Text

Houston Industries,Inc 1988 Annual Rept
	ML20247J747
Person / Time
Site:	South Texas
Issue date:	12/31/1988
From:	Jordan D; HOUSTON INDUSTRIES, INC.
To:	;
Shared Package
ML20247J737	List: ML20247J747; ML20247J774; ML20247J782; ST-HL-AE-3181, Forwards 1988 Annual Financial Repts for Houston Industries, Inc,City of Austin,Central Power & Light Co & San Antonio City Public Svc;
References
	NUDOCS 8907310315
	Download: ML20247J747 (151)
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1988 1987 1986

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opera;ing Pevenues (000)

$3,60,465 $3,628,213 $3535,968

.6 Operating Expenses (000)

$2,947,228 $2,890,745 $2,809,387 2.0 Net income (000)

$395,254

$434,958

$424,935 (9.1) m 1

Eamings Per Common Share

$3.34

$3.74

$3.81 (10.7) s-Retum on Average Ommon Equity 11.8 %

13.6 %

14.5 % (13.2)

Dividends Per Common Share

$234

$2.86

$2.76 2.8 q

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$28.75

$28.33 So7.19 1.5 1

Market Price Per Share (year <nd)

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$30.00

$34.75 (6.7)

Market toIkvik Value 97%

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Price /Eamings Ratio 8A 8.0 9.1 5.0 l - Common Shares Outstanding (000) o (year <nd) 118,511 117,661 114,124

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I Number of Qamon Sharetahrs (year.end) 86,978 78,880 81,9M 10.3 f

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lbtal Assets (Om) t10,219,046 $9,727,688 $9,027,817 51

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$3A98,868 $3,135,671 $3,208,160 11.6 i

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$3,407,419 $3,333,375 $3,102,627 2.2 E]A.kg:

Prefemd Stock (000)

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$440,374

$341,319 c

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asa tTABLE OF 3"a

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" CONTENTS)~' @WWW c

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. FinancialHighlighs.j 1 !2L, m 2 vv w am my w c

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President'sImer ! ' '

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i 1FinancialReview1 11 y

Lh..$miede,a,M, y > g, i < MM 111Operatmgflighlights.

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I iHIAP Operatingliighlights L "l7i EM..

. people 2a5,WaluenMadeama,4 '.

piggp'1988 Milestones "

17$ ML S}

g%g$;;y awHomenD%:sg!@

y. U 20 Construction L

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mg6p aqiby#N., M14SM.h. l;;d.d5!u Regulation :

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Paragon Highlights?

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a amw Nmm Utility Fuels,Inc.<

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vm-m m mm hilstias.psell PFrs Argentine _opemtions and is seek,.9

%med Management's Discussion and' 9#

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. Analysis

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, Statements of Consolidated ~

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Nineteen-eighty-eight presented both uncertainties and operating license for the second STP unit, whi:h is on opportunities for flouston Industries, in our core electric schedule for commercial operation in mid-1989, and utility business as well as m our quest for growth thmugh which is the last new generating unit we are building at divenification. We made substantial pmgress in both areas.

this time.

Ilowever, our financial results suffemd somewhat, We are now working to clear the final hurdle associated primarily as a result of costs incurred by our principal with the construction of new plant facilities-obtaining subsidian, Houston Lighting & Power Company, regulatory approval to begin recovering our im'estment which were not recovered thmugh electric rates. Ilouston through higher electric rates. In November 1988, we filed Industries' consolidated earnings were $395 million, a mjuest for a $432 million base rate increase.1he request or $3.34 per share, in 1988. compared to $435 million, is the fint in a three-step rate modemtion plan designed or $3.74 per share,in 1987.

to allow fil&P to fully recover the cost of building and Eamings for til&P were $369 million, or $3.12 per operating the new plants, while also softening the impact share, in 1988, down fmm $409 million, or $3.51 per share, of higher rates on thelocal economy.

a year earlier. fil&P has not had an increase in base rates since 1)ecember 1986 and is not fully recovering the cost of Interjm Relief Requested two new generating units placed in service since that time.

We do not expect a decision on our rate case until late-1989, H1's consolidated eamings also reflected an $8.6 million kiss for Primary Fuels, Inc. m. 1988, following a $4.5 and we have asked the Public Utility Comnu..ssion ofle.xas million pmfit for our oil and gas subsidiary a year earlier.

to approve the use of deferred accounting for costs associ-Utility Fuels, Inc., our coal supply subsidiary, reported ated with STP Unit I and Unit 2 at the Limestone lignite record eamings of $34.6 million in 1988, an increase from plant,schn in munedaWon sace 1)ecember 1986.

$24.2 million the previous vear.

"EE

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"" "E Our 1988 earnings were solid in view of factors which are impacting the Company in the short-term, and IIIAP to seek later recovery of operating and canying costs for both units from the commercial operation date of STP l am confident that our current actions, such as seekm.g Unit I until rates reDecting those costs take effect. This aporoval for rates which reflect lil&P.s current costs, accounting treatment also would eh.. te a drain on mma will impmve our long-temi financial perfonnance.

Hi&P.s earnings of appmximately $17 million a month, o

which is resulting fmm commer.hl operation of STP

=: 2 Construction Ending, Rate Case Pending Unin without rates which reDect the unit's costs I believe y

llouston Lighting & Power Company achieved several ma-the PFC will recognize our cntical need for this intenm an l

jor milestones in completing a power plant construction relief and will appmve the use of deferred accounting.

J; pmgram, which will ensure a stable, secure ekctricity supply into the late-1990s. Hi&P placed the fint nuclear unit at the South Texas Project in commercial operation on August 25,1988. STP Unit 1 is the first operating nuclear unit in Texas. In March 1989, Hi&P received a full power m

1 '..

1 3

MM Regulation WillImpact Outlook been unable to seule a Img-standing legal dispute with the City of Austin, one of the South Texas Project owners.

The South Texas Project is a quality nuclear plant, which Although we succeeded in reaching an out-of-court i

was built at a cost that compares favorably with the cost of settlement, which both parties believed to be in their lest 4

other nuclear plants built during the same time penod n

s,wme una e to saWy one mneon o%

I am convinced that STP and the other facilities which agreement. The settlement was contmgent on lilAP lil&P is seeking to include m. electric rates willprovide obtaining a ruling fmm the Public Utility Commission substantial long-tenn benefits to customers. We have pre-that the agreement was in the public interest. The PUC pared a strong rate case to demonstrate these benefits and refused to give such a finding and ruled that the issue to document the costs we ax seeking to recmer. Ilowever, g

j the outlook for ill&P is highly dependent on the decisions mately exercised our n. ht to tenmnate the settlement g

i to be made by regulators.

rather than risk future disallowances.

l Houston industries has been successful in maintammg 11ial of the case began in March 1989 and is expected r

its financial stability thmugh past periods of uncertainty, I

to be a lengthy legal process. We continue to regard and we have provided holders of our common stock with Austin's claims to be without merit. We have a stmng case uninterrupted quarterly dividends for 67 consecutive years, which will be presented well and we believe our case will both in times of record eamings and m. penods of short-tem 1 financial setbacks. We remain committed to paying attractive, stable divid"uds and would consider interrupting that tradition only in the event of an extremely adverse Ill Narrows Strategic Focus rate decision or other event which would severely impact Houston Industries took a major step toward gmwth the Company.

of its divenified businesses with the purchase of the U.S.

We anticipate that lil&P ultimately will receive equita-cable pmperties of Itogers Communications, Inc. The ble regulatory treatment for its investment in new facilities, acquisition, which closed in March 1989, makes our cable and we are koking forward to a period of lo'.er capital television subsidiary, KBLCOM Incorporated, one of the requirements, improved cash flow and more stable eam-15 largest cable operaton in the country.

ings for our electric utility.

We entered the cable industry in 1986 because of its operating similarities to our core electric utility business.

Austin Litigation Resumes We are expanding in that industr> because our earlier cable venture has exceeded our expectations, particularly in I am extrem6 inad of the pmgress we've made in terms of the increase which we've enjoyed in the value of bringinr,a long era of power plant construction very near ur nvestment. The pmperties we acquired fmm Itogers to a successful conclusion. Ilowever, I am disappointed that are Mua pn ngaumum gmwt muu one construction-related issue remains unresolved. We have j.

We are building long-tenn growth and value thmugh j

our divenified businesses, and we take a long-term j

penpective in ev:duating acquisitions Because it takes a numbu of years to begin showing a profit in the cable 1

A Ir I

l 4

4

Our decision to expand in the cable industry and leave the oil and gas industry is consistent with our diversifica-tion strategy of focusing on businesses similar to our core

~

's

/

l business, which require the same types of management expertise we've gained in the electric utility industry.

We remain committed to selective diversification as an avenue for future growth. Ilowever, our non-utility business activities could be sewrely curtailed if the Securities and Exchange Commission adopts e proposed rule which would substantially limit diversification by intrastate utility holding companies, including flouston Industries. We are monitoring this proposal and will defend our right to select a balance of regulated and non-regulated businesses to benefit ourinvestors.

Building Long-Tema Value na >>+

flouston Industries registered many solid achievements in industry, we anticipate that the Rogen acquisition will 1988, and I sincerely appreciate the dedication of our em-produce some earnings dilution in the early years of ployees, who made this pmgress possible. I also appreciate operations. Ilowever, cable telesision enjoys growing your interest in, and support of, llouston Industries. I am customer demand and significant untapped sources of confident that during the upcoming year, we will success-revenue. After the startup period, we expect stmng, steady fully resolve many of the short-term uncertainties which we cash flows.

are facing. I believe that flouston Industries is poised for The same long-tenn strategic planning which led to continued success in both the electric utility industry and Ill's expansion in the cable industry also resulted in our our divesified businesses.

decision to leave the oil and gas industry. In early 1989, v'e accepted ofIers totaling approximately $270 million for the U.S., Canadian and Argentine operations of Primary Fuels, Inc., our oil and gas subsidiary. We are continuing

,O~

to explore opportunities to sell PFI operations kcited in Indonesia and Greece.

Don D. Jordan President and Chief Executive Officer l

l l

llouston,'lexas March 28,1989 i

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-, _ mmm -------- t g, M ^ 3 37 .y IG FINANCIAL REVIEW nn E Eamings decline 9 flouston Industries (III) recorded eamings of $395 million, or $3.34 per share, during 1988, down from $435 million, i or $3.74 per share, in 1987. Return on average common j q "luity was 11.8 percent in 1988, compared to 13.6 perc(nt i I a year earlier. j>~' L The decline in consolidated eamings during 1988 was l l due primarily to lower earnings for flouston Lighting & j l Power Company (Ill&P) and ksses at Primary fuels, Inc. l f (Pfl). lil&P camed $369 million, or $3.12 per share, in t l 1988, compared to $409 million, or $3.51 per share, the l l presious year. PFI lost $8.6 million in 1988, following a E $4.5 million profit a year earlier. lil&P's earnings were negatively impacted by costs f I I which are not reflected in base electric rates, primarily in g connection with two new genemting units. til&P's last h l base rate increase went into effect in December 1986 and F was based on costs for a test year ending in December h 1985. A request for a $432 million base rate increase k j currently is pending before the Public Utility Commission of Texas (PUC). Allowance for funds Used During Construction l[ (AFUDC), or non-cash earnings that represent the carrying l costs associated with construction expenditures, accounted [ for 49 percent ofIll&P's camings in 1988, compared to [ 52 percent the presious year. p; th # s;:S y Dividend raised k R 111 common stock continues to prmide sharehoklers with f: an attractive source of income. In April 1988, the lioard $o g$g n l [$ l< of Directors appmved an increase in the quarterly dividend l on common stock from 72 to 74 cents per share, for an annual rate of $2% The higher dividend was effective i g with theJune 1988 payment. M<k'; -i* The dividend yield averaged 9.8 percent during 1988. Q 5 mmemp p!"TQ" At prices prevalent during the first quarter of 1989, current ' hh g [0[ "M*]*{"-" hhf dividends were providing a yield of over 10 percent. 111 common stock clmed at $28 per share on December 30,1988, down 6.7 percent from the 1987 year-end price. 9 9
'Ihe weakness in the stock price has been attributed to a The medium-term notes are collateralized by first number of factors affecting the Company in the short-term, mortgage bonds. This collateralized medium-term note including risirig interest rates and regulatory uncertainties program was established in 1988 to provide the note facinglil&P. holders with the security of senior indebtedness, while increasing lil&P's flexibility in structuring debt issues. Financing strategies track market Hi&P also has refunded five series of variable-rate E """ " *" "E " E""N IU continues to monitor market forces and utilize financ-ing strategies designed to hold down costs. For example, Hi&P is now issuing fixed-rate debt for its new monev ""E' "##[ ~#' E""'" financings and has refunded a substantial portion of its , a n an enep Hu nontmHmns u na variable-rate pollution contml revenue bcnds. "" I InJanuary 1988, Hi&P issued $400 million principal "E """ amount of 9% percent first mortgage bonds in a private acement.I oceeds re to finance construction and ggg """E " '" 9"**I "9 9 E" In early-1989, Hl&P raised approximately $455 million, "' ' 8 E' I primarily to finance its construction program and to retire 1 the Itogers acquisition and to repay bank debt. outstanding debt. The financings included $225 million principal amount of 10K percent first mortgage bonds, $29.7 million in new 7X percent pollution Cable f}DancingS arranged control revenue bonds and $200 million in In March 1989, Houston 1ndustries completed Ok 'ijk A,g the acquisition of the U.S. cable properties medium-term notes. .j of flogers Communications,Inc. The -{Q@yw, MI I 2, ~ n I l' l p-6 1 ; i (; ) d l 9.. l P E .) ,yp ,b b ql g n, b.
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.-,,_wn-acquisition was made through the purchase of all program nich pmvides for the sale of up to $275 million outstanding stock of in Cablesptems llolding Co., an of commercial paper !ucked by a bank letter of credit. The indirect subsidiary of Rogers Communications, Inc. Paragon financings are non-recourse to III. Ilouston Industries contributed $525 million for the purchase, which to'aied appmximately $1.35 billion, sub-capitalexpenditures decline ject to gxist-ckising adjustments.1he sale of oil and gas Capital requirements continued to decline in 1988 as operations which had been part of Pfl provided approxi-gigp.s power plant construction program neared comple-mately $215 million and the sale of common equity tion. Capital expenditures, excluding refinancing and prouded $106 million 1he remainder of firs contribution AFUDC, totaled $583 million in 1988, compared with came from short-term borrowing $753 million the previous year. 1he balance of the acquisition financing was provided Projected capital requirements for 1989,1990 anct 1991, by debt of KillLOM incorporated, ill s cable telesision exclusive of AFUDC, maturities oflong-term debt and the subsidiary, and KliL Cable, Inc., a subsidiary of KlilLOM Rogers acquisition in 1989, are $456 million, $415 million fonned for the Rogers acquisition. The debt includes $500 and $389 million, respectively. million of senior bank debt of Kill Cable. Ellt Cable also issued $100 million of 10 year senior notes and $125 miluon of 10$ ear senior subortunata notes. stoM OPERATING HIGHLIGHTS senior bank debt accounted for $100 million. Paragon Communications, a cable television operating partnership in which HFs KillfoM subsidia.y has a 50 Oil and gas operations sold percent interest, issued $200 million principal amount of in early 1989,111 sold the (LS. and Canadian operations intermediate-term notes in a private placement inJuly of Primary Fuels, Inc, and agreed to sell PFrs Argentine 1988. Paragon also has established a commercial paper J k T W pg ? W lN </ %o ppf ? % W m y $n n er m @y h R : j g > p, 9ws :ny fM&Wi Ynn&lQR g y M ,A ' m:. a 3 , l* 0;&} ldf }, j.C O*{Rf Yjf ll
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operations The total sale price was approximately $270 CountyJudge of Harris County, Texas since 1975. Mr. million, before purchase adjustments. The sales are ex-Meyer retired as President of Exxon Company USA in pected to result in an after-tax profit of approximately $30 February 192. million, net of expenses associated with winding down Shareholders also reelected flollis R Dean, whose term PFFs opemtions. Proceeds from the sales were applied to as director expired in 1988, to serve on the Board for an the purchase of the Rogers cable systems. H1 is continuing additional three years. Mr. Dean is HI Executive Vice to explore opportunities to sell PFI properties in Greece President and Chief Financial Officer. and Indonesia. Preferred changes approved Directors elected lil&P preferred shareholders approved changes in the arti-In May 1988, shareholders elected three new members to cles of incorporation, which allow the issuance of preferred the ill Board of Directors. Floyd L Culler,Jr.,Jon S. Lindsay stock that pays dividends more frequendy than quarterly. and Randall Meyer filled positions vacated by directors who The changes will enable HIAP to issue certain types of had reached retirement age, and each will serve a three-preferred stock which currently are attractive to investors, year term. but will have no effect on the amount of dividends or the Mr. Culler is President Emeritus and consultant to dividend payment dates for any shares of preferred stock the Electric Power Reetrch histitute, a research currently outstanding. No preferred stock was issued and development coopemtive of electric u during 1988. .dA utilities. Mr. Lindsay has served as .a1i" A
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kM WM4 464# x U@p' $ OPERATING HIGHLIGHTS W 19W W h :M WE ,s+ y wu ssy ) ::W ~ & 4-Q jiff {ffla l m k.t g Sales rise 4;, ~p i flouston 1.ighting & Power Company's 1988 sales totaled y p{ 6 57.1 billion kilowatt-hours, up 2.1 percent from the pre-g vious year. Sales were up in all three majar customer W e categories, with increases of 3.8 percent in sales to indus-k. trial customers,3.2 percent in commercial s: des and 3.7 percent in irsidential sales. Ilowever, gains in these three f, categories were partly offset by a drop in off-system sales. 3 - The increase in residential sales is primarily due to a [' 2.7 percent rise in average usage per customer and growth () of 2 percent in the number of residential customen sentd. 1 increases in sales to commercial and industrial customers } reflect the economic recovery in the senice area. Hi&P added a total of 2-1,000 customen during 1988, up 1.9 percent compared to the previous year. This was the j first increasesince 1985. j Peak demandincreases %g .jd Demand for electricity reached a peak for the year of 7 Q y< 10A22 megawatts on August 9, excluding interruptible h Y demand of 1,075 megawatts.1his was up from the 1987 / 3 %. ~ vf i peak of 10.302 megawatts, the fint increase in four 3 ears. Y lil&P projects that its sales and peak demand will gmw k at a compound annual rate of approximately 1 percent over the next decade. Improved appliance efficiencies and @y ; additional self-gemration of ekttricity by industrial cus-fj tomers are expected to hold down the mvrall rate of increase in ekttricity usage which is occuning as a result g j of economic recoverv and growth within the service area. g M Yi' 1988 MILESTONES Qn STP starts operation Q u HlAP pbced l' nit I at the South lisas Project (S1?) in h J# commercial operation August 25. It is the first operating (k_ [b> nuclear unit in the State of Texas. Unit 2 ns licensed for ' W Jh ', - 4 j(h - S full-power opemtion on March 28,1989 fN O, ;j M.f A n. v
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Rate request filed i On November 23, lil&P filed a request for a $432 million increase in base electric revenues. The increase, the first of a three-step rate moderation plan. is needed primarily to j begin recovering costs associated with building and operat-ing new generating units. I Agreements cut coal costs fil&P's customers will save about $1.00 per ton on Inms-portation of coal fmm Wyoming to the llouston area . e because of out-of-court settlements with several railroads. HinP and 111 s coal supply subs; diary, Utility fuels, Inc., [i had filed litigation charging the railroads with conspiring to block constmction of a coal slurry pipeline for tnms-
i portation of coal.
Computer center opens [l lil&P began moving its energv control and data processing operations to a state-of-the-art computer facility. When t fully operational in late-1989. the new energy manage- .i ment and control sprem at the facihty will provide reliable power system operation and the opportunity to save mil-tions of dollars annually in fuel and operating costs. Marketing programs implemented lil&P has kicked off a variety of marketing programs aimed at demonstrating beneficial uses of electricity to all classes of customers. The Q)mpany also continued its aggressive economic development activities aimed at attrac. f ting new customes and jobs to the llouston area. Rehabilitation saves i M+ lil&P is wiring money and cantrs through a successful program to rehabihtate workers disabkd by injury or illness. Forty-eight rehabilitated employees have retumed to work. l lil&P was recognind as " Company of the Year" and p j-rehabilitated lineman, Edward " Wayne" Oliver, was named 7: "llisabled Employee of the Year" in 1988 by the liarris f County Committee for the Employment of1)isabkd Persons. f-1 I; n: 1 18
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j CONSTRUCTION "*d "=i"8 ""st"""" (^'") *' ' *P "' l favorably to the cost of other nuclear plants completed .j during the same time frame. 1 Nuclear unit completed STP was recognized during 1988 for its quality and lil&P completed construction of Una 1 of the South Texas advanceJ safety systems. In October, the plant was selected 4 Project during 1988.1he nuclear unit was licensed for by the Nuclear Regulatory Commission (NRC) for an full-power operation on March 21 and was placed m. infonnation exchange with the So iet Union designed to commercial operation August 25.1he unit aclu.eved a pmmote world-wide nuclear safety. STP was chosen for the capacity factor of 72 percent during its first four months of exchange, according to the NRC, because it is a s'ste-of-operation.11ds compares to a 67 percent average capacity the-art plant with the latest safety features. ) factor for trie U.S. nuclear power industry during the first With commercial operation of STP Unit 2, lil&P ex-i nine months of 1988. pects to have adequate generating capacity to meet custom-Unit 2 was licensed for fuel loadingand low-power ers' needs until the late-1990s. i.arge-scale power plant operation on Decernber 16, meeting the schedule estab-construction will be complete for the near term. 2 lished in 1982.1his success in maintaining a schedule for ~ six years is extremely rare within the U.S. nuclerr power Pollution controlimproved industry.1he unit was licens;xt for full-power operation 1he last of three coal units at lil&P's W.A. Parish plant to March 28,1989 and is on schedule for commmial opera-he equipped with improved air pollution contml equipment tion in mid-1989 was retumed to senice inJanuary 1989. fil&P installed The cost for the completed project will be appmximately baghouses, which will remove over 99.9 percent of the $5.4 billion, net of financing costs and proceals from particulate emitted in flue gases, on three coal units at the rttlement of litigation with the fonner architect /engheer plant. A fourth coal unit at Parish was equipped with a and constructor of STP. Because of the settlemeat, the baghouse when it was constructed. I completed cost will be slightly below the budget established Installation of the bagimuses and associated equipment - i in August 1982, a year after Bechtel Power Corporation will remove several operating restrictions, increasing the l took over as architect / engineer and construction manager. capacity available from these units, and will ensure that the 1 1he cost to fil&P for it:,30.8 percent ownership will be Parish coal units are well within all emironmental stan-approximately $2.6 billion, or $3,343 per kilowatt of capac-dards for particulate removal. j ity, including financing costs, or Allowance for Funds a mmoemem. +5 y 1. y { M r i smut P C
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a ll l REGULATION i Despite an improsing kical economy and major operating ] achierments. ElaP's financial results deteriorated during ] 1988. Substantial new costs associated with commercial j operation of STP Unit I negatively impacted lil&P's 1988 caminp by appmximately $60 million. I Rate request filed M - A " ** I lilaP filed a request for a $432 million, increase in base electric rnenues on November 23. If granted, the increase will raise rates by approximately 15 percert and will be IC&Fs first base rate increase in three years. lilAP is sitking pennission to begin recovering $650 i I million invested in Unit 2 at the Limestone lignite plant and 65 percent of its $1.7 billion investment in STP Unit 1. The Limestone unit has been in senice since December 1986, and the STP unit was placed in commercial opera-if tion in August 1988. The Company ako is asking regula-I tors to approve a 14.3 ptrcent return on common equity, M, * '
WNNN lilaP propases to recover the remaining portion ofits investment in STP Unit I and its investment in STP Unit 2 in two future requests that are part of its rate moderation plan. This plan is designed to phase in the cost of new the accounting firm of Emst & Whinney to assist in this facilities to nduce the impact on the local economy.
process. A preliminary Emst & Whinney report issued in December 1988 found no imprudence that impacted the Interim relief requested co t or S,v in the time Period arter 19si. This rhase of the pr ject followed tennination of Bmwn & Root as architect / Approval of new rates is not expected before late-1989, and lil&P has asked the Public Utili'v Commission of Texas engmeer and constructor. For the eadier years of the project, the results were (PUC) to allow use of deferred accounting for cost., mixed. Of the issues ex; mined, Ernst & Whinney deter-associated with STP Unit I and Limestone Umt 2. mined that most wen handled prudently or had no mate-If approved, deferred accounting will em.Je tilAP to rial impact n the plant. The rmort cited several areas of seek later recovery of the units' operating and carrying macen e pmcess by whict Bmwn & Root was selected, costs from the commercial operatior. date of the STP unit the lack of experience to manage a nuclear project, and until rates which reflect these costs take effect. Deferred inadequate control of materials deliveryJ.ust & Whinney accounting also would eliminate a drain on HIAP's cam-is scheduled to issue a final report later this sunimer. ings of approximately $17 million a month resulting fmm lil&P has acknowledged that problems existed during costs associated with operation of STP Unit 1. the tenuie of die former architect / engineer and construc-tor. Ilowever, the owners received a ?750 million ould STP prudence examined court setdement fmm Bmwn & Root, which HIAP beheves The amount of rate increase grantul will be influenced pmvided full compensation for any imprudent costs. substantially by a prudence review of STP The ITC hired 22
I I L COST CONTROL
P is P si" "ed ' ""i"t i" " c *Pe"* *dae i" 1
fuel purchases as market conditions change. Fuel diversifi-cation over the last decade has reduced the Company's Rates which are adequate to cover operating costs are dependence on natural gas. At the same time, improve-critical to III&P's financial health and its ability to pmvide ments made m.od. and gas purchasing, storage and for the electricity needs of the flouston area. Ilowever, the delivery capabilities wer the past few years have pmvided j Company is committed to keeping costs as low as possible, die flexibility to continue obtaining favorable fuel prices without sacrificing senice quality. m changing market conditions. Staffing reduced Facility enhances efficiency A company-wiue staffing plan has enabled lil&P to reduce lil&P will have the opportunity to save millions of dollars payroll costs by eliminating almost 1,000 positions since per year in fuel and operating costs when a new Energv June 1,1986. Virtually all of the staff reductions have been Management and Control Sp".m (EMACS) is fully opera-accomplished thmugh volu'itary means such as early tional. EMACS will provide reliable power system operation rettrement and altritiut plus the state-of-the-art m. efficient generation and fuel control. Fuel costs competitive EMACS is located at a nev. Energy Control and Data Natural gas costs rose during 198%s a result of tightening Center, which was completed, tested and opened in 1988. market conditions, but lil&P cor tinued to keep its gas The center already is providing information processing costs among the kiwest of major utilities in the nation. senias to fil&P. Some generation and fuel control func-In addition to continued competitive natural gas pur-tions also were transfened to the new facility in 1988. By chases, Ill&P addal low-cost uranium to its fuel mix, late-1989, EMACS will replace all the functions of the and re:dized lower coal costs due to renegotiation of two existing Energy Control Center and offer additional func-long-term coal supply agreements. 'lhe Comp my's overall tions that will enhance fuel and operating efficiency. fuel costs in 1988 were slightly below 1987 levels. y& l g7 s ,e ";s f! 4 a% ,,s b ~_; f ,u j g g' g esa M 3 %y( 7 j g~ ,h d I j ' 4[ N$$; l al m, .?[ .m w s IMsC2m (N. lum "lAl*P ;; l1tfAP P s1WTee .DAMAS/ NSc(A Q T N - ' i PWlA McHIG,!Fj sAh4tIWoj WNL > T h 4 K h N 23
gf b u myggy gg %ya 4 y..4 ya\\ g nQ,e n.9a n~ gga,.y u4;p;p ', m el5 e n v 4 o e1 ,l p> m y .. g-s l: .g[ h heFORgi HiMELSIDMERk~ V W 2 6m41#2 W A n Miwu m m m. Ik. ].h j . ( llg r r (Hi&PhonanichlkmujhNnnEq espu$hin ] hemlameswhbk. .- nue, which helped Innance Cimp emeient me d11146 plue/ d " or m#de in illAPV seivice ' men C w. ,, -....~ ~gcalechy9. Une..~, I jolsandbenehtihelonl/ !ma,.,,.echaset,hellostonmenfor? [ Asm delpumea .. ~ e,. e w ..~ einde,nicalfacity fisavailablelhighe,raboutitymiss Aememy.Th+eyabohelpilIAP;usey ~ [ypsmienofsp.Mwilfhelp'clefonTsiddowis 'snsanieweicam&silMj$$lpossplan p ilsoktb. hMme IGAPitud Ma,EI 90kh,hschilfdjuste amundM Wan.dasdisib..s..e_cah,.si ~ merapmemw,if s.m m Eimidly$sioEfh.flh$limlied,Leny(%g@jf;Mo 1 down e.Wa.ter for a ud' imingekcincnywh,ende. .m lwho hae be.nrriks&PkNkilowan-homsuldHeeMac y. w,,dfan othefcutunna N i m.~ ~ n ~ ~ man s [derha WM W@mng peiskahogMMsample of M&P niarket pkdiw4i5enibjust? > became=snomici ' -5 deflSale deldtk;acistkhNdemandfor"slacirfanylistMdyhim0stlewhidiaEbriv sn ~pedit Eiicunn&. MA.mhelpihaia&, wnamWOcammer$,thEHoumonseni ' dui m.s u. hg. i OW
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N Q.Mwe ~ f d 3g ,,t 9d M s s .g] y. .w Q&% + M" - 1988 ECONOMIC' ~ 9 ^ s 4 ^ DEVEIDP. M.ENTAcmmES R 1 4 w u ~ GMS1 N.' ,1 w l ~. KWH SA!IS$ 4 \\ n - lTE h}l4M18($ : _ ' $N $N$lllUllSi s
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g g g TG exp nding within its senice area.1hese tax and energv incentive already have helped flouston win several plant lil&Fs marketing actisities during 1988 will generate future electricity sales estimated at nearly one billion kilowatt-hours per year over the next several years.1he OUSiness marketing Company continued its economic development pmgram, keeps CUSt0mers, boosts sales which ins been bringing new customers and jobs to the Marketing to existing industrial and large commercial area since 1984, and expanded activities aimed at demon-customers involves not only increasing kilowatt-hour sales, stratirig beneficial uses of electricity to all classes of existing but also avening the kiss of current sales to other attema-customers. tives, such as self-generation. III&P has developed a sophisticated computer modeling HI&P develops sales and jobs capabihty which enables customers to compare the costs of 1he bulk of the sales increases will come from industrial dwn energy options and amid self-generation pmjects that expansions and relocations in the lil&P senice area, are not economically beneficial. During 1988, customers which were influenced by the company's active economic using this modeling capability decided to cancel or shut development pmgram. During 1988, IIIAP assisted 30 down five planned or existing cogeneration pmjects within companies in selecting the llouston area as a business the ill&P senice area, which would have resulted in the location. I ss of 94 million kilowatt-hours in annual sales. When all of the expansions and new locations that Commercial and industrial marketing activities during lil&P influenced during 1988 have been completed, the the year also generated over 51 million kilowatt-hours per new indusuies are expected to use nearly 600 million year in new sales. The sales increases are due to replace-kilowatt-hours of electricity per year an[1 employ over 6,000 ment of natund gas-fired air conditioning systems in large people. The business gmwth also is expected to indirectly commercial facilities where ill&P representatives demon-result in creation of nearly 14,000 more jobs in the :.rea strated the economic benefits of electric equipment. and boost annual electricity sales by an additional 260 ~ million kilowatt-hours. Residentialprograms start up lil&P works ckssely with pmspects for beation in the II!AP's newest marketing activities are those aiw! at flouston area. Company representatives provide informa-residential and small commercial customers. Two major tion to aid in the decision-making pmcess and later programs were introduced during 1988. Ikith are designed coordinate the myriad of details, such as obtaining pennits, to encourage efficent use of electricity. involved in establishing new business operations. A pmgram promoting electric heat pumps was launched 1he Company also has leen instrumental in making in March 1988. lil&P made substantial pmgress during the the flouston area more attractive as a business location. year in buikling dealer relationships and creating a more Ill&P erked to obtain tax incentives for companies bring-receptive market for heat pumps within its senice area ing lobs to the area and, in 1988, established an economic In June, ill&P launched the Good Cents pmgram to development electric rate, which offers up to a 20 percent promote construction of energy-efficient homes featuring discount to qualifying business customers locating or electric heat pumps for heating and cooling Good Cents homes rate well above traditional standards for construction i and equipment. In 1988, several area builders made com-mitments to construct Good Cents model homes and showcase homes to be featured during 1989 25
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u g[Q Cable in q g0SSMYN pnnvyAQg KBLCOM INCORPORATED i Foperations are defined in thd following gh j jyn%dmqmeMpea%qrpudg KBLCOM Incorporated (K13LCOM) ranks among the top 15 %4 1 cable telesision operating companies in the U.S. EBI COM owns a 50 percent interest in Paragon Communications, hkWhdabi!liytdNN bh i a bele televisisicsiverter and 16 a h which sents approximately 735,000 cable customers in Mfmn'1 a central locstionddressability'bliMinakh eight states, and recently expanded its position in the C i tid smi to send it technician to a custo industry through the purchase of the U.S. cable properties pj fdr mutine clmges ir servinsid enableiy tal%[ h['MhdNmNmipanytoo#rr ef Rogers Communications, Inc. KBLCOM reported a $6.4 million loss in 1988 reflecting I p$ grswholawacktrembisin the early stages of operations.1his represented an imp-/e- .. m f 3. Wh ment compared to a $10.6 million kiss in 1987, the first 1 1 % Basic saturationeA mensonmf actual cable tele is full year of operations for111 s cable telesision subsidiary. h Leon su!scribership expnssed asMnspIAM j p' y lated by dhidink the number of potential subscribershiplasic haturati issicOU Because of the high cost of entering the cable industry, it takes several years for cable ventures to become profit. p}Basiccablecu { Lof homespusedbycable senich WecaudeWsE able. KBLCOM's purchase of the Rogers systems will g4g t pgg;gL; increase its kisses in 1989 to an estimated $.50 per share. [gg lktlNceivek, 1he majority of this amount will be due to non-cash y allcableserviceswhichdreiddidklirithsmin(< charges, such as depreciation. Financings at Houston r, imdm monthlyfee.a ' MQW s,ggf( Industries in connection with the Rogers purchase will {f Channelcap4Themixiriism.nium have an additional negative impact on 1989 consolidated eamig' s Jannelsacablecompanyisabletaolhytscus+ ' A H rthmerswiththeequipmentithads'phke.wv f flowever, HI projects that its cable television subsidiary i v h w Wq: ~ S nunA m m w h ~h ? xd11omes passdd: ct ofhbmestowhic cable service h availableJions wili produce strong cash flows and increased shareholder i & :L t value m,er the long temt 97 p 9 3 j.j v x+y. ay -vieK peClal i etionkSudb conce!1s - b; c or sporting emnts/which are not induded in1 8 ROGERS ACQUISITION pmenosfeest ba**praummen )~ M. are available foriieers to ordern. p n g. (h ( Pay unitsp The totadf all ha l KBLCOM purchased the Rogers cable systems for approxi-sim seri r jurchasmlicespurchased Asinglehotts mately $1.35 billion.1he systems have over 550,000 g gthreepremium semces accounts for ~ customers in five metropolitan areas: San Antomo anc N#sphpunits4L '.,f' litredo, lexas; Minneapolis, Minnesota; Portland, Oregon; f .'.f .,.[ h and Orange County, California. J. Prmiumsenics Channehfferingspecialpm; f. gramming,such afnwvies or sporting events;for i The properties purchased from Rogers are among the fLwhich cable custbuiers pay a monthly fmlIn addid most modern in the U.S. All of the systems are in the top l ' tion to the mragh fee for basic cabb serncepp Twd-wa, @feractiveH1heabilityfortw U M" ~ @W 22 percent in the country in terms of channel capacity, W 9i: yin and 80 percent of the cable plant has two-way interactive { Dchange ofinformationbetween a cablecompanv4 L capability.1his capability allows customers to receive the i %ntral location sud coseh$s located in custorN most advanced pay-per-view senices. Rogers capitalized on M Ders' homes.Twsayinteractive equipment alkms : g 4 icahkcustomerstoorderpay-per4iewservices .M that capability and kcame an industn' leader in sales of $p 4%dnnve@@rthWWpnef ' ) pay-per-semces. m, .w was.&w?pzmaga 20
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Q @7 mg 1 $p 'W IBlL0k0 amongtiletop 15'ealde opek b &y p'Qgh = - atingcompan$in th(UIEldOU (h g b [h nrenth acquired cable i;ptendseningj %_W M[M kMd i nmre thsn 550,000 bssic husto:nd h[;[h M[ HSl lg {[ kmajar metropolitan areas. Gif0M also is af !50 percent owner of Phragim Cbmmunidations,. ) [ @hichservsapproximdteh73'5l000liasic. u l } l M4 custamen;. y; + , ww b mm ,nner.wr,wggg g g g l 30 l
t Ikcause of the high quality of the systems purchased. Since the Group W purchase, Paragon has increased its MilLOM does not anticipate any major expenditures for basic customers 39 percent, from appmximately 530,000 to ] system impmvements on the pmpenies acquired from 735,000, and has raised basic saturation from 48 percent to. Rogets during the neu decade. 56 percent. Paragon also is increasing sales of premium The systems purchased from Rogers have high gmwth senices, especially in the Northeast. Paragon's pay units - potential, as well. Basic saturation at year-end 1988 was increased to 499,000 at >rar-end 1988, frora 469,000 a appmximately 49 percent, compared to an industy average year earlier. of 58 percent. MllLOM plans to increase basic saturation through aggressive marketing. Because the marginal cost Systems upgraded { of sening additional customers is kiw, adding basic sub-Paragon is mvesting m system upgmdes to expand 1 scribers can make important contributions to nNenues and program selections, improve reception and minimize i cash flows. MilLOM also will increase the emphasis on i downtime in 1988, Paragon completed rebuilang ofits { advenisingsales. El Segundo, California system and began major upgrades H in Manhattan, and in St. Petersburg and Hillsborough, PARAGON HIGHLIGHTS rk>rida. 1 Paragon's capital expenditures were $60 million in Paragon Communications is a joint venture with American 1988, and are estimated at $70 million for 1939. Over half ) Telesisjon and Communications (ATC), a subsidiary of of the expenditures are for projects designed to increase I Time, Inc. Paragon operates cable television systems in revenues. These projects include continued gmwth in the 'lexas, Arizona, New Mexico, the Empa Bay area of Flor-number of homes passed by cable senice and system ida, the Northeast, including a portion of Manhattan and improvements enabling Paragon to offer additional los Angeles County, Califomia. senices. j Most of the Paragon systems were acquired at an One such improvement is installation of addressable { attractive price in 1986 as part of a large purchase of conveners, thmugh which Paragon can upgrade a cus-i htinghouse's Group W systerm. At recent prices for cable tomer's level of senice without sending a senice person to. pmperties, MllLOM's $58 million sluity investment in the home. Addressability also enables Paragon to offer ] Paragon isworth about $600 million. highly pmfitable pay-per-view senices. Viewers can select Paragon's 1988 revenues were $192 million, up from recently releas 1 mosies, concerts and other special events $146 millionin 1987. for a predetemlined fee. ] Paragon has incmased its addressable base from Growth continues 542 in 1986 to 156,2 in 1988, a 189 percent increase, and expects its addressable base to reach 200,000 in 1989 Prragon has gmwn substantially both through acquisi-tions and aggressive marketing. During 1988, Paragon Ad salesincrease added appmximately 50,000 basic customers, an 8 percent increase for the year, including 6,500 customers gained Paragon is aggressively pursuing advertising sales, a scarce thmugh acquisitions of cable systems in Fort liliss, Texas of revenues which has not been fully developed in the cable - and the Tampa Bay area of Fkrida. industry. Paragon increased its advertising revenues by 40 -j I percent in 1988 and established interconnections with other cable systems. These interconnections allow advertisers l to reach larger target markets, and should contribute to addsional growth in advertising sales. l 1 31 q
UTILITY FUELS, INC. ) Utility Fuels, Inc (ITI) manages coal supply, transporta from Wyoming to the flouston area by almut $1.00 per ton. tion and handling senices for six llouston Lighting & UFI delivas approximately 8 million tons of Wyoming coal Power Company generating units. to ill&P annually, and the savings will be passed along to (Tl reported record camings dtving 1988, while also fil&P customers. achieving reductions in the delivered cost of coal supplied ITI and fil&P had filed litigation charging that five to ill&P. Eamings mse to $34 6 million in 1988, from railroads had conspired to block construction of a coal $24.2 million a year earlier, while revenues declined to sluny pipeline for transportation of coal. Litigation agaimt $477.3 million, from 558.4 million in 1987. one railroad went to trial. IIIAP received no award in Coal and lignite sales totakt! 15.5 million tons in 1988, that case. down slightly from the 15.8 million tons sold in 1987. The settlements are the latest in a series of actions Lignite accounted for 7.5 million tons, and Westem coal which have reduced the delivered cost of coal supplied to accoun:ed for 8.0 million tons. lilAP by 12 percent over the past five years. Other savings were achieved through negotiations involving coal supply Agree 111eilts ctit rail costs and transportation contracts as well as through intemal cost control efforts. [Tl and fil&P reached out-of-court settlements with four railroads, which will reduce the cost of transporting coal h ]@g 7Wqm"9q 729 3"7 =d %r % l 9M"7 94% y d (C0AE M7 1MM W M. S D ,f;L 1 y n%IGMTEs o Re A A R > hk JJ i, v 1la3 p - @ LESi. 9. Mep umW%p ^ 7 L WC i W+ W's@W. t V f l;m;i[ an m s t w y w~ yl lkpf f &; f 3l jf ~ ? g D'# u awon =.v: w w n e w w w , m~ ,:2 .JM - M5 1986' .1987 : 1988 i , lty,7/mM/#salC ' d Yh 2/Nmh/b (I N mzwww2 , jf&.. ~ =w/;, m!g;aN< yww*, f
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l UFIinvestsin efficiency bucketwheel project. UFI has met its capital itquirements entirely from intemally-generated funds for the last two UFI is investing approximately $25 milh.on m a bucket-wheel excavator for use at theJewett Mine, which supplies estimated at $47 million, intemally, as well. i lignite for thela.mestone plant. The bucketwheel system is ) more efhocat than traditional mining equipment in re-moving the increasing amounts of overburden encountered Development key to growth. as the lignite seams become deeper. Design of the bucket-UFI continues to pursue business development to achieve wheel was completed in August 1988 and fabrication is growth. Since lill P has no plans for additional generating underway. Startup and testing are scheduled for late-1989 capacity until the late-1990s, developing new customers, UFrs capital expenditures increased from $17 million offering new services and acquiring businesses which com-in 1987 to $38 million in 1988, lan;ely as a result of the piement existing operations will be the key to UFrs earning growth in the nearfuture. 1 ) i 1 1 1 INNOVATIVE CONTROLS, INC. j Innovative Controls, Inc. (ICI) manufactures security and 1988. ' Itis system provides excellent service capability and i decorative lighting fixtures, which are marketed through enhances ICrs ability to establish itself as a reliable sup-home improvement centers, as well as ittail, hardware and plier to major retail chains such as Sears. Sears began discount stores. carrying ICI products on a regional basis in 1987,.and is While the U.S. lighting market is a multi-billion dollar now expanding both the number of products canied and industry, ICI competes with a small number of companies the number of stores selling them. ICI products will be sold in a speciahzed niche sening do-it-youiselfers. nationwide by Sears by mid 1989 and have been included ICrs primary goal for 1988 was to expand its product in the 1989 Sears catalogue. line to meet the needs ofits customers. During the year, ICrs goal for 1989 is to increase market shsre in the ICI developed and began marketing 14 of its 18 products. home-impmvement lighting business by offering quality ICI also completed implementation of an integrated prwJucts, providing excellent senice and using targeted sales and production management contml system during advertising to increase national awareness. 33
i PRIMARY FUELS, INC. l Primary Fuels, Inc. (Pfi), fil's oil and gas subsidiary, revenues fell to $109 million in 1988, compared tc reported a loss of $8.6 million in 1988, compared to a $4.5 $114 million a yearearlier. million pmfit the previous year. An 18 percent (ktrease in Continued vnlatility in energy markets and the resulting oil sales prices, higher Argentine taxes and increased costs losses led til to seek buyers for its oil and gas operaans. In j of PFFs exploration pmgram contributed to the decline. early 1989, til accepted offers totaling approximately $270 l Production during 1988 totaled 39.7 billion cubic feet of million, before purchase adjustments, for the sale of PFI natural gas and 4.0 million barrels of oil.1his is up from operations in the U.S., Canada and Argentina.111 plans to 1987 production, which totaled 39.2 billion cubic feet leave the oil and gas industry after the remaining Pfl of natural gas and 3.7 million barrels of oil. Ilowever, operations, locatet in Greece ad Indonesia, are sold. HOUSTON INDUSTRIES FINANCE,INC. Ilouston Industries Finance, Inc. (IllF) was formed to invested. lilF uses commercial paper, with a bank credit purchase the accounts receivable of flouston l>ighting & facihty as a backup, to finance the receinbles. I Power Company.1hmugh use of leverage and short-term in early-1989, IIIF began purchasing the receivables financing, IllF can finance the receivables at a lower cost of some IWILOM operations. In the future the finance than lil&P would incur. This benefits lilAP customers subsidiary may also pursue opportunities to acquire other while allowing 111 to earn a reasonable retum on the equity high<luality receivables. N s DEVELOPMENT VENTURES,INC. Development Ventures, Inc. (D\\1) is a venture capital flow and earnings fmm DVI on a longer-term basis. In subsidiary formedinJanuary 1987, addition, the venture capital subsidiary is a vehicle for DVI invests in, and assists with the development of, identifying new opportunities for corporate gmwth and emerging service and manufacturing businesses whose diversification at relatively low risk. Communities benefit markets have the potential for above-average growth. because DVI helps attract new business operations and Priority is given to investments in 1bxas, esycially in additional funding. the flouston and lexas Gulf Coast areas where flouston 1b date, DVI has completed investments in five entities. Industries' operations are hea k uartered. Direct investments have been made in the commer-l DVI was e;tablished to benefit both !!ouston Industries cialization of space and in the bmad field of health care, and the communities in which funded ventures operate. two industries that offer rapid gmwth opportunities. DVI Due to the nature of venture capital investments,111 does also has invested in other venture capital funds. Additional not exlect an immediate payoff but expects to realize cash investment opportunities are being evaluated. \\ l. 34
4' 'f'.I' . fv",q'. ,, ? ' 4; '. < F: ' '~" ~ ' a t t ~ g m , f: 2 ? yj .l ) 4 T + i 10 h ( i
988 p
L f 3: IA.C::1S ? ? 9 ~ 2 e >~,T h SixWar Companson of Selected Financial Data 36 Operating Statistics of ifl&P 37 g Management's Discussion and {- Analysis 38 Statements of Consolidated j} ~ I Stal n1 15 of(httsollJ M! k Retatned Earnings 93 l-Outsolidatal Balance Sheets ] I ^: Slalements of subsidianes' j Preferred S10Ck and ( ,I 4 l.0hg Teml Debt 46 p[; 'E Statements of Consobdated h 1 }, # Qtsh Flows 98 .g Notes to Q1nsolidated F nancial Statements 90 sb k e y. Auditors Report 66 4 'S 4 Officers and Directors 67 { M j 5 l j_ m t 9 [ J a e y 5 i. 3. L
Ifoukn Industries incrjoratalandSulnharn SIXYEAR COMPARIS0N OF SELECTED FINANCIAL JATA The following table sets forth selected financial data with respect to the Company's consolidated financial condition and consolidated results of operations and should be read in conjunction with the Consolidated Financial Statements and the related notes included dahere herein. War Ended December 31, (Millions offk>llars, emptp hn'amowW) 1988 1987 1986 1985 1984 1983 Revenues $ 3,649 $3,628 $3,536 $4,062 $4,182 $3,993 Netincome $ 395 $ 435 $ 425 $ 434 $ 351 $ 300 Eamingper share $ 3.34 $ 3.74 $ 3.81 $ 4.13 $ 3.69 $ 3.50 Cash dividends declared per common share $ 2.94 $ 2.86 $ 2.76 $ 2.60 $ 2.44 $ 2.28 Retum on average common equity 11.8% 13.6 % 14.5 % 16.7% 15.7% 15.6 % Ratio of eamings to fixed charges: IncludingAFUDC 2.40 2.86 2.76 2.96 2.87 3.01 ExcludingAFUDC 1.85 2.14 2.00 2.23 2.43 2.79 At Year-End: Book valueper common share $ 28.75 $28.33 $27.19 $25.88 $24.31 $23.27 Market price per common share $ 28.00 $30.00 $u.75 $28.00 $22.50 $19.38 Market price as a percent of book value 97% 106 % 128 % 108 % 93 % 83% At Year-End: Totalassets $10,219 $9,728 $9,028 $8,626 $7,526 $6,483 long-term debt (including current maturitia) $ 3,499 $3,136 $3,208 $2,953 $2,683 $2,275 Capitalization: Common stock equity 46% 48% 47% 46% 45% 46% Cumulative preferred stock 6% 6% 5% 6% 5% 5% 1.ong-term debt (including current maturities) 48% 46% 48% 48% 50 % 49 % Capital Expenditures: Construction and nuclear fuel exr aditures (excludingAFUDC) $ 544 $ 662 $ 755 $ 893 $ 998 $ 914 Oil and gas additions 38 $ 41 $ 16 $ 224 $ 66 $ 66 Cable television investment 1 $ 50 $ 26 lil&PSelectulData: Percent of construction expenditures financed internally from operations 37% 29 % 35% 39% 37 % 42% Ratio of eamings to fixed charges: IncludingAFUDC 2.76 3.35 3.36 3.76 3.55 3.50 ExcludingAFUDC 2.06 2.41 2.42 2.84 2.99 3.22 Ratio of eaming to faed charges and preferred dividend requirements 2.39 2.87 2.95 3.26 3.05 3 01 AFUDC as a percent of netincome 49% 52 % 52% 45% 31 % 17% 36
HoutxiIndsatrwinwrpratalandSubiharles i L OPERATING STATISTICS OF]L&P War Ended December 31, 1988 1987 1986 Electric Energy Generated and Purchased (Mkwh): Generated-Net Station Output 50,732,594 48,798,146 45,507,566 Purchased 9,291,504 9,959,034 11,104,589 NetInterchange 229 (362) 737 i 1btal 60,024,327 58,756,818 . 56,612,892 Company Use, Inst and Unaccounted for 2,910,895 2,845,491 2,605,335 Energy Sold 57,113,432 $5,911,327 54,007,557 Electric Sales (Mkwh): Residential 15,250,510 14,701,438 14,627,569 Commercial 11,552,427 11,188,927 11,437,464 - Industrial 28,475,761 27,441,200 26,192,806 Street Lighting-Govemmeat and Municipal 108,369 108,176 107,039 lbtal 55,387,067 53,439,741 52,364,878 Other Electric Utilities 1,726,365 2,471,586 1,642,679 lbtal 57,113,432 55,911,327 54.007,557 Number of Customers (End of Period): Residential 1,170,889 1,147,962 1,144,165 Commercial 157,950 156,517 157,199 Industrial 1,780 1,764 1,755 Street Lighting-Govemment and Municipal 79 79 80 Total 1,3,%,698 1,306,322 1,303,199 ) Other Electric Utilities 5 6 6 lbtal 1,330,703 1,306,328 1,303,205 Operating Revenue (Thousands of Dollars): Residential $1,147,688 $1,078,934 $1,071,356 Commercial 737,501 690,078 707,386 Industrial 1,067,087 993,610 1,024,459 Street 1.ighting-Government and Municipal 18,170 17,786 16,683 Other Electric Utilides 66,775 79,503 68p ibtal 3,037,221 2,859,911 2$38,874 Miscellaneous Electric Revenues 26,352 - 140,921 70,866 Total $3,063,573 $3,000,832 $2,959,740 Installed Net Generating Capability (Kw): (End of Period) 13,259,000 12,855,000 12,680,000 Cost of Fuel (Cents per Million Bru): Gas 181.1 170.0 170.3 Coal 239.7 252.4 248.1 Ugnite 161.7 162.7 188.5. Nuclear 48.7 herage 190.5 192.4 197.1 37
1 u YANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS orwiew As discussed below under "Results of Operations," net income declined in 1988 principally as the result of the need for rate relief asscciated with Unit No. I of the South 1bxas Project Electric Generating Station (South Texas project).1he Company's future financial condition will be largely dependent, in the near term, upon the reaipt of deferred accounting treatment for operating costs associated I with Unit No.1 of the South Exas project and Unit No. 2 of the Limestone Electric Generating Station (timestone) and, in the longer term, upon the favorable resolution of Houston IJghting & Power Company's (Hi&P) pending applications for rate increases. In addition, as discussed below, it is anticipated that the acquisition of RCA Cablesystems Holding Co. (Cablesystems) will have a significant adverse impact on the company's camings for the next several years. Ratdtsofqwrations consolidated net income for 1988 was $395 million, a 9% decrease from 1987 and a 7% decrease f,m 1986. Consolidated ermings pr share decreased to $3.34 for the current year as compared to $3.74 per share in 1987 and $3.81 per share in 1986. HlAP, the Company's principal operating subsidiary, contributed $3.12 to the 1988 consol; dated eaming per share on income ir preferred dividends of $368.5 million. Utility Fuels, Inc. (Utility Fuels) contributed $.29 per share on eaming of $34.6 mdlion. The company's other subsidiaries posted a combined loss of $.15 per share. Ill&P. HIAP s income after preferred dividends for the year 1988 fell $40 million from 1987 and $6( million fmm 1986. Allowance for funds used during construction (AFUDC) accounted for 49% of 1988 eaming compared to 52% in 987 and 1986. AFUDC is a noncash item of net income, which represents the cost of funds used to finance construction pmjects and is capitalized as part of the cost of the assets being constructed. The decrease in AFUDC was primarily related to the commencement of commercial operation of Unit No 1 of the South 1bxasproject. The decline in H!aP's 1988 income after preferred dividends was attributable primarily to increased depreciation and operating expnses and the cessation of AFUDC associated with Unit No. I of the South 1bxas project, which is not yet reflected in electric rates. Also contributing to the decline in eaming was an increase in fmancing costs due primarily to increased borrowing associated with HIAP's construction pmgram. These effects were partially ofIset by the reduction in the federal corporate income tax rate and increased electric revenues resulting from higher kilowatt-hour (NH) sales. Unit No. I of the South 1bxas project began commercial operation on August 25,1988. Eamings have been adversely impacted by $15 to $20 million per month in 1988 and will continue to be adversely affected until electric rates are implemented reflecting such costs or deferred accounting treatment is authorized by the Public Utility Commission of Texas (Utility Commission). Following commencement of commercial operation of Unit No. 2 of the South Rxas project, which is scheduled to occur inJune 1989, it is estimated that eaming will be adversely impacted by an additional $10 million per month until similar regulatory treatment, including the adoption of a rate moderation plan encompassing Unit No. 2, is authorized b' the Utihty Commission. y InJune 1988, HIAP requested that the Utility Commission order a deferred accounting treatment for operating costs associated with Unit No. I of the South Exas project and limestone Unit No. 2 (Docket No. 8230).1he requested treatment would commence as of the commercial operation date of the South lbxas project Unit No.1, which was August 25,1988. Under the requested deferred accounting treatment, HlAP would he permitted, for both Limestone Unit No. 2 and Unit No.1 of the South 1bxas project, (a) to defer its portion of all oprating and maintenance expenses, taxes and depreciation that would otherwise be expensed effective with the commercial opsation of Unit No.1 of the South 1bxas pmject, and (b) to record an interest carrying cost ax,ociated with these investments until rates are placed into effect which would refht these investments as electric plant in ser ice in rate base. See Note 11 to the Consolidated i Financial Statements. I 1 i 38
Electric operating revenues increased 2.1% and 1.4% for the years 1988 and 1987, respectively. %e increase in revenues is primarily due to an increase in GH sales, excluding off-system sales, of 3.6% and 2% for the yean 1988 and 1987, respectively. Residential GH sales increased by 17% and less than 1% for the yean 1988 and 1987, n'spectively. Residential gains in 1988 were primarily due to a l 2.7% increase in average consumption per residential customer and a 2% increase in the number of customers. Commercial WH sales increased by 3.2% in 1988 and declined 2.2% in 1987. Industrial GH sales, which account for approximately half of Hi&P's overall sales, were up 3.8% and 4.8% for the years 1988 and 1987, respectively. Partially offsetting the increase in 1988 was a decline in '1 off-system sales. Fuel excense increased $23 million and $47 million for the yean 1988 and 1987, respectively. The increase um primarily due to increased geceration, partially offset by decreases in the unit price paid for fuel. The average cost of fuel used by HIAP during 1988 was $1.90 per milhon Btu as compared with $1.92 and $1.97 per million Btu for 1987 and 1986, respectively. The combined cost of fuel used by HI&P ard the fue! portion of purchased power during 1988 and 1987 was 1.86 cents per NH as compared to 2J 0 cents per 211 in 1986. Purceased power expense decreased 1% in 1988 and 10% in 1987. Electric operating sod maintenance expenses in 1988 increased 3.6% or $22 million over 1987. In 1987, such expenses increased $52 million or 9.3% as compared to 1986. ne increase in 1988 was due primarily to the commencement of operation and maintenance expenses related to Unit No. I of the South Texas project, while increases in 1987 were associated with Limestone Unit No. 2, which was placed in senice in December 1986. HI&P filed a request in November 1988 with the Utility Commission (Docket No. 8425) and the cities it serves for a rate increase of approximately $432 million. The rate increase would represent the first phase of a requested three-phase rate moderation or " phase-in" plan. In phase one of the requested rate moderation plan, HIAP seeks to begin recovering its remaining costs not yet reflected in the rates associated with Limestone Unit No. 2 and a portion of the costs associated with Unit No.1 of the South Texas project. See Note 12 to the Consolidated Financial Statements. t Utility Fuels. Utility Fuels reported eaming of $34.6 million in 1988, a $10.4 million increase over 1987 income and a $12.7 million increase over 1986 eaming The increase in eaming was primarily the result ofincreased retums on net assets associated with Hi&P's coal and huite generating units, a decline in interest costs and the reduction in the corporate income tax rate. Utility Fuels' fuel supply contracts with HIAP generally allow Utihty Fuels to recover its costs plus a retum on its net im'estment in facilities. As a result of the regulation of affiliated costs by the Utihty Commission, a portion of Utility Fuels' charges are not recoverable by HI&P 4 through its electric rates.. KBLCOM. GILOM Incorporated (EILOM) experienced a net loss of $6.4 million in 1988 compared to a net loss of $10.6 million in 1987, its first full year of operations. KBlf0M holds a 50 perca interest in Paragon Communications (Paragon), a partnenhip which opera:es cable television s) stems in several states. GILOM's eamings potential as it relates to Parapn will depend primarily on increased penetration of existing homes passed, increased population gravth and new construction within existing systems. ) In March 1989, KBL Cable, Inc. (KBL Cable), a wholly-owned subsidiary of GILOM, purchased all of the outstanding stock of Cablesystems for a purchase price of approximately $1.35 billion, which amount includes appmximately $340 million of indebtedness i of Cablesptems which was refinanced concurrently with the closing and is subject to certain post-closing adjustments. In connection with such acquisition, KBL Cable obtained bormaing from unaffshated thkd 0 ties totaling $725 million aggregate principal amount 9 and KBlCOM obtained initial borrowing of $100 million. KBlf0M is expected m experience losses for the next several yean that are substantially greater than the losses experienced in 1988. As a result of the acquisition of Cablesystems, the Company's caming are expected to be reduced in 1989 by approumately $80 million and, depending on interest rates, the success of marketing programs and other factors, such negative impact could be greater. Restrictions in KBILOM and KBL Cable credit agreements and other debt instruments entered into in connection with the acquisition of Cablesystems will effectively prevent the payment of disidends by these subsidiaries for the foreseeable future. See Note 18 to the Consolidated Financial Statements. Primary Fuels. Primary Fuels, Inc. (Primary Fuels) reported a 1988 net loss of $8.6 million as compared to caming of $4.5 million in 1987 and a net loss of $27.7 million in 1986. Primary Fuels' operating results for this year were adversely affected by reduced - oil prices, increased foreign taxes, increased exploration expense in connection with dry wells and higher intercompany interest expense. In March 1989, the company sold or entered into definitive sgreements for the sale of substantially all of the domestic and foreign oil and gas assets of Primary Fuels. These salenre expected to result in an after-tax gain of approximately $30 million in 1989, I after giving efr t to the expenses associated with winding down Primary Fuels' operations. See Note 18 to the Consolidated Financial ec l Statements. l l l 39
LiquidigandCeptlalResoums IJguidity and capital nsources are affected primarily through capital programs. nc capital requirements for 1988, and as estimated for 1989 through 1991, are as follows: (MillionsofIhllars) 1988 -1989 1990 1991 Construction and nuclear fuel (excludmg AFUDC)* $506- $ 384 $359 $334 Coal handling facilities and lignite mining and handling facilities 38 47 27 31 Oil and gas exploration and development 38 Cableelevision acquisition
1,350 Cable television capitalprograms 1
25 29 24 Maturities oflong-term deht 57 58 3 136 Total $640 $1,864 $418 $525 "These amounts do not include expenditures on projects for which Hi&P expects to be reimbursed by customers or cogenerators.
Amount represents the acquisition of all of the outstanding capital stock of Cablesystems in March 1989. Such amount includes approximately $340 million ofiulebtedness of Cablesystems which was refinanced concurrently with the acquisition and is subject to certain post-closing adjustments. For a discussion of the acquisition, see Note 18 to the Consolidated Financial Statements.
Constmetion and nuclear fuel expenditures for the 1989-1991 period principally represent estimated msts of HI&P's construction program and reflect the cor estimate for the South Texas project adopted inJanuary 1989 by the management committee for the pmject. he estimated expenditures for coal handling facilities and lignite mining and handling facilities are expected to be incurred by. Utility Fuels in connection with HI&P's lignite projects. HI&P expects to finance a portion of its construction prog am through funds generated intemally from operations. %e extent to which HI&P is able to fund its capital requirements from intemal funds is dependent, to a large degree, on regulatory practices which determine the amount and timing of recovery of investments in new plant facilities, depreciation rates, recovery of operating expenses 1 and the opportunity to eam a reasonable rate of retum on its im'ested capital. It is presently estimated that during 1989,10% to 20% of HI&P's construction program can be financed thmugh intemally generated funds from operations. Intemally generated funds for i subsequent years will be primarily dependent on the regulatory treatment of Hi&P's investment in the South 'Itxas project. The balance of HI&P's construction pmgram is expected to le financed through extemal sources, primarily sales oflong-term debt, preferred stock and additional shares of common stock to the Company, and, on an interim basis, the issuance of short-term debt securities. The interim financing requirements of HI&P are met primarily through the issuance of commercial paper supported by a bank line of credit. At December 31,1988, such line was maintained in the aggregate principal amount of $650 million, and in February 1989 such line was reduced by HI&P to $400 million. See Note 6 to the Consolidated Financial Statements for a discussion of tort-term financing. HI&P's capitalization mtios at December 31,1988, consisted of 48% long-term debt,7% preferred stock and 45% common equty, with similar ratios expected to be maintained in the future, assuming HI&P is able to obtain rate relief at levels comparable to those obtainedin thepast. Hi&P anticipates that it may utilize sales of senior debt securities and/or preferred stock in addition to those sales during the first quarter of 1989 described below to fund a portion of its construction pmgram during 1989. ne types, amounts and time of issuance of additional securities have not been determined. HIAP's Mortgage and Deed of' Rust (Mortgage) and corporate charter specify camings coverage and other conditions with which HIAP must comply prior.to the issuance of first mortgage bonds or preferred stock, respectively. Without deferred accounting or timely rate relief, eamings coverages may decline to levels which would n: strict or prohibit the issuance of preferred stock in the second half of 1989 and first mortgage bonds in the first half of 1990. DuringJanuary and February 'i989, Hl&P issued $200 million aggregate principal amount of collateralized medium-term notes having maturities ranging fmm 5 to 10 years and bearing fixed rates of interest ranging from 9.79% to 9.85% per annum. In February 1989, Hi&P sold $225 million aggregate principal amount of first mortgage bonds. These bonds bear interest at a rate of 10K% per annum and will mature on February 1,2019 I 40
..---y In February 1989, $75 million aggregate principal amount of 7.70% collateralized revenue refunding bonds and $29.7 million of l 7%% collateralized pollution control revenue bonds wem sold on behalf of HI&P. Proceeds from the sale of such revenue refunding. bonds will be used in connection with the redemption of pollution control reveaue bonds previously issued on behalf of HI&P. Proceeds from the sale of the pollution control revenue bonds will be used to finance certain pollution control facilities at the South itxas project. i In February 1989. HI&P deposited approximately $57 million with Ahe first mortgage bond trustee to redeem all of the outstanding bonds of the 153% Series of its first mortgage bonds at 100% of the principal amount and to pay accrued interest. The bonds of this series were redeemed pursuan' to the general redemption provisions of the Mortgage. In April 1989, HIAP intends to issue 1,385,000 shares of $9.375 cumulative preferred stock with a fixed liquidation price of $100 per share. It is expeded that Hl&P will be required to redeem 277,000 shares of this issue annually beginning April 1,1995. HIAP has also l filed a registration statement with the Securities and Exchange Commission that has become effective and that covers $100 million I aggregate fixed liquidation price of preferred stock that HI&P expects to issue no earlier than 1990. Houston Industries Finance, Inc. (Houston Industries finance) began purchasing Hi&P's customer accounts receivable inJanuary 1987 and accounts receivable of certain subsidiaries of KBl.COM in March 1989. The use of leverage and short-term borrowings by Houston Industries Finance allows the receivables of HI&P to be financed at a lower cost than would traditionally be incurred by HI&P. 4 The financing requirements are met through short-term bank loans and the issuance of commercial paper. Houston Industries Finance has entered into a bank revolving credit facility which provides for borrcwings of up to $300 million aggregaa principal arnount. This facility is available to make direct borrowing or to support the issuance of commercial paper. The Tax Reform Act of 1986 (Tax Act) includes a number of provisions that have adversely affected the Company's operating i subsidiaries, particularly HI&P. Although the Tax Act reduced corporate income tax rates, it eliminated investment tax credits efiective ) January 1,1986 (except with respect to certain transition properties, including the South lexas projea), required capitalization of the j construaion overhead costs and made subsuntial changes to the calculation of the altemative minimum tax. The latter provision effectively provides for the inclusion of up to one half of the amount of AFUDC, a noncash item ofincome for financial reporting purposes, as taxable income in determining the attemative minimum tax. These and other provisions of the lhx Act are expected to reduce the amount of cash flow generated from operations and therefore increase the Company's reliance on extemal sources of funds. Neu AccountingPronouncenmW in December 1987, the Financial Accounting Standards hoard (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 96, " Accounting for Income Taxes," which, as amended by SFAS No.100, becomes effective for fiscal years beginning after December 15,1989. 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. % provide that regulated enterpises are permitted to recognize such adjustments as regulatory assets or liabilities if it is probable that such amounts will be recovered from or retumed to customers in future rates. Another significant change relates to business acquisitions and requires assets and liabilities to be recorded at fair market value and a deferred tax liability or asset to be recognized for the tax effect of the temporary differences. KBLCOM has significant temponuy differences related to the 1986 acquisitions of certain cable television systems. While the Company has not completed the evaluation of the effects of SFAS No. %, it estimates that net income in the year of adoption will decrease by a minimum of $30 to $40 million prior to the effects, if any, of the acquisition of Cablesystems. The Company will implement SFAS No. 96 in 1990 but has not yet decided if it will be retroaalvely adopted for previous years. In December 1988, the FASB issued SFAS No.101, " Regulated Enterprises-Accounting for the Discontinuation of FASB Statement No. 71". SFAS No.101 specifies how an enterprise that ceases to meet the criteria for application of SFAS No. 71, " Accounting for the Effects of Certain 1rpes of Regulation," to all or part of its operations should report that event in its financial statements.1his statement - generally requires that the effects of ret;ulators' acions that had been recognized as assets or liabilities be eliminated from the financial statements. SFAS No.101 is effective for fiscal years ending after December 15,1988. HI&P does not anticipate that it will cease to meet the criteria for application of SFAS No. 71; therefore, the provisions of SFAS No.101 are not expected to affect the Company's financial position or results of operations. 1 41-
Houdm hulustrksinwrforatalmulSulalutna STATEMENTS OF CONSOLIDATED INCOME Year Ended December 31, (7hmsanduflMlars) 1988 1987 1986 Revenues: Electric $3,063,573 $3,000,832 $2,959,740 fuelsales 477,345 513,3H 470,852 Oil and gas 108,547 113,987 105.376 %tal 3,649,465 3,628,213 3,535,968 Expenses: Electric: Fuel 1,004,481 981,922 935,169 Purchased power 376,724 379,497 421,893 operation and maintenance 635,644 613,355 561,406 Taxes other than federal income taxes 164,819 151,667 146,791 Cost of fuelsold 391,851 430,754 392,777 Oiland gas operatingexpenses 53,111 47,703 53,440 _D preciation, depletion and amonization 320,598 285,847 297,911 %tal 2,947,228 2,890,745 2,809,387 Operatingincome 702,237 737,468 726,581 OtherIncome (Expense): Allowance for other funds used during construction 118,097 143,584 170,348 Other-net 1,338 10,199 (9,002) Ltal 119,435 153,783 161,346 Fixed Charges: Interest onlong-term debt 295,578 270,958 287,506 Otherinterest 46,718 44,747 42,137 Alknance fer borrowed funds used during construction (92,994) (109,160) (109,369) Preferred dividends of subsidiary 35,972 31,406 26,817 Ltal 285,274 237,951 247,091 incc,me Before Federalincome Taxes 536,398 653,300 640,836 Federallocome Taxes 141,144 218,342 215,901 Netincome $ 395,254 $ 434,958 $ 424,935 Earnings Per Common Share 3.34 3.74 3.81 Weighted Average Common Shares Outstanding (000) 118,184 116,322 111,593 l SwNota 10 Conx>MatalEtnancia! Statements. 42 I
Iknutan truhatrusinanvratalandSuhmbarus STATEMENTS OF CONSOLIDATED RETAINED 3RNINGS War Ended December 31, (71sousandsqfthilars) 1988 1987 1986 IWance atIkWnning of War $1,325,909 $1,223,409 $1,106,221 Add-Net income 395,254 434,958 424.935 lbtal 1,721,163 1,658,367 1,531,156 Deduct-Common Stock Dividends: 1988, $2.94; 1987, $2.86; 1986, $2.76 (per share) 347,364 332,458 307,747 Balance at End of kar $1,373,799 $1,325,909 $1.223,409 Sw Notes to ConxlidatedFinancitdStatements. l l 43
~ llouston induMs inwrjerohdarulSufatwrus r CONSOLIDATED 3ALANCE SHEETS December 31, (busandsof[k>llars) 1988 1987 Assets Property, Plant and Equipment-At Qst: Electric plant: l Production $ 5,797,764 $ 3,894,100 Pansmission 700,237 640,423 Distribution 1,951,630 1,845,618 General 501,476 456,232 l Construction workin progress 1,090,424 2,648,682 ] Nuclear fuel 152,583 131,323 E lleld forfuture use 180,841 180,333 Electric plant acquisition adjustments 3,166 3,166 ) F Coal handling equipment and mining property 579,477 542,549 l Oiland gas property 493,741 458,947 j Otherproperty 14,231 13,217 1 lbtal 11,465,570 10,814,590 I less accumulated depreciation, depletion and amortization 2,082,202 1,868,791 Property, plant and equipment-net 9,383,368 8,945,799 Current Assets: Cash and cash equivalents 22,350 1,418 Specialdeposits 399 209 Accounts receivable: j Customers (less allowance for doubtful accounts of $5,620 j and $5,315 on December 31,1988 and 1987, respectively) 143,220 124,333 Others 66,826 65,891 fuelstock,atlifo cost: I Oil and gas 19,310 18,698 Coalandlignite 67,116 49,478 Materials and supplies, at average cc,t 124,412 108,046 Other 18,550 14,068 T6talcurrent assets 462,183 382,141 Other Assets: = Cable television investment, at equity 66,836 70,423 Recoverable cancelled project costs 28,876 36,129 Unamortaed debt expense and premium on reacquired debt 76,048 69,348 Deferred debits 201,735 223.848 lbtalother assets 373,495 399,748 lbtal $10,219,046 $ 9,727,688 SeeNohs to ConsolidahriFinandalStahrnents L Y l 44
Iluu. tun huhistra inwr1eraktitmdSultmkire CONSOLIDATED 3ALANCE SHEETS December 31, (flousaruhofLMlars) l988 1987 Capitalization and Liabilities Capitalization: Common Stock Equity: Common stock, no par; authorized,200,000,000 shares; outstanding, 118,511,166 shares at Ikcember 31,1988 and 117,660,632 shares at December 31,1987 $ 2,033,620 $ 2,007.4(() Retained eamings 1,373,799 1,325,909 Totalcommon stock equity 3,407,419 3,333,375 Preference Stock, no par; authorized 10,000,000 shares; none outstanding ~ Cumu!ative Preferred Stock of Subsidiary: (s:atements on followingpage) Not subject to mandatoryMemp: ion 341,319 341,319 Subject to mandatory redemption 99,158 99,055 lbtalcumulative preferred stxk 440,477 440,374 tong-1trm Debt Debentures,9%% series due 1996 199,329 199,234 tong-term debt of subsidiaries (statements on followingpage) 3,241,482 2,S79,694 . 1btallong-term debt 3,440,811 3.078,928 lbtalcapitalization _ 7,288,707 6,852,677 Current Liabilities: Nots payable 636,931 725,820 Accounts payable 277,688 2(4,256 Taxes accrued 92,821 87,138 1rserest accrued 89,534 74,870 Accrued liabilities to municipalities 72,578 70,685 Current portion oflong-term debt 58,057 56,743 Other 68,477 50,655 lbtal current liabihties 1,2 %,086 1,330,167 Deferred Credits: Accumulated deferred federal income taxes 969,238 902,!53 Unamortizedinvestment tax credit 564,087 557,674 Other 100,928 85,017 Total deferred credits 1,634,253 1,544,844 Commitments and Contingencies 1btal $10.219Ai6 $ 9,727488 &v Nola to CorudklakrlFinancialMah rwits. 45
ihmem industrus inanpratalarulSidalwws STATEMENTS OF SUBSIDIARIES' 3 REFERRED STOCK AND,0NG-TERM DEBT December 31, (7hmsandufIMktrs) 1988 1987 Cumulative Preferred Stock, no par; authorized,10,000,000 shans; outstanding,4,447,397 shares at December 31,1988 and 1987 (entitled upon involuntary liquidation to $100 per shart) flouston Lighting & Power Company: Not subject to mandatory rederuption: $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 $9M serie,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 lbtal 341,319 341,319 Subject to mandatory redemption: $8.50 series,1,000,000 shares 99,158 99,055 lbtal cumulative preferred stock $440,477 $440,374 Inng-Term Debt floustonlj hting&PowerCompany: g First mortgage bonds: 3% series, due 1989 $ 30,000 $ 30,000 4%% series.due 1989 25,000 25,000 13M% series, due 1991 48,473 96% series,due 1991 132,000 15W% series,due 1992 52,662 52,662 4K% series,due 1992 25,000 25,000 96% scris,due 1992 132,000 94% series,due 1993 136,000 SK% series,due 1996 40,000 40,000 SK% series,due 1997 40,000 40,000 6%% series,due 1997 35,000 35,000 l 6K% series, due 1998 35,000 35,000 7M% series,due 1999 30,000 30,000 7K% series,due 2001 50,000 50,000 7n% series,due 2001 50,000 50,000 84% series, due 2004 100,000 100,000 104% series, due 2004 35,407 35,407 8K% series, due 2005 125,000 125,000 84% series,due 2006 125,000 125,000 1 8K% series, due 2007 125,000 125,000 I
Houtna huhatrusInanpnatwlandSufaharks STATEMENTS OF SUBSIDIARIES' 3 REFERRED STOCK AND LONG-TERM JEBT (Continued) December 31, (husan& <f[hilars) 1988 1987 8%% series, due 2008 $ 125,000 $ 125,000 9K% series,due 2008 100,000 100,000 9% series,due 2017 390,519 390,519 7K% pollution contml series, due 2015 68,700 8K% pollution control series, due 2015 90,000 7%% pollution control series, due 2016 68,000 68,000 7%% pollution control series, due 2018 50,000 50,000 8K% pollution control series, due 2019 100,0(0 8.10% pollution control series, due 2019 100,000 Funds on depositwidilhistee (3,671) (12,612) lbtal first mortgage bonds 2,411,617 1,692,449 Pollution control revenue bonds: Gulf Coast 1978 series,9M%,due 1998 19,200 19,200 Gulf Coast 1980T series, floating Rate, due 1998 5,000 5,000 Brazos River 1983 series,10M%, due 2003 25,000 25,000 Gulf Coast 1974 series,76%,due 2004 18,000 18,000 Braos River 1985 A2 series. 94%, due 2005 10,000 10,000 Gulf Coast 1982 series,9x%,due 2012 12,100 12,100 Brazos River 1982 series,9x%, due 2012 42,800 42,800 Brazos River 1983 series, lon%, due 2013 75,000 75,000 Brazos River 1985 Al series,9X%, due 2015 100,000 100,000 Brazos River 1985 B series, Floating Rate, due 2015 90,000 Matagorda County 1985 series,10%, due 2015 115,000 115,000 Brazos River 1984 F series, floating Rate, due 2016 68,700 Brazos River 1984 A-E series, Floating Rate, due 2019 200,000 400,000 Matagorda County 1984 A-C series, floating Rate, due 2019 250,000 250,000 Funds on deposit with1rustee (11,658) (74,126) lbtal pollution controlmtnue bonds 860,442 1,156,674 _llnamortized prtmium or (discoun0-net (7,691) (4.427) lbtal 3,264,368 2,844,696 l'tility fuels, Inc.: 9% secured notes,due 1988 3,800 Variable rate notes,due 1988 50,000 Other 6,935 7,472 Capitalized lease obligations. average discount rate 7.8% 28,236 30,469 lbtal 35,171 91,741 lbtal 3,299,539 2,936,437 li.ss current maturities 58,057 56,743 lbtal long-tenn debt of subsidiaries $3.241,482 $2,879,694 kr Nota la ConmlidatalFinancial Matement 47
m Houston hulustnesinaqoratetIandSubidiaries STATEMENTS OF CONSOLIDATED CASH FLOWS increase (Decrease) in Cash and Cash Equinients ~. - War Ended December 31, (husand cc Mus) 1988 1987 1986 Cash flows from Operating Activities: Netincome $ 395,254 $ 434,958 $ 424,935 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 320,598 285,847 297,911 Amortization of nuclearfuel 3,631 Deferred federalincome taxes 67,085 86,001 1,14,367 investment tax credits 6,413 (3,702) 26,240 Allowance for other funds used during construction (118,097) (143,584) (170,348) Fuel cost refunds and over/under recovery-net 400 (107329) (53,012) Equity in less of cable television investment 4,583 11,039 10,213 Changes in other assets and liabilities: Accounts receivable (19,822) (20,705) 16,279 inventory (34,616) (30,364) (20,281) Othercurrent assets (4,672) 3 469 2,067 Accounts payable 13,432 (14,310) 5,595 Interest and taxes accrued 20,347 (24,417) (8,555) Othercurrent liabilities 20,674 (9,231) (8,150) Other-net 59,644 28,277 (28,009) lbtal adjustments 339,600 59,891 ~ 184,317 Nct cash provided by operating activities 734,854 4 9,849 609,252 Cash flows from investing Activities: Construction and nuclear fuel expenditure. (including allowance for borrowed funds used during construction l, (608,030) (731,005) (817,553) Oil and gas additions (38,474) (41,488) (16,187) Cable televisioninvestment (1,130) (49,701) (26,249) Proceeds from sale of oil and gas properties 1,673 11,153 Other-net (13,013) (13,300) (1,164) Net cash used in investing activities (658,974) (824,341) (861,153) l 48 l
Hou.&n IndatrainanputaiarutSubkliaria l STATEMENTS OF CONSOLIDATED CASH FLOWS increase (Decrease) in Cash and Cash Equivalents (Continued) War Ended December 31, (7housandsoffkitars) 1988 1987 1986 'Wh flows from Financing Actinties: Proceeds from sale of common stock $ 26,154 $ 128,248 $ 176.847 Pmceeds from sale of preferred stock 98,994 i l-Proceeds from sale of debentures 197,454 Proceeds imm sale of first mortgage bonds 397,398 Proceeds from pollution control revenue londs I and first mortgage bonds held in trust 74,212 127,874 238,503 Payment of matured bonds _ (40,000) (30,000) Payment of common stock dividends (347,364) (332,458) (307,747) Increase (decrease) in notes payable-net (88,889) 505,328 (231,084) i Other debt of subsidiaries (56,475) (8,908) (10,783) Extinguishment oflong-term debt (48,473) (139,896) (118,824). Other-net (11,511) (22,361) (280). Net cash provided by (used in) fmancing acthities (54,948) 317,021 (85,914) Net increase (Decreae) ira Cash and Cash Equivalents 20,932 G3471) (337,815) Cash and Cash Equivalents at Beginning of V.ar 1,418 13,889 351,704 ' Cash and Cash Equivalents at End of Year $ 22,350 $ 1,418 $ 13,889 Sx Nohs to Conn'idatalFinancialStatements. 1 l l l l l l 49 L
ikrunm IndustriaInarrpraktandSubwharia NOTES"O CONSOLIDATED FINANCIAL STATEMENTS a For the 1bree Hurs EndvlLWemler31, Um
1. Summary of Significant Accounting Policies
.i 4)dem ofAcmunts the Company has a 20% to 50% interest when appropriate. Intangible develop-The accounting records of flouston Light-are recorded usingthe equity method ment costs applicable to productive wells ing & Power Company (HIAP),the ofaccounting. and to development dry holes and tan-Company's principal subsidiary, are gibleequipment costs related to the maintained in accordance with the Fed-Plant development of oil and gas reserves are eral Energy Regulatory Commission's Additions to electric plant, bettennents to capitalized. Exploratory costs, including UniformSystem of Accounts which has existing property and replacements of geological costs, costs of dry hole explor-been adopted by the Public Utility Com-units of property are capitalized at cost. atorywells andlease rentals,re missian of Texas (Utility Commission). Cost includes the original ost of con-expensed as incurred. Pmducing oil and tracted senices, direct 1:,bor and material, gas leases are depleted on the unit-of-PrinaplesofConzlidation indirect charges for engineering supeni, pmduction method merihe estimated The consolidated financial statements sion and similar overhead items and an proved reserves of the field. Related tan-irdude the accounts of the Company and Alleavance for Funds Used During Con-gible and intangible costs are depreciated its wholly-owned subsidiaries, HL&P, struction (AFL'DC). Customer advances or amortized on the unit-of-production KBILOM Incorporated (KBlf20, Utility for construction reduce adatiom to elec-method over the estimated proved devel-Fuels,Inc. (Utility Fuels), Primary Fuels, tric plant. oped resen'es. Inc. (Primary Fuels), Innovative Con-Maintenance of property and replace-The Company recognizesimpairment ] trols, Inc., Houston Industries Finance, ments and renewals ofitems determined of its pmducing properties when the net Inc. (Houston Industi:es Finance) and to beless than units of property are capitalized costs exceed the estimated Development Ventures, Inc. (Develop-charged to expense.'lhe actualor realizable value determined on a field-ment Ventures). average book cost of units of property . by-field basis. Fuel sales and related corof fuel sold replacedorenewedis removedfrom See Note 18 regardingthe sale of sub-j generally represent Utility fuels' coal and plant and such cost, plus removal cost stantially all of the Company's oil and j lignite sales to Hi&P and are not elimi-less salvage, is charged to accumulated gas assets. nated because of the distinction for depreciation. mgulatory purposes between utility and The Company computes depreciation - Allounnceforfunds UsedDuring non-utility operations. For this same rea-for its non-oil and gas properties using - Construction son, the purchases of accous receivable the straight-line methoi The depreci-Hi&P accrues AFUDC on construction from Hi&P by HoustonIndustries Fi-ation provision as a percentage of the and nuclear fuel expenditures except for nance also are not eliminated. All other depreciable cost of plant was 3.4% for amountsincludedin the rate base by - significant intercompany transadions 1988,3.6% for 1987 and 3.7% for 1986. regulatory authorities. AIUK was com-and balances are diminated in consoli-puted usinga gross rate of10% in 1988 dation, investments in affiliates in which oilandG7sPmperty and 10.75% in 1987.This gross rateis j TheCompanyfollows the successful applicable to all pmperty except certain efforts method of accounting for costs transition property, principally the South .j incurred in the exploration and develop-ment of oil and gas resen'es. lease Texas Project Electric Generating Station acquisition costs are initially capitalized ~ and am periodically assessed for impair-ment of value, and a loss is recognized i 50 .l
(South Texas project), on which interest months. The ruls of the Utility Commis. FalerclhameFixer is prmitted as a current deduction under sion provide for a reconciliation of fuel The Company follon a policy of com-the Tax Reform Act of1986.The net +f-revenues,with any over-or under. prehensive interperiod income tax allo-tax accrual rate was 8.5% during 1988, recovery of fuel costs to be considered in cation.TheTax Reform Act of1986 9% during1987 and 10% during1986. establishing future fuel cost recoveries. In eliminated investment tax cn>dits effective addition, a monthly reduction of the fuel ' January L 1986, except with respect to Rarmes-Elafric factor may be required if the Utility Com-certain transition propertie, principally Revenues are recognized from the sale of mission determines that a utility has. the South 1txas project. Investment tax electricity as bills are rendered to custom-materially over-recovered, or projects that credits are deferred and amonized over ers. The litility Commission provides for it will materially over4ecover, allowable. the estimated lives of the related property. the recovery of fuel and the energy por-fuel costs under its existing fuel factor, tion of purchased power costs through an inwhich case any fuelcost sating are EarningsPer Commons /wre - energy component of base electric rates. required to be refunded as a one-time Eamingper common share are com-ne energy component is established dur-credit to customers' bills. puted by dividing netincome by the ing a utility's general rate proaeding and weighted average number of shares out-is effective for a minimum of twelve standing during the respective periods.
2. Statements of Consolidated Cash Flows in 1988, the Company adopted Statement investments readily convenible to cash.
ofits 9% series of first mortgage bonds of Financial Accounting Standards During 1988, $358.7 million aggre-due 2017 in exchange for a like principal (SFAS) No. 95," Statement of Cash gate principal amount of collateralized amount of outstanding high coupon first Flows," and accordingly, has presented revenue refunding bonds was issued on mortgage bonds. These transactions were l the Statements of Consolidated Cash behalf of HIAP.ne proceedswere used noncash in nature and are not included ~ ) Flows for the years ended December 31, to redeem cenain variable rate pollution. in the Statements of Consolidated Cash 1988,1987 and 1986. Forpurposes of control revenue bonds previously issued Flows. reporting cash flows, cash equivalents are on behalf of Hi&P. In 1987,lil&P issued Supplementalinformation regarding considem! to be shon-tenn highly liquid $391 million aggregate principal amount cashpaymentsispmvidedbelowr 4 l War Ended December 31, (lbousankofLbilars) 1988 1981 1986 Interest (net of amount capitalized) $261,186 $246,070 $233,330 incomelhxes 39,095 104,260-38,088
3. Common Stock i
i Common stock issued during 1988,1987 and 1986 amounted to 850,531 shares,3,536,617 shares and 5,598,652 shares, respectively. i
4. Preferred Stock Hi&P's preferred stock may be redeemed 1990-$105.00; thereafter-$103.00 to 1994-$103.00; thereafter-$101.00.
at the following per share prices, plus any $101.00. Adjustable Rate Series"A":through unpaid accrued dividends to the date of $9.08 Series: through March 31, March 31,1989-not redeemable; redemption: 1991-$103.00; thereafter-$101.00. theirafter-$103.00 to $100.00. The divi-Not subject to mandatory redemption: $8.12 Series:through November 30, dead rate on this series, as ofJanuary 1, l $4.00 Series: $105.00. 1992-$104.25; thereafter-$102.25. 1989,is 7.60%.The rateis adjusted $6.72 Series: $102.51. $9.04 Serits: throughJanuary 31, quarterly, based on the yield on U.S. $7.52Seriu 1102.35. 11easury securities. 5).52 Senex 3 rough September 30, 51
Adjustable Rate Series"Ir':thmugh Subject to mandatory redemption: with or prior to the $8.50 series as to S2ptembr A 1990-not redeemable; $8.50 Series: through'tay 31, dividends or on liquidation, whem such themafter-$103.00 to $100.00. The divi-1992-$108.50, thereafter-$104.25 to debt has an effective inten:st cost, or such j , dead rate on this series, as ofJanuary 1, $100.00, provided that the $8.50 Series preferred stock has an effective dividend j 1989,is7.35% Therateisadjusted may not be redeemed, directly or ind!- cost, ofless than 8.50%' per annum. The quanedy, based on the yield on U.S. rectly,pnorioJune 1,1992 from the mandatory redemption provision requires Treasmvsecurities. proceeds of any refunding through the Hi&P to red &m 200,000 shares annually incurrence of debt or through the issu-at $100per shareplus accrued and un-ance of preferred stock ranking equally . paid dividends, beginningJune 1,1993
5. Iongarm Debt j
4 At Decembr 31,1988,sinkingorim-Hi&Phas agreed to expend an Consolidated annualmaturitiesof provement fund requirements ofIII&P's. amount erb year for replacements and. long-term debt and minimum capital fhst mortgage bonds outstanding will be improvements in respect of its depreciable leasepaymmts are appmximately $58 approximately $45 million for each of mongaged utility propeny equalto. millionin 1989, $3 millionin 1990, the years 1989 thmugh 1993. Of such $1,450,000 plus 2H% of net additions to $136millionin 1991,$213 millionin requirements, appmaimately $26 million _ such mongaged propeny made after 1992 and $140 millionin 1993 ) for each of the years 1989 through 1993 March 31,1948, and beforeJuly I of the Theissuableamount ofIll&P'sfirst 1 may be satisfied by cenifistion of prop-preceding year. Such requirement may be mongage bonds is unlimited as to natho-J erty additios at 100% of the require-metwith cash, first mortgage bonds, rization,butlimitedby property,. l ments,and the remainderthmugh cer-gross propeny additions ompenditures camings, and other provis;ons of the - tification of such propeny additions at for repairs or replacements, or by taking ' Mongage and Deed of1 rust and the sup-166 M% of the mquirements. Sinking or credit for property additions at 100% of plemental indentures thereto. Substan-improvement fund requirements for 1988 the requirements. At the option of Hi&P, tially all propenies ofIll&P are subject and prior years have been satisfied by ' but only with respect to fin,t mongage to liens securing its long-term debt. cenification of property additions. bonds of a series subject to special re-demption, deposited cash may be used to ndeem first mongage bonds of such se-ries at the applicable special redemption price.
6. Short4rm Financing l
The interim financing requirements of Company and its subsidiaries had bank 31,1988. Bankloans andcommercial the Company's operating subsidiaries are lines of credit aggregating $1.350 billion paper outstanding were $6,000,000 and - j met through short-tenn bank loans, the at December 31,1988 and1987 which $718,609,000, respectively, at December J issuance of commercial paper and short-limit its total short-term bonuwings and 31,1987. Commitment fees are required term advances fmm the Company.The provide for interest at rates generally less on the undrawn portion of the bank lines j than the prime rate. Commercial paper ofcredit. l outstanding was $636,010,000 at December w t l } ) 4 52
7.' Retirement Plan Pension costs are determined under the - senice costs. For the last three years, early retirement program are being paid provisions of SFAS No. 87, " Employers' however,as a result of the changein out of the Company's retirement plan. Accounting for Pensions". federal income tax rates, iIIAP's early assets and certain supplemental benefits ne Companyhasa noncontributory retirement pmgram discussed below, and relating to such pmgram are being paid retirement plan covering substantially all declines in the excess of plan assets over by fil&P. Upon the adoption of the early employees. Be plan provides retirement the pmjected benefit obligation, the Com-retirement pmgram, the projected benefit benefitsbasedonyearsofseniceand panyfunded the maximum amount obligations pertaining to the Company's the employee's highest 36 consecutie deductible for federal income tax pur-retirement plan and supplemental bene-months' base compensation during the poses. Plan assets consist principally of fits were increased by $17.5 million and last 120 moriths of employment. The pol-common stocks and investments in high $7.2 million, respectively. In September icyof theCompanyistofundallnet quality, interest-bearing obligatim,. 1988, HlAP recorded a one-time after-pension costs, but past serdce costs only in 1987,HlAP offered employees tax charge of $11 million related to the to the extent that the excess of plan assets (excluding oflicers) satisfying cenain - early retirement program. At December over accrued benefits does not meet the requirements as to age and years of ser-31,1988,Hi&P's obligation related Company's funding obligations for past vice an incentive program to retire early, to the supplementalbenefits was which program was accepted by 430 em- $3.6 million ployees. Pension beneilts related to the Net pension cost includes the following components: Year Ended December 31, (11ousandsofDollars) 1988 1987 1986 Service cost-benefits eamed during the period $ 12,770 $ 13,536 $ 11,254 Interest cost on projected benefit obligation 26,746 23,096 18,202 Actualretum on plan assets (20,764) (10,359). (26,666) - Deferred (gain) loss on plan assets (1,386) (10,257) 9,128 Amortization of transitional asset and prior senice cost (1,474) (1,474)' (1,924) Netpension cost $15,892 $ 14,542 $ 9,994 %e funded status of the retirement plan was as follows: December 31, (7housandsofDollars) 1988 1987 Actuarialpresent value of: Wsted benefit obligation $192.133 $182,097 Accumulated benefit obligation $221,597 $210,849 l Plan assets at marketvalue $283,387 $254,211 Projected benefit obligation 312,409 279,860 Assets less than projected benefit obligation (29,022) (25,649) Unrecognizedtransitional asset (26,855) (28,779) Unrecognizedpriorsenice cost 5,770 6,220 Unrecognized netICG 22,058 16,174 Accruedpension cost $ (28,049) - $(32,034) The projected bene 3t obligation was de-was assumed in both years. The assumed 1986 is being recognized over approxi-termined using an assumed discount rate long-term rate of return on plan assets is mately 17 years, and the prior senice cost of 96% in 1988 and 1987. Along-term 9%, The transitional asset atJanuary 1, is being recognized over appmximately rate ofcompensationincrease of 66% 15 years. 53 i .i. m
8. Commitments and Contingencies l
Significant commitments have been 10 for discussions of the budget and (#ility Fuels' expenditures for coal l incurred in connection with Hi&P's con-schedule for the South Texas pmject. An handling facihties and lignite mining struction program and for nuclear fuel additional $24 million is expected to be and handlint. cilities are estimated to. J purchases. HI&P's construction program spent during such period for uranium be $47 millionin 1989, $27 million in (exclusive of AFUDC and nuclear fuel) is concentrate and nuclear fuel processing 1990 and $31 millionin 1991. presently estimated to cost $379 million sertices for HIAP's portion of the South See Note 18 for discussions of commit-in 1989, $349 millionin 1990 and $325 Texas project. Commitments in ennec-ments associated with acquisitions and millionin 1991.These amounts do not tion with HI&P's construction program, disposals. include expenditures on projects for principally for generating plants and which HI&P expects to be reimbursed related facilities, are generally revocable by customers or cogenerators. See Note byill&P subject to reimbursement to manufacturers for expenditures incurred orother cancellation penalties. )
9. Panding Litigation Npalofl9&?RateOrder Commission's action, the T xas Supreme on future rate orders. Restatement of pre-InIkccmber 1987, the Texas Supreme Court upheld the Utility Commission's viously reported financial results will not
) Court rendered a decision in connection decision regarding allocation ofincome be required. with a December 1982 rate order by the tax benefits, mling that ' hose benefits Utility Commission. In the rate order, the shouldinure to the benefit of HIAP's furyAuurdin Condemnation Utility Commission disallowed the recov-ratepayers. The Texas Supreme Court did Pmcarling cry by HlAP of approximately $166 affirm certain other aspects of the lower la 1981,Hi&P filed a condemnation million of costs incurred in connection courts' decisions, thus requiring that the action against the Klein Independent with its cancelled Allens Creek nuclear case be remanded to the Utility Commis-School District (Klein) to take a tract of project, and ordered that vly tax savings sion. An attempt by HI&P to seek funher land owned by Klein. Following the trial associated with the disallowed portion be review of the Utility Commission's action inwhich Klein alleged that Hl&P had passal through to customers While the was unsuccessful. The case has been abused its discretion in taking the prop-Utility Commission purponed to permit remanded to the Utility Commission for erty, the County Coun at law hearing the ] $195 million of expenditures for the prol-implementation of the appellate court case awarded Klein $25 million in exem-ect to be recovered over a ten-year period, decisions (Docket No. 8555). No proce-plary damages,in addition to actual the fleethrough of tax savings on the duralschedule has yet been set by the damages of $104,000.The exemplary disallowed portion reduced the recovery Utility Commission to finally resolve this damages awardsus reversed bya Court to approximately $84 million. Although issue. It has not been determined what of Appealsin November 1987,which lower couns had reversed the Utility effect, if any, the ruling regaming allo-affirmed the actualdamages award of cation of income tax benefits will have l \\ 1 N l
$!04,000. InJuly 1988,theTexas railroads. In Febmary 1987, HI&P and Trialof the suitcommencedinJarr . Supreme Coun refused Klein's Applica-Utility Fuels were prmitted to file the uary 1989,and the juryrenderedits tion for Writ of Error fmm the appellate same claims for alleged antitrust vio-verdict in March 1989. Although the trial coun's decision, but a motion to recon-lations against the same railroads by judge granted a panial instructed verdict ^ sider that refusal is still pending before intervention in an action pending in the that the railroads had engaged in a con-the TexasSupreme Court. HIAP has Federal District Coun in Beaumont,1bxas spiracy in restraint of trade, the jury re-routed the transmissionline in between a third pany and those railroads. awarded no damages to HIAPor Utility question around Klein's propeny. The proceedings in the Houston litigation - Fuels.1he jury did find that the railroads have been stayed pending the outcome of causeddamagesof $345 million tothe fuelPanpriationLitigation the Beaumontlitigation. third party, which damages are trebled in in July 1986, Hi&P and Utility fuels filed During1988 and early 1989,HI&P accordance wilb the antitrust laws. HI&P suit in Federal District Court in Houston, and Utility Fuels entered into settlement ' and Utility Fuels are considering what ' -l Texas against tree railroad holding agreements with all defendants in the. ad6tional action may be appropriate in J companies and their railroad operating Beaumont and Houston cases other than light of the lury's verdict. It is expected I subsidiaries and two other railroads. The the A:chison,1bpeka & Santa Fe Railroad that proceeds from the settlements and suit alleges that the railmads violated Co. (A1SF) and its parent corporation, any otheramount recovered by HI&P certain federal statutes, including the Santa Fe Southem Pacific Corporation, and Utility fuels in this litigation, net of Shermaa Ac.,in activities aimed at pre-and appropriate final judgmer,ts have litigation costs, will be passed through to cludingdivelopment of coalsluny been entered in the licaumont and Hous- - HlhP's customers through the energy pipelines t1 at could have delivered coal ton cases component of HI&P's rates. to the plaimsisin comp 6aon with the
10. Jointly-Owned Nuclear Plant J
I Hi&P is project manager and one of four &ndinglitigation udbtheCiy During the course of the htigation, participants iW South Texas project, o/ Austin both Austin and HI&P have filed numer-I which consists et two 1.250 megawatt in 1983, the City of Austin (Austin), one ous motions regarding the issues to be (MW) nuclear generatingunits. Each of the fourpanicipantsin the South addressed in the litigation', including. participant finances its own share of con-Texas project, filed suit r.pinst HIAP and motions forsummary judgment on cer-struction expend tures,with HIAP's the Company in state district court in tain issues. The Court has been and will panicipating interest in the project being Travis County,1M,which suit sub-be continuing to refme the actual trial 30.8%. Each participant is also responsi-sequently was moved to state district court issues; however, the exact statement of ble for its share of operating expenses of in Dallas,1bxas. In its petition, as issues will not be known until the jury the plant. HI&P's share of the related amended over time, Austin (a) alleges issues are submitted by the Court follow-operation and maintenance expenses is that Austin was fraudulently induced to ing introduction of evidence. Austin has included in the corresponding onerating enter theSuthlbxas project based, also alleged damages in various amounts expense amounts on the Company's can-among other things, on alleged misrep-from time to time, awJ has most recently solidatedincomestatements. As of presentations as to the capabilities of the specified the amount of actual damages December 31,1988, HI&P's im'estments original architect-engir,eer and construc-claimed to bein a range of approxi-(net of accumulated depreciation and tion manager of the project, (b) alleges mately $500 million to approximately amortization) in the South Texas project thaWIAP failed to perform properly its $%0 million,allor someponion of and in nuclear fuel, including AFUDC, duties as project manager and (c) assens which was alleged to arisepursuant were $2A84 billion and $147 million, claims against HI&P under theTexas to, and to be subject to trebling under, respectively. Deceptive 1rade Practices-Consumer Pro-the DTPA. tection Act (DTPA), which act provides for the recovery of treble damages in cenain circumstances. 55 1
InJanuary 1988, til&P filed a third 'thalof the pendingsuit between the Utility Commission regarding regula-pany petition (Third Pany Petition) as-Austin and HMP commencedin March tory actions based on such evaluation. In sening that it is entitled to contribution 1989 andis expected to take several June 1986, that consulting firm presented and indemnity from the other two owners months. HMP and the Company regard its repon (Report) to the Utility Commis-in the South Texas project, the City of San Austin's claims and those asserted by San sion. He Report covered the period from Antonio (San Antonio) and Central Antonio and CPL to be without merit. project inception thmugh 1983. ne con-Power and Light Company (CPL), and Vhile HI&P and the Company cannot sulting firm concluded in the Report that from CPL's parent, Central and South give definitive assurance regarding the deficiencies in management of the project West Corporation (CST),in the event ultimate resolution of these matters, they had occurred and that such deficiencies j HMP should be heldliable to AJstin on presently do not believe such resolution led to imprudent expenditures estimated certain claims in the Austin litigation. In will have a material alverseimpact to be in a range of $1.1 to $1.3 billion, I addition, the nird Party Petition seeks a on HMP's or the Company's financial which range does not reflect the proceeds i J ruling that (a) Hi&P not be held liable position. fmm the settlement with the former to Austin, San Antonio, CPL or CSW with architect-engineer. According to the respect to Hi&P's actions or inactions as lhulen RerkteofSouth EvasPmjed Report,such amounts do notinclude project manager of the South Texas proj-ly Utili/r Commnsion AFUDC or rate effects which the consult-ect; (b) all pmceeding be deferred until in 1986, the Utility Commission insti-ing firm concluded would substantially after completion of Unit No. 2 of the tuted a prudence resiew of theSouth offset each other. The Repon also indi-South Texas project but not later than Texas project for the purpose of reaching cated that the estimates relating to the December 31,1990; and (c) attemative a final and binding determination for prudence issue were preliminary, were d spute resolution procedures, including future rate base treatment of the amounts based upon certain assumptions that arbitration, be implemented. (Commer-invested in the South Texas pmject. This should be refined and were subject to cial operation is now scheduled to occur proceeang(Docket No. 6669 encom-further refinement and mod fication. in bne 1989.) passes an investigation of the prudence in April 1988, the Utility Commission in March 1988, San Antonio and CPL and efficiency of the plaaing, manage-retained the accounting firm of Ernst & filed responses to the Third Party Petition ment and construction of the South Tcxas %hinney (FAW) to resiew the South asserting that Hi&P has breached its du-project, as well as the proper accounting Texas project and to provide an impartial ties and obligations as project manager treatment of the pmceeds received from and comprehensive evaluation concem-of the South Texas project and is liable to the former architect-engineer in the set-ing the prudence of management and the ) them for resulting unspecified damages. tlement of certain litigation relating to reasonableness of costs associated with l In addition. San Antonio and CPLhave the South Exas project. The issues raised the South Texas project. The scope of the sought arbitration under the terms of the in this docket will be considered by the FAW resiew includes a raiew of existing participation agreemtat for the South Utility Commission in conjunction with information related to the South Texas Exas project and have asked the trial HIAP's application for general rate project, including the Report, the litiga-court in the Austin htigation (a) to stay increases. Hearing on the general rate tion record in HI&P's lawsuit against the further proceeding with respect to San increases began in March 1989. See former architect-engineer of the South Antonio and CPL pending that arbitration Note 12. lxas project and Austin's lawsuit against and (b) to compelHIAP toproceenvith In view of the schedule for these hear-Hi&P. arbitration CSW also responded to the ing, a significant lag time will occur E&W to date has submitted two partial Third Party Petition in March 1988, de-between the commercialoperation of reports related to certain portions of its nyinganyliabihtywth respect to the Unit No. I of the South T xas project evaluation. Although the ovarall finding South Texas project and requesting that (which occurredon August 25,1988) have been that the South Texas project d sputes be submitted to arbitration. No and implementation of new rates reflect-was managed prudently after the release hearing has been scheduled by the court ing such facility as plmt in senice. As a of the former architect-engineer, F2W in the Austin litigation to consider these result of such lag time, Hl&P's operating concluded that a number of actions matters.The CPL and San Antonio results have been and, in the absence of taken during the early years of the South claims have been severed from the Austin deferred accounting treatment, will con-1xas project were imprudent. No cost or litigation, and San Antonio, CPL and tinue to be affected. See Note 11. CSW wdl not be required to participate in 1985,the Utility Commission re-in the trial of the pending suit between tained a consulting finn to evaluate the Austin and Hi&P. prudence and effiatncy of the planning and management of the South 1xas poject and to make recommendations to l i 56
i schedule impaa relating to the identified OPUC estimate of to:al costs for the Souih BudytandSchalute imprudent management actions have yet Rxas projectin acess of $10 billion. Unit No.1 of the South Texas project was been quantified by E&W. It is expec!cd OPUC alsoinduted thatit did not con-recognized as having achieved commer-that E&W will issue additional panial sider the reasonableness of the costs cialoperation as of August 25,1988, anddraft reports overthe next two incurred subsequent to the replacement after satisfying the criteria set out by the months coveringthe remaining audit of the former architect-engineer and that Utility Commission's rules. issues, including quantification, with a the recommendations contained in the The cost estimate for the South Rxas final repon and testimony available for testimony are preliminary and subject to projea is subject to continuing review. 1 filing with the Utility Commission on or change based upon final costs and com-Based upon its October 1988 completion - aboutJune 15,1989 mercial operation dates for Units No. I assessment (which reflected a commer-TheCity of Houstun (Houston) has and 2 of the South Rxas pmject. cialoperation date for Unit No.1 of also retained a consuhant to perform a It is anticipated that other estimates of August 25,1988), fil&P estimated that project miew. Although the Houston imprudence relating to the south Texas the total cost for the completed project consultant had not finalized its miew, projectwillbe madein connection would be $5.43 billion, excluding based on the consultant's preliminary with Docket No.6668 as the case moves AFUDC and net of the settlement with findings, Houston passed a rate ordi-to hearing. the former architect-engineer.The nance den)ing Hi&P an increase in rates Hi&P and the Company continue to increase over previous estimates results and declared that cenain aspects of the believe that the settlernent with the primarily from the delays in achieving SouthTexaspmjectwere not pmdently former architect-engineer provided full initial criticality and the resulting delay - managed. Hi&P appealed the Houston compensation for any imprudent or inef-in the date of commercial operation of ordinance,and as a result of such ficient planning or management during Unit No.1, which was previously as-appeal, the issues raised in connection theperiodin question. HI&P will sumed to be in the first quaner of 1988. with Hi&P's application for rate increase strongly contest any recommendation or On December 16,1988,the NRC filed with Houston willbe resohrdin findingthat amountsimestedin the granted a low power operating license conjunction with Hi&P's rate applica-South Rxas project, after taking into for Unit No. 2 of the South Rxas project, tions pending before the Utility Com-consideration the settlement, have been a andloading of nuclear fuelwas com-mission. See Note 12. Itis unclearat result of inefficiency or imprudence. pleted on December 20,1988. Initial this time how either Houston or any While no definitive assurance can be criticality at Unit No. 2 was achieved on otherparty willutilize the Reponin given that all amounts invested in the March 12,1989.on March 28,1989, the connection with Docket No. 6668 or South Texas project will be recoverable by NRC approved theissuance of a full otherpmceedings. Hi&P through electric rates or otherwise, power operating license for Unit No. 2 The Office of Public UtilityCounsel HI&P and the Company presently believe of the South Rxas project. Commercial (OPUC), a state agency that represents the ultimate reso!ution of the Utility operation of Unit No. 2 is scheduled to residential and small commercial rate-Commission's prudence miewwillnot commenceinJune 1989 payers, fikd a pertion of its testimony in have a material adverse effect on HI&P's Ibcket No. 6668 in October 1988. Simul-or the Company's financial position. Any NudearInsurance taneously with its fihng, OPUC issued a amounts that are not recoverable would HIAP and the otherowners of the South press release statmg that such testimony haveto be charged against camings. A Texas project maintain nuclear propeny recommends a disallowance of $3.5 substantial write-off could adversely affect and nuclear liability insurance cover-billion to $4.2 billion with respect to the the Company's ability to finance its capi-ages as required by law and periodically entire South Exas pmject, after taking talprogramand meet other financial review available limits a.id cercrage for into account the proceeds from the settle-obligations. additional protection. 'l hem can be no ment with the former architect-engineer assurance that all potential losses or of the South Texas project. OPUC further liabilities will be insurable or that tie assened that, based on the $4.2 billion amount of insurance carried will be suf. l Ulowance figure, $1.28 billion of the ficient to cover them. In addition, insur-l $3Million estimated by OPUC to be ce is not available for cenain types or Hi&P's share of the cost of the South amounts of losses which might be expe-Rxas project should be disallowed Such rienced. Any substantiallosses not cov-amounts include carrying costs as esti-ered by insurance could have a material mated byOPUC and are based on an effect on the financialcondition of Hi&P and the Company. ] l s 57
NRC regulations require nuclear to annual assessments,which could owners have agreed that such assess- ) power plant licensees to obtain property amount to approxirnziely $9 million in mentswillbe home on the basis of insurance coveragein the minimum any given year for the total pmject, in their respective ownership interests in amour:t of $1.06 billion The proceeds of the event that property losses as a result the project. this insurance are required to be used of an accident at a nuclear plant of any first to ensure that the licensed reactor is compar.y insured by NEIL exceed the IAmmmsioning l in a safe and stable condition and can be accumulated funds available to NEIL Based on a study prepared in 1986, Hi&P's j maintainedin that condition so as to HIAP and the other owners of the South share of the estimated costs of decom-prevent any significant risk to the pubhc Rxas projea have enteredinto an ar-missioning both units of the South 1hxas heahh or safety. These regulations further rangement such that the total costs of project, as adjusted to reflect certain min-require that (a) any remaining property insurance for the South Texas prqect imum funding requirements of tre NRC, insurance proceeds be used first tu com-(including premiums and assessmems) is approximately $1M milhon (in 1986 plete decontamination operations that are to be shared pro rata ksed upon dol'ars). Certain rules and regulations of may he ordered by the NRC and (b) the their respective ownership interests in the tb; NRC require each holder of a license proceeds are to be paid to a special trustee project. Under this arrangement, Hi&P f a operate a nuclear plant to submit to appointed to hold insurance prxeeds up would ultimately bear that portion of ihe NRC byJuly 1990,a decommission-to $1.06 billion to be used for sta-total property damage insurance costs, ing funding plan which contains, among bilization and decontamination. The includmg any assessment by NEIL, attrib-o her things, (a) a cost estimate for de-decontamincion prianty and trustee pro-utable to its ownership interest. Although commissioning such plant and (b) either visions were to have been implemented there can be no assurance as to the a funding plan or a certification of finan-in October 1988; however, in September amount of property insurance available cial assurance for covenng decommission-1988,the NRC pmposed a new rule ex-from time to time, it is anticipated that ing costs for such plant.1he management tending the implementation schedule for propertyinsurano coveragewillbe committee of the South Rxas project is these requirements by eighteen mor,ths. A maintained for the South Rxas project to in the process of updating the decommis-temporary exemption from the decon-the extent that pmperty of similar charac-sioning plan for the South Exas projea tamination priority and trustee provisions ter is usually so insured by companies for use in complying with these rules and has ben granted in the interim. Further similarly situated and operating like regulations of the NRC. Actual decom-rulemaking on these matters is expected, properties, to a reasonable amount. missioningcosts could, however,my but the Company is unable to predia how Congress has renewed the Price-substantially from any estimates of such such regulations will address difficulties Anderson Act, a compn:hensive statutory costs and will ultimately depend upon a in implementing these requirements, arrangement providing limitations.on number of faaorsincluding,without particularly the trustee provisions. nuclearliability and govemmental limitation, regulatory requirements and The owners of the South Texas project indemnities. The limit of liability for the method used to decommission the currently maintain property damage in-the owners of nuclear power plants was project. Provisions for decommissioning surance in the amount of $1.395 billion, increased from $720 million to approxi-costs are not refleaed in current opera-which isless than the totalamount of mately $7.5 billion per incident. The tions. HI&P has proposed in its current such insurance currently a"ailable for owners of the South Rxas project are rate applications to begin recovering $2.1 such los:es such property damage insur-insured for their share of this liability million annually for decommissioning anceis provided by American Nuclear through a combination of private insur-costs associated with Unit No.1 of the hisurers and Nuclear Electric insurance ance and a mandatory industry-wide pro-South Rxas project, on a straight-line limited (NEIL). Any NEILproceeds must gram of self-insurance, The maximum basis over the operating life of Unit No.1. be used to cover decontamination and amount that the owners of the South However, there can be no assurance that l clean-up expenses before being used to Rxas project may be assessed under such allof such costswillbe recoverable cover direct losses to property. As mem-program following a particular nuclear through rates or that the amounts that l bers of NEIL, Hi&P and CPL are subject incident is $63 million (which amount are recoverable willbe adequate. may be adjusted for inflation) for ead licensed reador, but not more than $20 million per nuclear incident in any year. HI&P and the other South Exas project I i 58
NuclearFuel fee of one mill ($.001) pr net kilowatts - facilities with the capacity to sto;e at Under a contract with the U.S. Depart-hour generated be paid to DOE.Thefee ' least 33 years of spnt fuel discharged ment of Energy (DOE),the DOEuill may be adjusted in order to ensure fall. . fmm each unit. ;llAP is proposing, in ultimately take possession vf all spent cost recovery.1he South Texas projd it the current rate applications, to recover fuel generated by the South 1bxas project currently designed to have on-site storage the disposal fee through the energ/ com-for long-term storage.1he contract cur-ponent of base electric rates rently requires that a spent fuel disposal -
11. Deferred Accounting'&eatment IllaP has pending witti the Utility Com-Tr'E prtposed order in HISP's deferredthe proposed order on HI&P's lequest,.
mission a request for deferred accountmg accmeingdocket,which had been rec-including a recommendation thatCPL treatmentwith respect to Limestone er. mended try the llearings Examiner on not be permitted to defer certain tosts - Electric Genemtieg Station (Limestone) febnury 3,1989, woukt authorize HI&P which thellearings Examinerindie - Unit No. 2 and Unit No. I of the Sxth - to continue to accrue AFUDC onitsin-HI&P docket recommended that HI&P Rxasproject. vestment in Unit No. I of the South 1bxas be permitted to defer. At the Febmary 22, The request for defermiaccounting project and to defer and capitalize the 1989 hearing, the Utility Commission treatment was filed because of the lag dyraiation, operations and mainte-noted that there were differences between time w!iich occurs between the commar-nance, insurance and tax expenses the tao proposed orders and expressed a q cial operation date of a new generatmg xsociatal with that unit from August 25, desire to censider the two reports at the - j unit and irr.plementation of new rates 1988 (the da!c of commercial operation) same time in order to evaluate the prece-1 reflecing such facility as plant in senice. until mtes are in effect tint reflect the dential effects of the proposed orders. - l' 1he lag time associated wi'h Umestone "pnxlently incurred" cuts of the plant. No prediction can be made at this Unit No. 2 and Unit No. I of the South The proposed orde.r for Hl&P would per-time regarding either the timing or the Texas projea has adverselyaffeaed mit HlAP to capitalize carrying chaqcs outaxne of the action by the Utihty Comi fil&P's operatmg resuhs and will con-in the same form as AFUDC forrate-mission on the Hearing Examiner's tivoe to base such an effed unless de-making purposes, but the equity portion pmposed order.Untilsuchtime as the femd accounting treatment is granted of those carring chargescould not be Utility Commission acts favorably on i or other mitigative acion by the Utility cryitalized for financial repening pur-ElhP's request for deferred accounting i Commission is taken. poses but instead would be disclosed in tn:atment,camings of Hi&P andthe On Fd> mary 22,1989, the Utility a footnote to financial statements.1he Companywillbe adverselyimpaaed. j Commission was scheduled to consider a Hearings Exammer'sproposedorder HI&h currentelectric rates do not j report and proposed order fmm a Hear-would not permitdefemd accounting reflect approximately $400 million of - ings Examiner in the defened accounting treatmentwith respect to Umestone anmnlized costs, including carrying e docket. However, the Utility Commission Unit No. 2. costs, a::sociated with the operation of deferred consideration of that report until lhe pmposed orderon CPL ~s request Unit No'.1 of theSouth1hxasproject such time as it can also censider a report appears to differ in some respecs from and Limstone Unit No. 2. Resta*ement and proposed order fmm another Hear-of previously reported financial resuhs - ings Examiner which was issued on Feb-would not berequiredif HI&Pshould ruary 21,1989 with respect to a similar obtain the' deferred accounting treatment. request for deferred acconting treatment I filed by CPL, which also has an ownership interestin the South 1hasproject. I n. o ^ 59
11 Applications for RateIncreases On November 23,1988, HMP filed ap-with the South Rxas project. Hearings the equity portion of AFUDC to be capital-plications for general rate increases with on Hi&Fs rate request began in March Ized other than during construction or as i the Utility Commission (Docket No. 1989; however, final action fmm the Util-part of a qualified phase-in plan. Hi&P's 1 8425) and the municipalities within iti Commission on the rate request is not requested Rate Moderation Plan includes HI&P's service area that retain original antdpated beforelate 1989 or early a qualified phase-in plan in accordance jurisdiction over electric rates. In these 1990. HlAP is requesting that increases with the presisions of SFAS No. 92. See i applications, HMP requested rates de-associatedwith thesecond and third Note 11. I signed to increase its system-wide base ~ phases become effective in successive In February 1989, Houston took final operating revenues for an adjusted test noe-year intervals fol!owing the effective-action with respect to HMP's rate request year endedSeptember 30,1988 by ap-ness of the phase one incmase. In phase by passing a rate ordinance which denied proximately $432 nJiion,which repre-two and phase three of the Rate Modera-HI&P any increase in its present rates. sents an increase of approximately 15% tion Plan, Hi&P would seek to begin The Houston ordinance, which declared. on totalrevmues.The rateincrease r: covering its remaining costs associated that certain aspects of the South Exas would represent the first phase of a re-with Unit No. I of the South Texas project project were not prudently managed, was quested three-phase rate moderation or and costs associsedwith Unit No. 2 of based, in part, on the preliminary find- " phase-in" plan (Rate Moderation
ne South T xas project. Pursuant to the ings of a consultant retained by Houston i
Plan) for recovering costs associated requested Rate Moderation Plan, Hi&P to perform a review of the project. HI&P l with Limestone Unit No. 2 and both would capitalize and defer for future re-appealedHouston's ordinance to the units of the South Rxas project. In covery those costs not included in the Utility Commission for final resolution in I phase one of the requested Rate Mod-initialorsecond phase.%e timing of conjunctiva with Docket No. 8425. It is. j eration Plan, HMP seeks to begin recov-phases two and three may be modified if anticipated that other municipalities may 1 ering its remaining costs not yet reflec-Hi&P does not receive favorable action adopt ordinances similar to that adopted ted in rates associated with 1.imestone on its 'equest for deferred accounting by Houston. i Unit N9. 2 and a portionof the costs tmatment. See Note 11. HI&P's ability to increase its rates will assoaatedwith UnitNo. I of the South In August 1987,the Financial Ac. be dependent upon favorable action by' Texas preject. counting Standards Board issued SFAS the Utility Commission and the munic - Incluuedin the rate applications No. 92," Regulated Enterprises-ipalities retaining original jurisdiction Hi&P's request to begin recovering Accounting for Phase-in Plans". SFAS over electric rates. It is expected that the l approximately $61 million of its invest-No. 92 requires allowable costs deferred prudence of expenditures relating to the ment in the proposed Malakoff Electric for future recovery under a phase-in plan South Rxas project will be a principal a GeneratingStationin Henderson ta be capitalized as a deferred charge if issue addressed in cconection with these Countj, Texas (Malakoff project), each of four criteria is met. Those criteria proceedings. Final action is not expected together with Utility Fuels' investment are(a) theplanhas been agreed toby before late 1989 or early 1990. See also in the project of approximately $124 the regulator, (b) the plan specifies when Note 10. million,whict;HIAPintends topur-recovery will occur, (c) all allowable costs HI&P has also filed a separate appli-J chase. Current recovery of these costs is deferred under the plan are scheduled cation (Docket No. 8431) that requests requested wer a nine year neriod with for recovery within ten years of the date final reconciliation of fuel costs incumxl a the unamortized balance io be included when deferrals begin, and (d) the per-since the last fuel reconciliation. This in rate base. It is presently contemplated centage increase in rates scheduled for petition requests that Hi&P be authorized that Utility Fuels will provide the lignite each futureyear under the planis not to continue use ofits present fuel cost supply services for the Malakoff project. greater than the percentage increase in factors which were implemented in ac-Although the rate increase requests as-rates scheduled for each immediately pre-cordance with the Utility Commission's ) sociated with the second and third phases ceding year. SFAS No. 92 does not permit finalorderin HI&P'slast rate case. ] of the Rate Moderation Plan will be filed Therefore, the requ=sted reconciliation i I asindependent rate cases, Hi&P has will not affect the current rates. The requested that the Utility Commission Utility Commission has consolidmed establish a scheduldor the recovery of that requestwith Docket No. 8425. the remainder of HI&P's costs associated j 60 a
13. Malakoff Project inJanuary 1987,Hi&P announced that necesmry to meet load growth require-December 31,1988 and suspended capi-the schedule for the construction of the ments. Hi&P's total investment in the talization of interest effective December proposed Malakoff project had been mod-Malakoff project, through December 31, 31,1986. For the 1980-1991 period, if;ed.1he scheduled in-senice dates, 1988,is $155 million including AFUDC Utility Fuels anticipates $32 million of which are the dates the units are expected andland. This amountisincludedin expenditures relating to die Malakoff to be available to meet peak demand, are Plant Held for Future Use, and HI&P has project which are primarily associated now 1997 for UnitNo. I and 1999 for suspended the accrualof AFUDC until with keeping lignite leases and other -
Unit Na. 2.The modified schedule such time as the project is reactivated. related agreements in effect. Hi&P has resulted from lowered projections of Utility Fuels, which will supply lignite agreed to indemnify Utility Fuels for all future demand for electricity in the Hous-fuel for the plant, has invested $124 mil-necessary and actual costs incurred due ton area. As a result of the modified lion in lignite resenes and uluipment to the modification of the schedule. In schedule, all developmental work on the relating to the Malakoff project through Ibcket No.8425,HI&P hasproposed two 645 MWlignite unitswas stopped, that a portion of its investment in the but H1&P wili resume activity when Malakoff project be recovered in current rates. See Note 12.
14. Unrecovered Costs The Utility Comntission has allowed re-making purposes. However, unrecovered priod The amounts ofsuch assets and covery of certain costs over a period of amountshave notbeeninchdedin rate die remaining recovery period applicable time by amortizing those costs for rate base and, as a result, no retum on invest-to each arelistedbelow-ment is being eamed during the recovery UnrecoveredAmount RemainingRecoveri eriod P
(7knesandsofDollars) at December 31,1988 at Dtrember 31,1988 Allens Creek Project $28,876 48 months other 3,155 11-94 months
15. FederalIncomeTaxes The current and deferred components of tax expenses are as follows:
WarEnded December 31, ~ (7knaandsofDDIlars) 1988 1987 1986 Current: U.S $ 28,818 $ 93,607 $ 23,387 Foreign 11,587 4,703 2,781 Deferred: l 1.iberalized dyeciation 91,431 79,894 88,441 Applicable to AFUDC 29,076 40,263 50.310 l Investment tax credit-net 5,078 (3,472) 28,174 Oiland gas (2,901) 695 (6,460) Altemative minimum tax credit (21,777) l Other-net (168) 2.652 29,268 Federalincome taxes $141,144 $218,342 $215,901 l 'l 61
Effective federal income tax rates are lower than statutory corporate rates for each year as follous: Year Ended December 31, j (&usandsofthilars) 1988 1987 1986 Incomebefore federalincometaxes $536,398 $653,300 $640,836 ~ Preferred dividends of subsidiary - 35,972 31,406 26,817 ) 1btal 572,370 684,706 667,653 l Statutory rate 34 % 40% 46% Federal income taxes at statutory rate 194,606 273,882 307,120 ] Reductionin taxes resulting fmm: AFUDC-otherincludedinincome 40,153 57,434 78,360 Other-net 13,309 (1,894) 12,859 lbtal 53,462 55,540 91,219 ) Federalincome taxes $141,144 $218,342 $215,901-l Effective rate 24.7 % 31.9 % 32.3 %
16. Supplementary Expense Information l
Taxes, other than federal income taxes, were charged to expense as follows: War EndedDecember 31, (#xwsandsofDutim) 1988 '1987 1986 i Electric: Advalorem -$ 83,926 $ 76,686 $ 73,366 State gross receipts 33,603 35,177; 31,630 Payroll 17,940 15,222 18,788 l - PUCassessment 4,847 4,758 4,709 l Miscellaneous 24,503 ' 19,824 18.298 l l lbtal 164,819 151,667 146,791-1hxesincludedin cost of fuelsold 5,519 5,936 1l/43. Thxesincludedin oiland gasexpmse 3,851 _5,475 7,067 lbtal $174,189 $163,078 _ $158,601 l l Research and dselepment costs chay. ed to expense $ 14456 $ 16,141 $ 14,462 1. t L t. .I
~ " ' " ' - ~ - - - - -
17. Cable hisionJoinWenture KBILOM owns a 50% interestin Paragon tions Corporation (ATC), a subsidiary of by Gro'ip W Cable,Inc. IriJuly 1988, Communications (Paragon), a partner--
Time, Inc. Paragon issued $200 million appegate ship that owns cable telesision systems - Paragonis a party to a $275 million principal amount of 9.56% senior insti-which, as of December 31,1988, served revohing credit and letter of credit facility. tutionalnotes due 1995. over 700,000 basic cable customers and agreement with a group of banks. Bot. The Company recordsitsimestment approximately 499,000 premium pro-mwing under the agreement are in Paragon utilizing the equity method gramming customers.The remaining non-recourse to the company and to . of accounting. KBLCOM experienced ' interest in the partnership is owned by ATC.Theinitialborrowing under the after-taxlosses of $6.4 million and American 'lblevision and Communica-facility were used to prmide permanent $10.6 million during 1988 and 1987, Anancing for the acquisition of cable respectively. television properties formerly owned
18. AcquisitionsaxDisposals On March 14,1989, KBLCable, hic.
The funds forthe acquisition of senior bank debt facility will bea* interest (KBL Cable), a newly-formed subsidiary cablesystems, presented in thowands of ' at rates detenninedby reference to a of KBILOM, purchased allof the out-dollars,were pmvided as follows: LIBOR,CD or prime base rate plus an standingcapitalstockof RCACable-W "Y KBL Cablesenior bank debt $ 500,000 systems llolding Co. (Cablesystems) for a wrado of MeJud qF ELCable senior notes 100,000 purchase price of approximately $1.35 c ble margmswillbein a range of 0% to EMe smior billion, which amount includes appmxi-iK% forprimeloans,M% to2H% for bo & M e E000 mately $340 million of indebtedness of UBORloans anM, to 26 fo@ KBILOM seniorbank debt 100,000 Cablesystems whicn was refinanced con-huns.%e ELCable senior notes and 0 n np We currently with the closing and is subject senior subordinated notes will mature in ggg to certam post-closing adjustmerrs. The ten years, require prepayments of principal pgg, g. Stock Purchase Agreement pursuant t beginning in 1992 and bear interest at Pnmary Fuels '15'000 which the stock of Cablesystems was pur-fixed rates of 10.95% and 11.30%, re-PMmdeof chased pmvides for an adjustment to the ommon stock E000 SPectively. Borrowing under the KBLCOM purchase price in the event that the num-senior bank debt facility, which facility 'Ibtal $ L350 m pmvides for renurse to the Company, ber of subscribers of Cablesystems is I determined to differ imm the number of . bears interest determined by reference to subscribers upon which the closing pur- . %e KBL Cable senior bank debt facil-LIBORplus an applicable margin f om chase price was computed. Cai,iesystems ity is a ten-year facility with imuxlatory ,75% to L25%.The KBICOM senior owns directly or indirectly cable telmsion reductions in commitments commencing bank debt facility is a $300 million facil-systems sening all or a ponion of yeater in 1992. Borrowing under the Kct Cable ity, with initial borrowing thereunder of San Antonio andlaredo,'Ibxas; Min- $100 million in connection with the ac-neapolis, Minnesota; Portland, Oregon; quisition of Cables) stems and additional andOrange County,Califomia. annats to be available thereunder to pmvideforpaymentsofprincipaland , interest on the KBL Cable senior subonli-1 I . ~.
nated notes,to pmvide funds to reim-KBILOM's capitalexpnditure forits $215 million, were completed in the first l burse XBL Cable for capital expenditures cable television systems are estimatd to quaner of 1989, and it is anticipated that and to pay interest on indebtt dness under be $25 millionin 1989, $29 millionin the sale of the Argentine subsidiaries will I the KBILOM senior bank du faci!ity. 1990 and $24 mdlion in 1991. be completedin the second quaner of I Other borraings incurred by the Com-The Company has sold or enteredinto 1989. 'Ihese sales are expected to result in pany in connection with the acquisition definitive agreements for the sale of all of an after-tax gain of appmximately $30 { were shon-term borrowing and bear in-the domestic and Canadian oil and gas million in 1989, after giving effect to the terest at fluctuating rates generally lower propenies of Primary Fuels and its sub-expenses associated w'th winding down than the prime rate. sidianes that conduct oil and gas activi-Primary Fuels' perations. The Company In connection with the: acquisition of ties in Argentina. The aggregate purchase is continuing to pursue the sale of Pri-Cablesystems,in March 1989 the com-price for these transactions is approxi-mary fuels' subsidiaries that conduct oil pany also increased the a;;gregate mately $270 million, subject to certain and gas activitiesin Greece and In- ~ amount of its bank credit lines from $400 adjustments The sales of the domestic donesia. However, these subsidiaries are million to $550 million andissued 4 ard Canadian propenies, aggregating not materid to the consolidated financial million shans of common stock for net position of the Company. prueeds of appmxima'ely $106 million.
19. Subsguent Events DuringJanuary and February 1989, interest at a rate of10K% per annum In Febmary 1989, HMP deposited ap-HMP issued $200 million aggregate and willmature on February 1,2019 proximately $57 million with the first principal amount of collateralized in February 1989, $75 million aggre-mortgage bond tmstee to redeem allof medium-term notes having maturities gate principal amount of 7.70% col-theoutstanding bonds of the 15K%
l ranging from 5 to 10 years and bearing lateralized revenue refunding bonds and Senes ofits first mangage bonds at 100% fixed rates ofinterest ranging from $29.7 million of 7x% coHateralized pol-of the principalamount and to pay ac-9.79% to9.85% perannum. lution control revenue bonds were sold cmed interest. The bonds of this series in Februarv 1989, HMP sold $225 an behalf of HMP. Proceeds from the were redeemed pursuant to the general million aggregate priacipal amount of sale of such revenue refunding bonds will tederrption proiisions of the Mongage first mortgage bonds These bonds bear be used in connection with the reiemp-andiked of Tmst. tion of pollution contml revenue bonds l pmiously issued on behalf of HMP. l { 1 I i 1 l l 1 1 I f I Wk I l l
a
20. Unaudited Quarterly Information
.1 The fo!!owing unaudited quarterly finan-comprise only normal recurring accru-operations because of seasonal and other l d cial information includes, in the opinion als) necessary for a fair presentation. factors, including rate increases and vari-of management, all ad;ostments (which Quarterly results are not necessarily in-ations in operating expense pattems. dicative of expectations for a full year's -i Operating Net Eaming per QuarterEnded Revenues income income Common Share"' l (7bousands ofIk>llars Etrgt Per ShareAmount) March 31,1987 $ 777,250 $106,533 $ 57,7/5 $.50 June 30,1987 899,016 171,136 99,690 .86 September 30,1987 1,135,680 327,527 203,676 1.75 December 31,It)87 816,267 132,272 73,817 .63 March 31,1988 808,885 126,066 79,533 .68 June 30,1988 863,006 146,893 88,243 .75 September 30,1988 1.107,769 291,085 180,333 1.52 December 31,1988 869,80s 138,193 47,145 '.40 "' Quarterly eaming per commea share are based on the weighted average number of shares outstanding during the quarter, and the I sum of the quarters may not equal annual caming per common share. I 1 21, Reclassification Certain amounts from the previous years have been reclassified to conform to the 1988 presentation of financial statements. I Such reclassifications do not affect eaming. .l 1 l 3 2 65
1 l 1 lNDEPENDENT AUDITORS' REPORT l Ilouston industriesIncorporated: We have audited the accompanying consolidated balance sheets and the statements of subsidiaries' preferred stock and long-term debt ofIlouston industries Incorporated and subsidiaries as of December 31,1988 and 1987 and the relami statements of consolidated income, consolidated reatined emings and consolidated csh flows for each of the three years in the period ended December 31,1988. These financial statemen's are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards.1 hose standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used aid significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion, 7 in our opinion, such financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at December 31,1988 and 1987 and the results of their operations and their cash flows for each of the three years in the l pried ended December 31,1988, M conformity with generally accepted accounting prin::iples. I DEL 0llTElitSKINS & SELIS l Ilouston,1bxas March 22,1989 I I (f i-1t
l llouston Industries Incorporated L OfBcers Don D. lordan Marc Kilbride llollis R. Dean Thomas B.McDade 56 PresidentandChief 36, Antstant Corporate
63. Executive Vice President 65 Privateinvestor Executive Officer Secretary and andChief FinancialOfficer Houston, Texas,6 rector Asststant Treasurer of the Company, Houston, since 1980.
Ilollis R. Dean txas, arector since 1977. 63, Executive Vice Kevin P. Inughnane RandallMeyer President and Chief 32, Assistar.t Treasur r Joseph M. Ikudrie, Ph.D 66 RetiredPrnident Financial Officer
64. Consulting Engineer, of Exxon Company USA.
Rufus S. Scott Bellport, New Wrk, & rector since 1988. William A. Cropper
45. AssistantCorporate 6 rector since 1985, 49, Vice President and Secretary Kenneth L Schnitzer,St Treasurer floward W.Ilonne 59, Chairman of the Board Robert E. Smith 62, Chainnan of the Board of Century Corp., Houston, Robert B. Dyer 44, Assistant Corporate of The Home Company, Texas. 6 rector since 1983 52,Vice President Secretary Houston, Texas 6 rector Coqxtrate Development since 1978.
Don D. Sykora Directors 58, ViceMesident of the llugh Rice Kelly Don D. Jordan Company, Houston, Exas, 46,Vice President Charles E. Bishop, Ph.D 56 PnsidentandChief director since 1982. GeneralCounsel and 67, President Ementus of ExecutiveOfficerof the Corporate Secretary University of Houston System, Company, Houston, Exas. Jack T. Tro:ter Houston, Texas, director & rector since 1974. 62, Pnvate investor and Datid M. McClanahan since 1983 Chainnan of First interstate Bank j 39,Vice Pnrident James R. Irsch of Texas, Houston 1xas, i and Comptroller John T. Cater 67, Retired Chairman of director since 1985. 53, President and Chief the Board of Hughesbol Don D. S)kora operating Officer, MCorP, Company, Houston, Texas 58,Vice President Houston, Texas, & rector 6 rector since 1982. " 983~ Gretchen H. Denum Jon S. Lindsay 34, AssistantCorporate Floyd L Culler,Jr, 53, CountyJudge of Secretary 66, President Emeritus and Harris County,1xas Consultant to the Electric directorsince 1988. Power Research Institute, Palo Alto, Califomia, erectorsince 1988 1 l I i 1 67
= / Ilouston Lighting & Power Company ofDeers Don D. Jordan D. E. Simmons lawrence B. llorrigan,Jr Gerald E.Vaughn 56, Chairman and Chief 64, Group Vice President 54,Vice President 46, Vice President Executive Officer Power Operations Purchasing andSuppon NuclearOperations Don D. Sykora RayJ.Snokhous Robert L Waldrop 58, President and Ch*f 59, Group Vice President AncelD.Maddox 42, Vice President Operating Ofkr Extemal Affairs 48,Vice President PublicAffairs Customer Relations Jerome11.Goldberg Edward A.Turwx Ken W. Nabors 58, Group Vice Preuent 61, Group Vice President StephenW.Naeve 45,teasurer Nuclear Administration and Support 41, vin President Corporate Planning Rufus S. Scott flugh Rice Kelly L G. Brackeen 45, Associate General 46, Senior Vice r' resident. 55,Vice Presi&nt Stephen L Rosen Counseland Assistarn GeneralCounsel and FossilFuel and 48,Vice President Corporate Secretary Corporate Secretary Cogeneration Nuclear Engineeringand Construction Gretchen H.Denum R. Steve Letbetter James S. Brian 34, Assistant Corporate 40, Group Yke Pnsident 41,Vice President Stephen C.Schaeffer Secretary finance and Regulatory andComptmiler 41,Vice President Relations Regulatory Relations frank C.Gemar Ross E. Doan $1, Assistant Corporde 59, Vice Presiaent David G. Tees Secretary and Assistant Human andInformation 44,Vice 5sident Teasurer Resources Energy Pmduction h111f0M Incorporated 3 l 0$cers l Don D. Jordan Iconard E. Allsup William A. Cropper Dean A. Gilbert 56 Chairmanand 40,Vice President 49,Vice President, 32, Vice President Chief Executive Officer Advertising Sales Veasurer and Marketingand ' * * * *'I "E""" "E Jack D.Greenwade Richard N.Clevenger 49 Chief OperatingOfficer 42,Vice President Engineering MichaelV. Fell Richard N. Palmer 42,Vice President Finance 40, Comptroller i Utility Fuels,Inc. omeets Don D. Jordan Charles L Merka LawrenceJ. Rogers JohnJ. Bartell i 56, Chairman 51, Senior Vice President 42,Vice President 51, Corporate Secretary Operations and Administration Business Development andTeasurer R President and Ronald D. Baalman Allan Meltzer Chief Executive 39,Vice President 42, Comptroller Officer Finance and Accounting Printuy Innovative Houston Industries Development Fuels, Inc. Controls,Inc. Iinance,Inc. Ventures,Inc. Don D. Jordan Robert B. Dyer !!ollis R. Dean DotD. Jordan 56, Chairman and 52, Chairman and
43. Chairman and 56,cairman and ChiefExecuuveOfficer Chief Executive Officer Chief Executive OCcer Chief Executive Officer
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10 1 l l SECURITIES AND EXCHANGE COMMISSION l Washington, D.C. 20549 i FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31,1988 Commission File No.1-3187H-1 5 HOUSTON LIGHTING & POWER COMPANY (Exact narne of registrant as specified in its darter) Texas 74-0694415 I (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) I 611 Walker Avenue i Houston, Texas 77002 I (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 228-9211 Securities registered pursuant to Section 12(b) of the Act: fh r gi ter Title of Each Class w None Securities registered punnant to Section 12(g) of the Act: Titie of Each Class Preferred Stock, cumulative, no par: $4 Series; $6.72 Series; $7.52 Series; $9.52 Series; $9.08 Series; $8.12 Series; $9.04 Series; Adjustable Rate, Series A; Adjustable Rate, Series B; and $8.50 Series. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes v' No. As of March 1, 1989, 106,660,778 shares of the registrant's Common Stock, wit.hout par value, were issued and outstanding and privately held, beneficially and of recond, by Houston Industries incorporated. j
HOUSTON LIGHTING & POWER COMPANY Form 10-K for the Year Ended December 31, 1988 TABLE OF CONTENTS Page No. Part I Item 1. Business The Company.......................... 3 Certain Factors Affecting Electric Utilities and HL&P.............. 3 Service Area............................... 4 Peak Loads and Capability.................. 5 Construction Program....................... 5 Competition and Least-Cost Planning........ 11 Purchased Power and Cogeneration.......... 11 Fuel....................................... 12 Regulatory Matters......................... 14 Nuclear Insurance.......................... 17 Labor Matters.............................. 17 Operating Statistics....................... 18 0fficers................................... 19 Item 2. Properties................................... 20 Item 3 Legal Proceedings............................ 21 l l Item 4. Submission of Matters to a Vote of Security Holders............................. 21 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 22 Item 6. Selected Financial Data...................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results l of Operations................................ 23 1 1 Item 8. Financial Statements and Supplementary Data.. 28 Item 9. Changes in and Disagreements with Accountants j on Accounting and Financial Disclosure....... 58 Part III Item 10. Directors and Executive Officers of the Registrant............................... 58 Item 11. Executive Compensation....................... 64 Item 12. Security Ownership of Certain Beneficial Owners and Management............. 68 Item 13. Certain Relationships and Related Transactions................................. 68 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 69 5 yyggggg}y q3 y : 3
,PART I Item 1. 0 THE COMPANY Housto' Smpany (HL&P) is engaged in the generation, transmissi6 T4 ale of electric energy, serving an area of the Texas' G"--imated at 5,000 square miles, which includes Houston (GC has) and approximately 156 smaller cities, villages ar; 2 dress of HL&P's principal executive of fices is 611 Valkrrhas 77002 (telephone number 713/228-9211). HL&PFr C Houston Industries Incorporated (Houston IndustriesT-HL&P's outstanding common stock. Houston IndustriesC4 as' defined in the Public Utility Holding Company At 't ), but is exempt from regulation as a " registered =Ar the 1935 Act except with respect to the acquisition 2 Teurities of other public utility companies and holdin Industries also owns all of the outstanding common stocararies: KBLCOM Incorporated, Utility Fuels, Inc. (Util
Fuels, Inc.,
Innovative Controls, Inc., Houston Incrrm and Development Ventures, Inc. Certain Fac 2c Utilities and HL&P HL&P, stric utilities in general, has experienced problems i racluding difficulty and delays in securing rate increc:=nts to finance its construction program and provide 'antnrr' common equity; uncertainties and delays respec ting::-4 : licensing of nuclear-fueled generating units; sub=: construction and operating costs including increasing a environmental legislation and regulations; uncertainty:: m rate treatment for costs incurred in constructitr estions raised as to the prudence of such costs; -net rags due to the commencement, at commercial operation m s, of substantial charges for depreciation and other mmd : the cessation of the accrual of an allowance l a nstYuction (AFUDC) without offsetting rate increases + nef;'high costs in raising large amounts of capital in x major users of ca.pital; competition from other supksr ertainties with respect to the cost and availabili mier over the safety and uses of nuclear ~ hange in energy sales due to economic 'c power; an9cm conditions,2=nergy conservation measures undertaken by customerce d. to in this paragraph have had and are expected wt 7,spact -on BL&P's operations. In addition, HL&P's opewely affected in recent years by a downturn in economigaice area. = Two - hare _ ' expected to af feet HL&P during 1989 the nig;grespect to Unit No. 1 of the South Texas are ) Proj ect E?_on' (South Texas project) and Unit No. 2 of " l y, 1
g; -p C 3l il PART I Item 1. Business l THE COMPANY Houston Lighting & Power Company (HL&P) is engaged in the generation, transmission, distribution and sale of electric energy, serving an area of ') i the Texas Gulf Coast Region, estimated at 5,000 square miles, which includes Houston (the largest city in. Texas) and.approximately 156 smaller cities, j; villages and communities. The address of HL&P's' principal executive offices v is 611 Valker Avenue, Houston, Texas ~77002"(telephone number 713/228-9211). HL&P is a subsidiary of Houston Industries Incorporated (Houston Industries) which owns all of HL&P's outstanding ~ common stock. Houston
I 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 .j acquisition of certain voting securities of other public utility companies j and holding companies. Houston Industries also owns all of the outstanding common stock of six other subsidiaries: KBLCOM Incorporated, Utility Fuels,
j Inc.
(Utility -Fuels), Primary Fuels, Inc.,. Innovative Controls, Inc., J] Houston Industries Finance, Inc., and Development Ventures, Inc. j Certain Factors Affecting Electric Utilities and HL&P HL&P, in common with electric utilities in general, has experienced .i problems in a number of areas,= including, difficulty and delays in securing . ) rate increases in sufficient amounts to finance its construction program.and provide an adequate return on -common equity; uncertainties and delays respecting the construction and licensing of nuclear-fueled generating l units; substantial increases in construction and operating costs including increasing costs attributable to! environmental legislation and regulations; Li uncertainties regarding adequate rate treatment for costs incurred in J constructing. plants, including questions raised ~as to.the prudence of such costs; 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 l accrual of an allowance for funds used during construction (AFUDC) without offsetting rate a increases or other regulatory relief; high costs in raising large amounts of capital in competition with other major users of capital; competition from other suppliers of energy; uncertainties with respect to the cost and j availability of fuel; controversies over the safety' and uses of nuclear power; and an uncertain rate of change in energy sales due to economic j conditions, self-generation and energy conservation measures undertaken by z customers. The problems referred to in this' paragraph have had and are expected to continue to have an impact on HL&P's operations. In~ addition, ~[ HL&P's operations have been adversely affected in recent, years by a downturn b in economic activity in EL&P's service area.- 3 e 1
j Two major contingencies that are expected to affect HL&P during 1989 i
iQ are the need for rate relief with respect to Unit No. 1 of the South Texas P Project Electric Generating Station (South Texas prcject) and Unit No. 2 of i d' 't ;
1
/-
the Limestone Electric Generating Station (Limestone) and the trial of the suit with the City of Austin (Austin) relating to HL&P's management of the South Texas project. As a result of the commencement of the commercial operation of Unit No.1 of the South Texas project in August 1988, earnings of HL&P have been and vill continue to be adversely impacted until electric rates are implemented that reflect the costs of such unit or until deferred accounting for st.ch costs is authorized by the Public Utility Commission of Texas (Utility Commission). See Item 7 of this Report and Note 10 to the Financial Statements included under Item 8 of this Report. Furthermore, while HL&P has filed applications for general rate increases that address costs relating to Unit No. 2 of Limestone and Unit No. 1 of the South Texas proj ec t, final action with respect to such rate applications is not anticipated before late 1989 or early 1990. The prudence of expenditure relating to the South Texas project vill be a principal issue addressed in connection with such rate applications. If these applications do not result in adequate rate relief, HL&P's financial condition could be materially adversely affected. See Notes 9, 10 and 11 to the Financial Statements included under Item 8 of this Report. In addition, the trial of the longstanding dispute between HL&P and Austin commenced in March 1989, and is expected to last several months. See 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 water transportation. As a result of a general downturn in economic activity in the Houston area which began in 1983 and weakness in the oil and gas industry and related servicing and supply industries which persisted into 1987, general economic and population growth in the service area has slowed. 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 a substantial decline in world 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 power from cogeneration facilities.
Although the recessionary conditions in the Houston area began to show some signs of improvement in 1988, a full economic recovery has not been achieved. Hr.&P operates under a certificate of convenience and necessity granted by the Utility Commission which covers its present service area and l facilities. l 1 Peak Loads and Capability The following table sets forth for the years indicated information with respect to the installed net capability and total net capability of HL&P at the time of peak demand, the net maximum hourly demand on its system (excluding demand which is interruptible), and the reserve margin at the time of its system net maximum hourly demand: Pur-Net Maximum Hourly Demand Installed chased % Change Net Power Total Net From Reserve Capability (Mega-Capability Megawatts Prior Margin Year (Megawatts) watts)(1) (Megavatts) Date (2) Year (%) 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 1,295 13,755 August 19 10,302 (2.4) 33.5 1988 12,855(3) 820 13,675 August 9 10,422 1.2 31.2 (1) Reflects firm purchased power capability available through interconnections with other utilities (prior to 1988) and from cogenerators. (2) Does not include interruptible load at time of peak. (3) Capability shown is as of time of system peak and does not reflect: (i) the 385 megawatt (MV) capacity for Unit No. 1 of the South Texas project which achieved commercial operation on August 25, 1988 and, therefore, was not available until after the system peak; or (ii) other capacity changes which increased net capability by 19 MV but which occurred after the system peak. At December 31,
1988, HL&P owned and operated generating facilities with generating capability of 13,259 MV.
For planning purposes, HL&P expects peak demand for electricity to grow at a compound annual rate of 1.2% over the ten-year period 1989 through 1999. In part, this reflects a recovery in the Houston area economy which began in late 1987. Assuming facilities currently planned 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 1989 through 1994 now projected to be in a range of 30% to 40%. See " Competition and Least-Cost Planning" and " Purchased Power and Cogeneration". Construction Program HL&P carries on a continuous construction and maintenance program. Such construction and maintenance program and the estimated construction costs set forth below are subject to periodic review and are revised from _ _ _ _ _ _ _ _
time to time in light of changes in load forecasts, fuel diversification objectives, the need to retire older plants, changing regulatory and environmental standards and other factors. The construction program discussed below is currently estimated to cost approximately $1.053 billion during the three-year period 1989-1991 with approximately $379 million to be spent in 1989, $349 million to be spent in 1990 and $325 million to be spent in 1991, excluding nuclear fuel and AFUDC. In 1988, total construction expenditures were approximately $478 million. These amounts do not include expenditures on projects for which HL&P was reimbursed or expects to be reimbursed by customers or cogenerators. HL&P's construction program for 1989-1991 consists of the following principal estimated expenditures: Amount (millions) Fossil-fueled generating facilities..... $ 253 24 Nuclear-fueled generating facilities.... 72 7 Transmission facilities................. 134 13 Distribution facilities................. 409 39 General plant facilities................ 185 17 Tota 1.............................. $1 053 100% g The 1989-1991 construction program includes expenditures in connection with the following major generating projects aggregating 1,675 MV of estimated capability. All dollar amounts are exclusive of AFUDC and nuclear fuel payments. Millions of Dollars (Excluding AFUDC) Expend-Estimated Scheduled itures Estimated Unit Net In-Through Estimated Cost Per Plant and Capability Service December Completed Net Location (County) (Kilowatts) Fuel Date(a) 31, 1988 Cost Kilowatt South Texas No. 2 (Matagorda)(b) 385,000 Nuclear 1989 (b) (b) (b) Malakoff No. 1 (Henderson)(c) 645,000 Lignite 1997 Malakoff No. 2 $138 $2,160 $1,674 (Henderson)(c) 645,000 Lignite 1999 (a) The scheduled in-service date indicates the year during which the unit is expected to be available to meet peak demand. (b) The figure shown in the table as to capability represents HL&P's 30.8% share of the second unit of a jointly owned 2.5 million kilowatt (KV) project for which HL&P acts as project manager. The other participants are Central Power and Light Company (CPL), Austin and the City of San Antonio. Unit No. 1 of the South Texas project was placed in commercial operation in August 1988. The -
expenditures through December 31, 1988 and estimated completed cost of HL&P's 30.8% interest in both units of the South Texas project, exclusive of AFUDC, are $1.698 billion and $1.735
billion, respectively, and reflect approximately $66 million, or
$86 per KW, expected to be capitalized by HL&P for state and local taxes. The expenditures through December 31, 1988 and the estimated completed cost reflect a credit of $154.1 million (net of expenses) as a result of the settlement of certain litigation with the former architect / engineer-constructor of the South Texas proj ec t. HL&P's share of the estimated completed cost for both units at the South Texas project (including AFUDC) is $2.574 billion or $3,343 per KV. See " South Texas Project", " Regulatory Matters" and Note 9 to the Financial Statements included under Item 8 of this Report. (c) HL&P's total invectment in the Malakoff Electric Generating Station in Henderson County, Texas (Malakoff project) through I__ December 31, 1988 was $155 million including AFUDC and land. In
addition, Utility Fuels, HL&P's fuel supply affiliate, had invested $124 million in lignite reserves and equipment related to the project through December 31, 1988.
For a discussion of HL&P's efforts to recover certain of these costs, see " Regulatory Matters - Applications for Rate Increases" and Notes 11 and 12 to the Financial Statements included under Item 8 of this Report. 4 Through December 31, 1988, HL&P spent approximately $132 million, excluding AFUDC, for uranium concentrate and nuclear fuel processing services for its share of the fuel for the South Texas project. HL&P expects to spend an additional $24 million for similar purposes in connection with its share of the project during the 1989-1991 period. See " Fuel - Nuclear Fuel Supply". The estimated construction expenditures set forth above do not include any amounts for the cost of decommissioning the South Texas project at the end of its estimated 40-year useful life. Based on a study prepared in 1986, HL&P's share of the estimated costs of decommissioning both units of the South Texas proj ect, as adjusted to reflect certain minimum funding requirements of the U. S. Nuclear Regulatory Commission (NRC), is approximately $104 million (in 1985 dollars). Certain rules and regulations of the NRC require each holder of a license to operate a nuclear plant to submit to the NRC by July 1990 a decommissioning funding plan which contains, among other things, (i) a cost estimate for decommissioning such plant and (ii) either a funding plan or a certification of financial assurance for covering decommissioning costs for such plant. The management committee of the South Texas project is in the process of updating the decommissioning plan for the South Texas project for use in complying with I these rules and regulations of the NRC. Actual decommissioning costs could, j however, vary substantially from any estimates of such costs and will ultimately depend upon a number of factors including, without limitation, regulatory requirements and the method used to decommission the project. Although HL&P has proposed in its current applications for rate increases to begin recovering 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 or that the amounts that are recoverable vill be adequate. Actual construction expenditures vill vary from the above estimates as a result of numerous factors, including, but not limited to, changes in the rate -of inflation, changes in equipment delivery schedules, construction delays and deferrals, availability of
fuel, environmental protection requirements, changing requirements of the NRC and licensing delays, 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 demend and business conditions.
The scheduled in-service dates for generating plants may also vary as a result of similar factors. In addition, the estimated completed cost for the South. Texas project is subject to continuing review. See " South Texas Project"
below,
" 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, 1988 aggregated $795 million (excluding AFUDC), including expenditures of $48 million in 1988. Environmental protection expenditures for 1989-1991 based on existing laws and regulations are estimated to be $24 million (excluding AFUDC), of which-$13 million is expected to be expended during 1989, S5 million during 1990 and $6 million during 1991. Changes in laws and regulations relating to environmental matters could require additional expenditures for environmental protection facilities. Total gross additions to the plant of HL&P during the five years ended, December 31, 1988 amounted to approximately $4.8 billion, and during the same period, retirements amounted to approximately $328 million. Gross additions during the same five-year period amounted to approximately 54% of total utility plant at December 31, 1988. South Texas Project. For a description of the estimated completion cost for the South Texas project, see note (b) to the second table under the caption " Construction Program" above and Note 9 to the Financial Statements included under item 8 of this Report. On December 16, 1988, the NRC granted a lov power operating license for Unit No. 2 of the South Texas proj ec t. Loading of nuclear fuel was completed on December 20, 1988, and initial criticality was achieved on March 12, 1989. On March 28, 1989, the NRC approved the issuance of a full power operating license for Unit No. 2 of the South Texas project. It is anticipated that Unit No. 2 of the South Texas project vill be available to meet peak demand in 1989. I As a result of, among other factors, delays and increases in costs of I building nuclear generating units, reduced energy demands, reduced need for additional electrical generating capacity, and the need for significant rate J increases in connection with completed nuclear generating units, 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 j rate increase requests has been delayed for considerable periods of time, while the utilities' earnings have deteriorated due to the cessation of the accrual of AFUDC and the commencement of operating expenses and depreciation l 1
l charges at commercial operation without offsetting rate relief. For a discussion of the impact on HL&P's earnings with Unit No. 1 of the South Texas project in commercial operation, see Item 7 of this Report and Note 10 l to the Financial Statements included under Item 8 of this Report. In other cases, regulatory authorities have disallowed certain expenditures based upon a finding that such expenditures were imprudent. For a discussion of the prudence review of the South Texas project by the Utility Commission, see Note 9 to the Financial Statements included under Item 8 of this Report. Also, a number of utilities have been required to " phase-in" the costs of j nuclear generating units over an extended time period for regulatory purposes, while financing the costs currently and deferring full recovery from customers to a subsequent date. For a discussion of certain accounting I standards relating to phase-in plans, see Note 11 to the Financial Statements included under Item 8 of this Report. 1 During 1988, there vere a number of significant developments in 1 i litigation and various regulatory proceedings pertaining to the South Texas project. For information respecting such matters, including the pending litigation with Austin; the pending litigation with San Antonio, CPL and its parent corporation, Central and South West Corporation; the prudence review of the Scath Texas project by the Utility Commission; and the budget and schedule for the South Texas project, see Note 9 to the Financial Statements included under Item 8 of this Report. For information respecting the applications for general rate increases relating to the South Texas project and Limestone Unit No. 2, see " Regulatory Matters - Applications For Rate j Increases" and Note 11 to the Financial Statements included under Item 8 of this Report. For information respecting licensing proceedings before the NRC, see " Regulatory Matters - Nuclear Licensing". I Malakoff Project. In' January 1987, HL&P announced that the schedule for the construction of the proposed 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 fc c Unit No. 2. The modified schedule resulted from lowered projections of future demand for electricity in the Houston area. As a result of the I modified schedule, all developmental work on the two 645 MV lignite units was stopped, but HL&P will resume activity when necessary to meet load growth requirements. HL&P's total investment in the Malakoff project, through December 31, 1988, was $155 million including AFUDC and land. This amount is included in Plant Held for Future Use, and HL&P has suspended the accrual of AFUDC until such time as the project is reactivated. Utility Fuels, which vill supply lignite fuel for the plant, has invested $124 million in lignite reserves and equipment related to the Malakoff project through December 31, 1988 and suspended capitalization of interest effective December 31, 1986. For a discussion of actions undertaken by HL&P seeking to recover certain of these costs, see Notes 11 and 12 to the Financial Statements included under Item 8 of thk Report. Financing of Construction Program. HL&P proposes to finance its construction program through the use of internally generated funds and the proceeds received from the issuance of securities including, on an interim
basis, short-term debt securities.
The interim financing requirements of HL&P are met primarily 1 0 ugh the issuance of commercial paper supported by ] a bank line of credit. At December 31, 1988, such line was maintained in~ l the aggregate principal amount of $650 million, and in February 1989 such line was reduced by HL&P to $400 million. HL&P's ability to finance its continuing construction program vill be substantially dependent upon the availability of adequate and timely rate relief. See Note 11 to the Financial Statements. included under Item 8 of this Report. It is presently estimated that during 1989, 10% to 20% of HL&P's construction program can be financed through internally generated funde from operations. Internally j generated funds for subsequent years vill be. primarily dependent on the i regulatory treatment of HL&P's investment in the South Texas project. l For a description of sales of debt securities by or on behalf of HL&P i during the first quarter of 1989 and the proposed issuance in April 1989 of preferred stock by HL&P, as well as a description of the liquidity and financing plans of HL&P, see Item 7 ~ of this Report and Note 17 to the Financial Statements included under Item 8 of this Report. HL&P anticipates that it may utilize additional sales of senior debt securities and/or preferred stock to fund a portion of its construction program during 1989. I 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 with which HL&P must comply prior to the issuance of any first mortgage bonds or preferred stock. In January 1988, HL&P sold $400 million aggregate principal amount of its first mortgage bonds. These bonds bear interest at a rate of 9 3/8% per annum and mature in approximately equal principal amounts in each of the years 1991, 1992 and 1993. In January 1988, HL&P deposited $52 million with the first mortgage bond trustee to redeem all of the outstanding first mortgage bonds of the l 13 7/8% Series at 100% of the principal amount thereof and to pay accrued interest. The bonds of this series were redeemed pursuant to the general redemption provisions of the Mortgage. In June 1988, $190 million aggregate principal amount of 8 1/4% collateralized revenue refunding bonds was sold on behalf of HL&P, and in July 1988, $100 million aggregate principal amount of 8.10% collateralized l revenue refunding bonds was sold. In October 1988, an additional $68.7 i million principal amount of 7 3/4% collateralized revenue refunding bonds i was sold on behalf of HL&P. All of such bonds were collateralized with HL&P first mortgage bonds, and the proceeds of the sales of such revenue ] refunding bonds have been used in connection with the redemption of pollution control revenue bonds previously issued on behalf of HL&P. During 1988, HL&P received $74 million of the proceeds from pellution control revenue bonds and first mortgage bonds issued in prior years. Approximately $15 million (including interest earned on funds held'in trust and accrued interest at closing) was held in trust at December 31, 1988. i Substantially all of the funds held in trust are expected to be drawn down 1 by HL&P in 1989 to fund qualifying construction expenditures. I, 'i
Competition and Least-Cost Planning HL&P is subject to competition from a number of suppliers of energy, i l particularly cogenerated energy. In recent years, rising costs of electricity provided by regulated utilities have caused certain industrial and commercial customers to seek other ways to meet their energy needs, including the construction of cogeneration systems which provide electric energy both for their own needs and for sales to HL&P and other electric utilities. A relatively large number of cogeneration facilities have been built in HL&P's service area because of the relatively high concentration of process industries. The availability of alternative energy sources increases the risk that major customers vill reduce their purchases of electricity from HL&P. Should reduced purchases occur, increased electric prices to the remaining customers could occur. As costs for electricity increase. ad/dtional customers may find it economically advantageous to turn to altsinative energy supplies. The existence of alternative producers of electricity has contributed to regulatory uncertainty concerning the recovery of power plant construction costs and a continued focus on "least-cost" planning for alternatives to large capital intensive generating stations. HL&P is addressing this increased competition by, among other things, implementing new programs to reduce costs, particularly construction and fuel costs; developing a variety of rates and services and other marketing strategies to increase sales and encourage industrial expansion in its service area; and fully evaluating all supply and demand options before initiating construction of additional large central station generating facilities. Steps that have already been taken in these areas includes completion of the new Limestone unitr Thead of schedule and under budget; development of an integrated fuel nc gement system to provide increased fuel purchasing flexibility and assure utilization of the most economical available fuels during peak periods; modification of existing gcaerating units to provide improved reliability, reduced maintenance costs and greater flexibility in responding to changing demand conditions; and deferral of the Malakoff project until the late 1990's. During 1988, HL&P implemented a new Economic Redevelopment Service (ERS) tariff into its rate structure to provide incentivos for the relocation or expansion of industry in HL&P's service area. This rate is expected to be available through the end of 1994. During 1988, several companies committed to significant expansions in the Houston area based in part on the availability of economic incentives such as the ERS rate. Purchased Power and Cogeneration The Public Utility Regulatory Policy Act of 1978 generally requires utilities to purchase all electricity offered to them by qualifying cogeneration facilities. HL&P is currently purchasing cogenerated energy from fourteen industrial cogeneration facilities and various small power producers which have over 3,200 MV of total generating capability. Three long-term capacity contracts cover 820 MV of this total amount. A fourth capacity contract for 136 MV has been temporarily suspended through mid-1990. During 1988, over 1,800 MV of cogenerated power was wheeled or transmitted by HL&P to other utilities in Texas. 1 HL&P's current load forecast indicates that additional firm capacity will not be needed until the late 1990's. Certain rules of the Utility { Commission provide that a utility is not required to contract for more capacity from cogenerators than is necessary to meet its approved demand j forecast. Therefore, HL&P does not intend to pursue any additional l long-term capacity contracts for cogenerated electric energy. in the near future. See " Regulatory Matters - Application for Standard Avoided Cost Calculation". Cogenerators are not permitted under Texas law to make electric sales ) to parties other than electric utilities, except for sales to the thermal 4 purchaser from the cogeneration facility. Regulated electric utilities are required to provide transmission service for power sales by cogenerators to other electric utiliti3s at a compensatory rate. Attempts have been made by owners of cogeneration facilities to secure authorization to sell electricity to traditional customers of regulated electric utilities. HL&P believes such retail sales would work to the detriment of the majority of the utility's remaining customers by forcing them to bear increased costs and by reducing the overall reliability of electric service. In addition, to the extent owners of cogeneration facilities and other unregulated electric entities are allowed to make sales to traditional electric utility customers or to gain access to the electric j transmission and distribution systems for their own purposes, HL&P's prospects may be adversely affected. HL&P intends to continue its opposition to such efforts. 1 HL&P currently has no long-term purchased power contrccts in effect with other utilities. Fuel Approximately 44% of HL&P's energy requirements during 1988 was met with natural gas, 37% vas met with coal and lignite, and 2% vith nuclear. 1 The remaining 17% vas met principally with purchased power and cogenerated power. HL&P currently expects its future energy mix to be in the following proportions: Estimated Energy Mix 1989 1990 1991 1997 Gas.................................... 37% 36% 33% 35% J l Coal and Lignite....................... 42 41 40 43 l Nuclear................................ 6 8 8 8 Cogeneration........................... 15 15 19 14 Total............................. 100.% 100% 100% 100.%. HL&P's actual energy mix in future years could vary from the percentages shown in the table. Such percentages are based upon numerous estimates and assumptions relating to, among other .hings, environmental protection requirements, load growth, load management, cogeneration, the ;
e cost: ~ and availability of fuels and purchased electrical energy and the actual in-service dates of HL&P's planned generating facilities. Natural Gas Supply. HL&P purchased its natural gas fuel supplies from a large number of suppliers during '1988; however, 64% of HL&P's gas i requirements were still purchased from its traditional suppliers and their affiliates. Two of these firms, -Exxon Company, U.S.A. (Exxon) and United Texas Transmission Company (UTT), sell gas to HL&P' under, long-term contracts. The third, Houston Pipe Line Company (HPL) and its affiliates provided 23% of HL&P's gas requirements even though no long-term contract exists between HL&P and HPL. The contract with Exxon vill expire in 1996 or after delivery of a specified quantity of natural gas, whichever comes first. The UTT contract vill expire on January 1, 1990, unless terminated earlier by operation of certain " economic out" provisions in the agreement or unless extended by mutual agreement of the parties. Availability of natural gas supplies is dependent to a large degree on markets and weather conditions. In February 1989, the extremely cold weather experienced in Texa= forced several of HL&P's gas suppliers to discontinue deliveries being purchased under interruptible agreements.
However, due to the availability of other gas under firm contracts, the use of gas in storege, access to a large nunber of gas suppliers and the ability to substitute oil for natural gas, HL&P was able to continue to provide power to all of its firm customers.
In 1988, the price of natural gas in the spot market increased 12%; however, HL&P's cost of natural gas only increased 8%, primarily due to aggressive negotiations, HL&P's strategic posi tf.on in the marketplace including its ability to utilize alternate fuel sources and other conditions in the natural gas markets. Coal and Lignite Supply. Coal supply services for HL&P's four coal-fired units at the V. A. Parish plant (aggregating 2,335 MW) are being provided by Utility Fuels. Utility Fuels purchases low-sulfur Powder River Basin coal under two long-term coal supply. contracts. During 1988, the price of delivered coal decreased 5% from 1987 prices, reflecting primarily the lower prices in contracts that vere renegotiated and became effective as of January 1, 1988. Substantially all of the ccal requirements of the four coal-fired units at the W. A. Parish plant are expected to be met under such contracts. For a discussion of the status of certain litigation among HL&P, Utility Fuels and certain railroads and railroad companies with respect to a ) proposed coal slurry pipeline, see Note 8 to the Financial Statements j included under Item 8 of this Report. The lignite supply services for HL&P's Limestone units.are also provided by Utility Fuels. The price for lignite during 1988 did not change substantially from the 1987 level. Utility Fuels has under lease or contract recoverable lignite reserves which are expected to be sufficient to meet the total projected lignite fuel requirements of 221 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,rea of the proposed Malakoff 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. For a discussion of actions undertaken by HL&P in seeking to. recover certain of the costs associated with such purchased or' leased properties, see Note 11 to the Financial Statements included under Item 8 of this 'l Report. I Nuclear Fuel Supply. The supply of fuel for nuclear generating facilities involves the acquisition of uranium concentrates, conversion to uranium hexafluoride, enrichment of the uranium hexafluoride, and fabrication of nuclear fuel assemblies. Contracts have been entered into with various suppliers to provide the South Texas project units with uranium concentrates to allow the units to operate through 1998, 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. Under a contract with the Department of Energy (DOE), the DOE will ultimately take possession of all spent fuel generated by the South Texas project for long term storage. The DOE 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 (KVH) 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 33 years of spent fuel discharges from each unit. Oil Supply. Fuel oi).s maintained in inventory by HL&P to provide for fuel needs in emergency situations if and when sufficient supplies of natural gas are not available. In addition, HL&P uses fuel oil from time to time when oil is a more economical fuel than incremental gas supplies. HL&P has storage facilities for approximately 6,700,000 barrels of oil located at those generating plants capable of burning oil. HL&P's oil inventory will l be adjusted periodically, as necessary, to accommodate changes in the l availability of primary fuel supplies and to take into consideration the back-up gas fuel supply capability provided by certain gas storage facilities. l Recovery of Puel Costs. For information relating to the cost of fuel over the last three years, see " Operating Statistics" and Item 7 of this Report. The Utility Commission rules provide for the recovery of fuel costs ] through an energy component of electric rates. The energy component is established during either a utility's general rate proceeding or an interim fuel proceeding and is to be generally effective for a minimum of twelve months, 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 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. For a discussion of HL&P's pending application for a reconciliation of fuel costs, see Note 11 to the Financial Statements included under Item 8 of this Report. Regulatory Matters Rates and Services. Pursuant to the Texas Public Utility Regulatory Act of 1975, the Utility Commission has original jurisdiction over L A
i 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.-
1 Applications for Rate Increases. For information concerning HL&P's applications for general rate increases with the Utility Commission (Docket No. 8425) and the municipalities within HL&P's service area, see Note 11 to I the Financial Statements included under Item 8 of this Report. Prudence Review of. South Texas Project. For information concerning a prudence review of the South Texas project by the Utility Commission and the City of Houston, see Note 9 to the Financial Statements included under Item 8 of this Report. Deferred Accounting Docket. 5 June 1988, HL&P requested that the 1 Utility Commission order a deferred accounting treatment for operating costs associated with Limestone Unit No. 2 and Unit No. 1 of the South Texas 4 project (Docket No. 8230). For information with respect to Docket No. 8230, see Item 7 of this Report and Note 10 to the Financial Statements included under Item 8 of this Report. Appeal of 1982 Rate Order. For information concerning the appeal of a l 1982 rate order and certain issues pending before the Utility Commission relating to such rate order, see Note 8 to the Financial Statements included under Item 8 of this Report. Application for Standard Avoided Cost Calculation. In December 1987, HL&P filed an application with the Utility Commission requesting approval of a standard avoided cost calculation for the purchase of firm energy and capacity from qualifying cogeneration facilities. In January 1989, the Utility Commission approved a stipulation entered into by the parties to j this proceeding. In essence, the stipulation stated that HL&P will not have i a need for additional capacity until the year 1997. j Environmental Quality. HL&P is subject to regulation with respect to j air and water quality, solid vaste disposal, and other environmental matters by varioas federal, state and local authorities. Environmental regulations continue to be affected by legislation, administrative actions, and judicial review and interpretation. As a result, the precise effect of existing and potential regulations upon existing and proposed facilities and operations cannot presently be determined. However, developments in these and other areas of regulation have in the past required HL&P to make substantial l expenditures to modify, supplement or replace equipment and facilities and may in the future delay or impede construction and operation of new facilities or require substantial expenditures to modify existing facilities. The Texas Air Control Board (TACB) has jurisdiction and enforcement power to determine the level of air contaminants emitted in the State of l Texas. The standards established by the Texas Clean Air Act and the rules i of the TAC 3 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 I L
substantial expense to HL&P. In addition, expanded permit and. fee systems and enforcement penalties may discourage industrial growth within HL&P's service area. In order to ensure the control of particulate emissions and compliance vith applicable clean air standards at its V. A. Parish plant, HL&P has upgraded pollution control equipment at the plant by installing baghouses on three of the four coal-fired generating units. The fourth coal-fired unit l at the V. A. Parish plant was already equipped with a baghouse. The first unit was completed in January 1988, the second unit was completed in May 1988 and the remaining unit was completed in January 1989. The total cost of the newly constructed baghouses was approximately $200 million including l AFUDC. HL&P obtained relief from certain TACB standards prior to the completion of the baghouse installations. l I At the national level, congressionally mandated research is presently under way with respect to acid rain and its effects on the environment. It is possible that new legislation may be enacted or that new or modified s regulations may be promulgated regarding acid rain, and other changes in laws and regulations regarding environmental matters could be implemented, which could affect many areas of HL&P's operations. The Texas Vater Commission (TVC) has jurisdiction over all water i discharges in the State of Texas and is empowered to set water quality standards and issue permits required for water discharges which might affect the quality of Texas water. The EPA is authorized to set such standards and issue permits with respect to discharges into navigable streams. HL&P has obtained permits from both the TVC and the EPA for all of its generating facilities currently in operation which require such permits. Applications for renewal of permits for existing facilities have been submitted as required. The reissued permits reflect changes in federal and state regulations which increase the cost of maintaining compliance. HL&P is also subject to regulation by the TVC and the EPA with 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 with 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 j No.1 of the South Texas project and Unit No.1 achieved initial criticality I on March 8, 1988. Unit No. 1 of the South Texas project was recognized as having achieved commercial operation as if August 25, 1988 after satisfying j the eriteria set out by the Utility Commission, j s i
On December 16, 1988, the NRC granted a low power operating license for Unit No. 2 of the South Texas project. Loading of nuclear fuel was completed on December 20, 1988, and initial criticality at Unit No. 2 was achieved on March 12, 1989. On March 28, 1989, the NRC approved the issuance of a full power operating license for Unit No. 2 of the South Texas proj ect. Commercial operation of Unit No. 2 is scheduled to commence in j 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 (Docket 6184). Several hearings were held in 1987 to consider the details of the various methods and assumptions needed to perform such an economic stody. No prediction can be made, however, of the timing or ultimate resolution of this proceeding. Nuclear Insurance See Note 9 to the Financial Statements included under Item 8 of this i Report for information concerning nuclear insurance. Labor Matters I As of December 31, 1988, I:L&P had 10,967 full-time employees of whom 4,430 were hourly-paid employees represented by the International Brotherhood of Electrical Workers under a collective bargaining agreement j vhich expires on May 25, 1990. i l l 1 4 I l i l ) Operating Statistics Year Ended December 31, ) 1988 1987 1986 Electric Energy Generated and Purchased (Mkvh): Generated - Net Station Output............... 50,732,594 48,798,146 45,507,566 Purchased.................................... 9,291,504 9,959,034 11,104,589 Net Interchange.............................. 229 (362) 737 Total...................................... 60,024,327 58,756,818 56,612,892 j Company Use, Lost and Unaccounted for.......... 2,910,895 2,845,491 2,605,335 Energy So1d................................ 57,113,432 55,911,327 54,007,557 l I Electric Sales (Mkvh): Residential.................................. 15,250,510 14,701,438 14,627,569 Commercia1................................... 11,552,427 11,188,927 11,437,464 Industrial................................... 28,475,761 27,441,200 26,192,806 Street Lighting - Government and Municipal... 108,369 108,176 107,039 Tota1...................................... 55,387,067 53,439,741 52,364,878 Other Electric Utilities..................... 1,726,365 2,471,586 1,642,679 Total...................................... 57,113,432 55,911,327 54,007,557 Number of Customers (End of Period): Residential.................................. 1,170,889 1,147,962 1,144,165 Commercial................................... 157,950 156,517 157,199 Industrial................................... 1,780 1,764 1,755 Street Lighting - Government and Municipal... 79 79 80 Total...................................... 1,330,598 1,306,322 1,303,199 Other Electric Utilities..................... 5 6 6 Tota1...................................... 1,330,703 1,306,328 1,303,205 l Operating Revenue (Thousands of Dollars): Residential.................................. $1,147,688 $1,078,934 $1,071,356 Commercia1................................... 737,501 690,078 707,386 Industrial................................... 1,067,087 993,610 1,024,459 Street Lighting - Government and Municipal... 18,170 17,786 16,683 Other Electric Utilities..................... 66,775 79,503 68,990 Total...................................... 3,037,221 2,859,911 2,888,874 Miscellaneous Electric Revenues.............. 26,352 140,921 70,866 Total...................................... S3,063,573 $3,000,832 $2,959,740 Installed Net Generating Capability (Kv) 1 (End of Period).............................. 13,259,000 12,855,000 12,680,000 Cost of Fuel (Cents per Million Btu): l Gas.......................................... 181.1 170.0 170.3 l Coal......................................... 239.7 252.4 248.1 Lignite...................................... 161.7 162.7 188.5 Nuclear...................................... 48.7 Average.................................... 190.5 192.4 197.1 I !
OFFICERS Officer Business Experience 1984-1988 Name Age (1) Since(2) Positions Term j i D. D. Jordan..... 56 1971 Chairman and Chief Executive 1984-Officer and Director D. D. Sykora..... 58 1977 President and Chief Operating 1984-Officer and Director J. H. Goldberg... 57 1980 Group Vice President - Nuclear 1985-Vice President - Nuclear 1984-1985 Engineering and Construction H. R. Kelly...... 46 1984 Senior Vice President, General 1984-Counsel and Corporate Secretary Partner - Baker & Botts 1984 R. S. Letbetter.. 40 1978 Group Vice President - Finance 1988-and Regulatory Relations Vice President - Regulatory 1984-1988 Relations D. E. Simmons.... 63 1972 Group Vice President - Power 1984-Operations R. J. Snokhous... 59 1983 Group Vice President - External 1984-Affairs E. A. Turner..... 61 1978 Group Vice President - 1985-Administration and Support Senior Vice President and 1984-1985 Assistant to the President Group Vice President - Fossil 1984 Plant Engineering and Construction L. G. Brackeen... 54 1984 Vice President - Fossil 1987-Fuels and Cogeneration Vice President - Fossil Fuel 1984-1987 Resources Senior Purchasing Agent - 1984 E. I. DuPont De Nemours & Co. J. S. Brian...... 41 1983 Vice President and Comptroller 1988-Vice President - Finance and 1986-1988 Comptroller Comptroller 1984-1986 R. E. Doan....... 59 1981 Vice President - Human and 1986-Information Resources Vice President - Human 1984-1986 Resources L. B. Horrigan... 54 1981 Vice President - Purchasing 1988-and Support Services Vice President - Purchasing 1987-1988 and Materials Management Vice President - Fossil Plant 1984-1987 Engineering and Construction ) A. D. Maddox..... 47 1982 Vice President - Customer 1984- ) Relations l OFFICERS (Continued) Officer Business Experience _1984-1988. Name Age (1) Since(2) Positions Tera j 'S. V. Naeve...... 41 1988 Vice President - Corporate 1988- ~ Planning' J General Manager - Planning and 1986-1988 j Strategic Management j Assistant to the President 1985-1986-l Manager - Gas and Oil Fuels 1984-1985 l Manager'- Coal and Lignite 1984 Fuels S. L. Rosen...... 48 1989(3) Vice President - Nuclear. 1989-Engineering and Construction General Manager - Operations 1988-1989 Support Chairman - Nuclear Safety 1986-1988 Review Board Vice President and Director, 1985-1986 Engineering Division, Institute of Nuclear Power Operations i Director, Analysis and 1984-1985 Engineering Division, Institute of Nuclear Power -Operations l D. G. Tees....... 44 1986 Vice President - Energy 1986-l Production General Manager - Energy 1984-1986 Production G. E. Vaughn..... 46 1987 Vice President - Nuclear 1987-Operations General Manager - Nuclear 1984-1987 Stations - Duke Power Company R. L. Waldrop.... 41 1988 Vice President - Public Affairs 1988-General Manager - Public Affairs 1985-1988 Manager - Commercial 1984-1985 Director - Regulatory Services 1984 K. V. Nabors..... 45 1986 Treasurer 1986-Manager - Accounting Services 1984-1986 (1) At December 31, 1988. (2) Elected May 18, 1988 to serve for one year or until their successors.are duly elected and qualified. (3) Elected March 1, 1989. Item 2. Properties. All of HL&P's electric generating stations and all of the other operating property of HL&P are located in the State of Texas. HL&P considers this property to be well maintained and in good operating condition. Electric Generating Stations. As of December 31, 1988, HL&P had eleven electric generating stations (61 generating units) with a combined turbine nameplate rating of 13,023,697 KV. Substations. As of December 31, 1988, HL&P owned 195 major substations (with capacities of at least 10.0 Mva) having a total installed rated tt:nsformer capacity of 52,178 Mya (exclusive of spare transformers). In addition, BL&P had an interest in one major substation (30.8% of 3,136 Hva), for an installed rated transformer capacity of 966 Hva. The sum of the above capacities, 53,144 Mva, excludes standby, emergency and auxiliary transformers. Electric Lines-Overhead. As of December 31, 1988, HL&P operated 22,028 pole miles of overhead transmission and distribution lines, including 1,503 pole miles operated at 138,000 volts and 608 pole miles operated at 345,000 volts. Electric Lines-Underground. As of December 31, 1988, HL&P operated 5,683 circuit miles of underground transmission and distribution lines, including 8 circuit miles operated at 139,000 volts. General Properties. HL&P owns 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 owned in fee by HL&P. Transmission lines and distribution systems have been constructed in part on or across privately owned land pursuant to easements or on streets and highways and across waterways pursuant to authority granted by municipal and county
permits, and by permits issued by state and federal governmental authorities.
Under the laws of the State of Texas, HL&P has the right of eminent domain pursuant to which it may secure or perfect rights-of-way over private property, if necessary. l The maj or properties of HL&P are subj ect to liens securing its ] long-term debt, and titles to some of its properties are subject to minor j encumbrances and defects, none of which impairs the use of such properties j in the operation of its business. ] Item 3. Legal Proceedings. For a description of material legal and regulatory proceedings affecting HL&P, see Notes 8 through 11 to the 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. I There vere no matters submitted to a vote of security holders during the fourth quarter of 1988. l l. I J
l i l i PART II J Iten 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. I I Iten 6. Selected Financial Data. The following table sets forth selected financial data with respect to HL&P's financial condition and results of operations and should be read in conjunction with the Financial Statements and the related notes included elsewhere herein. (Thousands of Dollars) Year Ended December 31, 1988 1987 1986 1985 1984 Revenues............. $3,063,573 $3,000,832 $2,959,740 $3,533,364 $3,674,556 Income after preferred ) dividends.................. $ 368,516 $ 408,581 $ 434,927 $ 455,904 $ 355,522 j AFUDC as a percent of income after preferred dividends.. 49% 32% 52% 45% 31% Return on average common equity............ 12.2% 14.0% 15.5% 17.6% 15.7% Ratio of earnings to fixed charges: Including AFUDC............ 2.76 3.35 3.36 3.76 3.55 Excluding AFUDC............ 2.06 2.41 2.42 2.84 2.99 Ratio of earnings to fixed ) charges and preferred l dividend requirements...... 2.39 2.87 2.95 3.26 3.05 At year-end: Total assets............... $9,127,320 $8,687,744 $8,136,725 $7,829,390 $6,990,332 Long-term debt (including current maturities)...... $3,264,368 $2,844,696 $2,908,277 $2,841,399 $2,573,602 Capitalization: Common stock equity........ 45% 48% 47% 46% 46% Cumulative preferred stock. 7% 7% 6% 6% 5% Long-term debt (including current maturities)...... 48% 45% 47% 48% 49% Construction and nuclear fuel expenditures (excluding AFUDC).......... $ 506,074 $ 644,580 $ 712,418 $ 745,972 $ 904,076 Percent of construction expenditures financed internally from operations. 37% 29% 35% 39% 37% l l l _ _ - _ _ _
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview As discussed below unoer "Results of Operations," income after preferred dividends declined in 1988 principally as the result of the need for rate relief associated with Unit No. 1 of the South Texas Projcet Electric Generating Station (South Texas project). The future financial condition of Houston Lighting & Power Company (HL&P) vill be largely dependent, in the near term, upon the receipt of deferred accounting treatment for operating costs associated with Unit No. 1 of the South Texas project and Unit No. 2 of the Limestone Electric Generating Station (Limestone) and, in the longer term, upon the favorable resolution of the pending applications for rate increases. Results of Operations HL&P reported income aftet preferred dividends of $368.5 million for the year 1988, dovn $40 million from 1987 and $66 million from 1986. Allowance for funds used during construction (AFUDC) accounted for 49% of 1988 earnings compared to 52% in 1987 and 1986. AFUDC is a noncash 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 assets being constructed. The decrease in AFUDC was primarily related to the commencement of commercial operation of Unit No. 1 of the South Texas project. The decline in HL&P's 1988 income after preferred dividends is attributable primarily to increased depreciation and operating expenses and the cessation of AFUDC associated with Unit No 1 of the South Texas project, which is not yet reflected in electric rates. Also contributing to the decline in earnings was an increase in financing costs due primarily to increased borrowings associated with HL&P's construction program. These effects were partfally offset by the reduction in the federal corporate income tax rate and increased electric revenues resulting from higher kilowatt-hour (KWH) sales. Unit No. 1 of the South Texas project began commercial operation on August 25, 1988. Earnings have been adversely impacted by $15 to $20 million per month in 1988 and vill continue to be adversely affected until electric rates are implemented reflecting such costs or deferred accounting treatment is authorized by the Public Utility Commission of Texas (Utility Commission). Following commencement of commercial operation of Unit No. 2 of the South Texas project, which is scheduled to occur in June 1989, it is estimated that earnings vill be adversely impacted by an additional $10 million per month until similar regulatory treatment, including the adoption of a rate moderation plan encompassing Unit No. 2, is authorized by the Utility Commission. { 3
i l l In Jane 1988,.HL&P requested. that the Utility Commission order a deferred accounting treatment for operating costs associated with Unit No. 1 of the South Texas project and Limestone Unit No. 2 (Docket No. 8230). The i _ requested treatment vould commence as of the commercial operation date of the South lexas project Unit No. 1, which was August 25, 1988. Under the requested deferred accounting treatment, HL&P vould be permitted, for both Limestone Unit No. 2 and Unit No.1 of the South Texas project, (a) to defer its portion of all operating and maintenance expenses, taxes and depreciation that vould otherwise be expensed effective with the commercial operation of Unit No. 1 of the South Texas project, and (b) to record an interest carrying cost associated with these investments until rates are placed into offect which would reflect these investments as electric plant in service in rate base. See Note 10 to the Financial Statements. Electric operating revenues increased 2.1% and 1.4% for the years 1988 and 1987, respectively. The increase in revenues is primarily due to an increase in KVH sales, excluding off-system sales, of 3.6% and 2% for the years 1988 and 1987, respectively. Residential KVH sales increased by 3.7% and less than 1% for the years 1988 and 1987, respectively. Residential gains in 1988 vere primarily due to a 2.7% increase in average consumption ] per residential customer and a 2% increase. in the number of customers. Commercial KVH sales increased by 3.2% in 1988 and declined 2.2 in 1987. Industrial KVH sales, which account for approximately half of HLA 's overall sales, were up 3.8% and 4.8% for. the years 1988 and 1987, respectively. Partially offsetting the increase in 1988 was a decline in off-system sales. I Fuel expense increased $23 million-and $47 million for the years 1988 and 1987, respectively. The ' increase was primarily due to increased generation, partially offset by decreases in the unit price paid for fuel. The average cost of fuel used by HL&P during 1988 vas $1.90 per million Btc as compared with $1.92 and $1.97 per million Btu for 1987 and 1986, i respectively. The combined cost of fuel used by HL&P and the fuel portion of purchased power during 1988 and 1987 was 1.86 cents per KVH as compared to 2.10 cents per KVH in 1986. Purchased power txpense decreased 1% in 1988 and 10% in 1987. Electric operating and maintenance expenses in 1988 increased 3.6% or $22 million over 1987. In 1987, such expenses increased $52 million or 9.3% i as compared to 1986. The increase in 1988 vas due primarily to the commencement of operation and maintenance expenses related to Unit No. 1 of the South Texas project, while increases in 1987 vere associated with Limestone Unit No. 2, which was placed in service in December 1986. HL&P filed a request in November 1988 with the Utility Commission (Docket No. 8425) and the cities it serves for a rate increase of approximately $432 million. The rate increase vould represent the first phase of a requested three-phase rate moderation or " phase-in" plan. In phase one of the requested rate moderation plan, HL&P seeks to begin recovering its remaining costs not yet reflected in the rates associated with Limestone Unit No. 2 and a portion of the costs associated with Unit No. 1 of the South Texas pro',ect. See Note 11 to the Financial Statements.
Liquidity and Capital Resources HL&P's construction and nuclear fuel expenditures (excluding AFUDC) for the year 1988 totaled $506 million. The approved budget for 1988 was $528 million. Estimated expenditures for 1989, 1990 and 1991 are $384 l
million,
$359 million and $334 million, respectively. These amounts do not include expenditures on projects for which HL&P expects to be reimbursed by customers or cogenerators. Maturities of long-term debt for this same period include $55 million in 1969, no maturities in 1990 and $132 million in 1991. 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 new plant facilities, depreciation rates, recovery of operating expenses and the opportunity to earn a reasonable rate of return or. Its invested capital. It is presently estimated that during
1989, 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 UL&P's investment in the South Texas proj ect. The balance of HL&P's construction program is expected to be financed through external sources, primarily sales of long-term debt, preferred stock and additional shares of common stock to Houston Industries Incorporated (Houston Industries) and, on an interim basis, the issuance of short-term debt securities. The interim financing requirements of HL&P are met primarily through the issuance of commercial paper supported by a bank line of credit. At December 31, 1988, such line was maintained in the aggregate principal amount of $650 million, and in February 1989 such line was reduced by HL&P to $400 million. See Note 5 to the Financial Statements for a discussion of short-term financing. HL&P's capitalization ratios at December 31, 1988, consisted of 48% long-term debt, 7% preferred stock and 45% 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. HL&P anticipates that it may utilize sales of senior debt securities and/or preferred stock in addition to those sales during the first quarter of 1989 described below to fund a portion of its construction program during 1989. 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 coverage and other conditions with which HL&P must comply prior to the issuance of first mortgage bonds or preferred
stock, respectively. Vithout deferred accounting or timely rate relief, earnings coverages may decline to levels which would restrict or prohibit the issuance of preferred stock in the second half of 1989 and first mortgage bonds in the first half of 1990.
During January and February 1989, HL&P issued $200 million aggregate principal amount of collateralized medium-term notes having maturities ranging from 5 to 10 years and bearing fixed rates of interest ranging from 9.79% to 9.85% per annum. -In February 1989,_HL&P sold $225 million aggregate principal amount of first mortgage bonds. These bonds bear interest at a rate of 10 1/4% per annum and will mature on February 1, 2019. In February 1989, $75 million aggregate principal amaunt of~ 7.70% collateralized revenue refunding.<onds and $29.7 million. of 7 -7/8% collateralized pollution control revenue bonds were sold on behalf of HL&P.. Proceeds from the sale of such revenue refunding bonds vill be used in connection with the redemption of pollution control revenue bonds previously_ issued on behalf of HL&P. Proceeds from the sale of the pollution control revenue bonds vill be used to finance certain pollution control facilities at the South Texas project. In February 1989, HL&P deposited approximately S57 million with the first mortgage bond. trustee to redeem all of the outstanding bonds lof the 15 1/8% Series of its first mortgage bonds at 100% of the principal amount and to pay accrued ' interest. The bonds of this series were redeemed pursuant to the general redemption provisions of the Mortgage. In April 1989, HL&P intends to issue 1,385,000 shares of $9.375 cumulative preferred stock with a fixed liquidation price of $100 per share. It is expected that HL&P vill be required to redeem 277,000 shares of this issue annually beginning April 1, 1995. HL&P has also filed e registration statement with the Securities and Exchange Commission that has become effective and that covers $100 million aggregate fixed liquidation price of preferred stock that HL&P expects to issue no earlier than 1990. Houston Industries Finance, Inc. (Houston Industries Finance), a wholly-owned subsidiary of Houston Industries, began purchasing HL&P's customer accounts receivable in January 1987. The use of leverage and short-term borrowings by Houston Industries Finance allows the-receivables to be financed at a 1.over cost than vould traditionally be incurred by HL&P. l The Tax Reform Act of 1986 (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, l 1986 (except with respect to certain transition properties, including the i South Texas project), required capitalization of the construction overhead I costs and made substantial changes to the calculation of the alternative-l minimum tax. The latter provision effectively provides for the inclusion of I up to one half of the amount of AFUDC, a noncash item of income for financial reporting purposes, 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 flow generated from operations and therefore increase HL&P's reliance on external sources of funds, i I New Accounting Pronouncements In December 1987, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 95, " Accounting for Income Taxes," which, as amended by SFAS No. 100, becomes effective for fiscal years beginning after December 15, 1989. 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 new pronouncement to have a material effect on its financial position or results of operations. HL&P vill implement SFAS No. 96 in 1990 but has not yet decided if it vill be retroactively adopted for previous years. In December 1988, the FASB issued SFAS No. 101, " Regulated Enterprises - Accounting for the Discontinuation of FASB Statement No. 71". SFAS No. 101 specifies how an enterprise that ceases to meet the criteria for application of SFAS No. 71, " Accounting for the Effects of Certain Types of Regulation," to all or part of its operations should report that event in its financial statements. This statement generally requires that the effects of regulators' actions that had been recognized as assets or liabilities be eliminated from the financial statements. SFAS No. 101 is effective for fiscal years ending after December 15, 1988. HL&P does not anticipate that it vill cease to meet the criteria for application of SFt.S No. 71; therefore, the provisions of SFAS No. 101 are not expected to affect its financial position or results of operations. Item 8. Financial Statements and Supplementary Data. BOUSTON LIGHTING & POWER COMPANY STATEMENTS OF INCOME (Thousands of Dollars) Year Ended December 31, 1988 1987 1986 Operating Revenuer........................ $3,063,573 $3,000,832 $2,959,740 Operating Expenses: Fuel.................................... 1,004,481 981,922 935,169 Purchased power......................... 376,724 379,497 421,893 0peration............................... 447,171 423,789 391,873 Maintenance............................. 188,473 189,566 169,533 Depreciation and amortization........... 252,411 219,501 206,262 Federal income taxes.................... 126,417 195,416 222,281 Other taxes............................. 164,819 151,667 146,791 Tota1............................... 2,560,496 2,541,358 2,493,802 Operating Income.......................... 503,077 459,474 465,938 Other Income (Expense): Allowance for other funds used during construction.......................... 118,097 143,584 170,348 Other - net............................. (14,988) (7,747) 7,236 Total............................... 103,109 135,837 177,584 Income Before Interest Charges............ 606,186 595,311 643,522 Interest Charges: Interest on long-term debt.............. 266,237 238,919 259,887 Other interest.......................... 27,719 25,432 24,258 Allowance for borrowed funds used during construction.......................... (63,432) (68,817) (55,278) Taxes applicable to the allowance for borrowed funds used during construction.......................... (28,826) (40,210) (47,089) Total............................... 201,698 155,324 181,778 Net Income................................ 404,488 439,987 461,744 Dividends on Preferred Stock.............. 35,972 31.406 26,817 Income After Preferred Dividends.......... S 368,516 $ 408,581 $ 434,927 See Notes to Financial Statements. - )
BOUSTON LIGHTING & POWER COMPANY STATEMENTS OF RETAINED EARNINGS (Thousands of Dollars) Year Ended December 31, 1988 1987 1986 BALANCE AT BEGINNING OF YEAR............ $1,373,205 $1,269,492 $1,128,547 ADD - NET INC0ME........................ 404,488 439,987 461,744 Tota1............................. 1,777,693 1,709,479 1,590,291 DEDUCT - CASH DIVIDENDS: Preferred: $4.00 Series........................ 390 390 390 $6.72 Series........................ 1,680 1,680 1,680 $7.52 Series........................ 3,760 3,760 3,760 $9.52 Series........................ 3,808 3,808 3,808 $9.08 Series........................ 3,632 3,632 3,632 $8.12 Series........................ 4,060 4,060-4,060 $9.04 Series.....................,.. 2,712 2,712 2,712 "A" Series........................ 3,775 3,415 3,435 "B" Series........................ 3,655 3,345 3,340 $8.50 Series........................ 8,500 4,604 Common: 1988 $2.94; 1987 $2.86; 1986 $2.76 (per share)....................... 313,582 304,868 293,982 Total............................. 349,554 336,274 320,799 ( BALANCE AT END OF YEAR.................. $1,428,139 $1,373,205. $1,269,492 i See Notes to Financial Statements. l l l l l i l
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BOUSTON LIGHTING & POVER C4MPANY l BALANCE SHEETS (Thousands of Dollars) ASSETS December 31, 1988 1987 1 PROPERTY, PLANT AND EQUIPMENT-AT COST: Electric plant: Production..................................... $ 5,797,764 $ 3,894,100 Transmission................................... 700,237 640,423 Distribution................................... 1,951,630 1,845,618 Genera1........................................ 501,476 456,232 Construction vork in progress.................. 1,090,424 2,648,682 l Nuclear fuel................................... 152.583 131,323 Held for future use............................ 180,841 180,333 Electric plant acquisition adj ustments........... 3,166 3,166 Tota1........................ 10,378,121 9,799,877 Less accumulated depreciation and amortization... 1,677,849 1,530,543 Property, plant and equipment - net.......... 8,700,272 8,269,334 CURRENT ASSETS: Cash and cash equivalents........................ 2,389 596 Special deposits................................. 381 147 Accounts receivable Affiliated companies........................... 1,274 1,208 0thers......................................... 43,656 37,159 Notes receivable from affiliated companies....... 9,500 Invent 9ry: Fuel oil and gas, at lifo cost................. 19,310 18,698 Materials and supplies, at average cost........ 106,771 90,946 0ther............................................ 15,373 11,661 Total current assets......................... 198,654 160,415 OTHER ASSETS: Recoverable cancelled project costs.............. 28,876 36,129 Unamortized debt expense and premium on reacquired debt................................ 74,186 67,559 Deferred debits.................................. 125,332 154,307 Total other assets........................... 228,394 9.57,995 Tota1................................... S 9,127,320 $ 8,687,744 See Notcs to Financial Statements. 30-
i i -l o HOUSTON LIGHTING & POWER COMPANI BALANCE SHEETS (Thousands of Dollars) CAPITALIZATION AND LIABILITIES December 31, j 1988 -1987 l ' CAPITALIZATION (statements on following page): Common stock equity.............................. $3,030,236; $2,975,302 Cumulative preferred stock: Not subj ect to mandatory redemption............ 341,319 .341,319 Subj ect to mandatory redemption................ 99,158 99,055 l Long-term debt................................... 3,209,368 2,844,696 i Total capitalization......................... 6,680,081' 6,260,372 i l CURRENT LIABILITIES: Notes payable..................................... 392,707 551,007 Accounts payable................................. 212,$18 202,798 Accounts payable to affiliated companies......... 24,675 22,374 Taxes accrued.................................... 87,140 79,224 Interest and dividends accrued................... 81,429 65,163 Accrued liabilities to municipalities............ 72,578 70,685 Current portion of long-term debt................ 55,000 0ther............................................ 61,462 45,334-Total current liabilities................... 987,509 1,036,585 DEFERRED CREDITS: Accumulated deferred federal income taxes........ 841,028 793,082 Unamortized investment tax credit................ 537,820-529,337 1 0ther............................................ 80,882 68,368 ,l Total deferred credits..................... 1,459,730 1,390,787 COMMITMENTS AND CONTINGENCIES Tota1.................................. $9,127,320 $8,687,744 l See Notes to Financial Statements. 1 I
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I 1 1 HOUSTON LIGHTING E POWER COMPANY STATEMENTS OF CAPITALIZATION (Thousands of Dollars) December 31, 1988 1987 COMMON STOCK EQUITY: Common stock, no par; authorized 200,000,000 shares; outstanding 106,660,778 shares at December 31, 1988 and 1987............ $1,602,097 $1,602,097 Retained earnings............................................. 1,',28,139 1,373,205 Total common stock equity......................... 3,030,236 2,975,302 CUMULATIVE PREFERRED STOCK, no par; authorized, 10,000,000 shares; outstanding, 4,447,397 shares at December 31, 1988 and 1907 (entitled upon involuntary liquidation to $100 per share) j l Not subject to mandatory redemption: I $4.00 series, 97,397 shares........................... 9,740 9,740 i $6.72 series, 250,000 shares........................... 25,115 25,115 $7.52 series, 500,000 shares........................... 50,225 50,225 J $9.52 series, 400,000 shares........................... 39,372 39,372 { $9.08 series, 400,000 sF3res........................... 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 Tota1.............................................. 341,319 341,319 Subj ect to mandatory redemption: $8.50 series, 1,000,000 shares.......................... 99,158 99,055 Total cumulative preferred stock................... 440,477 440,374 LONG-TERM DEBT: First mortgage bonds: 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 9 3/8% series, due 1991.................................. 132,000 15 1/8% series, due 1992.................................. 52,662 52,662 4 1/2% series, due 1992.................................. 25,000 25,000 9 3/8% series, due 1992.................................. 132,000 9 3/8% series, due 1993.................................. 136,000 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.................................. 3.>,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 35,407 8 3/4% series, due 2005.................................. 125,000 125,000 l 8 3/8% series, due 2006.................................. 125,000 125,000 8 3/8% series, due 2007.................................. 125,000 125,000 i (continued on next page) -
HOUSTON LIGHTING & PO U R COMPANY STATEMENTS OF CAPITALIZATION (Thotsands of Dollars) (Continued) December 31, 1988 1987 8 7/8% series, due 2008........... $ 125,000 $ 125,000 9 1/4% series, due 2008............... 42 100,000 100,000 9% series, due 2017............... ....r............. 390,519 390,519 7 3/4% pollution control series, due 0015............... 68,700 8 1/4% pollution control series, due 2015................ 90,000 7 7/8% pollution control series, due 2016................ 68,000 68,000 7 7/8% pollution control series, due 2018................ 50,000 50,000 8 1/4% pollution control series, due 2019................ 100,000 8.10% pollution control series, due 2019................ 100,000 Funds on deposit with Trustes............................ (3,671) (12,612) Total first mortgage bonds......................... ~},411,617 1,692,449 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 Matagorda County 1985 series, 10%, due 2015.............. 115,000 115,000 Brazos River 1984 F series, Floating Rate, due 2016...... 68,700 Brazos River 1984 A-E series, Floating Rate, due 2019.... 200,000 400,000 Matagorda County 1984 A-C series, Floating Rate, due 2019 250,000 250,000 Funds on deposit with Trustee............................ (11,658) (74,126) Total pollution control revenue bonds.............. 860,442 1,156,674 I Unamortized premium (discount) - net......................... (7,691) (4,427) Tota1........................................... 3,264,368 2,844,696 Less current maturities......................... 55,000 Total long-term debt............................ 3,209,368 2,844,696 Total capitalization.......................... $6,680,081 $6,260,372 l l See Notes to Financial Statements. ) -l
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1 i I 1 1 BOUSTON LIGHTING & POVER COMPANY STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents -(Thousands of Dollars)- I Year' Ended December 31, l 1988 1987 1986 Cash Flows from Operating Activities: Net income.................................... $404,488 $439,987 $461,744 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................. '252,411 219,501: 206;262 Amortization of nuclear fuel.................. . 3,631 Deferred federal income taxes................. 47,946 67,890-93,689 Investment tax credits.....................'... 8,483 (955) 26,156 i Allowance for other funds used during construction.............................. (118,097): (143,584) (170,348)' Fuel cost refunds and over/under recovery d l net..................................... 400 (107,829) (53,012). Changes in other assets and liabilities: Accounts receivable - net.'................ (6,563) 114,591 12,111 3 Materials and supplies.................... (15,825) (10,902) (20,844) j Fuel stock................................ (612) '(2,115) 895 i Accounts payable.......................... 12,021 (22,324) 38,014 Interest and taxes accrued................ 24,182 (38,366) ~ (44,019) l Other current liabilities................. 18,759 (13,679) (8,311) Other - net............................... 59,142 46,533 (5,424) l Total adjustments......................... 285,878 108,761' 75,169 Net cash provided by operating activities. 690,366 548,748 536,913' l i Cash Flows from Investing Activities: Construction and nuclear fuel expenditures (including allowance for borrowed funds used during construction).................- (569,506) (713,397) -(767,696) Other - net................................... (13,339) (10,813) (10,681)' Net cash used in investing activities..... (582,845) (724,210) '(778,377) j l 3 l l 1 (continued on next page) l ! l 1 [];
~ HOUSTON LIGHTING & POWER COMPANY-l l STATENENTS OF CASH FLOWS Increase (Decrease).in Cash and Cash Equivalents (Thousands of Dollars) (Continued) j i .I . Year Ended December 31, 1988 1987 1986 Cash Flows froa Financing Activities: Proceeds from sale of common stock............ 4,850 Proceeds from sale of preferred stock......... 98,994-Proceeds from sale of first mortgage bonds.... $ 397,398 Proceeds from first mortgage bonds and pollution ' control bonds held in trus t..... 74,212 127,874- $ 238,503 a Payment of matured bonds...................... (40,000) (30,000) ] Payment of dividends.......................... (349,554) (336,274) (320,799) Increase (decrease) in notes payable / receivable - net.................. (167,800) 482,126 155,424 Extinguishment of long-term debt.............. (48,473) -(139,896) (118,824) Other - net (11,511) (22,361) (2,826) Net cash provided by (used in)' financing activities............................ (105.728) 175,313 (78,522) Nat Increase (Decrease) in Cash and Cash Equivalents.................................. 1,793-(149) (319,986) Cash and Cash Equivalents at Beginning of Year... 596 745 320,731 i Cash and Cash Equivalents at End of Tear......... 2,389 596-745 See Notes to Financial Statements. l 1 i ~i j l i i ; .1
HOUSTON LIGHTING & POVER COMPANY NOTES TO FINANCIAL STATEMENTS For the Three Years Ended December 31, 1988 (1) Summary of Significant Accounting Policies System of Accounts The accounting records of Houston Lighting & Power Company'(HL&P) are maintained in accordance with the Federal Energy Regulatory Commission's Uniform System of Accounts which has been adopted by the Public Utility Commission of Texas (Utility Commission). Electric Plant Additions to electric plant, betterments'to existing property;and replacements of units of property are capitalized at cost. Cost includes the original cost of contracted services, direct labor and material, -indirect charges for engineering supervision'and siinilar overhead items and an Allowance for Funds Used During Construction (AFUDC). Customer advances for construction reduce additions to electric plant. Maintenance of property and replacements and renewals of items determined to be less than units of property are charged to expense. The actual or average book cost of units of property replaced or renewed is removed from plant and such cost, plus removal cost less salvage, is charged to accumulated depreciation. HL&P computes depreciation using the straight-line method. The depreciation provision as a percentage of>the depreciable cost of plant was 3.3% for 1988, 3.4% for 1987 and 3.6% for 1986. Allowance for Funds Used During Construction HL&P accrues AFUDC on construction and nuclear f'uel expenditures except for amounts included in 'the rate base by ' regulatory authorities. AFUDC was computed using a gross rate of 10% in 1988 and 10.75% in 1987. This gross rate is applicable to all property except certain transition property, principally the South Texas Project Electric Generating Station (South Texas project), on which interest is permitted as a current deduction under the Tax Reform Act of 1986. The net-of-tax accrual rate was 8.5% during 1988, 9% during 1987 and 10% during 1986. Operating Revenues j 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 pover' costs.] i
) i i through an energy component of base electric r.ates. The energy component is established during a utility's gereral rate proceeding i and is effective for a minimum of twelve months. The rules of the Utility Commission provide for a reconciliation of fuel revenues, with any over-or under-recovery of fuel costs to be considered in establishing future fuel cost recoveries. In addition, a monthly reduction of the fuel factor may be required if the Utility Commission determines that a utility has materially over-recovered, or projects that it vill materially over-recover, allowable fuel l costs under its existing fuel factor, in which case any fuel cost savings are required to be refunded as a one-time credit to customers' bills. Federal Income Taxes Houston Industries Incorporated (Houston Industries) and its subsidiaries file a consolidated income tax return. HL&P records as its current income tax expense an amount equal to the tax it would have to pay if it filed a separate return. HL&P follows a policy of l comprehensive interperiod income tax allocation. The Tax Reform Act i of 19.86 eliminated investment tax credits effective January 1, 1986, l except with respect to certain transition properties, principally the { South Texas proj ect. Investment tax credits are deferred and amortized over the estimated lives of the related property. (2) Statements of Cash Flows In 1988, HL&P adopted Statement of Financial Accounting Standards (SFAS) No. 95, " Statement of Cash Flows," and accordingly, has presented the Statements of Cash Flows for the yo?.rs ended December 31, 1988, 1987 and 1986. For purposes of reportin:; cash flows, cash equivalents are considered to be short-term highly liquid investments readily convertible to cash. ) During
1988,
$358.7 million aggregate principal amount of collateralized revenue refunding bonds was issued on behalf of HL&P. The proceeds were used to redeem certain variable rate pollution control revenue bonds previously issued on behalf of HL&P. In 1987, HL&P issued $391 million aggregate principal amount of its 9% series of first mortgage bonds due 2017 in exchange for a' like principal amount of outstanding high coupon first mortgage bonds. These 2 transactions were noncash in nature and are not included in the Statements of Cash Flows. Supplemental information regarding cash payments is provided below: Year Ended December 31, 1988 1987 1986 (Thousands of Dollars) Interest (net of amount capitalized) $ 218,224 $ 197,534 $ 208,331 Income Taxes 40,354 121,209 84,141,
r (3) Pr fGrred Steck l HL&P's preferred stock may be redeemed at the following per share prices, plus any unpaid accrued dividends to the date of redemption. Not subject to mandatory redemption: $4.00 Series: $105.00. $6.72 Series: $102.51. $7.52 Series: $102.35. $9.52 Series: through September 30, 1990 - $105.00; thereafter - $103.00 to $101.00. $9.08 Series: through March 31, 1991 - $103.00; thereafter - $101.00. $8.12 Series: through November 30, 1992 - $104.25; thereafter - $102.25. $9.04 Series: through January 31, 1994 - $103.00; thereafter - $101.00. Adjustable Rate Series "A": through March 31, 1989 - not redeemable; thereafter - $103.00 to $100.00. The dividend rate on this series, as of January 1, 1989, is 7.60%. The rate is adjusted quarterly, based on the yield on U.S. Treasury securities. Adj us table Rate Series "B": through September 30, 1990 - not i l redeemable; thereafter - $103.00 to $100.00. The dividend rate on this series, as of January 1, 1989, is 7.35%. The rate is adjusted quarterly, based on the yield on U.S. i I Treasury securities. Subject to mandatory redemption: $8.50 Series: through May 31, 1992 - $108.50; thereafter - $104.25 to $100.00, provided that the $8.50 Series may not be i
redeemed, directly or indirectly, prior to June 1, 1992 from I
the proceeds of any refunding through the incurrence of debt or i through the issuance of preferred stock ranking equally with or l prior to the $8.50 Series as to dividends or on liquidation, where such debt has an effective interest cost, or such preferred stock has an effective dividend cost, of less than 8.50% per annum. The mandatory redemption provision requires j HL&P to redeem 200,000 shares annually at $100 per share plus accrued and unpaid dividends, beginning June 1, 1993. (4) Long-Term Debt At December 31,
1988, sinking or improvement fund requirements of HL&P's first mortgage bonds outstanding vill be approximately $45 million for each of the years 1989 through 1993.
Of such requirements, approximately $26 million for each of the years 1989 through 1993 may be satisfied by certification of property additions l l t II ( l
at 100% of the requirzm:nts, and tha remaind:r through certification of such property additions at 166 2/3% of the requirements. Sinking or improvement fund requirements for 1988 and prior years have been satisfied by certification of property additions. HL&P has agreed to expend an amount each year for replacements and improvements in respect of its depreciable mortgaged utility property equal to $1,450,000 plus 2 1/2% of net additions to such mortgaged property made after March 31,
1948, and before July 1 of the preceding year.
Such requirement may be met with cash, first mortgage bonds, gross property additions or expenditures for repairs-or replacements, or by taking credit for property additions at 100% of the requirements. At the option of HL&P, but only with respect to first mortgage bonds of a series subject to special redemption, deposited cash may be used to redeem first mortgage bonds of such series at the applicable special redemption price. Annual maturities of long-term debt are approximately $55 million in
1989, no maturities in 1990, $132 million in 1991,
$210 million in 1992 and $136 million in 1993. I The issuable amount of HL&P's first mortgage bonds is unlimited as to authorization, but limited by
property, earnings, and other provisions of the Mortgage and Deed of Trust and the supplemental indentures thereto.
Substantially all properties of HL&P are subject to liens securing its long-term debt. (5) Short-Term Financing The interim financing requirements of HL&P are met primarily through 1 the issuance of commercial paper. HL&P had a bank line of credit l aggregating $650 million at December 31, 1988 and 1987 which limits its total short-term borrowings and provides for interest at rates generally less than the prime rate. Commercial paper outstanding was $391,786,000 at December 31, 1988 and $549,796,000 at December 31, 1987. Commitment fees are required on the undrawn portion of the bank line of credit. (6) Retirement Plan Pension costs are determined under the provisions of SFAS No. 87, " Employers' Accounting for Pensions". HL&P has a noncontributory retirement plan covering substantially all employees. The plan provides retirement benefits based on years of service and the employee's highest 36 consecutive months' base compensation during the last 120 months of employment. The policy of HL&P is to fund all net pension costs, but past service costs only to the extent that the excess of plan assets over accrued benefits does 1 not meet HL&P's funding obligations for past service costs. For the last three years, however, as a result of the change in federal income tax rates, the early retirement program discussed below, and j declines in the excess of plan assets over the projected benefit obligation, HL&P funded the maximum amount deductible for federal income tax. purposes. Plan assets consist principally of common stocks and investments in high quality, interest-bearing obligations. j In 1987, HL&P offered. employees (excluding officers) satisfying' certain requirements as to age and years of service an incentive program to retire early, which program vu, ocepted by 430 employees. Pension benefits related to the early retirement program are being paid out of HL&P's retirement plan assets and certain supplemental 4 benefits relating to such program are being paid by HL&P. Upon the i adoption of the early retirement program, the projected benefit obligations pertaining to HL&P's retirement plan and supplemental l benefits were increased by $17.5 million and $7.2 million, ) respectively. In September 1988, HL&P recorded a one-time after-tax charge of $11 million related to the early retirement program. At December 31, 1988, HL&P's obligation related to the supplemental benefits was $3.6 million. Net pension cost includes the following components: Year Ended December 31, 1988 1987 1986 (Thousands of Dollars) Service cost - benefits earned during the period..................... $ 12,147 $ 12,909 $ 10,961 Interest cost on projected benefit obligation.................... 26,325 27,782 17,971-Actual return on plan assets............ (20,397)' (10,186)- (26,379) Deferred (gain) loss on plan assets..... (1,361) (10,096) 9,064 Amortization of transitional asset and prior service cost................ (1,455) (1,455) (1,915) Net pension cost........................ $ 15,259 $ 13,954 $ 9,702 . - ~.., The funded status of the retirement plan was as follows: Year Ended December 31, 1988 1987 (Thousands of Dollars) Actuarial present value of: Vested benefit obligation.................... $189,527 $180,118 Accumulated benefit obligation............... $218,073 $207,859 Plan assets at market value.................... $277,635 $249,403 Projected benefit obligation................... 306,963 275,342 Assets less than projected benefit obligation........................... (29,328) (25,939) Unrecognized transitional asset................ (26,502) (28,400) Unrecognized prior service cost................ 5,690 6,134 Unrecognized net loss.......................... 21,520 16,034 Accrued pension cost........................... $(28,620) $(32,171) The projected benefit obligation was determined using an assumed discount rate of 9 1/2% in 1988 and 1987. A long-term rate of compensation increase -of 6 1/2% vas assumed 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. (7) Commitments and Contingencies Significant commitments have been incurred in connection with HL&P's construction program and for nuclear fuel purchases. HL&P's construction program (exclusive of AFUDC and nuclear fuel) is presently estimated to cost $379 million in 1989, $349 million in 1990 and $325 million in 1991. These amounts do not include expenditures on projects for which HL&P expects to be reimbursed by customers or cogenerators. See Note 9 for discussions of the budget and schedule for the South Texas project. An additional $24 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. I Commitments in connection with HL&P's construction program, j j 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. j (8) Pending Litigation Appeal of 1982 Rate Order. In December 1987, the Texas Supreme Court rendered a decision in connection with a December 1982 rate order by
J A
I the Utility Commission. In the rate ordar,- the Utility Commission disallowed the recovery by HL&P'of approximately $166 million of costs . incurred in connection with its cancelled Allens Creek nuclear proj ec t, and ordered that any tax savings associated -vith the 1 disallowed portion be passed through to customers. While the Utility Commiseion purported to permit $195 million of expenditures for the i proj ect to be recovered over a ten-year period, the_ flow-through of 1 tax savings on the disallowed portion reduced the recovery to .j approximately $84 million. Although lover courts had reversed the i Utility Commission's action, the Texas Supreme Court upheld the Utility Commission's decision regarding allocation of income tax
benefits, ruling that those benefits should inure to the benefit of HL&P's ratepayers. The Texas Supreme Court did affirm certain other aspects of the lover courts' decisions, thus requiring that the case be remanded to the Utility Commission.
An attempt by HL&P to seek further review of the Utility Commission's action was unsuccessful. The case has been remanded to the Utility Commission for implementation of the appellate court decisions (Docket No. 8555). No procedural schedule has yet been set by the Utility Commission to finally resolve this issue. It has not been determined what effect, if any, the ruling regarding allocation of income tax benefits vill have on future rate orders. Restatement of previously reported l financial results will not be required. 1 Jury Award in Condemnation Proceeding. In 1981, HL&P filed -a i condemnation action against the Klein Independent School District ] (Klein) to take a tract of land owned by Klein. Following the trial I in which Klein alleged that HL&P had abused its discretion in taking i the property, the County Court at Law hearing the case awarded Klein i $25 million in exemplary damages, in addition to actual damages of $104,000. The exemplary damages award was reversed by a Court of Appeals in November 1987, which affirmed the actual damages award of l $104,000. In July 1988, the Texas Supreme Court refused Klein's Application for Vrit of Error from the appellate court's decision, but j a motion to reconsider that refusal is still pending before the Texas Supreme Court. HL&P has re-routed the transmission line in question around Klein's property. i Fuel Transportation Litigation. In July 1986, HL&P and Utility Fuels, Inc. (Utility Fuels), a fuel supply subsidiary of Houston Industries, filed suit in Federal District Court in Houston, Texas against three railroad holding companies and their railroad operating subsidiaries and two other railroads. The suit alleges that the railroads violated certain federal statutes, including the Sherman Act, in activities aimed at precluding development of coal slurry pipelines that could have delivered coal to the plaintiffs in competition with the railroads. In February 1987, HL&P and Utility Fuels were permitted to file the same claims for alleged antitrust violations against the same ! 1
railroads by intervention in an action pending in the Federal District Court in Beaumont, Texas between a third party and those railroads. The proceedings in the Houston litigation have been stayed pending the outcome of the Beaumont litigation. During 1988 and early 1989, HL&P and Utility Fuels entered into settlement agreements with all defendants in the Eeaumont and Houston cases other than the Atchison, Topeka &' Santa Fe Railroad Co. (ATSF) 'I and its parent corporation, Santa Fe Southern Pacific Corporation, and appropriate final judgments have been entered in the Beaumont and Houston cases. Trial of the suit commenced in January 1989, and the jury rendered its verdict in March 1989. Although-the trial judge granted a partial instructed verdict that the railroads had engaged in a conspiracy in restraint of trade, the jury awarded no damages to HL&P or Utility Fuels. The jury did find that the railroads caused _. damages of $345 million to the third party, 'which damages are trebled in accordance vith the antitrust laws. HL&P and Utility Fuels are considering what. l I additional action may be appropriate in' light lof the jury's verdict. It is expected that proceeds from the settlements and any other amount. recovered by HL&P and Utility Fuels in this. litigation, net of litigation costs, will be passed through to HL&P's customers through the energy component of HL&P's rates. I l (9) Jointly-Ovr.ed Nuclear Plant HL&P is project manager and one of four participants in the South Texas proj ect, which consists of' two 1,250 megawatt (MW) nuclear I generating units. Each participant finances its own share of construction expenditures, with HL&P's participating interest in the project being 30.8%. Each participant is also responsible for its-share of operating expenses of the plant. HL&P's share of the related operation and maintenance expenses is included in the corresponding operating expense amounts on its income statements. As of December i 31, 1908, HL&P's investments (net of accumulated depreciation and l amortization) in the South Texas project and in nuclear fuel, including AFUDC, were $2.484 billion and $147 million, respectively. i Pending Litigation with the City of Austin. In 1983, the City of l Austin (Austin), one of the four participants in the South Texas proj ect, filed suit against HL&P and Houston Industries in state ] district court in Travis County, Texas, which suit subsequently was moved to state district court in Dallas, Texas. In its petition, as amended over time, Austin (a) alleges that Austin was fraudulently induced to enter the South Texas project based, among other things, on alleged misrepresentations as to the capabilities of the. original architect-engineer and construction manager of the project, (b) alleges that HL&P failed to perform properly its duties as-project I l /
l 2 manager and (c) asserts claims against HL&P under the Texas Deceptive l Trade Practices--Consumer Protection Act (DIPA), which act provides for the recovery of treble damages in certain' circumstances. During the course of the litigation, both Austin and HL&P have filed numerous motions regarding the issues to be addressed in the litigation,. including motions for summary judgment on certain issues. The Court has been and will be continuing to rafine the actual trial issues; however, the exact. statement of issues vill not be known until the jury issues are submitted by the Court following introduction of evidence. Austin has also alleged damages in various amounts from time to time, and has most' recently specified the amount of actual damages claimed to be in a range of approximately $500 million to approximately $940 million, all or some portion of which was alleged to arise pursuant to, and to be subject ta trebling under, the DTPA. 1 In January 1988, _ HL&P filed a third. party petition (Third Party Petition) asserting that it is entitled to contribution and indemnity ) from the other two owners in the South Texas project, the City of San i Antonio (San Antonio) and Central Power and Light Company (CPL), and j from CPL's parent, Central and South West Corporation (CSV), in the i event HL&P should be held liable to Austin on certain claims in the Austin litigation. In addition, the Third Party Petition seeks a ruling that (a) HL&P not be held liable to Austin, San Antonio, CPL or CSV vith respect to HL&P's actions or inactions as project manager of the South Texas project; (b) sll proceedings be deferred unti? after j completion of Unit No. 2 of the South Texas proj ect but not later than December ~ 31, 1990; and (c) alternative dispute resolution procedures, including arbitration, be implemented. (Commercial operation of Unit No. 2 is now scheduled to occur in June 1989.) l In March 1988, San Antonio and CPL filed responses to the Third Party Petition asserting that.HL&P has breached its duties and obligations as project manager of the South Texas project and is liable to them for resulting unspecified damages. In addition, San Antonio and CPL have sought arbitration under the terms of the participation agreement for the South Texas project and have asked the trial court in the Austin litigation (a) to stay further proceedings with respect to San Antonio and CPL pending that arbitration and (b) to compel HL&P to ] proceed with arbitration. CSV also responded to the Third Party 1 Petition in March 1988, denying any liability with respect to the i South Texas proj ect and requesting that disputes be submitted to j arbitration. No hearing has been scheduled by the court in the Austin litigation to consider these matters. The CPL and San Antonio claims I have been severed from the Austin litigation, and San Antonio, CPL and l CSV vill not be required to participate in the trial of the pending suit between Austin and HL&P. l Trial of the pending suit between Austin and HL&P commenced in March 1989 and is expected to take several months. HL&P regards Austin's i i 'ss s
claims and thosa ess2rted by S n Antonio cnd CPL to ba without varit. While HL&P cannot give definitive assurance regarding the ultimate j resolution af these matters, HL&P presently does not believe such resolution vill have a material adverse impact on its financial position. I Prudence Review of South Texas Project by Utility Commission. In 1986, the Utility Commission 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 proj ect. This proceeding (Docket No. 6668) encompasses an investigation of the prudence and ef ficiency 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 of certain litigation relating to the South Texas project. The issues raised in this docket i vill be considered by the Utility Commission in conjunction with HL&P's application for general rate increases. Hearings on the general rate increases began in March 1989. See Note 11. In view of the schedule for these hearings, a significant lag time vill occur between the commercial operation of Unit No. 1 of the South Texas project (which occurred on August 25, 1988) and implementation of new rates reflecting such facility as plant in service. As a result of such lag time, HL&P's operating results have been and, in the absence of deferred accounting treatment, vill continue to be affected. See Note 10. In 1985, the Utility Commission retained a consulting firm to evaluate I the prudence and efficiency of the planning and management of the South Texas proj ect and to make recommendations to the Utility Commission regarding regulatory actions based on such evaluation. In June 1986, that consulting firm presented its report (Report) to the Utility Commission. The Report covered the period from project inception through 1983. The consulting firm concluded in the Report that deficiencies in management of the project had occurred and that such deficiencies led to imprudent expenditures estimated to be in a range of $1.1 to $1.3 billion, which range does not reflect the proceeds from the settlement with the former architect-engineer. According to the Report, such amounts do not include AFUDC or rate effects which the consulting firm concluded would substantially offset each other. The Report also indicated that the estimates relating to the prudence issue were preliminary, were based upon certain assumptions that should be refinc i and vere subject to further refinement and modification. In April 1988, the Utility Commission retained the accounting firm of Ernst & Whinney (E&V) to review the South Texas project and to provide an impartial and comprehensive evaluation concerning the prudence of management and the reasonableness of costs associated with the South --- - - - - - - - - - - - ./
i l Texas project. The scope of the E&V review includes a review of existing information related to the South Texas project, including the
Report, the litigation record in HL&P's lawsuit against the former architect-engineer of the South Texas project and Austin's lawsuit 1
against HL&P. ) l E&W to date has submitted two partial reports related to certain portions of its evaluation. Although the overall findings have been that the South Texas project was managed prudently after the release I I of the former architect-engineer, E&V concluded thLt a number of actions taken during the early years of the South Texas project were imprudent. No cost or schedule impact relating to the identified imprudent management actions have yet been quantified by E&V. It is expected that E&7 vill issue additional partial and draft reports over the next two months covering the remaining audit issues, including quantification, with a final report and testimcny available for filing with the Utility Commission on or about June 15, 1989. The City of Houston (Houston) has also retained a consultant to perform a project review. Although the bouston consultant had not j finalized its review, based on the consultant's preliminary findings, Houston passed a rate ordinance denying HL&P an increase in rates and declared that certain aspects of the South Texas project were not prudently managed. HL&P appealed the Houston ordinance, and as a result of such appeal, the issues raised in connection with HL&P's application for rate increase filed with Houston vill be resolved in l conjunction with HL&P's rate applications pending before the Utility Commission. See Note 11. It is unclear at this time how either Houston or any other party vill utilize the Report in connection with Docket No. 6668 or other proceedings. The Office of Public Utility Counsel (OPUC), a state agency that represents residential and small commercial ratepayers3 filed a portion of its testimony in Docket No. 6668 in October 1988. Simultaneously with its filing, OPUC issued a press release stating that such testimony recommends a disallowance of $3.5 billion to $4.2 billion with respect to the entire South Texas project, after saking into account the proceeds from the settlement with the former architect-engineer of the South Texas project. OPUC further asserted
that, based on the $4.2 billion disallowance figure, $1.28 billion of the $3.04 billion estimated by OPUC to be HL&P's share of the cost of the South Texas project should be disallowed.
Such amounts include carrying costs as estimated by OPUC and are based on an OPUC estimate of total costs for the South Texas project in excess of $10 billion. 1 OPUC also indicated that it did not consider the reasonableness of the costs incurred subsequent to the replacement of the former architect-engineer and that the recommendations contained in the testimony are preliminary and subject to change based upon final costs and commercial operation dates for Units No. 1 and 2 of the South Texas proj ec t. It is anticipated that other estimates of imprudence relating to the South Texas project will be made in connection with Docket No. 6668 as the case moves to hearing. i N ___.______________C
HL&P continues to believe that the. settlement with the former architect-engineer provided full compensation for-any, imprudent or inefficient planning or. management during the period in question.- HL&P will strongly contest any recommendation or finding that amounts invested in the South Texas project, after taking-into consideration the settlement, have. been a result of inefficiency or imprudence. While.no definitive assurance can be given.that all amounts invested in the South Texas proj ect will be recoverable by HL&P'through electric rates or otherwise, HL&P presently believes.the ultimate resolution of the Utility Commission's prudence review will not have a material adverse effect on its financial position. Any amounts that are not recoverable vould have to be. charged against earnings. A substantial write-off could adversely affect HL&P's ability to finance its capital program and meet other financial = obligations.- Budget and Schedule. Unit No. 1 of the South Texas project' was recognized as having achieved commercial operation as of Augtst R25,
1988, after satisfying the criteria set out by the Utility Commission's rules.
The cost. estimate for the South Texas project is subject to continuing r'eview. Based upon its October 1988 completion assessment (which reflected a commercial operation date for Unit No. 1 of August 25, 1988), HL&P estimated that the total cost for the completed project would be $5.43 billion, excluding AFUDC and net of the settlement with the former architect-engineer. The increase over. previous estimates results.primarily from the delays in achieving initial' criticality and the resulting delay in the date of commercial operation of Unit No. 1, which was previously assumed to be in the first quarter.of 1988. On December 16, 1988, the NRC granted a low power operating license for Unit No. 2 of the South Texas project, and loading of nuclear. fuel was completed on December 20, 1988. Initial criticality at Unit No. 2 was achieved.on March 12, 1989. On March 28, 1989, the NRC approved the issuance of a full power operating license for Unit No. 2 of the South Texas project.. Commercial operation of Unit No. 2 is scheduled to commence in June 1989. Nuclear Insurance. HL&P and the other owners of the South Texas project maintain nuclear property and nuclear liability insurance coverages as required by law and periodically review available limits and coverage for additional protection. There can be no assurance that all potential losses or liabilities will be insurable or that the amount of insurance carried vill be sufficient to cover them. In
addition, insurance is not available for certain types-or amounts of losses which might be experienced. Any substantial losses not covered by insurance could have a material effect on HL&P's financial condition.
NRC regulations require nuclear power plant. licensees to obtain property insurance coverage in the minimum amount of $1.06 billion. ______
The proceeds of this insurance are required to be used first to ensure that the licensed reactor is in a safe and stable condition'and can be maintained in that condition so as to-prevent any significant risk to the 'public health or safety. These regulations further require that (a) any remaining property insurance proceeds be used first to complete decontamination operations that may be ordered by the NRC and (b) the proceeds are to be paid to a special trustee appointed to hold insurance proceeds up to $1.06 billion to be'used_ for stabilization and decontamination. The deco *camination priority and trustee provisions were to have been implemented in October 1988; however, in September
1988, the NRC proposed a new rule extending the implementation schedule for these requirements by eighteen months.
A temporary exemption from the decontamination priority and trustee provisions has been-granted in'the interim. Further rulemaking on these matters is expected, but HL&P is unable to predict how such regulations vill address difficulties in implementing these requirements, particularly the trustee provisions. The owners of the South Texas project currently maintain property damage insurance in the amount of $1.395 billion, which is less than the total amount of such insurance currently available for such losses. Such property damage insurance is provided,by American Nuclear Insurers and Nuclear Electric Insurance. Limited (NEIL). Any NEIL proceeds must be used to cover decontamination and clean-up expenses before being used to cover direct losses to property. As members of NEIL, HL&P and CPL are subject to' annual assessments, which could amount to approximately $9 million in any given year for the total-proj ect, in the event that property losses as-a result of an accident at a nuclear plant of any company insured by NEIL exceed the accumulated funds available to NEIL. 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 their respective ownership interests in the project. Under this arrangement, HL&P would ultimately bear that portion of total property damage insurance costs, including any assessment by NEIL, attributable-to its ownership interest. Although there can be no assurance as to the amount of property insurance available from time to time, it is anticipated that property insurance coverage vill be maintained for the South Texas project to the extent. that property of similar character is usually so insured by companies similarly situated and operating like properties, to a reasonable amount. Congress has renewed the Price-Anderson Act, a comprehensive statutory arrangement providing limitations on nuclear liability and governmental indemnities. The limit of liability for the owners of nuclear power plants was increased from $720 million to approximately $7.5 billion per incident. The owners of the South Texas project are insured for their share of this liability through a combination of private insurance and a mandatory industry-wide program of .........~. self-insurance. Thn' maximum amount that the owners of the South Texas proj ect may be assessed under such program following a particular nuclear incident is $63 million (which amount.may be adjusted for-inflation) for each licensed reactor, but not more than $20 million per nuclear incident in any year. HL&P.and the other South Texas proj act owners have agreed that such assessments vill be borne on the basia of their respective ownership interests in the project. Decommissioning. Based on a study prepared in 1986, HL&P's share of the estimated costs of decommissioning'both units of'the South Texas project,.as adjusted to reflect certain minimum funding requirements of the NRC, is_ approximately $104 million (in 1986 dollars). Certain rules and regulations of the NRC require each holder of a license to operate a nuclear plant to submit to.the NRC by July 1990, a decommissioning funding plan which contains, among other.
things, (a) a cost estimate for decommissioning such plant and (b) either a funding plan or a certification of financial assurance for covering decommissioning costs for such plant.
~The management l committee of the South Texas project is in the process of updating the decommissioning plan for the South Texas project for use in complying with these rules and regulations of the NRC. Actual decommissioning costs could, however, vary substantially from any estimates of such costs and will ultimately depend upon a number of factors including, without limitation, regulatory requirements and the method used to decommission. the. proj ec t. Provisions 'for decommissioning costs are not reflected in current operations. HL&P has proposed in its current rate' applications to.begin recovering $2,1 million annually for decommissioning costs associated with Unit No. 1 l of the South Texas proj ec t, on a straight-line basis over the I operating life of Unit No. 1. However, there can be no assurance that i all of such costs vill be recoverable through rates or that the amounts that are recoverable vill be adequate. ( i Nuclear Fuel. Under a contract with the U. S. Department of Energy i (DOE), the DOE vill ultimately take possession of all spent fuel ] generated by the South Texas project for long-term storage. The 1 contract currently requires that a spent fuel disposal fee of one mill j ($.001) per net kilowatt-hour generated be paid to DOE. The fee may j be adjusted in order to ensure fuli cost recovery. The South Texas project is currently designed to he/e on-site storage facilities with the capacity to store at least 33 y ears of spent fuel discharged from each unit. HL&P is proposing,. in 'he current rate applications, to recover the disposal fee through the energy component of base electric 4 rates. (10) Deferred Accounting Treatment HL&P has pending with the Utility Commission a request for deferred accounting treatment with respect to Limestone Electric Generating Station (Limestone) Unit No. 2 and Unit No. 1 of the South Texas 1 1 i _ _ _ _ _ _ _
l } l proj ect. The request for deferred accounting treatment was filed because of the lag time which occurs between the commercial operation date of a new generating unit and implementation of new rates reflecting such facility as plant in service. The lag time associated l with Limestone Unit No. 2 and Unit No. 1 of the South Texas project I has adversely affected HL&P's operating results and will continue to l have such an effect unless deferred accounting treatment is granted or other mitigative action by the Utility Commission is taken. 1 On February 22, 1989, the Utility Commission was scheduled to consider a report and proposed order from a Hearings Examiner in the deferred accounting docket.
However, the Utility Commission deferred j
consideration of that report until such time as it can also consider a ]' report and proposed order from another Hearings Examiner which was issued on February 21, 1986 with respect to a similar request for deferred accounting treatment filed by CPL, which also has an ownership interest in the South Texa., ; roject. The proposed order in HL&P's deferred accounting docket, which had been recommended by the Hearings Examiner on February 3, 1989, vould authorize HL&P to continue to accrue AFUDC on its investment in Unit l No. 1 of the South Texas proj ect and to defer and capitalize the l depreciation, operations and maintenance, insurance and tax expenses associated with that unit from August 25, 1988 (the date of commercial l operation) until rates are in effect that Leflect the " prudently incurred" costs of the plant. The proposed order for HL&P vould permit HL&P to capitalize carrying charges in the same form as AFUDC I for ratemaking purposes, but the equity portlon of those carrying charges could not be capitalized for financial reporting purposes but instead would be disclosed in a footnote to financial statements. The Hearings Examiner's proposed order would not permit deferred accounting treatment with respect to Limestone Unit No. 2. The proposed order on CPL's request appears to differ in some respects from the proposed order on HL&P's request, including a recommendation that CPL not be permitted to defer certain costs which the Hearings Examiner in the HL&P docket recommended that HL&P be permitted to defer. At the February 22, 1989 hearing, the Utility Commission noted that there vere differences between the two proposed orders and expressed a desire to consider the two reports at the same time in order to evaluate the precedential effects of the proposed orders. No prediction can be made at this time regarding either the timing or the outcome of the action by the Utility Commission on the Hearing Examiner's proposed order. Until such time as the Utility Commission acts favorably on HL&P's rcquest for deferred accounting treatment, earnings of HL&P vill be adversely impacted. HL&P's current electric rates do not reflect approximately $400 million of annualized costs, ____ ______-_______ _ ____
including carrying costs, associated with the operation of Unit No. 1 of the South Texas project and Limestone Unit No. 2. Restatement of previously reported financial results would not be required if HL&P should obtain the deferred accounting treatment. (11) Applications for Rate Increases On November 23,
1988, HL&P filed applications for general rate increases with the Utility Commission (Docket No.
8425) and the municipalities within HL&P's service area that retain original jurisdiction over electric rates. In these applications, HL&P requested rates designed to increase its system-vide base operating revenues for an adj us ted test year ended September 30, 1988 by approximately $432 million, which represents an increase of approximately 15% on total revenues. The rate increase would represent the first phase of a requested three-phase rate moderation or " phase-in" plan (Rate Moderation Plan) for recovering costs associated with Limestone Unit No. 2 and both units of the South Texas proj ec t. In phase one of the requested Rate Moderation Plan, HL&P seeks to begin recovering its remaining costs not yet reflected in rates associated with Limestone Unit No. 2 and a portion of the costs associated with Unit No.1 of the South Texas project. Included in the rate application is HL&P's request to begin recovering approximately $61 million of its investment in the proposed Malakoff Electric Generating Station in Henderson County, Texas (Malakoff project), together with Utility Fuels' investment in the project of approximately $124 million, which HL&P intends to purchase. Current recovery of these costs is requested over a nine year period with the unamortized balance to be included in rate base. It is presently contemplated that Utility Fuels vill provide the lignite supply services for the Malakoff project. Although the rate increase requests associated with the second and third phases of the Rate Moderation Plan vill be filed as independent rate cases, HL&P has requested that the Utility Commission establish a schedule for the recovery of the remainder of HL&P's costs associated with the South Texas project. Hearings on HL&P's rate request began in March 1989; however, final action from the Utility Commission on the rate request is not anticipated before late 1989 or early 1990. HL&P is requesting that increases associated with the second and third phases become effective in successive one-year intervals following the effectiveness of the phase one increase. In phase two and phase three of the Rate Moderation Plan, HL&P vould seek to begin recovering its remaining costs associated with Unit No.1 of the South Texas project and costs associated with Unit No. 2 of the South Texas project. Pursuant to the requested Rate Moderation Plan, HL&P vould capitalize and defer for future recovery those costs not included in the initial or second phase. The timing of phases two and three may be modified l if HL&P does not receive favorable action on its request for deferred accounting treatment. See Note 10. 1 _ _ _ _ _ - _ _ _ _
i I l In August.1987, the Financ'ial Accounting Standards Board issued SFAS' ) No. 92, " Regulated Enterprises - Accounting'for Phase-in Plans". SFAS l No. 92 requires allovable costs deferred for future recovery under a I phase-in plan to be capitalized as a deferred: charge if-each of four criteria is met. Those criteria are (a) the plan has been agreed to l by the regulator, (b) the plan specifies when recovery will occur, (c)' all allovable costs deferred under the plan are scheduled for recovery within 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. l construction or as part of a qualified phase-in plan. HL&P's i requested Rate Moderation Plan includes a qualified phase-in plan in i accordance with the provisions of SFAS No. 92. See Note 10. In February 1989, Houston took final action with respect to HL&P's rate request' by passing a rate-ordinance ~ hich denied. HL&P any v increase in its present rates. The Houston ordinance, which declared' that certain aspects of the South Texas project were not prudently managed, was based, in part, on the preliminary findings of a i 1 consultant retained by Houston to perform a review of the project. HL&P appealed Houston's ordinance to the Utility Commission for final resolution in conjunction with Docket No. 8425. It is anticipated that other municipalities may adopt ordinances similar to that adopted by Houston. .l HL&P's ability to increase its rates vill be dependent upon favorable -j action by the Utility Commission and the municipalities retaining i original jurisdiction over electric rates. It is expected that the prudence of expenditures relating to the South Texas project' vill be a principal issue addressed in connection with these proceedings. Final l action is not expected before late 1989 or early 1990. See Note 9. HL&P has also filed a separate application (Docket No. 8431) that I requests final reconciliation of fuel costs incurred since the last 1 fuel reconciliation. This petition requests that HL&P be authorized i to continue use of its present fuel cost factors which vere implemented in accordance with the Utility Commission's final order in I HL&P's last rate case. Therefore, the requested reconciliation vill i i not' affect the current rates. The Utility Cominission has consolidated that request with Docket No. 8425. (12) Malakoff Project In January 1987, HL&P announced that the schedule for'the construction of the proposed Malakoff project had been modified. The scheduled in-service dates, which are the dates the units are expected to be' 'l available to meet peak demand, are nov 1997 for Unit No. I and 1999' for Unit No. 2. The modified. schedule resulted from lowered j 1 i .j ; l u l
1 projections of future demand for electricity in the Houston area.- As i a result of the modified schedule, all developmental work on the two 645 MW lignite units was stopped, but HL&P vill-resume activity when i necessary to meet load growth requirements. HL&P's total investment in the Malakoff project, through December 31, 1988, is $155 million including AFUDC and land. This amount is included in Plant Held for. Future' Use, and HL&P has suspended the accrual of AFUDC until such time as the project is reactivated. HL&P has agreed to indemnify Utility Fuels for all necessary and actual costs incurred due to the l modification of the schedule. See Note 16 for such costs indemnified I in 1988 and 1987. Utility Fuels,.which vill supply lignite fuel for the plant, has invested $124 million-in lignite reserves and equipment relating to the Malakoff project through December 31, 1988 and suspended capitalization of interest effective December 31, 1986. For l the 1989 - 1991 period, Utility Fuels anticipates $32 million of expenditures relating to the Malakoff project which are primarily associated with keeping lignite leases and other related agreements in effect. In Decket No. 8425, HL&P has proposed that a portion of its investment in the Malekoff project be recovered in current rates. See Note 11. (13) Unrecovered Costs The Utility Commission has allowed recovery of certain costs over a period of time by amortizing those costs for rate making purposes. However, unrecovered amounts have not been included in rate base and, as a result, no return on investment -is being earned during the recovery period. The amounts of such assets and the remaining recovery period applicable to each are listed below: Unrecovered Amount Remaining Recovery Period at December 31, 1988 at December 31, 1988 (Thousands of Dollars) Allens Creek q Proj ec t..... $ 28,876 48 months 4 Other......... 3,155 11 - 94 months l l 1 i l l 'l I
l 4 (14) Federal Income Taxes The current and deferred components of tax expenses are as follows: l l I Year Ended December 31, 1988 1987 1986 (Thousands of Dollars) Current................................ S 41,161 $ 88,201 $ 53,471 ) Deferred: Liberalized depreciation............. 79,204 64,615 73,207 Investment tax credit - net.......... 8,483 (885) 28,033 1 Applicable to AFUDC.................. 28,826 40,210 47,089 l Alternative minimum tax credit....... (23,476) l Other - net.......................... (7,781) 3,275 20,'81 Federal income taxes................... 126,417 195,416 222,281 Effective federal income tax rates are lover than statutory corporate rates for each year as follows: Year Ended December 31, 1988 1987 1986 (Thousands of Dollars) Federal income taxes at statutory corporate rate....................... $180,508 $254,161 $314,651 Reduction in taxes resulting from: i AFUDC - other included in income..... 40,153 57,434 78,360 Amortization of ITC.................. 5,941 6,334 7,068 l Other - net.......................... 7,997 (5,023) 6,942 Tota1.......................... 54,091 58,745 92,370 Federal income taxes................... $126,417 $195,416 $222,281 l Effective rate......................... 23.8% 30.8% 32.5% i (15) Supplementary Expense Information l
Taxes, other than federal income taxes, vere charged to expense as follows:
1 Year Ended December 31, 1988 1987 1986 (Thousands of Dollars) Electric: I Ad valorem........................... S 83,926 $ 76,686 $ 73,366 State gross receipts................. 33,603 35,177 31,630 Payroll.............................. 17,940 15,222 18,788 8 PUC assessment....................... 4,847 4,758 4,709 Miscellaneous........................ 24,503 19,824 18,298 l Total........................... $164,819 $151,667 $146,791 l Research and development costs charged to expense........................... $ 13,960 $ 15,317 $ 14,462 l 1
1 1 I (16) Principal Transactions Between HL&P, Its Parent and Other Related Companies Common stock dividends paid to Houston Industries by HL&P totaled $313,582,000, $304,868,000 and $293,982,000 in 1988, 1987 and 1986, respectively. No common stock of HL&P was issued in 1988 or 1986. HL&* issued 145,395 shares of common stock for total consideration of I $4,850,000 to Houston Industries during 1987. l Operating Expenses-Fuel in the accompanying Statements of Income for the years ended December 31,
1988, 1987 and 1986 includes
$473,847,000, $509,739,000 and $468,274,000, respectively, of coal and i lignite purchased from Utility Fuels. l Operating Expenses-Operation in the accompanying Statements of Income for the years ended December 31,
1988, 1987 and 1986 includes
$15,590,000, $15,382,000 and $9,139,000, respectively, of service
fees, reimbursable direct costs and shared costs charged by Houston Industries In addition, such operating expenses includes limestone purchases from Utility Fuels of $3,380,000, $3,594,000 and $2,408,000 l
for the years ended 1988, 1987 and 1986, respectively. Also reflected for the years ended December 31, 1988 and 1987 are $26,071,000 and $26,313,000, respectively, of factoring 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 years ended December 31, 1988 and 1987 includes lignite holding expenses charged by Utility Fuels of $10,932,000 and $8,931,000, respectively. As part of the consolidated financing program, Houston Industries has established a money fund through which HL&P can invest on a short-term basis. Other Income (Expense) in the accompanying Statements of Income for the years ended December 31, 1988, 1987 and 1986 includes $88,901, $133,810 and $3,634,400, respectively, of interest income from Houston Industries through such money fund transactions. (17) Subsequent Events During January and February 1989, HL&P issued $200 million aggregate principal amount of collateralized medium-term notes having maturities ranging from 5 to 10 years and bearing fixed rates of interest ranging from 9.79% to 9.85% per annum. In February 1989, HL&P sold $225 million aggregate principal amount of first mortgage bonds. These bonds bear interest at a rate of 10 1/4% per annum and vill mature on February 1, 2019. In February 1989, $75 million aggregate principal amount of 7.70% collateralized revenue refunding bonds and $29.7 million of 7 7/8% _ _ _ _ _ _ _ _ - _ _ - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _
collateralized pollution control revenue bonds were sold on behalf of HL&P. Proceeds from the sale of such revenue refunding bonds vill be used in connection with_the redemption of pollution control revenue bonds previously issued on behrlf of HL&P. In Februar' 1989, EL&P deposited approximately.$57 million with the first morigage bond trustee to redeem-all of the outstanding bonds of .the 15 ~1/8% Series of its first mortgage bonds at 100% of the princ' pal amount and to pay accrued interest. The bonds of this series were redeemed pursuant to the general redemption provisions of the Mortgage and Deed of Trust. (18) Unaudf.ted Quarterly Information The following unaudited quarterly financial information includes, in the opinion of management, all adjustments (which' comprise only normal 1 recurring accruals) necessary for a fair presentation. Quarterly results are not necessarily indicative of expectations for a full year's operations because of seasonal and other factors, including rate increases and variations in operating expense patterns. Income After Operating Preferred Quarter Ended Revenues Income Dividends (Thousands of Dollars) March 31, 1987......... $638,353 S 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 March 31, 1988......... 677,517 90,762 '71,831 June 30, 1988.......... 710,641 104,681 83,038 . September 30, 1988..... 946,853 203,372 174,706 December 31, 1988...... 728,562 104,262 38,941 l 1 (19) Reclassification Certain amounts from the previous years have been reclassified to conform to the 1988 presentation of financial' statements. Such reclassifications do not affect earnings, i
INDEPENDENT AUDTTORS' REPORT Bouston Lighting & Power Company: Ve have audited the accompanying balance sheets and the statements of capitalization of Houston Lighting & Power Company as of December 31, 1988 and 1987 and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1988. These financial statements are the responsibility of the. Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. Ve conducted our audits in accordance with generally accepted. auditing standards. Those standards require that we plan and perform the audit'to obtain reasonable assurance about whether the financial statements are free of material misstatement.. An -audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such-financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1988 and 1987 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1988, in conformity with generally accepted accounting principles.
Our audits also comprehended the supplemental schedules V, VI,.VIII and IX for each of the three years in the period endea December 31, 1988. In our j I 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 22, 1989 57-
'l Item 9.. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None PART III Item 10. Directors and Executive Officers of the Registrant. .The information set forth under Item 1. " Business - Officers" is incorporated herein by reference. The executive officers of HL&P are D. D.
Jordan, D. D. Sykora, J. H.
Goldberg, H. R.-Kelly, R. S. Letbetter, D. E. Simmons, R. J. Snokhous and E. A. Turner. The following table sets forth certain information with respect to those persons who vill-be nominene for election as directors of Houston Industries at its 1989 Annual Meeting of. Shareholders and with respect to all other members of its Board of Directors whose terms vill continue after such Annual Meeting. Each member of the -Board of Directors of Houston i Industries is also a member of the Board of Directors of HL&P. Each member I of the Board of Directors of HL&P is elected annually for a one year term. Included within the information below is information concerning the business experience of each such person during the past five years, other directorships held by each such person, if any, and shares of Commor Stock of Houston Industries beneficially owned by each such person as of March 29, 1989. Except as otherwise indicated, each person has had the same principal occupation or employment for more than five years. Nominees for Election as Director to Class II Number of Shares of Year Houston Housion Industries Industries Common Stock Nominee and Term Vould Beneficially Business Experience Expire and Class Owned (1) (2) Charles E. Bishop, Ph.D., 1992 297 age 67, has been a director (Class II) since 1983. Dr. Bishop is President Emeritus of the University of Houston System and Special Assistant to the Provost at the University of North Carolina at Chapel Hil.1, North Carolina. Prior to 193), he was President of the University of Houston System. (A) (D) (G) Number of Shares of 1 Year Houston Houston Industries l Industries Common Stock -j Nominee and Term Vould Beneficially Business Experience Expire and Class Owned (1) (2) John T. Cater, age 53, has been a 1992 1,000 (4). director'since 1983. Mr. Cater. (Class II) is President and Chief Operating Officer and a director'of MCorp (3). Prior to the formation 'f o MCorp in 1984, he served as Cnairman of the Board of Southwest Baneshares, Inc. and of Bank of the Southwest, National Association. (B) (C) (E) James R. Lesch, age 67, has been a 1992 768-director of HL&P since 1982 and of (Class II) 1 Houston Industries since 1983. I Prior to August 1986, Mr. Lesch served as Chairman of the Board of l Directors of Hughes Tool Company, ) having previously served as ) President and Chief Executive Officer of that firm. Mr. Lesch also serves as a director of Dun & l Bradstreet Corporation and Rowan Companies, Inc., and as an advisory director of Texas Commerce Bank National Association (5). l (A) (C) (G) Thomas B. McDade, ege 65, has been a 1992 3,193 director since 1980. 'Mr. McDade (Class II) is primarily engaged in managing his personal investments. In March 1989, he was appointed as a Commissioner of the State Board 1 of Insurance of.the State of Texas. Prior to June 1988, he i served as a consultant to Texas Commerce Bancshares, Inc. (5) ~. i Before 1985, he served as Vice l Chairman of the Board of Directors-of that company. (A) (B) (C) Don D. Sykora, age 58, has been a 1992' 15,680 director since 1982. Mr. Sykora (Class II) is Vice President of Houston i Industries and is President and Chief Operating Officer of HL&P. the also. serves as a director of Powell Industries, Inc. (E) (F) !
i l 4 1 Directors in Class I and Class III l Number of Shares of l Year Houston Houston. Industries-Industries Common Stock Name and Term Expires Beneficially Business Experience and Class Owned (1) (2) Floyd L. Culler, Jr., age 66, has 1991 '1,000 been a director since 1988. (Class I) Mr. Culler has been President-Emeritus and consultant to the Electric Power Research Institute (EPRI), a research and development cooperative of electric utilities in Palo Alto, California, since January 1988. Prior to 1988, Mr. Culler served as President of EPRI for more than five years. (F) (G) i Hollis R. Dean, age 63, has been a 1991 22,259 j director since 1977. Mr. Dean (Class I) is Executive Vice President and Chief Financial Officer of 3 Houston Industries. Prior to 1986, he was Vice President and Treasurer of Houston Industries and Executive Vice President of HL&P. (B) (E) Joseph M. Hendrie, Ph.D., age 64, 1990 281 has been a director since 1985. (Class III) Dr. Hendrie is a Consulting Engineer in Bellport, N. Y. He served as Chairman and Commissioner of the U. S. Nuclear Regulatory Commission from 1977 to 1981. Dr. Hendrie also served as President of the American Nuclear Society during 1985. (A) (T) (G) Howard V. Horne, age 62, has been a 1990 834 director since 1978. Mr. Horne (Class III) is Chairman of the Board of Directors of the Horne Company, [i s a Houston realty firm. (A) (E) _ _ _ _ _ _ - - _ - _ _ - - _ _ _ _ - _ _.
Number of Shares of Year Houston Houston Industries Industries Ccmmon Stock Name and Term Expires Beneficially Business Experience and Class Owned (1) (2) Don D. Jordan, age 56, has been a 1990 38,023 director of Houston Industries (Class III) since 1977 and of HL&P since 1974. Mr. Jordan is President and Chief Executive Officer of Houston Industries and Chairman of the Board of Directors and Chief Executive Officer of HL&P. Mr. Jordan is also a director of Texas Commerce Baneshcres, Inc. (5) (A) (B) (E) Jon S. Lindsay, age 53, has been a 1991 0 director since 1988. Mr. Lindsay (Class I) has served as County Judge of Harris County, Texas since 1975. (D) (E) Randall Meyer, age 66, has been a 1991 1,000 director since 1988. Until he (Class I) retired in 1988, Mr. Meyer had been President of Exxon Company, U.S.A. in Houston, Texas for more than five years. (C) (F) j Kenneth L. Schnitzer, Sr., age 59, 1990 1,000 has been a director since 1983. (Class III) Mr. Schnitzer is Chairman of the Board of Directors of Century Corporation. Until March 1989, Mr. Schnitzer was Chairman of the Loard of Directors of Century Development Corporation (6), a Houston-based real estate development firm. He is also a director of Veingarten Realty, Inc. (D) (E) l -----__ _ _
Number of Shares of Year Houston Houston Industries Industries Common Stock Name and Term Expires Beneficially Business Experience and Class owned (1) (2) Jack T. Trotter, age 62, has been a 1990 1,000 director since 1985. Mr. Trotter (Class III) is primarily engaged in managing his personal investments in Rouston, Texas. He is also Chairman of the Board of Directors of First Interstate Bank of Texas, National Association (7). He serves as director of Electrosource, Inc., First Interstate Bancorp of Texas, Inc., Howell Corp. and Zapata Corporation. (8) (B) (D) (A) Member of the Executive and Nominating Committee. (B) Member of the Finance Committee. (C) Member of the Personnel Committee. l (D) Member of the Audit Committee. (E) Member of the Budget Committee, i (F) Member of the Fuel and Cogeneration Committee. l (G) Member of the Nuclear Committee. I (1) In accordance with Securities and Exchange Commission regulations, shares are deemed to be " beneficially owned" by a person who, directly or indirectly, has or shares the power to vote or to dispose of, or to direct the voting or di.<nosition of, such shares. In addition, a person is deemed to own beneficially any shares if such person has the right to acquire beneficial ownership of such shares within 60 days, such as by conversion of a convertible security or exercise of a stock option. Shares of Houston Industries Common Stock listed above include those that are owned and held by the nominee or director or his spouse, j as well as chares held for his account under Houston Industries' Dividend Reinvestment and Savings Plans. No director or nominee owns any right that vould enable him to acquire beneficial ownership of additional shares within 60 days. Each respective director or nominee has sole voting and dispositive power with respect to all shares, except as described in other footnotes. (2) No director or nominee beneficially owns more than 1% of the outstanding shares of Houston Industries Common Stock. As of March 29,
1989, all directors and officers as a group beneficially owned 114,351 l
shares of Common Stock, representing.09% of Houcton Industries' Common l Stock outstanding on such date. Less than 1/2 of 1% of any class of equity securities of any subsidiary of Houston Industries was beneficially owned by the directors and officers as a group as of such date. (3) MBank Houston, National Association (MBank), a subsidiary bank of
MCorp, participates in various credit facilities with each of Houston Industries, certain of its subsidiaries and Paragon Communications I
(Paragon), a cable television partnership in which Houston Industries-has a 50% interest through a subsidiary. Under these agreements, MBank has a maximum aggregate commitment of approximately $71 million. In September 1985, the Securities and Exchange Commission filed a'- civil enforcement action alleging that Mr. Cater violated certain federal securities laws primarily in connection with certain unaudited financial statements of Southwest Baneshares, Inc. (Southwest) for interim periods in 1983 and relating to loan loss provisions, earnings, charge-offs and the allowance for possible loan losses (Mr. Cater was Chairman of the Board of Directors and Chief Executive Officer of Southwest prior to its merger with Mercentile Texas Corporation to form' HCorp).- The action was resolved by entry of a consent decree in which Mr. Cater neither admitted nor denied any allegations in the complaint but consented to an order enjoining him from future violations of the federal securities laws. In March 1989, MCorp announced that it intended to seek protection from its creditors by filing under Chapter-11 of the federal bankruptcy laws, which announcement followed the filing by certain creditors of MCorp of petitions under Chapter.7 of the federal bankruptcy laws seeking an involuntary liquidation of MCorp.
Further, in March 1989, the Federal Deposit Insurance Corporation (FDIC) declared 20 of MCorp's 25 banks to be insolvent and transferred the assets and deposits of such banks to The Deposit Inst rance Bridge Bank, National Association.
(4) All 1,000 shares are held by Mr. Cater as custodian under Texas Uniform Gifts to Minors Act for the benefit of his children. (5) Texas Commerce Bank National Association (TCB), a subsidiary bank of Texas Commerce Baneshares, Inc., is the agent or a co-agent for, and/or participates in, various credit facilities with each of Houston I I Industries, certain of its subsidiaries and Paragon. Under these l agreements, TCB has a maximum aggregace commitment of approximately $162 million. Chemical Bank of New York (Chemical), a subsidiary of Chemical New York Corporation, the parent of Texas Commerce Baneshares, Inc., is the agent or a co-agent for, and/orL participates in, credit facilities with each of Houston Industries, certain of its subsidiaries and Paragon under which Chemical has a maximum aggregate commitment of approximately $218 million. ) (6) HL&P currently leases office space in a building owned or controlled by Century Development Corporation (Century). HL&P paid a total-of 4 approximately $4.7 million in lease payments to Century in 1988, and it j is expected that approximately $4.7 million in lease payments for these I facilities vill be paid in 1989. Property Management Systems, Inc., a wholly-ovned subsidiary of Century, provides building maintenance and jani torial services at certain other office facilities of HL&P. Payments for these services during 1988 totaled $2.8 million and payments for 1989 are expected to be approximately $3.4 million. Another subsidiary of Century, Partners Construction Co., is expected to be paid approximately'$289,000 in 1989 for construction of temporary office facilities. HL&P believes that such payments to Century and its subsidiaries are competitive with those that vould be made to other firms for comparable facilities and services. In March 1989, BancPlus
Savings, the parent of Century, was taken over by the FDIC, and Mr.
Schnitzer resigned as Chairman of the Board of Directors of Century. _ a
(7) Pirst Interstate Bank of California (Pirst Interstate), an affiliate of First Interstate Bank of Texas, National Association, participates in various credit facilities with each of Houston Industries, certain of its Jbsidiaries and Paragon. Under these agreements, Pirst Interstate has a ma:timum aggregate commitment of approximately $157 million. (8) Mr. Trotter owns a majority interest in Koenig Millworks Company, a local construction and fabrication company, from which HL&P has contracted to purchase certain services during the rehabilitation of its zone dispatching system. It is expected that payments to Koenig Millworks will total approximately.$496,000 during 1989. HL&P believes that the price to be paid vill be competitive with the price charged by other firms for comparable services. Item 11. Executive Compensation. The following table shows, for the fiscal year ended December 31, 1988, compensation data for the five most highly compensated executive officers of-HL&P whose cash compensation exceeded $60,000 in 1988 and all' executive officers of HL&P as a group. Principal Capacity In Cash Compensation Name Vhich Served Salary Other(1) D. D. Jordan Chairman of the Board and $550,417 $110,475 Chief Executive Officer D. D. Sykora President and Chief 354,583 70,875 Operating Officer J. H. Goldberg Group Vice President - Nuclear 261,667 27,480 H. R. Kelly Senior Vice President, 228,750 26,890 General Counsel and Corporate Secretary E. A. Turner Group Vice President - 185,833 22,739 i i Administration and Support All executive officers of HL&P as a group (8 persons, including those named above) $2,119,584 $318,160-(1) Other Cash Compensation includes vested portions of amounts earned I under the Executive Incentive Compensation Plan, whether received in cash or deferred as described below, and Board of Director and committee fees. Other Cash Compensation does not-include compensation for, or amounts distributed to, the named individuals or group pursuant to Houston Industries' Employee Stock Ownership Plan (ESOP), Savings Plan or Retirement Plan described below. The information related to Mr. Jordan also includes compensation earned' i in his capacity as President and Chief Executive' Officer of Houston Industries. ! L _ _ 1 _ ______ _ 1
i .The Board of Directors of Houston Industries voted to terminate the ESOP, effective January 1, 1988 as a result of the Tax Reform Act of 1986 eliminating payroll based tax credits to-the ESOP.- Substantially all of the Common Stock of Houston industries held by the ESOP was distributed to the participants (including the executive officers of HL&P), in December 1988. Such amounts are not included in the Cash Compensation Table. Also during 1988, certain officers of HL&P, including those named in the Cash Compensation Table above, received awards under the Houston Industries Executive Incentive Compensation Plan (EICP). One half of each award to each participant is contingent and not vested and vill be converted into a number of share equivalent units determined by reference to the market price of Houston Industries Common Stock. Amounts equal to dividends paid on the Houston Industries Common Stock are credited to a participant's account in the form of additional share equivalent units. The contingent portion of a participant's account vill be payable at the earlier of (a) completion of four years of employment after the award was granted, (b) death or disability, or (c) the expiration of four years after the award was granted if the participant retired after attaining the age of 60 during such i four-year period. If a participant is 50 years of age or older and owns 5,000 shares or more of Houston Industries Common Stock, he may elect in lieu of receiving share equivalent units as described above, to. have the amount of his annual awards credited to an account as if i't 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 were 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 l lump sum payment. The remaining one-half is vested at the date'of the award and is paid in cash unless the participant has irrevocably elected to have all or part of such vested amount credited to a deferral account in the Deferred Compensation Plan, to be held and paid in accordance with the terms and conditions of such plan. The Cash Compensation Table set forth above includes vested amounts that were earned pursuant to the EICP during 1988 for services rendered in 1987. The non-vested portions of such awards have been excluded from the table and are as follows: $99,375 for Mr. Jordan; $57,375 for Mr. Sykora; $27,480 for Mr. Goldberg; $26,890 for Mr. Kelly; $22,739 for Mr. Turner; and $293,560 for all executive officers as a group 3 persons). Houston Industries maintains a Savings Plan in which substantially all employees of Houston Industries and its subsidiaries, including HL&P, are eligible to participate. Under the Savings Plan, a participating employee may invest up_ to 10% of his total compensation base. A participant's compensation base includes all salary, vages, commissions, overtime pay and any other payment of compensation subject to FICA tax (up to a maximum of $200,000 for plan years commencing on or after January 1, 1989), but does not include any deferred amounts pursuant to a written salary deferral agreement. Houston Industries makes matching contributions equal to 70% ) (60% prior to January 1, 1989) of the first 6% of such investment. 1 !
Contributions by Houston Industries are invested in Houston Industries j Common Stock. Employees may direct that their contributions be invested in Common Stock of Houston Industries and/or certain other investment securities. Employee contributions are fully. vested and the percentage of company contributions that is vested and payable upon termination of j employment of an employee depends upon the reason for termination and the i length of such employee's participation in the Savings Plan. Investments in the Savings Plan are held by a bank trustee. During 1988, 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 '3 follows: Mr. Jordan, S11,250; Mr. Sykora, $7,632; Mr. Goldberg, $7,760; Mr, Kelly, $2,633; Mr. Turner, $5,120; and all executive officers as a group (8 persons), $47,879. Such amounts are not included in the cash Compensation Table. Houston Industries maintains a noncontributory Retirement Plan for substantially all employees of Houston Industries and certain of its subsidiaries, including HL&P, under which Houston Industries annually makes l such contributions as are actuarily determined to be necessary to provide l the retirement benefits established under such plan. Benefits are based on a percentage of employee eligible earnings and length of service and are reduced by Social Security benefits. Such benefits are payable upon normal retirement at age 65, upon early retirement or after termination of employment under certain circumstances. Houston Industries also maintains a l Benefit Restoration Plan, which provides officers of Houston. Industries.and its subsidiaries, including HL&P, an amount equal to the difference, if any, l between the benefits they would have been entitled to receive under the Retirement Plan but for limitations imposed by the Internal Revenue Code and the benefits they actually receive from the Retirement Plan. Houston l Industries and HL&P own life insurance policies on the. lives of such participants, and it is anticipated that the Benefits Restoration Plan vill l result in no future cost to Houston Industries or HL&P. The following table I shows the estimated annual benefits, after reduction for Social Security benefits under Houston Industries Retirement Plan (as supplemented, where necessary, by the Benefits Restoration Plan) that would be payable to officers in various compensation classifications upon retirement in 1988 at age 65 after the indicated periods of service. Final Average Annual Pay at Estimated Annual Pension Based on Years of Service Age 65 10 years 20 years 30 years 35 or more years $ 50,000 $ 8,202 $ 16,403 $ 24,605 $ 28,706 100,000 18,202 36,403 54,605 63,706 150,000 28,202 56,403 84,605 98,706 200,000 38,202 76,403 114,605 133,706 250,000 48,202 96,403 144,605 168,706' 300,000 58,202 116,403 174,605 203,706 350,000 68,202 136,403 204,605 238,706 400,000 78,202 156,403 234,605 273,706 450,000 88,202 176,403 264,605 308,706 l 500,000 98,202 196,403 294,605 343,706 550,000 108,202 216,403 324,605 378,706 600,000 118,202 236,403 354,605 413,706 650,000 128,202 256,403 384,605 448,706 700,000 138,202 276,403 414,605 483,706 750,000 148,202 296,403 444,605 518,706 l
1 4 Hessrs. Jordan, Sykora, Goldberg, Kelly and Turner have credited years 4 of service of 33, 33, 8, 3, and 34 years respectively, under the Retirement Plan. Mr. Goldberg and Mr.. Kelly are entitled to an additional ten years of credit for service for purposes of determining their benefits under the table above pursuant to the terms of supplemental agreements with HL&P. Effective January 1, 1989, the Tax Reform Act of 1986 made significant changes in the way qualified employee benefit plans, such as the retirement
Plan, can integrate their benefits with those provided by federal Social Security.
The current formula, used as the basis for the above table, vill be revised in 1989. The table above illustrates the amounts of annual pension benefits payable under the Retirement Plan formula in effect as of December 31, 1988. In reliance on IRS Notice 88-131, Houston Industries has amended the Retirement Plan effectively to " freeze" benefit accrual under the Retirement Plan for highly compensated participants as of December 31, 1988 until such time as Houston Industries, upon the advice of _its I independent actuary, prepares the new benefit formula.- Houston Industries has established a plan that provides to key. employees of Houston Industries and its subsidiaries, including those .l executive officers of HL&P named in the Cash Compensation Table above, (a) a j salary continuation benefit. of 100% of the officer's current salary for j twelve months after his death during active employment and 50% of his salary for nine years or until the deceased officer vould have attained age 65, if later, or (b) a post-retirement death benefit of 50% of the officer's pre-retirement annual salary payable each year for six years. Houston Industries and its subsidiaries own, and are-beneficiaries under, insurance i policies on the lives of such officers to fund the plan. Directors, officers and certain key employees of Houston Industries and its subsidiaries, including HL&P, are eligible to participate'in a Deferred i d Compensation Plan through 1989 and thereafter if such plan is extended. Under the Deferred Compensation Plan, an eligible employee participant may elect to defer up to 25% or 40% (depending on such participant's age) of his salary in the plan year, with a minimum deferral of $2,000. A participant may also elect to defer any incentive compensation awarded him, with $2,000 being the minimum amount which may be deferred. Non-officer directors may defer their annual retainers and beginning January 1, 1989, any director may defer meeting fees. ) i Employees who continue employment until at least age 60 vill receive payments from the Deferred Compensation Plan over a 15-year period beginning at age 65. Directors vill receive payments from the Deferred Compensation Plan over a 15-year period beginning at age 70. For salary and director fee deferrals after January 1, 1989, and for all deferrals after January 1,
1990, a lump sum distribution vill be made unless the participant elects to receive payments over a 15-year period.
In addition, for deferrals prior to January 1, 1989 and for 1989 incentive compensation deferrals, if any, a nartic'. pant who is 57 years of age or younger and who remains an employee or director for seven years after deferral vill receive up to four annual payments equal to the deferred amount. For salary and director fee deferrals after January 1, 1989, and for all deferrals after January 1, 1990, a participant may elect to receive en early distreution of either 50% or 100% of his original deferral plus accumulated interest not sooner than _ _- _ _
credited years nt d Turner haveunder the Retireme of ars ~ f:en, felly anrespectively,dditional ten ye the under ra, G:
3. araf 3+ y u rsentitled to their benefitswith HL&P.
an a ing reements significant
r. re117 are Puricier :f determincf r:pplemental agAct of 1986 mad nt 4
he teru by federalve table, vill One Tax Reform 1, I E 6 n w benefit plans, suprovided annual abo of of ifief er vith those is for the amountseffect as fortch, md as the basillustrates theformula inton Industriesunder bereft x has eir Plan fit accrualof December 31, tacTe ice 88 131, Hous under ::e Petirement taff The to " freeze" bene of its reliaret m '15 Not as ble advice effe::ively d participants the upon for hig-J.7 ::m;ensateIndustries, formula. to Plan at key E m :::v benefit pro idesincluding those s v as re -m :e that ve, (a) a preparts plan subsidiaries, abo for a established Compensation Tablecurrent salarysalary its t.as and officer's 0% of his if
riesInh.stries the Cash ef EL&F ratei it1C0% of theemployment and 5 attained age 65, officer's ton

n bendit tring a:tive would haveof 50%
f of the Houston his deAtt d officerbenefit six years.under, insurance until the decette deathyear forficiaries ment each 2 post-retire >able v'n, and are beneers to fund the pof Houston Indu lan. and ps sala:7 ies c_:ualsubsidiariesefficployees icipate in extended.
ts cs of su a d certain key emeligible to part such plan is ant may lives employee participate) of his f
efficers ELLT, areand thereafter i n eligiblesuch participant'sA participant s, including $2,000 1959 nsation Plan, an(depending ondeferral of $2,000 warded him, with An through may minimumcompensationNon-officer directors
red Compe 40 may a
director cp to 25 crwith a plan year, incentive deferred. 1, 1989, any any be ary to deferamount which mayand beginning Janu vill receive beginning least age 60a 15-year period nsation . rum =al retainers at from the Deferred Compedirector fee l employment unti f ees. ver o 1, continue pensation Plan salary and January deferrals i ant elects to ents after For the Deferred Com who vill receive paym 70 unless the partic pferrals prior to beginning at age 1989, and for all any, a 2irectors addition, for de rals, if 5-year period made or employeeannual 1, vill be compensation deferremains ter January ion d In an
sum distributa 15-year perio.
to fourdirector fee entive and who up inc or younger receive and 1, for 1989 over January of agedeferral vill salary after
ts deferrals of either 50%
1989 and For rho is 57 years oner than after amount. all distribution not so yearsdeferred1989, and early for
r seven to 1,
receive accumulated interes the an pal af ter January:icipant may eledeferral plus ct to original his 67-
three years from the end of the year in which such deferral was made. An employee who terminates employment before age 60 vill receive one payment of his total account balance. Houston Industries owns, and is beneficiary
under, insurance policies on the lives of such participants, and it is anticipated that deferrals prior to 1989 as well as any 1989 incentive compensation deferrals vill result in no future costs to Houston Industries or to HL&P. Compensation of executive officers of HL&P deferred in 1988 is included in the Cash Compensation Table above.
1 Other compensation paid or distributed during 1988 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 j
group, the lesser of $200,000 or 10% of the compensation of the group i
reported in the table. Each director receives a fee of $700 for each board meeting of HL&P l that he attends and a fee of $700 for each committee meeting that he attends. Additionally, each director who is not an employee of HL&P, Houston Industries or another of Houston Industries' subsidiaries receives an annual retainer of $15,000 in his capacity as a director of HL&P. Non-officer directors may defer all or a part of their annual retainers (see the discussion of the Deferred Compensation Plan above). l Item 12. Security ownership of Certain Beneficial Owners and Management. As of March 29, 1989, Houston Industries owned 106,660,778 shares of HL&P's Common Stock, without par value, constituting all of the issued and outstanding shares of Common Stock of HL&P. The information set forth under Item 10 above is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. i The information set forth under Item 10 above is incorporated herein by reference. l l 1 I ___._____________.________.___J
PART IV ' Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)-(1) Financial Statements. Page Statements of Income for the Three Years Ended December 31, 1988............................................... 28 Statements of Retained Earnings for the Three Years Ended December 31, 1988...................................... 29' Balance Sheets at December 31, 1988 and 1987............. 30 Statements of Capitalization at December 31, 1988 and 1987................................................... 32 Statements of Cash Flows for the Three Years Ended December 31, 1988...................................... 34 Notes to Financial Statements............................ 36 Independent Auditors' Report............................. 57 (a) (2) Financial Statement Schedules. Schadules for the Three Years Ended December 31, 1988: V -- Proparty, Plant and Equipment.................... 71 i VI -- Accumulated Provision for Depreciation, Depletion and Amortization of Property, Plant l and Equipment 72 VIII -- Reserves........ 73 ) IX -- Short-Term Borrowings............................ 74 The following schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements: I, II, III, IV, VII, X, XI, XII and XIII. (a) (3) Exhibits. See Index of Exhibits on page 76. (b) Reports on Form 8-K. 1 The registrant filed reports on Form 8-K as follows: ) (1) October 3, 1988 1 Item 5. Other Events. (a) Prudence Reviev' of South Texas Proj ect by Utility j Commission. I < i
(b) Pending Litigation and Settlement Agreement with City of Austin. f (c) Appeal of 1982 Rate Order. (2) October 24, 1988 Item 5. Other Events. (a) Pending Litigation and Settlement Agreement with City of Austin. (3) November 23, 1988 Item 5. Other Events. (e) Application for Rate Increase. (b) Fuel Transportation Litigation. (4) December 15, 1988 Item 5. Other Events. (a) Prudence Review of South Texas Proj ect by Utility Commission. (b) Low Power Licensing of Unit No. 2 of the South Texas Proj ec t. (c) Settlement of Fuel Transportation Litigation. L
_q J SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT For the Three Years Ended De.: ember 31. 1988 (Thousands of Do71ars)
==============================w. see=========================================================== col. A Col. B Col. C Col. D Col. E Col. F- , ~ ~. Other Balance Additions Changes -. Balance Beginning at. Retire-Add End Classification of Year Cost monts .(Deduct) of Year For the Year Ended December 31., 1988: Production Plant................... $3,894,100 $1,976,197 $ 72,533 $ 5,797,764 Transmission Plant................. 640,423 61,695 1,881 700,237 Distribution Plant. 1,845,618 125,032 19,020 1,951,630 General Plant..... 456,232-54,823 8,620 $ (959) 501,476 Plant Acquisition Adjustments. 3,166 3,166 Plant Hold for Future Use.......... 180,3J3 470 38 190,841 ~~~ Total Plant..... 7,019,872 2,218,217 102,054 (921) 9,135,114 Construction Work in Progreso...... 2,648,682 (1,555,455) (2,803) 1,090,424 Nuclear Fuel............ 131,323 21,260 152,583 Total... $9,799,877 $ 684,022 $102,054 $ (3,724) $10,378,121 For the Year Ended December 31, 1987: Production Plant. $3,747,442 $ 146,974 316 $3,894,100 Transmission Plant................. 601,084 41,211 1,872 640,423 Distribution Plant............ 1,747,216 119,045 20,643 1,845,618 General Plant.............. 431,048 44,913 16,557 $ (3,172) 456,232 Plant Acquisition Adjustments...... 3,166 3,166 Plant Held for Future Use.... 167,008 13,396 (71) 180,333 Total Plant............ 6,696,964 365,539 39,388 (3,243) 7,019,872 constrv-tion Work in Progress... 2,170,700 486,373 (8,391) 2,648,682 Nuclear Fuel. 126,190 5,133 131,323 Total.............. $8,993,854 $ 857,045 $ 39,388 $ (11,634) $9,799,877' For the Year Ended December 31, 1986: Production Plant.............. $3,238,785 $ 534,322 $ 25,665 $3,747,442 Transmission Plant.............. 587,907 14,564 1,387 601,084 Distribution Plant... 1,664,687 105,296 22,767.. 1,747,216 General Plant...... 414,C17 27,357 8,170 $ (2,756) 431,048 Plant Acquisition Adjustments... 3,166 3,166 Plant Held for Future Use.......... 26,537 140,502 (31) 167,008 Total Plant. 5,935,699 822,041 57,989 (2,787) 6,696,964 Construction Work in Progress...... 2,083,650 108,025 (20,975) 2,170,700 Nuclear Fue1.......... 118,181 9,009 126,190 Total......... $8,137,530 $ 938,075 $ 57,989 $ (23,762) $8,993,854 1 ) j l Notes (A) Substantially all additions are originally charged to Construction Work in Progress and transferred to electric utility plant accounts upon completion. Additions at cost give effect to such transfers. (B) Additions at coat include noncash charges for an allowance for funds used during construction, j j l (C) HL&P computes deproriation using the straight-line method. The depreciation provisions as a j l percentage of the averego depreciable cost of plant were 3.3% for 1988, 3.4% for 1987 and 3.6% for 1986. (D) Other changes in Plant Accounts include certain changes in capital leases which do not affect Total Plant. (E) construction Work in Progress was reduced by the amount of capitalized interest earned on funds held in t rust in 1988, 1987 and 1986. (F) Additions to production plant in 1988 and 1986 include the transfers from Construction Work in Progress of $1.768 billion for the completed Unit No. 1 of the South Texas project and $530 million for the completed Limestone Unit No. 2, respectively. (G) Additions to Plant Held for Future Use are primarily cost' 4 elated to the Malakoff project. I i I 1
SCHEDULE VI - ACCUMULATED PROVISION FOR DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT For the Three Years Ended December 31, 1988 (Thousands of Dellars) 1 Col. A Col. B Col. C Col. D Col. E Additions Deductions from Reserve Retirements, Balance at. Charged Charged Renewals Balance Beginning to to Other and at Close -l Description of Period Income Accounts Replacements Other of Period Year Ended December 31, 1988: Depreciation, depletion and amortization of property, plant and equipment...... $1,530,543 $252,411 $10,074 S120,435 S1,672,593- ) Amortization of nuclear fue1..................... 3,631 1,625 5,256 Year Ended December 31, 1987: Depreciation, depletion and j amortization of property, i plant and equipment...... $1,351,412 S219,501 S10,178 S 50,548 $1,530,543 Year Ended December 31, 1986: Depreciation, depletion and amortization of property, plant and equipment...... $1,203,039 $206,262 $11,830 $ 69,719 .$1,351,412 I l l l SCREDULE VIII - REsER7Es For the Three Years Ended December 31, 1988 (' thousands of Dollars) I f col. A Col. s col. c col. D col. E Additions Deductions Balance at Charged Charged from Balance Beginning to to other. Reserves at Close Description of Period Income Accounts (A) of Period Year Ended December 31, 1988: Esserves other than those deducted from assets on balance sheets Property insurance.......... $ (48) 354 30; Injuries and damages........ 1,667 3,907 4,010 $1,764 l "sar Ended December 31, 1987: ] Accumulated provisions deducted from related assets on balance I sheet Unco 11ectible accounts...... $4,300 $ 4,300 Reserves other than those I deducted from assets on balance sheets Property insurance.......... 43 28 119 $ (48) l Injuries and damages...... 4,723 2,611 5,467 1,867 Year Ended December 31, 1986: Accumulated provisions deducted from related essets on balance sheets ] Uncollectible occounts...... $5,707 $11,493 $12,900 $4,300 Reserves other than those deducted from assets on balance sheets Property insurance.......... (1,429) 238 $ 1,234 43 Injuries and damages........ 5,597 3,658 4,532 4,723 NOTES: (A) Deductions from reserves represent losses or expenses for which the respective reserves were created. In the case of uncollectible accounts reserve, such deductions are not of recoveries of amounts previously written off. I - _ _ - _ _ _ -
..y I SCHEDULE II - SNORT-TE3tM BORROWINGS i For the Three Yeero Ended December 31, 1988 j (Thousando of Dollare)
=========m ..m====....... ....m aman================... ....me===== m====. Col. A Col. B Col. C Col. D Col. E Col. F ) Weighted Maximum Average Weighted l Category of Average ~ Amount Amount Average Aggregate Balance Interest Rate outstanding outstanding Interest Rate Short-term at End of at End of During the During the During the Description Borrowings Forlod (A) Period Period Period Period Year Ended Dece mbe r 31, 1988... Commercial Paper $391,786 9.55%' $479,171 $372,903 7.75% Yeas Ended December 31, 1987... Bank Loans 685 7.50% Commercial Paper $549,796 8.15% $549,796 357,883 7.14% Year Ended December 31, 1986... Bank Loans $ 50,000 7.50% $119,067 $ 1,093 7.91% commercial Paper 14,100 6.35% 247,381 79,589 6.57% Notes (A) The Balance at End of Period excludes land and other notes (in thousands of do11 era) of $921, $1,211, and $4,781 as of December 31, 1988, 1987, and 1986, respectively. I i I
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the i registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly i authorized,in the City of Houston and State of Texas, on the 30th day of March,1989. l HOUSTON LIGHTING & POWER COMPANY (Registrant) D. D. JORDAN ' (D. D. Jordan, Chairman) Pursuant to the requirements of the Sec rities Exchange Act of 1934, this report has been signed u below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date Principal Executive D. D. JORDAN Officer and Director 1 (D. D. mfan, Chairman) Principal Financial R. S. LETBETTER Officer (R. S.14thetter, Group Vice President) Principal l J. S. BRI AN Accounting Officer (J.S. Brian, Vice President and Comptroller) CHARLES E. Bisitor Director (Charles E. Bishop) JOHN T. CATER Director (John T. Cater) FLOYD L. CULLER. JR. Director (Floyd L Culler,Jr.) l H. R. DEAN Director (11. R. Dean) l-JosErn M. HENDRIE Director l (Joseph M. Hendrie) HOWARD W. HORNE Director (floward W. llorne) JAMES R. LEscu Director l (James R. Lesch) JoN S. LINDSAY DiTCClor l (Jon S. IJndsay) TuouAs B. McDADE Director (Thomas B. McDade) RANDALL MEYER Diiector (Randall Meyer) ) KENMTH L. SenNITZER. SR. DireClor (Kenneth L Schnitzer, Sr.) D. D. SynoRA Director (D. D. SyLora) J ACK T. TRorrER Director (Jack T. Trotter) I i I
l HOUSTON LIGHTING & POWER COMPANY Exhibits to the Annual Report on Form 10-K. For the Fiscal Year Ended December 31, 1988 INDEI 0F EXHIBITS Exhibits not incorporated by reference to a prior filing are designated l 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 through May 26, 1988) (Exhibit 3 to HL&P's Quarterly Report on Form 10-0 for the quarter ended June 30, 1988; File No. 1 1-3187H-1). 3(b) - Articles of Correction dated July 6, 1988 to the Restated Articles of Incorporation of HL&P (Exhibit 3(a) to HL&P's Quarterly Report on Form 10-0 for the quarter ended June 30, 1988; File NO. 1-3187H-1). ] 3(c) - Articles of Amendment dated July 7, 1988 to the Restated i Articles of Incorporation of HL&P (Exhibit 3(b) to HL&P's I Quarterly Report on Form 10-0 for the quarter ended June 1 30, 1988; File No. 1-3187H-1). 3(d) - Copy of Amended and Restated Bylaws of HL&P a.s 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). l 4(a)(1) - Mortgage and Deed of Trust, dated as of November 1, 1944, between HL&P and South Texas Commercial National Bar.k 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) - Twenty-Second Supplemental Indenture to Exhibit 4(a)(1). (Exhibit 2(d), File No. 2-62879). 4(a)(4) - Twenty-Third Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 1 to HL&P's Annual Report on' Form 10-K for the year ended December 31, 1978; File No. 1-3187H-1). 4(a)(5) - Twenty-Fourth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 1 to HL&P's Annual Report on Form 10-K for the year ended December 31, 1979; File No. 1-3187H-1). - - - _ _ _ _ _ _ _ _ _ _ - -
INDEX OF EIBIBITS (CONT'D) 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 en Form 10-K for the year ended December 31, 1980; File No. 1-3187H-1). 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 3*., 1981; File No. 1-3187H-1). 4(a)(9) - Twenty-Eighth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit (4)(b)(9) to HL&F'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). 4(a)(17) - Thirty-Sixth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4.19, File No. 33-24078). ;
INDEX OF EXHIBITS (CONT'D) 4(a)(18) - Th'.rty-Seventh Supplemental Indenture to Exhibit 4(a)(1) (Lxhibit 4.20, File No. 33-24078). 4(a)(19) - Thirty-Eighth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4.21, File No. 33-24078)'. 4(a)(20) - Thirty-Ninth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4(a)(20) to Houston Industries' Annual Report on Form 10-K for the year ended December 31, 1988; File No. 1-7629). l 4(a)(21) - Fortieth Supplemental Indenture to Exhibit 4(a)(1) (Exhibit i 4(a)(21) to Houston Industries' Annual Report on Form 10-K for the year ended December 31, 1988; File No. 1-7629). 4(a)(22) - Forty-First Supplemental Indenture to Exhibit 4(a)(1) (rxhibit 4(a)(22) to Houston Industries' Annual Report on Form 10-K for the year ended December 31, 1988; File No. 1-7629). 4(a)(23) - Forty-Second Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4(a)(23) to Houston Industries' Annual Report on Form 10-K for the year ended December 31, 1988; File No. 1-7629). l l 4(a)(24) - Forty-Third Supplemental Indenture to Exhibit 4(a)(1) (Exhibit 4(a)(24) to Houston Industries' Annual Report on Form 10-K for the year ended December 31, 1988; File No. 1-7629). 4(b) - Collateral Trust Indenture dated as of September 1, 1988 between HL&P and Texas Commerce Bank National Association, as Trustee (Exhibit 4(d) to Houston Industries' Annual i Report on Form 10-K for the year ended December 31, 1988; l File No. 1-7629). 4(b)(1) - First Supplemental Indenture to Exhibit 4(b) dated as of January 1, 1989 (Exhibit 4(d)(1) to Houston Industries' Annual Report on Form 10-K for the year ended December 31, 1988; File No. 1-7629). 10(a) - Supplemental Retirement Benefit Agreement, effective as of October 20, 1980, between HL&P and Mr. Jerome H. Goldberg (Exhibit 10(e) to the Quarterly Report on Form 10-0 of Houston Industries Incorporated for the quarter ended March 31, 1987; File No. 1-7629). 10(b) - Employment and Supplemental Benefits Agreement, effective as of September 1, 1984, between HL&P and Mr. Hugh Rice Kelly (Exhibit 10(f) to the Quarterly Report on Form 10-0 of Houston Industries Incorporated for the quarter ended March 31, 1987; File No. 1-7629). _ _ _ _ _.
1 1
12
- Computation of Ratio of Earnings to Fixed Charges and Earnings to Fixed Charges and Preferred Dividends. l
24(a)
- Consent of Independent Public Accountants. j i HL&P vill furnish to the Securities and Exchange Commission upon request all constituent instruments defining the rights of holders of long-term debt of HL&P not filed herewith as permitted by paragraph J (b)4(iii)(A) of Item 601 of Regulation S-K. i I l 1 i i l 1. _ _ _ _ _ _ -
f ___.._--.-----w I i i I \\ RECEIVED MAY 2 51989 STP ACCOUNTING j i i l ^ l l l ._)}}

ML20247J747

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