and (b) commencing February l 1, 1960, and during the three fiscal years ending January 31, 1961, 1962, and 1963, a sua in cash which, when added to (1) the payment in lieu of taxes for the year as provided in Section 5 of Article V of this Indenture, (2) the amount of said reimbursements for electric and gas services during the year, and (3) the

amount expended during the year for additions to the street and traffic lighting system will enount to j

        $6,508,000 for the year, and comencing with the fiscal year beginning February 1,1963, and for each fiscat l

ye)r thereafter, a sum in cash which, when added to the payments, relmbursements and expenditures for the year mentioned in (1) to (3), inclusive, in the next preceding sentence hereof, will total en amount equal to 14% of the gross revenues of the Systems for the current fiscal year. Such fixed total payments for the first i three fiscal years and etch additional payments to be made thereafter based on gross revenues shall be paid in monthly instettments in accordance with estimates made by the Board and shall be adjusted on or before March 15 after the close of each fiscal year. 04

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4G.a . Att funds remaining in the General Account of the Board of Trustees after making such payments and relabursements, including all allowances f or deprecletion, shall be placed in the said "Electric and Gas System Improvements and Contingencies Fund" until such fund, after all disbursements and charges for the purposes above specified have been made, enounts to twenty (20%) per cent of the vetue of fixed capital I 1 assets as shown by the audited statement of the Systems. If et the close of any fiscal year any funds fatting I into sold Improvements and Contingencies Fund result in increasing it above twenty (20%) per cent of the value I of fixed capital assets as shown by the audited statement as of the end of the fiscal year, such excess shall be retained in a fund to be known as the "Electric and Gas Systems Surplus Fund". The monies in the Surplus ) Fund shall be used by the Board of Trustees either (a) as an offset to permit the reduction of either electric l rates or gas rates or both coenencing in the next fiscal year and extending for such time as the funds wilt  ! permit, or (b) for the redemption of so many of the last maturing bonds then eligible for redemption prior to maturity, as the evaltable funds are suf ficient to retire, such bond retirements to be made out of such fund , only when funds ovellebte for such purpose reach the enount of $1,000,000 or more. In the event monies in the Surplus Fund are used by the Board of Trustees as an offset to permit the reduction of rates, the Board of Trustees shalt in each year transfer all or so much of the surplus Fund to the Generet Account of the Board as it may deem necessary, based on the advice of rate engineers for the Board, to offset or old in offsetting the J Less of revenues during the succeeding fiscal year or years due to such rate reductions. If at the beginning of each fiscal year the totet of the funds in the leprovements and Contingencies Fund and l in the Bond Construction Fund avellable for extensions and improvements to the systems, plus the amounts catimated by the Board of Trustees to be evaltable f rom revenues for such purposes during such fiscal year, is less then the amount budgeted for extensions and improvements during such fiscal year, it shall be the duty of the Board of Trustees to request the City Council to authorize and provide for the sale of odditionet improvement bonds in the amount necessary with other funds, to meet the cost of budgeted improvements, and it shall be the duty of the City Council to provide for the issuance and sete of such bonds in order that the budgeted extensions and improvements may be made. SECTiod 7. All Interest received by the Board of Trustees and the Corporate Trustee upon funds of the system er upon bonds or other securities li which such funds may be Invested in accordance with the provisions of this Trust Indenture, except interest received on the Bond Reserve Account, shalt be paid annuelty into the General Account and deal with as a part of the revenues of the system. Interest received on the Bond Reserve Account may, at the discretion of the Board of Trustees, be used for payment of bond interest and principat from time to time. All funds in the possession of the Board of Trustees under the Trust indenture dated August 1, 1942 and not specifically dealt with and allocated by the provisions of this Trust Indenture shatt, upon the ef f ective date of this Trust indenture, become funds to be adelnistered by the Board of Trustees hereunder for the same purposes and u.es to which the same have been dedicated under sold prior Trust Indenture. Att moneys and funds held in any of the accounts and special funds provided for in this Indenture shall be held as trust funds and accounts for the benefit of the holders of the bonds issued hereunder and moneys and funds in all of said accounts and funds shalt et att times, to the extent practicable, be adequately secured by or, as to money in the Reserve Account, invested In United States government bonds or cther marketable securftles eligible as security for the deposit of trust funds under regulations of the Board cf Governors of the Federal Reserve System, or by indemnity bonds of surety compentes quellfled as surety for United States government deposits. All securities and indemnity bonds taken or standing as security for auch money or funds shall be subject to the approval of the Board of Trustees. The Board of Trustees shall make a monthly report to the Corporate Trustee specif ying the enounts held in each of the funds on deposit in the Depository and listing the securt tles and indemnity bonds standing as security for such deposits, and the Corporate Trustee may, but need not, require such additions and substitutions to be made in such securities and indemnity bonds es in its opinion is necessary to protect the interest of the holders of the bonds. Moneys and funds et any time held in the improvements and Contingencies Fund say, et the discretion of the Board of Trustees, be invested in securities which are either direct obligettons of the United States of Americe or direct obligettons of any State or municipality in the United States of Amerlee which are elf elble for the investment of trust funds under the laws of either the State of Texas or the State of New York then in force, or which are direct obligations of Bexar County, Texas, the City of San Antonio, Texas, or the San Antonio Independent School Olstrict. SECTION 8. At the close of each fiscal year all accounts and funds of the Systems shall be balanced and f' adjusted and such transfers, distribution and adjustments made as will cause att revenuesand theand income Board for the of Trustees I year to be applied and held in accordance with the provisions of this Article V, shall at the close of each operating year cause en audit of the Board's accounts and operations to be made by l or under the supervision of independent certified public accounts selected by the Board of Trustees. I ARTICLE VI MANASENENT SECTION 1. Pursuant to the authority contained in Article 1115, Revised Civit Statutes of Texas, 1925, as amended, the complete management and control of the systems during such time as any bonds lesued hereunder are outstanding and unpeld shall be vested in e Board of Trustees consisting of five citizens of the United States i of America permanently residing in Bezer County, Texas, to be known as the "City Pubtle Service Board, of Sen l Antonlo". Said Board is referred to in this Trust indenture as the

• Board" and the
• Board of Trustees". The Mayor of the City of San Antonio shall ex of ficio be one of the members of the Board of Trustees, and the renalning members of the Board of Trustees shall consist of Walter P. Napier, to serve for a ters ending 05

g,, ,

                                                             , . _ . .,,-          "WhiimenG *M A a January 31, 1953; Wittard E. Simpson, to serve for a term ending Janvery 31, 1955; James N. Calvert, to serve for a term ending Janusry 31, 1957; and John M. Bennett, Jr., to serve for a term ending January 31, 1959; each term of of fice to casunence with the date of this Trust Indenture. AL L vecencies in membership on the Board, whether occasioned by f ailure or refusal of any person above named to accept appointment or by expiration of term of of fice or otherwise, shall be filled by the majority vote of the remaining members of the Board of Trustees. No person who la related within the second deBree of consanguinity or offinity to any member of the Board of Trustees or any person who shall have been a member of the Board of Trustees within a period of five years prior to the election shall be eligible for election as a member of the Board. The term of of fice of each member elected to the Board, af ter the inttlet terms of the members named above, shall be five years. A person who has served as a member of the Board alther for en initial term as above speelf f ed or a single five yese term by virtue of election by the Board of Trustees, shall be eligible to be re elected for one additional flwyear ters, and one only. A member who is elected to the Board to serve out en unexpired portion of a retired member's term shall not be considered to have served a "ters" unless the unexpired portion of the term so served is three years or more. Permanent removal of residence from Bexar County by any member of the Board shall vacate his office as a member of he Board, and any member of the Board, other than the Mayor or the City, who shall be continuously obsent f rom all meetings held by the Board for a period of fcur consecutive months shell, unless he shall have been granted leave of obsence by the unanimous vote of the remaining members of the Board, be considered to have vacated his office as a member of the Board. Any member of the Board other than the Mayor of the city may, by unanimous vote of the remaining members of the Board, be removed from office, but only for adequate cause.

Except as otherwise speelfically provided in this Trust Indenture, the Board of Trustees shall have absolute and complete authority and power with reference to the control, management and operation of the systems and the expenditure and application of the revenues of the systems subject to the provisions contained in this Trust Indenture, all of which shall be binding upon and shall govern the Board of Trustees. In connection with the management and operation of the systems and the expenditure and application of the revenues therefrom, the Bserd of Trustees shall be vested with all of the powers of the City with respect thereto, including all powers necessary or oppropriate for the performance of all of the covenants, undertakings and agreements of the City contained in this Trust Indenture, and that! have futt power and authority to make rules and regulations governing the furnishing of electric and gas service to customers and for the payment of the some, and for the discontinuance of such services upon f atture of customers to pay therefor, and, to the extent authorized by law, shall have full authority with reference to making of extensions, improvements and sdditions to the systems and the acquiring by purchase or condemnation of properties of every kind in cennection therewith. The Board of Trustees shall elect one of its members as thelrman and one as Vice Chairman of the Board and shalt appoint a secretary and a Treasurer, or a Secretary Treasurer, who say, but need not be, a member or members of the Board. If a member of the Board of Trustees is not appointed as Secretary or Treasurer, or Secretary Treasurer, then en employee or employees of the Board whose duties in the operation of the systems require performance of stellar duties may be appointed as Secretary or Treasurer, or secretary Treasurer. The Board of Trustees may follew and adopt such rules for the orderly handling of its affairs as it may see fit and may manage and conduct the affairs of the systems with the same freedom and in the some manner ordinarity employed by the Board of Directors of private corporations operating properties of a sieller nature. L The Board of Trustees shall appoint and employ ELL of ficers and employees which it may deem desirable, including a General Manager of the system and an attorney or attorneys. No officer or employee of the Board of L Trustees may be employed who shall be related within the second degree of consanguinity or ef finity to any I member of the Board of Trustees. The Board of Trustees shall obtain and keep continually in force an employees' fidelity and indemnity bond of the so called "blanket" type, written by a solvent and recognited indemnity company and covering losses to the amount of not less then One Hundred Thousand Dollars (S100,000). l The members of the Boarc of Trustees, other then the Mayor of the City, shall receive annual compensation in ' the amount of Two Thousand ($2,000.00) Dollars, except that the Chairmen of the Board shall receive annual l compensation in the amount of Two Thousand Five Hundred (S2,500.00) Dollars. The members of the Board of Trustees shall not be personally liable, either individually or collectively, for any act or celssion not willfully fraudulent or in bad felth. ARTICLE VII POSSESSION ABO BELEASE OF PROPERTY SECTION 1. While not in default in the payment of principal of or interest on any of the bonds secured hereby, or in respect of any of the covenants, agreements or conditions in this indenture contained, the City, through the Board of Trustees, shall be permitted and suf f ered to possess, use end enjoy the trust estate and att l property and appurtenances, f ranchises and rights conveyed by this Indenture (except money or property, if I any, expressly required to be deposited with the Corporate Trustee) and to receive and use the revenues, iants, lasues, income, produce and profits thereof with power in the ordinary course of business f reely and without let or hindrance on the part of the Indenture Trustees or of the holders of t h e bonds , to use and consume supplies; to alter, repair, dismantle and change the position of any of its buildings and structures, D6 l

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1 1 a . l 1 plants, mains, pipe lines, poles, wires, coadults or other property whstsoever (provided that no such change shalt impair the tien of this Indenture upon any such building, structure, plant, main, pipe line, pole, wire, cindult, or other property); to replace and renew any of its equipment, machinery or other property; and to acquire any and att rights, easements and contracts in connection therewith and release any rights, easements and contracts which are abandoned. SECTION 2. The City from time to time, through the Board es, while in possession of the trust estate shall be suf f ered and permitted without any retesse f rom or action by the Indenture Trustees or either of them, to i sell, exchange or otherwise dispose of, free from Lien of this Indenture, (1) any of its equipment, machinery, fixtures, apparatus, appliances, tools, implements, or other chattels at any time subject to the Lien hereof which mey have become worn out or unserviceable, disused, undesirable or unnecessary for use In the conduct of its business, replacing the same by, or substituting for the some, other property of equal value to the City, which shalt f orthwith become, without further action, subject to the tien of this Indenture, and (2) any materials, merchandise equipment and supplies in the ordinary course end conduct of its business; provided, however, that upon the sete or other disposition of such property to the value of $10,000 or more in any one calender month, the Board of Trustees shall cause to be filed with the Corporate Trustee a certificate describing such paoperty, statirg that such property has become worn out, unserviceable, undesirable or unnecessary for use in the conduct of its properties and that such disposition thereof will not impair the operating integrity of the properties, and stating also the consideration received f rom such sete or other disposition thereof and the use made or to be made of such consideration. SECTION 3. So Lorig as the City is not in def ault hereunder the City may sett or otherwise dispose of any rest

      . property and improvements thereon mortgaged or covered by this Trust Indenture and the Corporate Trustee shalt release the lien and encumbrance of this Trust Indenture upon such property, but only upon the receipt by the Corporate Trustee of a certificate signed by a majority of the members of the Board of Trustees and by on independent licensed engineer stating in substances (1) that the proposed sete price of the property to be released represents the then fair value of the property to be sold; (2) that the City is not, to the knowledge of the signers of the certificate, in default in the performance of any of the terms or covenants of this Trust Indenture, or any indenture supplemental thereto, or any of the bonds secured thereby; and (3) that the release of the property will not, in the opinion of the signers, be prejudf ef el to the intereat of the bondholders and that the property to be released is not, or will not et the date of delivery or surrender of possession thereof be necessary or useful in the proper and economical operation of the systems.

The money received from the sale of such released property shall be held and used by the Board to the extent permitted by law for the purchase of additional property deemed by the Board necessary or advantageous to the system, and unless such money is used in such purchase of property within two years of the time recef ved, the some shall be used for the redemption prior to maturity of as many of the bonds as may be redeemed with such money in the manner and as a part of the redemption fund provided for in Section 6, Article V of this Trust Indenture. All additional property purchased or acquired under the provlsions of this section' shall isnediately upon such purchase or acquisition become subject to the (fen of this Indenture. ARTICLE Vill ISWE OF ADOlfl0NAL DONOS (This section has not been reproduced since it is no longer applicable) ARTICLE IX DEFAULTS AND REMEDIES SECTION 1. For the purpose of this Indenture and any indenture supplemental hereto the following events are hereby defined as and are declared to be "events of default": (a) Default in the due and punctual payment of any interest on any bond or bonds and the continuance thereof for a period of ninety (90) days ef ter written notice thereof by the Corporate Trustee to each member of

               'the governing body of the City of San Antonio and to each member of the Board of Trustees, stating that payment has been demanded and default made.

(b) Default in the due and punctual payment of the principet of any of the bonds at maturity thereof and the continuance thereof for a period of ninety (90) days af ter written notice thereof by the Corporate Trustee to each member of the governing body of the City of San Antonio and to each member of the Board of Trustees, stating that payment has been desiended and def ault made. (c) Defaultof in the performance or observance of any other of the covenants, egreements or conditions on the the City to be kept, observed and performed contained in this Indenture or any indenture part supplemental hereto, or in the bonds, and continuation of such default for a period of ninety (90) days af ter written notice thereof by the Corporate Trustee to each member of the governing body of the City of San Antonio and to each member of the Board of Trustees, (d) The institution of bankruptcy proceedings, either voluntary or involuntary, under any State or Federet statute, whereby the City's duty to carry out all of the covenants and agreements in this Indenture or any supplemental indenture might be in anywise affected. Any notice heretnprovided to be given to of a member of the governing body or the City Clerk, or to member of or the Secretary of the Board l I D*7

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s.n . . ~ - . j Trustees shall be deemed suf flelently given if sent by registered mall with postage prepaid to the person to be notlfled, addressed to him at the post of fice in the City of San Antonio. The Corporate Trustee may give any such notice in its discretion and shett give such notice if requested so to do by the holders of not less then twenty per cent (20%) in principal enount of the bonds at the time outstanding. Wherever the term "bonds" is used in this article and elsewhere in this Trust indenture, unless the context clearly indicates otherwise, the same shall be taken to refer to any bonds issued under this Indenture or any indenture supplementet thereto. SECTiou 2. Upon the happening of any event of def ault as defined in Section 1 of this article, the Corporate Trustee shall, but only upon the written request of the holders of not less then sixty per cent (60%) in principal amount of the bonds then outstanding hereunder, and upon bains indemnified to its satisf action, by Mtice in writing to the Secretary of the goerd of Trustees and to the City Clerk, to be sent as provideci in Section 1 hereof, declare the principal of all bonds then outstanding hereunder to be due and payable Ismediately, and upon any such declaration the said principal shall become and be due and payable lausediately, anything in this Indenture or in the said bonds to the contrary notwithstanding. This provision, however, is subject to the condition that if at any time efter the principal of sold bonds shall have been doctored due and payable and bef ore any sale of the trust estate shall have been made, all arrears of Interest upon att such bonds, with interest upon att past due installments of Interest et the rate borne by the bonds, and att past due principal of the bonds, together with the reasonable charges and expenses of the Indenture Trustees, their egents, attorneys and counsel, shalt be paid by the City, and after all other defaults which may have cccurred shall have been remedied or cured to the settsfaction of the Trustee, then and in every such case, the holders of sixty per cent (60%) in principal amount of the bonds then outstanding may, tf notice in writing given to the Corporate Trustee, and to the City Clerk and the Secretary of the Board of Trustees in t the manner provided in Section 1 of this article, waive such def ault and its consequences, and rescind such i declaration, but no such wolver or rescission shall extend to or af fect any subsequent default or impair or l exhaust any right or power consequent thereon. SECTION 3. Upon the happening of any event of def ault as defined in Section 1 of this article, the Indenture l Trustees or either of them, personally or by their attorneys or egents, may to the extent permitted by law l enter into and upon and take possession of all the trust estate and each and every part thereof and exclude l the City and the goerd of Trustees, or its agents, servants and employees, whetty therefrom, and have, hold, use, operate, manage and control the same, and each and every part thereof, and in the name of the City or i otherwise, as they shalt deem best, conduct the business thereof and exercise the f ranchises pertaining 1, thereto and at t the rights and powers of the City, and use all of the then existing property, materials, l current supplies, stores, and other assets for that purpose, and at the expense of the trust estate from time to time maintain, restore, insure and keep insured the properties, plants, equipment and apparatus provided or required for use in connection with such business, and likewise from time to time, et the expense of the trust estate, make all such necessary or proper repairs, renewats and reptocements and all such useful alterations, additions, betterments and improvements as to them may seen judicious, and collect and receive all rates, earnings, income rents, issues, profits and revenues of the same and of every part thereof, and after diducting therefrom the expenses of operation and att expenses incurred hereunder and all other proper outleys herein authorized, and at t payments which may be made es just and reasonable compensation for their own services, and for the services of their attorneys, egents, and assistants, and the rest and residue of the moneys received by the Trustees, or either of them, shall be apptfed as follows: (a) In case the principal of none of the bonds shall have become due, to the payment of the interest in l- default, in order of the maturity of the Installments of such interest, with interest on the overdue instattments thereof at the some rates, respectively, as were borne by the bonds on which such interest shall be in default, such payments to be made retably to the parties entitled thereto without discriminetton or preference. (b) In case the principal of any of the bonds shall have become due by declaration or otherwlse, first to the I payment of the interest in default, in the order of the maturity of the installment thereof at the same rates, respectively, as were borne by the bonds on which such Interest shall be in default, and next to the payment of the principal of all bonds then due, such payments to be made ratably to the partl4s entitled thereto without discrimination or preference, in case att of such payments, and payment of whatever may be payable for any other purpose required by any provision of this Indenture, shall have been made in full and no suit to forectose or enforce this Indenture shalt have been begun or sete made as hereinaf ter provided, and upon compliance with all other provielons of this Indenture as to which the City shall be in default, the Indenture Trustees, after making such provision as to them may seem advisable for the payment of the next maturing instat tment of interest to fatt due upon the bonds, shall restore the possession of the trust estate (other than any cash at the time required to be held by the Corporate Trustee hereunder) to the goerd of Trustees. SECTION 4. Upon the happening of any event of def ault es defined in Section 1 of this Article, if the principal of att of the bonds outstanding hereunder rhell have been properly doctered due and payable as provided in Section 2 of this Article, and whether or not the remedies autherleed by Section 3 of thls Article shall have been pursued in whole or in part, the Indenture Trustees, or either of them, may cause this Indenture to be forectosed and the trust estate to be sold, and may proceed to protect and enforce the rights ' of the Indenture Trustees and the bondholders hereunder in such manner as counsel for said Trustees shall D8 l

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a t :..a - , ssw m~g%cxmu_.ms2%W- 4 advise, whether for. the specific performance of any covenant, condition, agreement or undertaking herein contained, or in aid of the execution of any power herein granted, or for the enforcement of such other appropriate legal or equitable remedies as may in the opintoa )f such counsel be more effectual to protect and enforce the rights aforesaid. The Indenture Trustees shalt take any such action or actions if requested so to do by the holdera of at least slaty per cent (60%) in principal enount of the bonds then outstanding hereunder.

SECTION 5. Upon the happening of any event of def ault as defined in section 1 of this Article, and if the 1 principal of all of the outstanding bonds shall have been declared due and payable as provided in section 2 of I this Article, then and in every such case, and whether or not the remedies authorized by section 3 of this l Article shall have been pursued in whole or in part, the Indenture Trustees, or either of thee, shalt, but only upon the written request of the holders of not less than sixty per cent (60%) In principal amount of the bonds then outstanding hereunder, with or without entry, sell to the highest bidder the trust estate and all right, title, interest, ctsin and demand thereto and the right of redemption thereof, at any such place or places, and at such time or times and upon such notice and terms as the Trustee acting may fix and specify and as may be required by law. In case of such sale of any of the property subject to this Indenture, notice of i such sete shall first be given by publication in at least one daily newspaper published in the city in which I the sale is to be made at least once a week for four successive weeks next preceding such sale, and by like  ! publication in at least one daily newspaper published in the City of New York, New York, and by the giving of any other notices which may be required by law, and upon such sale the Trustees may make and deliver to the purchaser or purchasers a good and suf ficient deed or deeds for the some, which sete shall be a perpetual bar both at law and in equity against the City and all persons and corporatione lawfutty claiming or to claim by, through or under it. No purchaser at any such sete shall be bound to see to the application of the purchase ) money or to inquire as to the authoritation, necessity, expediency or regularity of any such sale. Nevertheless, the City, if so requested by the acting Trustee, shall ratify and confirm any sete or sales by executing and delivering to the acting Trustee or to such purchaser or purchasers att such Instruments as may be necessary or in the judgment of the acting Trustee proper for the purposes which may be designated in such request. Such notice of sale shall state that the City has granted to the purchaser of the mortgaged property a franchise for the operation thereof for a period of twenty years dating f rom such purchase. SECTION 6. In the event of any sale, whether made under the power of sale hereby granted and conferred or under or by virtue of judicial proceedings or of a judgment of decree of foreclosure and selv, the whole of the trust estate shall be sold in one tot and as an entirety, unless such sale as an entirety la impossible or lapracticable by reason of some statute or otherwise. SECTION 7. The acting Trustees may from time to time adjourn any sale to be made by them hereunder by announcement at the time and place of such adjourned sale, and without further notice or publication except as otherwise required by Law may make such sete at the time and place to which the same may be so adjourned. SECTION 8. In case en event of def ault as defined in Section 1 of th!s Article occurs, and if all of the bonds tutstanding hereunder shalt have been declared due and payable as provided in section 2 hereof, and in case a bitt in equity shall be filed or any other judicial proceeding cemenced to enforce any right of the Indenture Trustees or of the bondholders under this Indenture or otherwise, then as a matter of right, the acting Trustee shall be entitled to the appointment of a receiver of the trust estate and of the earnings, income or

• revenues, rents, issues and profits thereof with such powers as the court. making such appointment may confer.

SECTION 9. In case the Indenture Trustees, or either of them, shatl have proceeded to enforce any rights under this Indenture by fcreclosure, sale, or otherwise, and such proceedings shall have been discontinued or superseded, or shall have been determined adversely to said Trustee or Trustees, then and in every such case the City and the Indenture Trustees shall be restored to their former respective posi t t or s and rights hereunder in respect of the trust estate, and all rights, remedies and powers of the Indenture Trustees and the bondholders shall continue as though no such proceedings had been teken. SECTION 10. In case of any such sale of the trust estate, any bondholder or bondhelders or coenittee or bondholders or either Trustee, may bid for and purchase such property and upon compliance with the terms of l sete may hold, retain possession and dispose of such property as the absolute right of the purchaser or purchasers without further accountability and shall be entitled, for the purposes of 6.aking settlement or payment for the property purchased, to use and apply any bonds hereby secured and any Interest thereon due and unpaid, whether or not such interest be evidenced by coupons, by presenting such bonds and coupons in order that there may be credited thereon the sua apportionable and applicable thereto out of the net proceeds of such sale, and thereupon such purchaser or purchasers shall be credited on account of such purchase price payable by him or them with the sum apportionable and applicable out of such net proceeds to the payment of or as credit on the bonds and coupons so presented. D9

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                                                                                , w e r.e      n a h w M E W M ,2 SECTIou 11. The proceeds of any judicial or other sale of the trust estate, together with any funds at the time held by the Corporate Trustee and not otherwise appropriated, shall be apptled as fottown:

A FIRST: To the payment of the costs, expenses, feen and other charges of s 9ch sale and a reasonable compensation to the Indenture Trustees, their agents and attorneys, and to the diecharge of all expenses and tisbilities incurred and advances or disbursements made by said Trustees hereunder. SECONO: Any surplus then remaining to tne payment of the whole amount then due or ur<9 aid upon the bonds issued hereunder and then outstanding for principal and Interest, with interest on overdue principal and overdue installments or interest et the sama rates, respectively, as we.'e borne by the bonds whereof the principal or Installments of Interest may be overdue, and in case sJch tjroceeds shall be Insuf ficient to pay in full the whole amount so due and unpaid, then to the payment of such principal and interest retably according to the aggregate amount due on all bonds then outstandlnts without preference or priority of principal over interest or of interest over principal. , t

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Tutt0 Any surplus then remaining to the City or whomsoever shall be lawfully entltted thereto. l SECTION 12. In case of a sale under any of the foregoing provisions of this Article, whether made under the power of sale herein granted or under or by virtue of judictat proceedings, the principal of att bonds issued i l hereunder and then outstanding, if not previously due, shall lamediately thertuporr become du: and payable, j anything in said bonds or in this Indenture, or any supplementet indenture, to the contrary notv'ithstanding. SECTION 13. The remedies herein conf erred upon or reserved to the Indenture Trustees or to the holders of bonds hereby secured are not intended to be exclusive of any other remedy, but each remedy herein provfdsd shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereaf ter existing, and every power and remedy hereby given to sold Trustees or to the holders of bonds issued hereunder may be exercised f rom time to time as of ten as may be deemed expedient. No delay or omission of said Trustces or of any holder of bonds issued hereunder to exercise any power or right arising from any def ault bereunder shall impair any such right or power (unless the exercise of such right or power shall become barred by law) or shall be construed to be a waiver of any such default or to be acquiescence therein. SECTION 14. Anything In this Indenture contained notwithstanding, the holders of sixty per cent (60%) in I principal enount of bonds hereby secured and then outstanding shall have the right by en instrument or instruments in writing delivered to the Indenture Trustees to direct enc control sold Trustees as to the swthod of taking any and all proceedings for any sale of any or ett of the trust estate, or for the foreclosure of this Indenture, or any supplemental indenture, or for the appointment of a receiver, and may at I any time cause any proceedings authorized by the terms hereof to be n taken or to be discontinued or deleyed; provided, however, that such holdera shall not be entitled to cowe said Trustees to take any proceedings t:hich in their opinion, or the opinion of the one acting, would be unjd;tly prejudicial to non essenting bondholders. SECTION 15. No holder of any t,ond or coupon issued hereunder shall have m right es such holder to institute any suit, action or proceeding for the forectosure of this Indenture or f or the execution of any Trust hereunder or for the appointment of a receiver, or for any other remedy hereunder, ett right of action hereunder being vested exclusively in the Indenture Trustees, unless and until such holder shall have previously given to sold Trustees written notice of a def ault hereunder and of the continuance thereof, and also unless the holders of the requisite principal amount of the bonds then outstanding shall have made teritten request upon said Trustees and shall have afforded a reasonable opportLnfty to Institute such action, suit or proceeding in the name of one or both of them, and unless sold Trustees shall have been of fered reasonable Indemnity satisf actory to them against the costs, expenses and liabilities to be incurred therein er thereby, and said Trustee for thirty (30) days af ter receipt of such notification, request or offer of Indemnity shall have f ailed to institute any such setion, suit or pcoceedird, it being understood and intended that no one or more holders of the bonds shall have the right IS any manner whatever by his or their action to affect, disturb or prejudice the lien of this indenture, or any suppleme;nt hereto, or to enforce any right thereunder except in the manner herein provided and for the equal bensfit of att holders of euch outstanding s bonds,

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SECTION 16. In any suit or action by or against the Indenture Trustees, or either of them, erlsing under this Indenture or on all or any of the bonds or coupons issued hereunder, sold Trustee or Trustees shall not be i rtquired to produce such bonds or coupons, but shall be entl\ led in all thinJs to mainteln or defend any such suit or action without their production. \ SECTION 17. If any covenant, agreement, velver or part thereof in this Article or elsewhere in thls Indenture, or in any supplementet indenture, contained be forbidden by any pertinent law, or under any pertinent law be effective to render this Indenture invalid or unenforceable, or to impaq the lien thereof, then each auch l covenant, agreement, walver or part thereof shall itself be and is herebyI helsred to be wholly ineffective and this Indenture end supplements thereto shall be construed as if the same sero not included heroin.

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ARTICaf Il

                                                               ' WANCuf3E In the event that any sale of the trust estate shall be made under any of the provlsions of this Indenture for the enforcement of, the tien of this Indenture, and any supplements therato, the City hereby grants to the purchaser or purcNeers at such sete a f ranchise to operate the propgrty so guarchesad for a term of twenty years dating fna such purchase, subject to att tows regulating snee then In force. the properties su purchased, in tM event they are operated by ihe purcheter purgent to such fisochise, shat t be operated, conducted and maint:Irva in such manner as to be a benefit to the City of sen Anttoh and its inhabitants, and such purchaser shall be pledged 1a render ef ficient public service.                                      N s

( APV CLE XII le0DIFICATION OF Tulf, INCENTURE , SECTID't 1. The holders of seventy five per cent (75%) in principal amount of bonds at any time cutstanding (not f including in any case any bonds which may tNn be held or owned by or for the account of the City) shalt have '.he right from time to time to consent to end approve the execution by the City and the Indenturo Trustees of such Indenture or Indentures supplementb hereto as shall be deemed necessary or desirable by the ' City for the purpose of modifying or amending any of the terms or provisions contained in this Indenture or it any Indenture or Indentures supplementet thereto V contained in the ordinerce authorialng bonds secured by this Indenture; provided, however, that nothitq herein contained sheit permit or be construed as permitting tha moalfication or amendment of the terms and conditions contained in this Indenture or 96y supplemental Indentura or any ordinance or bonds so es to , (a) Make any change in the r.aturity of the bonds lasued hereunder. \ i s N S (b) Reduce the rate of interest borne by any bonds. (c) Reduce the amount of the principal or preatum, if any, payeble on bonds. j (d) Modify the terms of payment of principal or of interest or premi.am upon bonds or any of them or impose l any conditions with respect to such payment. I  ! (e) Af fect the rights of the holders of ;ess then all bonds then outsteridir d, if at any time the City shall request the Indenture Trustees to enter into such Supplements! Indenture, sold Trustee, unless they shall deem that such proposed supplemental Indenture shalt contain provisions which affect their rights or obligations and to which they are ewilling to essent, shelt at the expense of the

       ,geerd of Trustees, cause notice of the proposed executf ors of such supplemental tedenture to be published in t                            's f
       ' finenalet newspaper or tournal published in the City of yew York, New York, and in a newspaper of general circulation published in the City of ten Antonio, once during each chlender week for at least four successiva                                ,

cadendar weeks, afd on or before. the date of the first pubilcaldr of such notice, the Corporate Trustee shall also call e copy thereof to each rep stered owner of bonde et his address spoeering on said Trustee's registry books, but failure to mall any suen notice or any def ect therein shell not af fecg the validity of the proceedings f or obtaining consents to the exebilon and delivery of such supplemental hdenture. Such notice shall briefly set forth the nature of such prtyised supolemerital Indenture and shalt state that a copy thereof is on file at the principal of fice of said Ts u'.ee Vor'.nspection by all holders of bondi. sf i y Chenever et any time within one year f rom thk(cate of the first publication of said notice the City shall deliver te.the Cofporate Trustee an (Mirument or Instruments execuW by the holders of at least a,eventy-five , n l

       -per cenk (75%) In aggreg1te prlMpel amount V the bonds then wstanding Ss in this section defined, which                                  ;

instrungo or instrveents shall ref er to the proposed supplOenfal Indenture described in said notice ed , shall specifically consent to and approve the execution thereof .in substantially the form of tb copy thereof s ' on file with the Corporars Trv tee, thereupon, b'a t not otherwise, the Indenture Trustees shall execute the. sold supplemental Indenture in substantially the sold form withdat titebility or responsibility to any holder ' of any bond, whether or not such holder shall have consented thereto. If the houers of et least s=>enty five per cent (75%) in aggregate principal amount of the bcnds outstanding as in t0is section defined at the time of executien of any cuch supplemental indenture, or the predecessors in s title ci such holders shril have consented to end appetaed the execution thereof as herein provided, no holder of any, bond, whether or not such holder shall have consented to or shall have revoked any consent as in this section provloed, shall have any right or interest to object to the execution of such supplemental Indenture l or to object to any of the terms or provlefont theretrv :ontelntd, or to Oe geration thereof, or to enjoin or i restrain the Indenture f rustees or the City f ron executing the same or from* taking any action pursuant to the l N Grevisions thereof. SECTlos 2. Upon the suecution of any shptementet indentrte oesuant to the provisions of this section, this Indenture and any supp em:nts therets and the ordinances W.horising the bonds then outstanding shall be and be deemed to be modified and emerv%d in accordence with such supplemental Indenture, and the respective j 1 0 11

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f 's - .. . _ _ g 4 rechts, duties and obligations of the City, the Trustees and all the holders of outstanding bonde shall thereafter be determined, exercised and enforced, subject in all respects to such modifications and amendments. Any consent given by the holder of a bond pursuant to the provisions of this section shall be irrevocable for a period of six months from the date of the first publication of the notice provided for in this Article, and shall be conclusive and binding upon all future holders of the some bei during such period. Such consent sey be revoked at any time af ter six months f rom the date of the first MLication of such notice by the holder who save auch consent, or by a successor in title, by filing notice with the Trustees in form settsfactory to thee of such revocation of consent, but such revocation shalt not be effective if the holders of seventy five per cent (75X) essresete principet enount of the bonds outstanding as in this section defined have, prior to the attsapted revocation, consented to and approved the supplementet Indenture referred to in such revocation. Fsr the purposes of this Article, ownership of bonds shall be established in the menner provided in Section 1 of Article XIll of this Indenture. Any supplementet Indenture executed in accordance with the provisions of this Article shalt thereafter form a part of this Indenture and ett the terms and conditions in any such supplemental Indenture as to any provf sf on authorized to be contained therein shall be and be deemed to be part of the terms and conditions of this Indenture for any and ett purposes. I

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= y Y?hfC,y:,U - - s . w . .as&bM 'l Y): 'll . ,, , j m APPENDIX E 5 CPSB BESOLUTION APPROVING NEW SEtlES 80508 ORDINANCE - L T A RESOLUTION OF THE CITY PUBLIC SERVICE BOARD Z OF SAN ANTONIO, TEXAS, RELATINO TO THE ISSUANCE AND SALE OF $160,000,000 CITY OF SAN ANTONto k - TEXAS, ELECTRIC AND CAS STSTEMS REVENUE IMPROVEMENT BONDS, NEW SERIES 1988 _ a Trust indenture, dated February h WHEREAS, pursuant to the authority contained in Article 1115, V.A.T.C.S., 1,1951, and various Supplemental Indentures thereto (cottectively cetted the "Indenture") providing security

       /                                                                                                                                                  -

I~ for the payment of outstanding revenue bonds known as "Old Series Bonds" and ordinances passed by the City

     ;                     Council of the City of San Antonio, Texas, on October 9,1975, February 2,1976, June 24, 1976, January 6, 1977, July 15, 1977 February 23, 1978, August 3, 1978, January 11, 1979, July 12, 1979, February 7, 1980, i-August 21, 1980, March 5, 1981, September 17, 1981, March 11, 1982, October 28, 1982, May 12, 1983, December 8, 1983, May 31, 1984, October 11, 1984, January 24, 1985, April 11, 1985, October 24, 1985, February 27, f

1986, June 12, 1986, January 22, 1987, and February 26, 1987, (cottectively cetted the "Ordinances"), L suthorl Ing the issuance of outstanding revenue bonds known as "New Series Bonds." The complete management and

control of the electric and gas systems (the "Systems") of the City of San Antonio, Texas, la vested in a '

( Board of Trustees known as the City Public Service Board of San Antonio, Texas (the "Board"), during the 1 period of time any of the af orementioneJ "Old Series Bonds" and "New Series Bonds" are outstanding and j unpald; and i WNEREAS, in the performance of its duties and responsibilities pertaining to the management and operation of j the Systems, the Board has determined that $160,000,000 in revenue bonds should now be issued by the City to

1. provide funds to meet the costs of improvements and extensions to the Systems currently under construction and i estimated costs of planned improvements and extensions to sold bystems, such snount of bonds being based upon (f) the dif ference between the estimated costs of such extensions and improvements and the total enount of funds avellable and estimated to be available to meet said estimatM costs, anc (if) the current rate of expenditure of funds for such capital improvement project costs; and 7

WHEREAS, by virtue of the authority and power vested in the Boar. th reference to the expenditures and _ h application of the revenues of the systems and to comply with the terms and conditions prescribed in the k Ordinances for the issuance of additional bonds on a parity with the heretofore issued "New Series Bonds," It is necessary and proper for the Board to formatty request the City Council of Can Antonio to authorite and 7 set t such bonds, consent to the issuance of the some, approve the ordinance authorlains such bonds and agree to somply with ett the terms and provisions of such ordinance with relation to the operation of the Systems, [ end the handling of the proceeds of such bonds. 7 NOV, THEREFORE, BE IT RESOLVED BY THE BOARD OF TRUSTEES OF THE CITY PUBLIC SERVICE BOARD 0F 5AW ANTONIO, i TEXAS:

1. Met the City Council of the City of Sa1 Antonio, Texas, is hereby formatty requested to authorite and -

( gg sett $160,000,000 in principal amount of revenue bonds payable f rom the same source, secured in the same manner and on a perity with the heretofore issued "New Series Bonds"; and the Board by the adoption of this "a rest;ution dw hereby evidence its consent to the issuance and sale of such bonds and the payment thereof g from the net rev*nues uf the Systems and its approvst of the ordinance authorizing the issuance of the p $160,000,000 "City of San Antonio, Texas, Electric and Gas Systems Revenue Improvement Bonds, kew Series 1988 dated March 1,1938, a ccpy of which ordinance is attached to this resolution; and the Board hereby agrees to 3 compt) with att of the terms and provisions of said ordinance with relation to the adelnistratton and - operation of the Systems and the disposition of the revenues therefrom; and

2. That the T ficial Notice of Sale" (tnetuding abbreviated inre to be published) and "Official Statement" g prepared in connection with the issuance and sale of the bonds destCneted "City of San Antonio, Texas, Electric and Cas Systems Revenue Improvement Bonds, New Series 1988", in the princisat sum of $160,000,000, It are hereby approved, and the Chairman of the Board is hereby autGorlted to execute the Of ficial Statement on

= behalf of the Board; and

3. That the ceneret Manager or Secretary of the Board is authorized to prepare any addenda or amendments to the "officist Notice of Sale" and "Officist Statement" deeetj oppropriate or necessary, and cause the same to

= be published and/or distributed prior to the sale of the Bonds; and e 4. That the Board recognites that the ordinance authorizing the New Serles 1988 Bonds (the "Bonds") contain covenants of the City of San Antonio to the ef f ect that (1) the City vitt make no use of the proceeds of the Bonds directly or Indirectly that would cause s ch Bonds to be arbitrage bonds within the seening of Section g 103 (c) of the Internal Revenue Cooe of 1954, as amended, (the "Code"), and (ii) the city will comply from the r date of issuan:e of the Bonds with the amendments relating to tax exempt Bonds included in the Tax Reform Act of 1986 (the "Amendments"); and realizing that in accordance with the terms of the ordinance the proceeds of the Bonds wlLL be entirely within the cont ol and disposition of the Board, the Board therefore speelfically s adopte such covenants made by the City Council in such ordinance and hereby covenants with the purchasere of the Bonds that it will make no use of the proceeds of the Bonds at anytime throughout the term thereof which m E1 i m-

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 -n..            -
                                                                 , '        . . . .. . .:~di.A -    A 'E= %:M:N?SA$ N 05 etutd cause the Bonds to be orbitrage bonds within the seening of Section 103(c) of the Code or any Treasury regulations or income tax rulings promutseted thereunder or pertelning thereto, that it will comply with the requirements of section 103(c) of the Code and all applicebte regulations and rulings, and that it will comply 4:lth the covenants made by the City in such ordineer.e pertelning to the Amendments.

PASSED AND APPROVED by en af firmative vote of the Board of Trustees of the City Pubtle Service Board of San Antonio, Texas, this the 25th day of January, 1988. ATTEST:

        /s/        N0 WARD t. FREEMAW                                                        /s/      EARL C. Mill Secretary, City Public service Board                                             Chelrmen, City Pubtle Service Board l

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• 4 Central Power and Light Company supplies elec tic senice to a 44,000-square-nule area wh.ch reached into 44

                                                                                                 'ounties of South Texas. Tne E ~m g

Company is a subsidiarv ot

                                                                                                                                                        .j Cental and South West Corrora-lc,g5 tion, a registered holding compant.                 .R S                                      At the end of 1987 Cental Power              q g.

and Light Compant servea 532.540 9i: customers m 224 communities - k;i.M and the surrounf , area. Tne N Company also supplies, at h wholesale, a pan or all ot se F-electric requirements o! tive mral e}eC[ric CO0peratives and ato

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temtort served bv the Comparr has a populanon at appre.umatch

                                                                --        +                       1.8 million. Pnncipa! executiv:                     _

'a= E. offices are located at 305 N

=> tarancahua Steet. Corrus Chrisu, Texas. Telernene: t312i

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881-5300.

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• 14w 7em t'oum Can 1%M:Smus IvarJ of San .Lww Loser Cokrak knvr Authonn-Howan behang .t 1%st Cc h

en l l l C 007baUOn i REGION l u o m Saoon e GULF OF MEXICO

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During 1987, Central Power and any reductions not impair the quality of l IJght Company made significant progress senice to our customers. l toward long and short term objectives that Most of the reduction will be accom- I will enable us to meet current and future plished through an early retirement challenges, package that 'vas offered to employees Nearly two decades ago the Company near the end of 1987. Of the 268 eligi-initiated a plan to end its almost total ble employees,236 or 88% elected to dependence on natural gas as a boiler accept it. fuel. That plan, which consisted of add- The reorganization plan, wiuch ing both coal and nuclear capacity, will affected virtually all work groups, was i be culminated with the completion of the announced near the end of the year. 2 South Texas Project nuclear plant. Unit 1 Under the new structure, the Company's , of STP has been completed and is ex- six distribution districts and four trans- l pected to be in senice prior to our mission divisions were consolidated into summer peak, and Unit 2 is scheduled four operatirt regions. Mere feasible, for operation in 1989. The diversification local manager posinons were reduced by of our fuel base will assure both price combining the responsibilities for several and supply stability, benefitting communities under one area manager, customers and investors. Likewise, power plants in reasonable Despite the difficulties of building and proxintity to each other were combined licensing nuclear plants, STP will be an under the supemsion of a smgle asset to South Texas and will be the manager. The reorganizanon also source of reliable power at a stable pnce. red}}