UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 1-7629
HOUSTON INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-1885573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Post Oak Park
4400 Post Oak Parkway
Houston, Texas 77027
(Address of principal executive offices) (Zip Code)
(713) 629-3000
(Registrant's telephone number, including area code)
Commission file number 1-3187
HOUSTON LIGHTING & POWER COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-0694415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
611 Walker Avenue
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 228-9211
(Registrant's telephone number, including area code)
______________________________
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrants were required to file such
reports), and (2) have been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
As of April 30, 1994, Houston Industries Incorporated had 130,708,985
shares of common stock outstanding. As of April 30, 1994, all 1,000
authorized and outstanding shares of Houston Lighting & Power
Company's Class A voting common stock, without par value, were held by
Houston Industries Incorporated and all 100 authorized and outstanding
shares of Houston Lighting & Power Company's Class B non-voting common
stock were held by Houston Industries (Delaware) Incorporated.
HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1994
This combined Form 10-Q is separately filed by Houston Industries
Incorporated and Houston Lighting & Power Company. Information
contained herein relating to Houston Lighting & Power Company is filed
by Houston Industries Incorporated and separately by Houston Lighting
& Power Company on its own behalf. Houston Lighting & Power Company
makes no representation as to information relating to Houston
Industries Incorporated (except as it may relate to Houston Lighting &
Power Company) or to any other affiliate or subsidiary of Houston
Industries Incorporated.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Houston Industries Incorporated and Subsidiaries
Statements of Consolidated Income
Three Months Ended March 31, 1994 and 1993 3
Consolidated Balance Sheets
March 31, 1994 and December 31, 1993 5
Statements of Consolidated Cash Flows
Three Months Ended March 31, 1994 and 1993 7
Statements of Consolidated Retained Earnings
Three Months Ended March 31, 1994 and 1993 9
Notes to Consolidated Financial Statements 16
Houston Lighting & Power Company
Statements of Income
Three Months Ended March 31, 1994 and 1993 10
Balance Sheets
March 31, 1994 and December 31, 1993 11
Statements of Cash Flows
Three Months Ended March 31, 1994 and 1993 13
Statements of Retained Earnings
Three Months Ended March 31, 1994 and 1993 15
Notes to Financial Statements 16
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 37
-2-
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Thousands of Dollars)
Three Months Ended
March 31,
1994 1993
REVENUES:
Electric . . . . . . . . . . . . . . $ 821,581 $ 805,685
Cable television . . . . . . . . . . 60,520 60,274
Total . . . . . . . . . . . . . . 882,101 865,959
EXPENSES:
Electric:
Fuel . . . . . . . . . . . . . . . 217,188 198,563
Purchased power . . . . . . . . . . 98,549 129,699
Operation and maintenance . . . . . 193,851 195,236
Taxes other than income taxes . . . 63,112 61,864
Cable television operating expenses . 39,227 36,841
Depreciation and amortization . . . . 119,501 115,775
Total . . . . . . . . . . . . . . 731,428 737,978
OPERATING INCOME . . . . . . . . . . . 150,673 127,981
OTHER INCOME (EXPENSE):
Allowance for other funds used
during construction . . . . . . . . 1,316 708
Interest income . . . . . . . . . . . 8,418 8,140
Equity in income of cable television
partnerships . . . . . . . . . . . 7,910 7,022
Other - net . . . . . . . . . . . . . (8,329) 1,932
Total . . . . . . . . . . . . . . 9,315 17,802
INTEREST AND OTHER FIXED CHARGES:
Interest on long-term debt . . . . . 87,013 97,076
Other interest . . . . . . . . . . . 5,726 3,789
Allowance for borrowed funds used
during construction . . . . . . . . (1,688) (744)
Preferred dividends of subsidiary . . 8,273 9,145
Total . . . . . . . . . . . . . . 99,324 109,266
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS . . . . . . . 60,664 36,517
INCOME TAXES . . . . . . . . . . . . . 22,289 9,462
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR POSTEMPLOYMENT BENEFITS 38,375 27,055
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POSTEMPLOYMENT BENEFITS (NET OF
INCOME TAXES OF $4,415) . . . . . . . (8,200)
NET INCOME . . . . . . . . . . . . . . $ 30,175 $ 27,055
-3-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Thousands of Dollars)
(continued)
Three Months Ended
March 31,
1994 1993
EARNINGS PER COMMON SHARE:
EARNINGS PER COMMON SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS . . . . . . $ .29 $ .21
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POSTEMPLOYMENT BENEFITS . . . . (.06)
EARNINGS PER COMMON SHARE . . . . . . $ .23 $ .21
DIVIDENDS DECLARED PER COMMON SHARE . $ .75 $ .75
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000) . . . . . . . . . 130,707 129,600
See Notes to Consolidated Financial Statements.
-4-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
March 31, December 31,
1994 1993
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Plant in service . . . . . . . . . . . . . . . . . . $ 11,616,776 $ 11,480,244
Construction work in progress . . . . . . . . . . . 178,123 242,661
Nuclear fuel . . . . . . . . . . . . . . . . . . . . 211,794 211,785
Plant held for future use . . . . . . . . . . . . . 197,607 196,330
Electric plant acquisition adjustments . . . . . . . . 3,166 3,166
Cable television property . . . . . . . . . . . . . . . 378,165 372,178
Other property . . . . . . . . . . . . . . . . . . . . 50,377 47,494
Total . . . . . . . . . . . . . . . . . . . . . 12,636,008 12,553,858
Less accumulated depreciation and amortization . . . . 3,434,546 3,355,616
Property, plant and equipment - net . . . . . . 9,201,462 9,198,242
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . 19,078 14,884
Special deposits . . . . . . . . . . . . . . . . . . . 6,811 11,834
Accounts receivable:
Customers - net . . . . . . . . . . . . . . . . . . 7,916 4,985
Others . . . . . . . . . . . . . . . . . . . . . . . 21,736 11,153
Accrued unbilled revenues . . . . . . . . . . . . . . . 24,881 29,322
Fuel stock, at lifo cost . . . . . . . . . . . . . . . 58,531 58,585
Materials and supplies, at average cost . . . . . . . . 163,388 166,477
Prepayments . . . . . . . . . . . . . . . . . . . . . . 13,552 20,432
Total current assets . . . . . . . . . . . . . 315,893 317,672
OTHER ASSETS:
Cable television franchises and intangible
assets - net . . . . . . . . . . . . . . . . . . . . 971,495 984,032
Deferred plant costs . . . . . . . . . . . . . . . . . 658,254 664,699
Deferred debits . . . . . . . . . . . . . . . . . . . . 370,661 371,773
Unamortized debt expense and premium on
reacquired debt . . . . . . . . . . . . . . . . . . 169,101 169,465
Equity investment in cable television
partnerships . . . . . . . . . . . . . . . . . . . . 134,341 122,531
Equity investment in foreign electric utility . . . . . 36,065 36,984
Regulatory asset - net . . . . . . . . . . . . . . . . 244,869 246,763
Recoverable project costs . . . . . . . . . . . . . . . 112,931 118,016
Total other assets . . . . . . . . . . . . . . 2,697,717 2,714,263
Total . . . . . . . . . . . . . . . . . . . $ 12,215,072 $ 12,230,177
See Notes to Consolidated Financial Statements.
-5-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
March 31, December 31,
1994 1993
CAPITALIZATION:
Common Stock Equity:
Common stock, no par value . . . . . . . . . . . . . . . . . . . . . . . . $ 2,418,551 $ 2,415,256
Note receivable from ESOP . . . . . . . . . . . . . . . . . . . . . . . . (332,489) (332,489)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,125,167 1,191,230
Total common stock equity . . . . . . . . . . . . . . . . . . . . . 3,211,229 3,273,997
Preference Stock, no par value, authorized
10,000,000 shares; none outstanding
Cumulative Preferred Stock of Subsidiary, no
par value:
Not subject to mandatory redemption . . . . . . . . . . . . . . . . . . 351,345 351,354
Subject to mandatory redemption . . . . . . . . . . . . . . . . . . . . 167,236 167,236
Total cumulative preferred stock . . . . . . . . . . . . . . . . . . 518,581 518,590
Long-Term Debt:
Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 548,590 548,544
Long-term debt of subsidiaries:
Electric:
First mortgage bonds . . . . . . . . . . . . . . . . . . . . . . . . 3,019,982 3,019,843
Pollution control revenue bonds . . . . . . . . . . . . . . . . . . 155,225 155,218
Cable television:
Senior bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . 364,000 364,000
Senior and subordinated notes . . . . . . . . . . . . . . . . . . . 124,783 140,580
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,935 15,010
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 4,226,515 4,243,195
Total capitalization . . . . . . . . . . . . . . . . . . . . . . 7,956,325 8,035,782
CURRENT LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 813,316 591,385
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,413 239,814
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,675 187,503
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,116 84,178
Dividends accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,170 105,207
Accrued liabilities to municipalities . . . . . . . . . . . . . . . . . . . . 18,677 22,589
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,546 65,604
Current portion of long-term debt and
preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,822 55,109
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,724 62,688
Total current liabilities . . . . . . . . . . . . . . . . . . . 1,458,459 1,414,077
DEFERRED CREDITS:
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 1,988,962 1,987,336
Unamortized investment tax credit . . . . . . . . . . . . . . . . . . . . . . 429,659 434,597
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381,667 358,385
Total deferred credits . . . . . . . . . . . . . . . . . . . . . 2,800,288 2,780,318
COMMITMENTS AND CONTINGENCIES
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,215,072 $ 12,230,177
See Notes to Consolidated Financial Statements.
-6-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
Three Months Ended
March 31,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,175 $ 27,055
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 119,501 115,775
Amortization of nuclear fuel . . . . . . . . . . . . . . . . . . . . 257 2,101
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 6,041 8,750
Investment tax credits . . . . . . . . . . . . . . . . . . . . . . . (4,938) (5,072)
Allowance for other funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . (1,316) (708)
Fuel cost (refund) and over/(under) recovery
- net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,008 (2,739)
Equity in income of cable television
partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,910) (7,022)
Cumulative effect of change in accounting
for postemployment benefits . . . . . . . . . . . . . . . . . . . 8,200
Changes in other assets and liabilities:
Accounts receivable and accrued unbilled
revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,073) 289,489
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,143 2,806
Other current assets . . . . . . . . . . . . . . . . . . . . . . . 11,903 6,137
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (56,401) (57,716)
Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . (108,890) (120,235)
Other current liabilities . . . . . . . . . . . . . . . . . . . . 3,991 (19,063)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,357 15,385
Net cash provided by operating activities . . . . . . . . . . . . . . 15,048 254,943
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital expenditures
(including allowance for borrowed funds
used during construction) . . . . . . . . . . . . . . . . . . . . . . (88,038) (65,884)
Cable television additions . . . . . . . . . . . . . . . . . . . . . . . (12,127) (7,496)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,380) (3,188)
Net cash used in investing activities . . . . . . . . . . . . . . . . (108,545) (76,568)
-7-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(CONTINUED)
Three Months Ended
March 31,
1994 1993
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock . . . . . . . . . . . . $ 9,455
Proceeds from first mortgage bonds . . . . . . . . 396,798
Proceeds from senior bank debt . . . . . . . . . . 20,000
Payment of matured bonds . . . . . . . . . . . . . $ (19,500) (136,000)
Payment of senior bank debt . . . . . . . . . . . (167,349)
Payment of senior and subordinated notes . . . . . (10,384) (6,372)
Payment of common stock dividends . . . . . . . . (98,032) (97,190)
Increase in notes payable - net . . . . . . . . . 221,931 851
Other - net . . . . . . . . . . . . . . . . . . . 3,676 (1,014)
Net cash provided by financing activities . . . 97,691 19,179
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . 4,194 197,554
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . 14,884 69,317
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . $ 19,078 $ 266,871
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) . . . . . $ 96,835 $ 97,354
Income taxes . . . . . . . . . . . . . . . . . 23,365 33,715
See Notes to Consolidated Financial Statements.
-8-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Three Months Ended
March 31,
1994 1993
Balance at Beginning of Period . $ 1,191,230 $ 1,254,584
Net Income for the Period . . . . 30,175 27,055
Total . . . . . . . . . . . 1,221,405 1,281,639
Common Stock Dividends . . . . . (98,070) (97,190)
Tax Benefit of ESOP Dividends . . 1,832 1,563
Balance at End of Period . . . . $ 1,125,167 $ 1,186,012
See Notes to Consolidated Financial Statements.
-9-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(Thousands of Dollars)
Three Months Ended
March 31,
1994 1993
OPERATING REVENUES . . . . . . . . . . $ 821,581 $ 805,685
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . 217,188 198,563
Purchased power . . . . . . . . . . 98,549 129,699
Operation . . . . . . . . . . . . . 132,967 140,607
Maintenance . . . . . . . . . . . . 60,884 54,629
Depreciation and amortization . . . 98,929 96,216
Income taxes . . . . . . . . . . . . 27,073 10,947
Other taxes . . . . . . . . . . . . 63,112 61,864
Total . . . . . . . . . . . . . 698,702 692,525
OPERATING INCOME . . . . . . . . . . . 122,879 113,160
OTHER INCOME (EXPENSE):
Allowance for other funds used during
construction . . . . . . . . . . . 1,316 708
Other - net . . . . . . . . . . . . (2,986) 367
Total . . . . . . . . . . . . . (1,670) 1,075
INCOME BEFORE INTEREST CHARGES . . . . 121,209 114,235
INTEREST CHARGES:
Interest on long-term debt . . . . . 61,842 69,605
Other interest . . . . . . . . . . . 2,896 4,655
Allowance for borrowed funds used
during construction . . . . . . . . (1,688) (744)
Total . . . . . . . . . . . . . 63,050 73,516
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS . . . . . . 58,159 40,719
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS (NET OF INCOME TAXES
OF $4,415) . . . . . . . . . . . . . (8,200)
NET INCOME . . . . . . . . . . . . . . 49,959 40,719
DIVIDENDS ON PREFERRED STOCK . . . . . 8,273 9,145
INCOME AFTER PREFERRED DIVIDENDS . . . $ 41,686 $ 31,574
See Notes to Financial Statements.
-10-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
March 31, December 31,
1994 1993
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant in service . . . . . . . . . . . . . $ 11,616,776 $ 11,480,244
Construction work in progress . . . . . . . . . . . 178,123 242,661
Plant held for future use . . . . . . . . . . . . . 197,607 196,330
Nuclear fuel . . . . . . . . . . . . . . . . . . . . 211,794 211,785
Electric plant acquisition adjustments . . . . . . . 3,166 3,166
Total . . . . . . . . . . . . . . . . . . . . . 12,207,466 12,134,186
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . 3,268,419 3,194,127
Property, plant and equipment - net . . . . . . 8,939,047 8,940,059
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . 8,594 12,413
Special deposits . . . . . . . . . . . . . . . . . . 6,811 11,834
Accounts receivable:
Affiliated companies . . . . . . . . . . . . . . . 903 1,792
Others . . . . . . . . . . . . . . . . . . . . . . 14,753 2,540
Accrued unbilled revenues . . . . . . . . . . . . . 24,881 29,322
Inventory:
Fuel stock, at lifo cost . . . . . . . . . . . . . 58,531 58,585
Materials and supplies, at average cost . . . . . 157,219 160,371
Prepayments . . . . . . . . . . . . . . . . . . . . 4,606 9,234
Total current assets . . . . . . . . . . . . . . 276,298 286,091
OTHER ASSETS:
Deferred plant costs . . . . . . . . . . . . . . . . 658,254 664,699
Deferred debits . . . . . . . . . . . . . . . . . . 319,414 333,620
Unamortized debt expense and premium on
reacquired debt . . . . . . . . . . . . . . . . . 164,222 164,368
Regulatory asset - net . . . . . . . . . . . . . . . 244,869 246,763
Recoverable project costs . . . . . . . . . . . . . 112,931 118,016
Total other assets . . . . . . . . . . . . . . . 1,499,690 1,527,466
Total . . . . . . . . . . . . . . . . . . . . $ 10,715,035 $ 10,753,616
See Notes to Financial Statements.
-11-
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
March 31, December 31,
1994 1993
CAPITALIZATION:
Common Stock Equity:
Common stock, class A; no par value . . . . . . . . $ 1,524,949 $ 1,524,949
Common stock, class B; no par value . . . . . . . . 150,978 150,978
Retained earnings . . . . . . . . . . . . . . . . . 1,990,614 2,028,924
Total common stock equity . . . . . . . . . . . . 3,666,541 3,704,851
Cumulative Preferred Stock:
Not subject to mandatory redemption . . . . . . . . 351,345 351,354
Subject to mandatory redemption . . . . . . . . . . 167,236 167,236
Total cumulative preferred stock . . . . . . . . . 518,581 518,590
Long-Term Debt:
First mortgage bonds . . . . . . . . . . . . . . . . 3,019,982 3,019,843
Pollution control revenue bonds . . . . . . . . . . 155,225 155,218
Other . . . . . . . . . . . . . . . . . . . . . . . 13,935 15,010
Total long-term debt . . . . . . . . . . . . . . . 3,189,142 3,190,071
Total capitalization . . . . . . . . . . . . . . 7,374,264 7,413,512
CURRENT LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . . . . 335,830 171,100
Accounts payable . . . . . . . . . . . . . . . . . . . 120,577 190,583
Accounts payable to affiliated companies . . . . . . . 8,425 8,449
Taxes accrued . . . . . . . . . . . . . . . . . . . . 95,180 187,517
Interest and dividends accrued . . . . . . . . . . . . 57,458 65,238
Accrued liabilities to municipalities . . . . . . . . 18,677 22,589
Customer deposits . . . . . . . . . . . . . . . . . . 65,546 65,604
Current portion of long-term debt and
preferred stock . . . . . . . . . . . . . . . . . . 26,025 44,725
Other . . . . . . . . . . . . . . . . . . . . . . . . 71,994 63,607
Total current liabilities . . . . . . . . . . . 799,712 819,412
DEFERRED CREDITS:
Accumulated deferred federal income taxes . . . . . . 1,803,483 1,798,976
Unamortized investment tax credit . . . . . . . . . . 426,156 430,996
Other . . . . . . . . . . . . . . . . . . . . . . . . 311,420 290,720
Total deferred credits . . . . . . . . . . . . . 2,541,059 2,520,692
COMMITMENTS AND CONTINGENCIES
Total . . . . . . . . . . . . . . . . . . . . $ 10,715,035 $ 10,753,616
See Notes to Financial Statements.
-12-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
Three Months Ended
March 31,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . $ 49,959 $ 40,719
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . 98,929 96,216
Amortization of nuclear fuel . . . . . . . . . . 257 2,101
Deferred income taxes . . . . . . . . . . . . . 8,922 7,526
Investment tax credits . . . . . . . . . . . . . (4,840) (4,973)
Allowance for other funds used during
construction . . . . . . . . . . . . . . . . (1,316) (708)
Fuel cost (refund) and over (under) recovery
- net . . . . . . . . . . . . . . . . . . . . 16,008 (2,739)
Cumulative effect of change in accounting for
postemployment benefits . . . . . . . . . . . 8,200
Accounts receivable - net . . . . . . . . . . (6,883) 160,329
Material and supplies . . . . . . . . . . . . 3,152 2,490
Fuel stock . . . . . . . . . . . . . . . . . . 54 1,021
Accounts payable . . . . . . . . . . . . . . . (70,030) (49,933)
Interest and taxes accrued . . . . . . . . . . (100,117) (117,196)
Changes in other assets and liabilities:
Other current liabilities . . . . . . . . . . 5,180 447
Other - net . . . . . . . . . . . . . . . . . 22,262 17,201
Net cash provided by operating activities . . . . 29,737 152,501
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction) . . . . . . . . . . . (88,038) (65,884)
Other - net . . . . . . . . . . . . . . . . . . . (2,556) (3,125)
Net cash used in investing activities . . . . . (90,594) (69,009)
-13-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(CONTINUED)
Three Months Ended
March 31,
1994 1993
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from first mortgage bonds . . . . . . . . $ 396,798
Payment of matured bonds . . . . . . . . . . . . . $ (19,500) (136,000)
Payment of dividends . . . . . . . . . . . . . . . (88,233) (112,510)
Increase in notes payable . . . . . . . . . . . . 164,730 28,560
Decrease in notes payable to affiliated
company . . . . . . . . . . . . . . . . . . . . (19,000)
Other - net . . . . . . . . . . . . . . . . . . . 41 18,310
Net cash provided by financing activities . . . 57,038 176,158
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . (3,819) 259,650
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . 12,413 4,253
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . $ 8,594 $ 263,903
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized
or deferred) . . . . . . . . . . . . . . . . . $ 72,111 $ 78,669
Income taxes . . . . . . . . . . . . . . . . . . 14,821 30,999
See Notes to Financial Statements.
-14-
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Three Months Ended
March 31,
1994 1993
Balance at Beginning of Period . $ 2,028,924 $ 1,922,558
Net Income for the Period . . . . 49,959 40,719
Total . . . . . . . . . . . 2,078,883 1,963,277
Deduct - Cash Dividends:
Preferred . . . . . . . . . . 8,273 9,145
Common . . . . . . . . . . . . 79,996 102,996
Total . . . . . . . . . . . 88,269 112,141
Balance at End of Period . . . . $ 1,990,614 $ 1,851,136
See Notes to Financial Statements.
-15-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) REGULATORY PROCEEDINGS AND LITIGATION REFERENCE
The information presented in the following Notes in this
Form 10-Q should be read in conjunction with the Houston
Industries Incorporated (Company) Annual Report on Form 10-K
for the year ended December 31, 1993 (File No. 1-7629), filed
in combined form with the Houston Lighting & Power Company
(HL&P) Annual Report on Form 10-K for the year ended December
31, 1993 (File No. 1-3187) (collectively, the 1993 Combined
Form 10-K), including the Notes to the Company's Consolidated
and HL&P's Financial Statements included in Item 8 thereof.
Notes 9, 10 and 11 to the Company's Consolidated and HL&P's
Financial Statements in the 1993 Combined Form 10-K are
incorporated herein by reference as they relate to the Company
and HL&P, respectively.
(2) COMMON STOCK
COMPANY. At March 31, 1994, and December 31, 1993, the
Company had authorized 400,000,000 shares of common stock, of
which 130,708,985 and 130,658,755 shares, respectively, were
outstanding.
HL&P. All issued and outstanding Class A voting common stock
of HL&P is held by the Company and all issued and outstanding
Class B non-voting common stock of HL&P is held by Houston
Industries (Delaware) Incorporated (Houston Industries
Delaware), a wholly-owned subsidiary of the Company.
(3) HL&P PREFERRED STOCK
At March 31, 1994, and December 31, 1993, HL&P had 10,000,000
shares of preferred stock authorized of which 5,432,397 shares
were outstanding.
(4) EARNINGS PER COMMON SHARE
COMPANY. Earnings per common share for the Company is
computed by dividing net income by the weighted average number
of shares outstanding during the respective period.
HL&P. Earnings per share data for HL&P is not computed since
all of its common stock is held by the Company and Houston
Industries Delaware.
(5) LONG-TERM DEBT
COMPANY. In March 1994, KBL Cable, Inc. made a scheduled
repayment of $10.4 million principal amount of its senior
notes and senior subordinated notes.
-16-
HL&P. In January 1994, HL&P repaid at maturity $19.5 million
principal amount of Series A collateralized medium-term notes.
HL&P has registered with the Securities and Exchange
Commission $230 million aggregate liquidation value of
preferred stock and $580 million aggregate principal amount of
debt securities that may be issued as first mortgage bonds
and/or as debt securities collateralized by first mortgage
bonds. Proceeds from the sales of these securities are
expected to be used for general corporate purposes, including
the purchase, redemption (to the extent permitted by the terms
of the outstanding securities), repayment or retirement of
outstanding indebtedness or preferred stock of HL&P.
(6) POSTEMPLOYMENT BENEFITS FOR THE COMPANY AND HL&P
The Company and HL&P adopted Statement of Financial Accounting
Standards (SFAS) No. 112, "Employer's Accounting for
Postemployment Benefits", effective January 1, 1994. SFAS No.
112 requires companies to recognize the liability for benefits
provided to former or inactive employees, their beneficiaries
and covered dependents after employment but before retirement.
Those benefits include, but are not limited to, salary
continuation, supplemental unemployment benefits, severance
benefits, disability-related benefits (including worker's
compensation), job training and counseling, and continuation
of benefits such as health care and life insurance. SFAS No.
112 requires the transition obligation (liability from prior
years) to be expensed upon adoption. As a result, the Company
and HL&P recorded in the first quarter of 1994 a one-time,
after-tax charge to income of $8.2 million.
(7) ENVIRONMENTAL AND CABLE REGULATIONS
(a) ENVIRONMENTAL REGULATIONS. For information regarding the
impact of environmental regulations on the Company and its
subsidiaries, see the fifth paragraph of Note 8(a) to the
Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which portion of Note
8(a) is incorporated herein by reference.
(b) IMPACT OF THE CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION
ACT OF 1992 ON KBLCOM INCORPORATED (KBLCOM). In March 1994,
the Federal Communications Commission (FCC) issued its
revised benchmark rules (Rate Rule II) as well as its
interim cost-of-service rule (Interim COS Rule). Each of
these rules will become effective on May 15, 1994. Rate Rule
II revises the "benchmark formulas" established by the FCC in
May 1993. Under Rate Rule II (which will be applied
prospectively), cable operators must reduce their existing
rates to the higher of (i) the rates calculated using the
revised benchmark formulas (Revised Benchmarks) or (ii) a
level 17% below such cable operators' rates as of September
30, 1992, adjusted for inflation. Cable operators which
cannot or do not wish to comply with the Revised Benchmarks
may choose to justify their existing rates under the Interim
COS Rule. The Interim COS Rule establishes a cost-of-service
rate system similar to that used in the telephone industry.
KBLCOM expects that it will sustain higher operating costs and
increased administrative burdens under these new rules, and
that the Revised Benchmarks will impose some additional
reductions in KBLCOM's rates for regulated services. In light
of the lengthy and complex nature of these rules, it is
impossible at this time to assess the detailed impact of Rate
Rule II or the Interim COS Rule on KBLCOM's financial position
and results of operations.
-17-
(8) JOINTLY-OWNED NUCLEAR PLANT
(A) HL&P INVESTMENT. HL&P is project manager and one of four co-
owners in the South Texas Project Electric Generating Station
(South Texas Project), which consists of two 1,250 megawatt
nuclear generating units. Each co-owner funds its own share
of capital and operating costs associated with the plant, with
HL&P's interest in the project being 30.8%. HL&P's share of
the operation and maintenance expenses is included in electric
operation and maintenance expenses on the Company's Statements
of Consolidated Income and in the corresponding operating
expense amounts on HL&P's Statements of Income. As of March
31, 1994, HL&P's investments (net of accumulated depreciation
and amortization) in the South Texas Project and in nuclear
fuel, including Allowance for Funds Used During Construction,
were $2.1 billion and $119 million, respectively.
(B) CITY OF AUSTIN LITIGATION. In February 1994, the City of
Austin (Austin), one of the other owners of the South Texas
Project, filed suit against HL&P in the 164th District Court
for Harris County, Texas. Austin alleges that the outages at
the South Texas Project since February 1993 were due to HL&P's
failure to perform obligations it owed to Austin under the
Participation Agreement among the four co-owners of the South
Texas Project (Participation Agreement). Austin also asserts
that HL&P breached certain contractual obligations allegedly
owed to Austin under the terms and conditions of the Operating
Licenses and Technical Specifications relating to the South
Texas Project. Austin claims that such failures have caused
Austin damages of at least $125 million, which are continuing,
due to the incurrence of increased operating and maintenance
costs, the cost of replacement power and lost profits on
wholesale transactions that did not occur.
As it did in litigation filed against HL&P in 1983, Austin
asserts that HL&P breached obligations HL&P owed under the
Participation Agreement to Austin, and Austin seeks a
declaration that HL&P had a duty to exercise reasonable care
in the operation and maintenance of the South Texas Project.
In that earlier litigation (which was won by HL&P at trial,
affirmed on appeal and became final in 1993), however, the
courts concluded that the Participation Agreement did not
impose on HL&P a duty to exercise reasonable skill and care as
project manager.
Austin also asserts in its current suit that certain terms of
a settlement reached in 1992 among HL&P and Central and South
West Corporation (CSW) and its subsidiary, Central Power and
Light Company (CPL), another co-owner of the South Texas
Project, are invalid and void. The Participation Agreement
permits arbitration of certain disputes among the owners, and
the challenged settlement terms provide that in any future
arbitration, HL&P and CPL would each appoint an arbitrator
acceptable to the other. Austin asserts that, as a result of
this agreement, the arbitration provisions of the
Participation Agreement are void and Austin should not be
required to participate in or be bound by arbitration
proceedings. Alternatively, Austin asserts that HL&P's rights
with respect to CPL's appointment of an arbitrator should be
shared with all the owners or cancelled, and Austin seeks
injunctive relief against arbitration of its dispute with
HL&P.
HL&P and the Company do not believe there is merit to Austin's
claims, and they intend to defend vigorously against them.
However, there can be no assurance as to the ultimate outcome
of this matter.
-18-
For more detailed information regarding the outage of the
South Texas Project, the previous litigation filed by Austin
and the settlement with CSW and CPL referred to above, see
Notes 9(b), 9(c) and 9(f) of the Notes to the Company's
Consolidated and HL&P's Financial Statements included in the
1993 Combined Form 10-K, which Notes are incorporated herein
by reference. Also, see Note 8(f) of the Notes to the
Company's Consolidated and HL&P's Financial Statements in this
Report.
(C) ARBITRATION WITH CO-OWNERS. For a discussion of the
arbitration requested by the City of San Antonio for its claim
under the Participation Agreement, see Note 8(b) of the Notes
to the Company's Consolidated and HL&P's Financial Statements
in this Report and Note 9(c) of the Notes to the Company's
Consolidated and HL&P's Financial Statements included in the
1993 Combined Form 10-K, which Note is incorporated herein by
reference.
(D) 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. For
a discussion of the nuclear property and nuclear liability
insurance maintained in connection with the South Texas
Project and potential assessments associated therewith, see
Note 9(d) of the Notes to the Company's Consolidated and
HL&P's Financial Statements included in the 1993 Combined Form
10-K, which Note is incorporated herein by reference.
(E) NUCLEAR DECOMMISSIONING. For information regarding the
nuclear decommissioning costs of the South Texas Project
and the current review of such costs by HL&P, see Note 9(e) of
the Notes to the Company's Consolidated and HL&P's Financial
Statements included in the 1993 Combined Form 10-K, which Note
is incorporated herein by reference.
(F) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS
AND OPERATIONS. Both generating units at the South Texas
Project were out of service from February 1993 to February
1994, when Unit No. 1 was returned to service. Unit No. 2 is
currently scheduled to resume operation after completion of
regulatory reviews in late spring of 1994. HL&P removed the
units from service in February 1993 when a problem was
encountered with certain of the units' auxiliary feedwater
pumps. At that time, HL&P concluded, and the NRC confirmed,
that the units should not resume operation until HL&P had
determined the root cause of the failure, had briefed the
NRC and had taken corrective action.
The South Texas Project is currently listed on the NRC's
"watch list" of plants with "weaknesses that warrant NRC
attention." The decision to place the South Texas Project on
the "watch list" followed the June 1993 issuance of a report
by a Diagnostic Evaluation Team (DET) which conducted a review
of the South Texas Project and identified a number of areas
requiring improvement at the South Texas Project. Plants
in this category are authorized to operate but are subject
to close monitoring by the NRC. The NRC reviews the
status of plants on this list semi-annually. HL&P, however,
does not anticipate that the South Texas Project will be
removed from the list until there has been a period of
operation for both units, and the NRC concludes that the
concerns which led the NRC in June 1993 to place the South
Texas Project on the list have been satisfactorily addressed.
In 1993, it was reported that the NRC had referred to the
Department of Justice allegations that the employment of three
former employees
-19-
and an employee of a contractor to HL&P had been terminated or
disrupted in retaliation for their having made safety related
complaints to the NRC. HL&P understands that these matters
are no longer under consideration by the Department of
Justice. Civil proceedings by the complaining employees and
administrative proceedings before the Department of Labor
remain pending against HL&P, and the NRC could take
enforcement action against HL&P and/or individual employees
with respect to these matters. Also, a subcommittee of the
U.S. House of Representatives has notified the Company that
it is conducting an inquiry regarding the South Texas Project
that will address whistleblower matters.
For additional information regarding the foregoing matters,
including the DET's report on weaknesses at the South Texas
Project, increases in fuel and non-fuel expenditures relating
to the outage, the possible impact of the outage on the
results of a proceeding conducted under Section 42 of the
Texas Public Utility Regulatory Act of 1975, as amended, (PURA)
involving the Company's rates, and various civil and
administrative proceedings relating to the South Texas
Project, see Notes 9(f), 10(f) and 10(g) of the Notes to the
Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which Notes are
incorporated herein by reference. Also see Note 9(e) of the
Notes to the Company's Consolidated and HL&P's Financial Statements
included in this Report.
(9) UTILITY COMMISSION PROCEEDINGS
Pursuant to a series of applications filed by HL&P in recent
years, the Public Utility Commission of Texas (Utility
Commission) has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant
construction, including the South Texas Project. Although
Utility Commission action on those applications has been
completed, judicial review of a number of the Utility
Commission orders is pending. In Texas, Utility Commission
orders may be appealed to a District Court in Travis County,
and from that court's decision an appeal may be taken to the
Court of Appeals for the 3rd District at Austin (Austin Court
of Appeals). Discretionary review by the Supreme Court of
Texas may be sought from decisions of the Austin Court of
Appeals. The pending appeals from the Utility Commission
orders are in various stages. In the event the courts
ultimately reverse actions of the Utility Commission in any of
these proceedings, such matters would be remanded to the
Utility Commission for action in light of the courts' orders.
Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and
HL&P generally are not in a position at this time to predict
the outcome of the matters on appeal or the ultimate effect
that adverse action by the courts could have on the Company
and HL&P. On remand, the Utility Commission's action could
range from granting rate relief substantially equal to the
rates previously approved to a reduction in the revenues to
which HL&P was entitled during the time the applicable rates
were in effect, which could require a refund to customers of
amounts collected pursuant to such rates.
Judicial review is pending on the final orders of the Utility
Commission described below.
(a) DOCKET NO. 8425. For information concerning HL&P's
application for rate increase in Docket No. 8425 (1988 rate
case) and the status of appeals relating thereto, see Note
10(b) of the Notes to the Company's Consolidated and HL&P's
Financial Statements included in the 1993 Combined Form 10-K,
which Note is incorporated herein by reference.
(b) DOCKET NO. 9850. For a discussion of HL&P's 1991 rate case
(Docket No. 9850), the settlement agreement approved by the
Utility Commission, and the status of appeals relating
thereto, see Note 10(c) of the Notes to
-20-
the Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which Note is
incorporated herein by reference.
(c) DOCKET NO. 6668. For a discussion of Docket No. 6668, the
Utility Commission's inquiry into the prudence of the
planning, management and construction of the South Texas
Project, see Note 10(d) of the Notes to the Company's
Consolidated and HL&P's Financial Statements included in the
1993 Combined Form 10-K, which Note is incorporated herein by
reference.
Separate appeals are pending from Utility Commission orders in
Docket Nos. 8425 and 9850 in which the findings of the order
in Docket No. 6668 are reflected in rates. See also Notes
9(a) and 9(b) above.
(d) DOCKET NOS. 8230 AND 9010. For a description of the Utility
Commission's authorization of deferred accounting for the
South Texas Project (Docket Nos. 8230 and 9010), which dockets
are in various stages of appeal, see Note 10(e) of the Notes
to the Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which Note is
incorporated herein by reference.
(e) DOCKET NO. 12065. In February 1994, an administrative law
judge (ALJ) of the Utility Commission ruled that a proceeding
should be conducted pursuant to Section 42 of PURA in order to
inquire into HL&P's existing rates. Efforts by HL&P to secure
reversal or reconsideration of that decision, which the ALJ
acknowledged to be a close one, were unsuccessful, and HL&P is
scheduled to file material in support of its existing rates on
July 13, 1994. A final decision by the Utility Commission is
not expected before the summer of 1995. In ordering that a
proceeding be held under Section 42, the ALJ also found that
there could be a link between the outage at the South Texas
Project, the NRC's actions with respect to the South Texas
Project and possible mismanagement by HL&P, which could be
taken into account in the review of HL&P's authorized rate of
return. Although HL&P and the Company believe that the Section 42
inquiry into HL&P's rates is unwarranted and that the South
Texas Project has not been imprudently managed, there can be
no assurance as to the outcome of this proceeding, and HL&P's
rates could be reduced following a hearing. HL&P believes
that any reduction in base rates as a result of a Section 42
inquiry would take effect prospectively.
(f) FUEL RECONCILIATION. At March 31,1994, HL&P had recovered
through the fuel factor included in its rates approximately
$100 million (including interest) less than the amounts
expended for fuel, a significant portion of which
underrecovery occurred in 1993 during the outage of the South
Texas Project. For additional information regarding HL&P's
recovery of fuel costs incurred in electric generation
(including possible assertions that a portion of such costs
should be disallowed as unreasonable), see Note 10(g) of the
Notes to the Company's Consolidated and HL&P's Financial
Statements included in the 1993 Combined Form 10-K, which Note
is incorporated herein by reference.
(10) DEFERRED PLANT COSTS
The Utility Commission authorized deferred accounting with
respect to the South Texas Project (Docket Nos. 8230 and 9010
for Unit No. 1 and Docket No. 8425 for Unit No. 2). Each
of the Utility Commission's
-21-
orders granting deferred accounting has been appealed and such
orders are in various stages of judicial review.
In May 1991, HL&P implemented under bond, in Docket No. 9850,
a $313 million base rate increase. At that time, HL&P ceased
all cost deferrals related to the South Texas Project and
began the recovery of such amounts. These deferrals are being
amortized on a straight-line basis as allowed by the final
order in Docket No. 9850. The amortization of these deferrals
totaled $6.4 million for each of the three months ended March
31, 1994 and March 31, 1993 and is recorded on the Company's
Statements of Consolidated Income and HL&P's Statements of
Income in depreciation and amortization expense.
The following table shows the original balance of the
deferrals and the unamortized balance at March 31, 1994.
Balance at
Original March 31,
BALANCE 1994
(Thousands of Dollars)
Deferred Accounting: (a)
Deferred Expenses . . . . $ 250,151 $ 231,740
Deferred Carrying Costs
on Plant Investment . 399,972 370,534
Total . . . . . . . . . . 650,123 602,274
Qualified Phase-In Plan: (b) 82,254 55,980
Total Deferred Plant Costs $ 732,377 $ 658,254
____________
(a) Amortized over the estimated depreciable life of the South
Texas Project.
(b) Amortized over nine years beginning in May 1991.
As of March 31, 1994, HL&P has recorded deferred income taxes
of $199.6 million with respect to deferred accounting and
$14.0 million with respect to the deferrals associated with
the qualified phase-in plan.
The accounting for deferred plant costs is described in
greater detail in Notes 10(e) and 11 of the Notes to the
Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which Notes are
incorporated herein by reference.
(11) MALAKOFF ELECTRIC GENERATING STATION
For a discussion of the current rate treatment of HL&P's
investment in the Malakoff Electric Generating Station and
related matters, see Note 12 of the Notes to the Company's
Consolidated and HL&P's Financial Statements included in the
1993 Combined Form 10-K, which Note is incorporated herein by
reference.
(12) CABLE TELEVISION ACQUISITION
On February 17, 1994, KBLCOM entered into an agreement to
acquire three cable companies serving approximately 47,000
customers in the Minneapolis area. KBLCOM will acquire the
stock of the companies in
-22-
exchange for the issuance of common stock of the Company. The
amount of common stock of the Company to be issued, currently
estimated to be approximately $24 million, is dependent on the
amount of liabilities assumed, currently estimated to be
approximately $63 million.
Approximately 40,000 of the cable customers served by the
properties to be acquired are in the Minneapolis metropolitan
area. The remaining 7,000 customers are located in small
communities south and west of the metropolitan area. Closing
of the transaction, which is anticipated to occur in the
summer of 1994, is subject to the satisfaction of certain
conditions.
(13) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative
of results expected for the year due to the seasonal nature of
HL&P's business. In the opinion of management, the interim
information reflects all adjustments (consisting only of
normal recurring adjustments) necessary for a full
presentation of the results for the interim periods. Certain
amounts from the previous year have been reclassified to
conform to the 1994 presentation of consolidated financial
statements. Such reclassifications do not affect earnings.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPANY. Selected financial data for Houston Industries
Incorporated (Company) is set forth below:
Three Months Ended
MARCH 31,
Percent
1994 1993 CHANGE
(Thousands of Dollars)
Revenues . . . . . . . . $ 882,101 $ 865,959 2
Operating Expenses . . . 731,428 737,978 (1)
Operating Income . . . . 150,673 127,981 18
Other Income . . . . . . 9,315 17,802 (48)
Interest and Other
Charges . . . . . . . 99,324 109,266 (9)
Income Taxes . . . . . . 22,289 9,462 136
Net Income . . . . . . . 30,175 27,055 12
The Company had consolidated earnings per share of $.23 for the
first quarter of 1994, compared to consolidated earnings per share of
$.21 for the first quarter of 1993.
Electric Utility Operations:
HL&P. GENERAL. Selected financial data for Houston Lighting &
Power Company (HL&P) is set forth below:
Three Months Ended
March 31,
Percent
1994 1993 Change
(Thousands of Dollars)
Revenues . . . . . . . . $ 821,581 $ 805,685 2
Operating Expenses . . . 698,702 692,525 1
Operating Income . . . . 122,879 113,160 9
Other Income (Expense) . (1,670) 1,075 -
Interest Charges . . . . 63,050 73,516 (14)
Income After Preferred
Dividends . . . . . . 41,686 31,574 32
The increase in HL&P's first quarter earnings resulted primarily
from increased energy sales and reduced interest expense resulting
from refinancing activities and reduction of long-term debt levels,
partially offset by increased operating expenses which included the
recognition of postemployment benefit costs as required by the
adoption, beginning in January 1994, of Statement of Financial
Accounting Standards No. 112, "Employer's Accounting for
Postemployment Benefits."
OPERATING REVENUES AND SALES. Electric operating revenue for the
quarter ended March 31, 1994, increased $15.9 million over the same
period in 1993 due to increased kilowatt-hour (KWH) sales in all three
major customer categories, excluding sales of interruptible power.
Residential
-24-
and commercial KWH sales for the first quarter of 1994 increased 5%
and 3%, respectively, due, in large part, to the unusually mild winter
weather experienced in the first quarter of 1993 and a 1.7% increase
in the number of customers compared to the first quarter of 1993.
Firm industrial KWH sales increased 3% for the same period. Base
revenues for the quarter ended March 31, 1994 increased $27.9 million
compared to the same period in 1993.
FUEL AND PURCHASED POWER EXPENSES. Fuel expenses increased $18.6
million for the first quarter of 1994 compared to the same period of
the previous year. The 9% increase in the first quarter of 1994 was
primarily due to increases in the utilization of coal and the unit
cost of gas, partially offset by decreases in the unit cost of oil,
coal, and lignite. Fuel costs in the first quarter of 1994 reflect,
in part, the use of non-nuclear sources of fuel during the outage of
Unit Nos. 1 and 2 of the South Texas Project Electric Generating
Station (South Texas Project). For additional information regarding
the South Texas Project, see Notes 8(f) and 9(f) to the Company's
Consolidated and HL&P's Financial Statements in Item 1 of this Report.
Purchased power expense decreased $31.2 million for the first quarter
of 1994 compared to the first quarter of 1993 due to the expiration of
a purchase power contract. The average cost of fuel for the first
quarter of 1994 was $1.81 per million British Thermal Units (MMBtu)
compared to $1.78 per MMBtu for the same period in 1993. The combined
costs of fuel used by HL&P and the fuel portion of purchased power was
1.92 cents per KWH for the first quarter of both 1994 and 1993.
OPERATION AND MAINTENANCE, DEPRECIATION AND AMORTIZATION, AND
INTEREST EXPENSES. Electric operation and maintenance expense for the
first quarter of 1994 decreased $1.4 million compared to the same
period in 1993. Depreciation and amortization expense for the first
quarter of 1994 increased $2.7 million compared to the same period in
1993, primarily due to an increase in depreciable property and the
amortization, beginning in January 1994, of Demand Side Management
expenditures. Interest expense for the first quarter of 1994
decreased $9.5 million compared to the same period in 1993, primarily
due to refinancing activities and reduction of long-term debt levels.
RATE PROCEEDINGS. In February 1994, an administrative law judge
(ALJ) of the Public Utility Commission of Texas (Utility Commission)
ruled that a proceeding should be conducted pursuant to Section 42 of
the Texas Public Utility Regulatory Act of 1975, as amended, in order
to inquire into HL&P's existing rates. Efforts by HL&P to secure
reversal or reconsideration of that decision, which the ALJ
acknowledged to be a close one, were unsuccessful, and HL&P is
scheduled to file material in support of its existing rates on July
13, 1994. A final decision by the Utility Commission is not expected
before the summer of 1995. In ordering that a proceeding be held
under Section 42, the ALJ also found that there could be a link
between the outage at the South Texas Project, the NRC's actions with
respect to the South Texas Project and possible mismanagement by HL&P,
which could be taken into account in the review of HL&P's authorized rate
of return. Although HL&P and the Company believe that the Section 42 inquiry
into HL&P's rates is unwarranted and that the South Texas Project has not
been imprudently managed, there can be no assurance as to the outcome
of this proceeding, and HL&P's rates could be reduced following a
hearing. HL&P believes that any reduction in base rates as a result
of a Section 42 inquiry would take effect prospectively.
-25-
UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) DIAGNOSTIC
EVALUATION OF THE SOUTH TEXAS PROJECT. In June 1993, the NRC
announced that the South Texas Project had been placed on its "watch
list" of plants with "weaknesses that warrant increased NRC
attention." The announcement was made following the issuance of a
report on the South Texas Project by the NRC's Diagnostic Evaluation
Team which had been sent to review the South Texas Project in the
spring of 1993. For a further discussion of the NRC diagnostic
evaluation of the South Texas Project, see Note 8(f) to the Company's
Consolidated and HL&P's Financial Statements in Item 1 of this Report
and Note 9(f) of the Notes to the Company's Consolidated and HL&P's
Financial Statements included in the 1993 Combined Form 10-K.
Cable Television Operations:
KBLCOM. KBLCOM Incorporated (KBLCOM), the Company's cable
television subsidiary, experienced a loss, before long-term financing
cost with parent, of $3.2 million in the first quarter of 1994
compared to a loss of $4.1 million for the same period in 1993.
KBLCOM's 1994 first quarter results improved from the same period
in 1993 due primarily to reduced interest expense and increased
profits from its jointly-owned cable television partnership, Paragon
Communications (Paragon).
REVENUES AND EXPENSES. First quarter revenues were unchanged
from the same period in the prior year while operating expenses
increased 6.5%. Operating margin (revenue less operating expenses
exclusive of depreciation and amortization) percentages were 35.2% and
38.9%, respectively, for the quarters ended March 31, 1994 and 1993.
Interest expense decreased $3.5 million or 22.2% due to lower interest
rates and a reduction of long-term debt levels. KBLCOM's equity
interest in the first quarter pre-tax earnings of Paragon was $7.9
million, an increase of $1.0 million or 13.8% compared to the first
quarter of 1993.
Basic service revenues for the first quarter of 1994 decreased
$1.9 million or 4.6% over the same period last year due to the
regulation of basic service rates. This was partially offset by the
addition of approximately 32,000 customers from the first quarter of
1993. At March 31, 1994 and 1993, KBLCOM operated systems serving
approximately 613,000 and 581,000 basic subscribers, respectively.
Premium service revenues increased $.4 million in the first
quarter or 3.6% compared to the same period in the prior year due
primarily to increased sales of premium products.
Ancillary revenues including advertising, pay-per-view and
installation fees increased $1.8 million or 19.8% over the same period
last year.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
(1992 CABLE ACT). In October 1992, the 1992 Cable Act became law.
The 1992 Cable Act significantly revised various provisions of the
Cable Communications Policy Act of 1984. The 1992 Cable Act provides
that the Federal Communications Commission (FCC) will set guidelines
for retail prices on basic cable service, which includes network
broadcast stations and educational, public and governmental access
channels. Local governments will regulate retail prices for basic
service based on the FCC's guidelines. The 1992 Cable Act also
requires that the FCC, upon complaint from a franchising authority or
a cable subscriber, review the
-26-
reasonableness of rates for additional tiers consisting of cable
programming services. Only rates for premium pay channels, single
event pay-per-view services and a la carte (pay-per-channel) services
are excluded entirely from rate regulation. Prior to the release of
its rate regulation rules (Rate Rule), the FCC entered an order,
effective April 5, 1993, freezing rates for all cable television
services, other than premium and pay-per-view services which was
subsequently extended by the FCC through May 15, 1994. The 1992 Cable
Act also requires cable programmers to license their services on a
fair basis to cable competitors, such as direct broadcast satellite
and wireless distribution systems. In addition, at the option of the
broadcasters, cable operators will be required to obtain the
permission of, and potentially pay a charge to, local broadcast
television affiliates to retransmit their programming to cable
customers. For a further discussion regarding the 1992 Cable Act, see
"Business-Business of KBLCOM - Regulation" in Item 1 of the 1993
Combined Form 10-K filed by the Company and HL&P.
In February 1994, the FCC announced further changes in the Rate
Rule and announced its interim cost-of-service standards. In March
1994, the FCC issued its revised benchmark rules (Rate Rule II) as
well as its interim cost-of-service rule (Interim COS Rule). Each of
these rules will become effective on May 15, 1994. Rate Rule II
revises the "benchmark formulas" established by the FCC in May 1993.
Under Rate Rule II (which will be applied prospectively), cable
operators must reduce their existing rates to the higher of (i) the
rates calculated using the revised benchmark formulas (Revised
Benchmarks) or (ii) a level 17% below such cable operators' rates as
of September 30, 1992, adjusted for inflation. The FCC believes that
the application of the Revised Benchmarks will result in a reduction
of cable system rates to approximately 17% below September 1992 rate
levels. Cable operators which cannot or do not wish to comply with
the Revised Benchmarks may choose to justify their existing rates
under the Interim COS Rule. The Interim COS Rule establishes a cost-
of-service rate system similar to that used in the telephone industry.
Rate Rule II and the Interim COS Rule are lengthy and complex.
For a more detailed description of Rate Rule II and the Interim COS
Rule, see "Other Information" in Item 5 of this Report. Although
KBLCOM expects that it will sustain higher operating costs and
increased administrative burdens under these new rules, as well as
additional reductions in KBLCOM's rates for regulated services, it is
impossible at this time to assess the detailed impact of Rate Rule II
or the Interim COS Rule on KBLCOM or Paragon. In connection with its
analysis of the new rules, KBLCOM is considering whether to use the
Interim COS Rule as an alternative procedure to the Revised Benchmarks
to justify the rates in at least some of its cable systems. Where
rates are found to exceed the permitted levels, either under the
Revised Benchmarks or the Interim COS Rule, KBLCOM may be subject to
refund obligations and other penalties. The extent of the anticipated
decline in revenues and of potential refunds and penalties cannot be
determined at this time, but will have an adverse impact on KBLCOM's
financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company:
GENERAL. The Company's cash requirements stem primarily from
operating expenses, capital expenditures, payment of common stock
dividends, payment of preferred stock dividends and interest and
principal payments on debt. Net cash provided by operating activities
totaled $15.0 million for the three months ended March 31, 1994.
-27-
Net cash used in investing activities for the three months ended
March 31, 1994, totaled $108.5 million, primarily due to electric
capital expenditures of $88.0 million and cable television additions
of $12.1 million.
Financing activities for the first three months of 1994 resulted
in a net cash inflow of $97.7 million. The Company's primary
financing activities were the increase in short-term borrowings offset
by the payment of dividends and the repayment of matured long-term
debt. For further information with respect to these matters,
reference is made to Note 5 to the Company's Consolidated and HL&P's
Financial Statements in Item 1 of this report.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY. The Company has
registered with the Securities and Exchange Commission (SEC) $250
million of debt securities which remain unissued. Proceeds from any
sales of these securities are expected to be used for general
corporate purposes including investments in and loans to subsidiaries.
The Company also has registered with the SEC five million shares
of its common stock. Proceeds from the sale of these securities will
be used for general corporate purposes, including, but not limited to,
the redemption, repayment or retirement of outstanding indebtedness of
the Company or the advance or contribution of funds to one or more of
the Company's subsidiaries to be used for their general corporate
purposes, including, without limitation, the redemption, repayment or
retirement of indebtedness or preferred stock.
The Company's outstanding commercial paper at March 31, 1994 was
approximately $477.5 million, which is supported by a $600 million
bank credit facility.
RATIOS OF EARNINGS TO FIXED CHARGES. The Company's ratios of
earnings to fixed charges for the three and twelve months ended March
31, 1994 were 1.57 and 2.52, respectively. The Company believes that
the ratio for the three-month period is not necessarily indicative of
the ratio for a twelve-month period due to the seasonal nature of
HL&P's business.
Electric Utility:
HL&P. GENERAL. HL&P's cash requirements stem primarily from
operating expenses, capital expenditures, payment of dividends and
interest and principal payments on debt. HL&P's net cash provided by
operating activities for the first three months of 1994 totaled $29.7
million.
Net cash used in HL&P's investing activities for the first three
months of 1994 totaled $90.6 million. HL&P's construction and nuclear
fuel expenditures (excluding Allowance for Funds Used During
Construction) for the first three months of 1994 totaled $88.0 million
out of the $478 million annual budget. HL&P expects to finance
substantially all of its 1994 capital expenditures through funds
generated internally from operations.
HL&P's financing activities for the first three months of 1994
resulted in a net cash inflow of approximately $57.0 million.
Included in these activities were the increase in short-term
borrowings offset by the payment of dividends and the repayment of
matured long-term debt. For further information with respect to these
matters, reference is made to Note 5 to the Company's Consolidated and
HL&P's Financial Statements in Item 1 of this Report.
-28-
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY. In January 1994,
HL&P repaid at maturity $19.5 million principal amount of Series A
collateralized medium-term notes.
HL&P has registered with the SEC $230 million aggregate
liquidation value of preferred stock and $580 million aggregate
principal amount of debt securities that may be issued as first
mortgage bonds and/or as debt securities collateralized by first
mortgage bonds. Proceeds from the sales of these securities are
expected to be used for general corporate purposes including the
purchase, redemption (to the extent permitted by the terms of the
outstanding securities), repayment or retirement of outstanding
indebtedness or preferred stock of HL&P.
HL&P's outstanding commercial paper at March 31, 1994 was
approximately $335.8 million, which is supported by a $400 million
bank credit facility.
RATIOS OF EARNINGS TO FIXED CHARGES. HL&P's ratios of earnings
to fixed charges for the three and twelve months ended March 31, 1994,
were 2.25 and 3.59, respectively. HL&P's ratios of earnings to fixed
charges and preferred dividends for the three and twelve months ended
March 31, 1994, were 1.91 and 3.06, respectively. HL&P believes that
the ratios for the three-month period are not necessarily indicative
of the ratios for a twelve-month period due to the seasonal nature of
HL&P's business.
Cable Television:
KBLCOM. GENERAL. KBLCOM's cash requirements stem primarily from
operating expenses, capital expenditures, and interest and principal
payments on debt. KBLCOM's net cash provided by operating activities
was $3.5 million for the three months ended March 31, 1994.
Net cash used in KBLCOM's investing activities for the three
months ended March 31, 1994 totaled $15.6 million, primarily due to
cable television additions of $12.1 million. These amounts were
financed principally through internally generated funds and
intercompany borrowings.
KBLCOM's financing activities for the three months ended March
31,1994 resulted in a net cash inflow of $12.1 million. Included in
these activities were the reduction of third party debt, proceeds from
additional paid-in capital and an increase in borrowings from the
Company.
The Company has engaged an investment banking firm to assist in
finding a strategic partner or investor for KBLCOM in the
telecommunications industry.
On February 17, 1994, KBLCOM entered into an agreement to acquire
three cable companies serving approximately 47,000 customers in the
Minneapolis area. KBLCOM will acquire the stock of the companies in
exchange for the issuance of common stock of the Company. The amount
of common stock of the Company to be issued, currently estimated to be
approximately $24 million, is dependent on the amount of liabilities
assumed, currently estimated to be approximately $63 million.
Approximately 40,000 of the cable customers served by the
properties to be acquired are in the Minneapolis metropolitan area.
The remaining 7,000 customers are located in small communities south
and west of the metropolitan area. Closing of the transaction, which
is anticipated to occur in the summer of 1994, is subject to the
satisfaction of certain conditions.
-29-
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY. In March 1994, KBL
Cable, Inc. (KBL Cable) reduced its outstanding indebtedness by $10.4
million through scheduled principal payments. Additional borrowings
under KBL Cable's bank facilities are subject to certain covenants
which relate primarily to the maintenance of certain financial ratios,
principally debt to cash flow and interest coverages. KBL Cable
presently is in compliance with such covenants. KBLCOM's cash
requirements for the remainder of 1994 are expected to be met
primarily through intercompany borrowings.
-30-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the
Company and its subsidiaries, including HL&P, reference is
made to the information set forth in Item 3 of the 1993
Combined Form 10-K and Notes 9, 10 and 11 to the Company's
Consolidated and HL&P's Financial Statements in Item 8 of
the 1993 Combined Form 10-K, which information, as qualified
and updated by the description of developments in regulatory
and litigation matters contained in Notes 10, 11 and 12 of
the Notes to the Company's Consolidated and HL&P's Financial
Statements included in Part I of this Form 10-Q, is
incorporated herein by reference.
In April 1994, two former employees of HL&P filed a
lawsuit against the Company, HL&P and certain executive
officers and directors of the Company and HL&P. In this
lawsuit (PACE AND FUENTEZ V. THE COMPANY, HL&P, ET AL.), the
former employees alleged that certain officers and directors
of the Company and HL&P had engaged in various acts of
mismanagement. The lawsuit, which purports to have been
filed as a class action and shareholder derivative suit on
behalf of all shareholders of the Company, is pending in the
212th Judicial District Court of Galveston County, Texas.
Management believes that the suit is without merit.
In April 1994, the state district judge of the 268th
Judicial District Court, Fort Bend County, Texas, dismissed
for lack of subject matter jurisdiction a suit (PACE AND
SCOTT V. HL&P) filed by two former employees of HL&P, who
alleged that HL&P was charging illegal rates. The claim was
based on the argument that the Utility Commission had failed
to allocate to ratepayers the alleged tax benefits accruing
to the Company and HL&P by virtue of the fact that HL&P's
federal income taxes are paid as part of a consolidated
group.
In March 1994, the United States District Court for the
Southern District of Texas granted summary judgment in favor
of the Company and HL&P and dismissed a lawsuit filed by
former HL&P employees who claimed that their employment had
been terminated in violation of the WORKER ADJUSTMENT AND
RETRAINING NOTIFICATION ACT (WARN). In a separate order,
another judge of the United States District Court for the
Southern District of Texas granted summary judgment in favor
of the Company and HL&P on the validity of releases executed
by most of the employees who had been terminated in the 1992
reduction which gave rise to the claims under the WARN Act. The
question of the validity of those releases in the WARN Act case
and in other pending cases involving that staff reduction was
consolidated for decision. Notices of appeal to the United States
Court of Appeals for the Fifth Circuit have been filed from both
decisions. Other legal proceedings, which the Company and HL&P
believe to be immaterial and without merit, have been filed by
former employees of HL&P seeking damages alleged to have been
caused by that staff reduction. Although there can be no assurance
that additional proceedings asserting labor related claims will not
-31-
be filed, the Company and HL&P believe that the resolution
of these claims will not have a material adverse effect on
the Company's or HL&P's results of operations.
ITEM 5. OTHER INFORMATION.
RECENT DEVELOPMENTS IN RATE REGULATION. On March 30, 1994,
the Federal Communications Commission (FCC) issued its
lengthy new benchmark rate rules (Rate Rule II), as well as
its interim cost-of service rule (Interim COS Rule) which it
had previously announced in February 1994 in several
Executive Summaries. Both Rate Rule II and the Interim COS
Rule become effective on May 15, 1994.
REVISED BENCHMARKS. Rate Rule II contains revised
benchmark formulas (Revised Benchmarks) which are based upon
(1) the number of subscribers a particular system has; (2)
the average total number of channels the system carries; (3)
the number of non-broadcast channels the system carries; (4)
the average subscriber revenue of the system; (5) the
penetration of discretionary services, such as additional
outlets, remote control devices and satellite tiers; (6) the
size of the multiple system operator with which the system
is affiliated, if any; and (7) the median household income
of the community the system serves. Under Rate Rule II,
cable operators must reduce their existing rates to the
higher of the recalculated benchmark (Revised Benchmark
Rate), or to a level 17% below their September 30, 1992
rate, adjusted for inflation (Full Reduction Rate). Using
these complex new formulas, the cable operator must complete
and submit newly issued forms to each franchising authority
which has been certified to regulate basic rates of the
applicable cable systems, and to the FCC upon the filing of
a complaint by a franchising authority or a subscriber
regarding the operator's cable programming services tier
rates. The FCC believes that most cable operators which
apply the Revised Benchmarks will have to reduce a system's
rates to approximately 17% below the level of those rates as
of September 1992. As with the original rate rule, under
Rate Rule II, equipment must be priced at cost and unbundled
from the rate for regulated services permitted under the
Revised Benchmarks.
The FCC has made Rate Rule II prospective only. Hence,
existing disputes with franchising authorities about basic
rates, and disputes before the FCC regarding cable
programming service rates, must be resolved using the Rate
Rule and the already filed Form 393. To the extent that any
refunds may be due, refunds under rates applicable from
September 1, 1993 to May 15, 1994, shall be calculated under
the Rate Rule; refunds under rates effective from May 15,
1994 shall be calculated under the Revised Benchmarks.
Because Rate Rule II takes effect on May 15, 1994,
cable operators who wish to restructure their services and
rates to meet the Revised Benchmarks by that date must
provide notice of such changes to franchising authorities
and subscribers by April 15, 1994. In the alternative, Rate
Rule II provides that cable operators which make no changes
in their regulated services or rates may provide notice to
their franchising authorities and subscribers by June 14,
1994 of the changes
-32-
they plan to make to comply with the Revised Benchmarks and
implement such changes by July 14, 1994, without incurring
additional refund liability for the May 15 to July 14
period.
INTERIM COS RULE. Cable operators which cannot or do
not wish to comply with the Revised Benchmarks may choose to
justify their existing rates under the Interim COS Rule,
issued at the same time as the Revised Benchmarks. As
indicated in its Executive Summary issued in February 1994,
the Interim COS Rule establishes a cost-of-service rate
system very similar to that applied by the FCC to the
telephone industry. Cable operators choosing the cost-of-
service approach must base their showings on the applicable
cable system's most recent fiscal year (Test Year). The
rate base is the original book cost of plant. Expenses
which can be included are ongoing operating expenses,
depreciation, amortization, and an allowance for taxes.
Plant which is not in service during the Test Year, but
which will be in service by the end of the year following
the Test Year, may be included in the rate base, thereby
allowing inclusion of certain rebuild costs.
The Interim COS Rule presumptively disallows including
intangibles in the rate base, other than the value of
customer lists, the costs of establishing the legal entity
that obtained the franchise and the costs of obtaining the
franchise itself. In particular, as it had indicated
previously in the Executive Summary issued in February 1994,
the FCC excluded acquisition costs above book value from the
rate base because it concluded that such "excess acquisition
costs" represent the value of the monopoly rents the
acquirer expected to earn during the period when an acquired
cable system was effectively an unregulated monopoly. A
cable operator may make a showing that certain presumptively
excluded intangibles should be included because they result
in significant benefits to cable subscribers. Finally, the
FCC adopted an after-tax return of 11.25% on overall
capital.
Under the Interim COS Rule, cable operators which opt
for the cost-of-service approach may make such filings only
once every two years. Quarterly inflation adjustments and
external cost pass-throughs allowed under the Revised
Benchmarks may also be permitted under the Interim COS Rule.
A LA CARTE CARRIAGE. Under the Rate Rule, the FCC
appeared to allow cable operators to create per channel
offerings (A La Carte Channels). In Rate Rule II, the FCC
addressed the creation of A La Carte Channels by enumerating
both favorable and unfavorable criteria to which the FCC and
franchising authorities would look in determining whether an
A La Carte Channel evades the regulatory purposes of the
Cable Television Consumer Protection and Competition Act of
1992. Unfavorable factors identified by the FCC as
indicating that an A La Carte Channel is illegal are: (1)
whether a package of A La Carte Channels "avoids" rate
regulation; (2) whether an entire regulated tier of channels
was converted into a package of A La Carte Channels; (3) how
deep a price discount is offered with a package of A La
Carte Channels in comparison to single offerings of such
channels; (4) whether the operator imposes a significant
equipment charge in order to take a
-33-
single A La Carte Channel; (5) whether the A La Carte
Channels were removed from a regulated tier of service; (6)
whether the A La Carte Channel has been traditionally
offered on an a la carte basis; (7) whether customers were
automatically enrolled in A La Carte Channel packages; and
(8) whether the programmers object to a la carte
distribution of the A La Carte Channel. Among the favorable
factors identified by the FCC as indicating that an A La
Carte Channel is legal are: (1) whether the subscriber can
choose which channels make up a package of A La Carte
Channels and (2) whether the cable operator considered or
implemented A La Carte Channels prior to rate regulation.
The FCC will decide challenges to A La Carte Channel
carriage on a case-by-case basis and has delegated
enforcement of these new criteria to the franchising
authorities in the first instance. A La Carte Channels
which are found to evade rate regulation rather than enhance
subscriber choice will be treated as regulated tiers, and
operators found to have engaged in such evasions may be
subject to refunds and other sanctions.
CHANNEL ADDITION AND DELETION. Under Rate Rule II, a
cable operator which adds channels to regulated service
levels must recalculate its per channel regulated rate
multiplied by the new number of channels to reflect an
increase in the rate for that level of service, and then add
new programming costs as an "external" cost pass-through.
The FCC indicates that the operator may also add a 7.5%
mark-up to the cost for the new programming added via the
newly added channels. Conversely, if an operator removes
channels from a regulated service level, it must reduce its
regulated rate to reflect reduced programming costs, plus a
7.5% mark-down, and recalculate its regulated rate to
reflect the decrease in the number of channels.
INFLATION RATE ADJUSTMENTS. While the FCC affirmed its
ruling in the Rate Rule that cable operators may seek rate
increases based upon the increase in inflation as measured
by the GNP-PI index on a quarterly basis, the FCC proposed
in Rate Rule II that such adjustments be reduced by a 2%
annual productivity offset. The FCC also ruled in Rate Rule
II that inflation-based rate increases in the basic level of
service can be taken by the cable operator only after
application to and approval by the regulating franchise
authority. Cable operators whose Revised Benchmark Rate is
above the Full Reduction Rate cannot take inflation
adjustments until the Full Reduction Rate equals the Revised
Benchmark Rate.
EXTERNAL COST PASS-THROUGHS. Under Rate Rule II,
certain external costs which are beyond the cable operator's
control may be passed-through to the subscriber in addition
to the regulated rate. The external costs include: (1) all
changes in franchise fees; (2) all changes in the costs of
satisfying franchise mandated requirements, such as public,
educational and governmental access channels; (3) all
changes in cable-specific taxes; (4) all changes in
programming costs and copyright fees, plus a "margin" of
7.5%; and (5) all changes in retransmission consent fees
beyond the initial amounts paid by the cable operator from
October 5, 1993 through October 5, 1994. Regarding the
pass-through of programming cost changes, all increases and
decreases for
-34-
programming in a particular regulated level of service must
ultimately be aggregated, and all payments, such as
marketing support payments, received by the cable operator
from the programmer must be netted out against such
increases on a channel-by-channel basis before any amount
can be passed-through. Pass-throughs may be implemented
generally beginning on February 28, 1994.
FINANCIAL IMPACT ON KBLCOM. In view of the continuing
changes, as well as the length and complexity of the
recently published Rate Rule II and Interim COS Rule, KBLCOM
cannot currently assess the full impact upon its future
financial results. KBLCOM expects that it will sustain
higher operating costs and increased administrative burdens
under these new rules, and that the Revised Benchmarks will
impose some additional reductions in KBLCOM's rates for
regulated services. KBLCOM is considering whether to use
the Interim COS Rule as an alternative procedure to Rate
Rule II to justify the rates in at least some of its cable
systems. Where rates are found to exceed the permitted
levels, either under Rate Rule II or the Interim COS Rule,
KBLCOM may be subject to refund obligations and other
penalties. The extent of the anticipated decline in
revenues and of potential refunds and penalties cannot be
determined at this time, but will have an adverse impact on
KBLCOM's financial position and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
HOUSTON INDUSTRIES INCORPORATED:
Exhibit 10 - The Company's Master Savings Trust, as
Amended and Restated Effective as of January
1, 1994, between the Company and Texas
Commerce Bank National Association.
Exhibit 11 - Computation of Earnings per Common Share and
Common Equivalent Share.
Exhibit 12 - Computation of Ratios of Earnings to Fixed
Charges.
Exhibit 99(a) - Notes 8(a), 9, 10, 11 and 12 of the Notes to the
Consolidated Financial Statements included on
pages 83 through 97 of the Company's Annual
Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-7629).
Exhibit 99(b) - Part I, Item 1 - Business of HL&P - Fuel -
Recovery of Fuel Costs included on pages 13
and 14 of the Company's Annual Report on Form
10-K for the year ended December 31, 1993
(File No. 1-7629).
Exhibit 99(c) - Part I, Item 3 - Legal Proceedings included
on pages 37 and 38 of the Company's Annual
Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-7629).
-35-
Exhibit 99(d) - First Amendment to Houston Industries
Incorporated Savings Plan, as Amended and
Restated Effective January 1, 1994 effective
as of April 6, 1994.
HOUSTON LIGHTING & POWER COMPANY:
Exhibit 10 - The Company's Master Savings Trust, as
Amended and Restated Effective as of January
1, 1994, between the Company and Texas
Commerce Bank National Association
(incorporated by reference to Exhibit 10 to
the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 31, 1994,
File No. 1-7629).
Exhibit 12 - Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Fixed
Charges and Preferred Dividends.
Exhibit 99(a) - Notes 8(a), 9, 10, 11 and 12 of the Notes to the
Financial Statements included on page 104 of
HL&P's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-3187)
(incorporated by reference to Exhibit 99(a) to
the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 31, 1994,
File No. 1-7629).
Exhibit 99(b) - Part I, Item 1 - Fuel - Recovery of Fuel
Costs included on pages 13 and 14 of HL&P's
Annual Report on Form 10-K for the year
ended December 31, 1993 (File No. 1-3187)
(incorporated by reference to Exhibit 99(b) to
the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 31, 1994,
File No. 1-7629).
Exhibit 99(c) - Part I, Item 3 - Legal Proceedings included
on pages 37 and 38 of HL&P's Annual Report
on Form 10-K for the year ended December 31,
1993 (File No. 1-3187) (incorporated by
reference to Exhibit 99(c) to the Quarterly
Report on Form 10-Q of the Company for the
quarter ended March 31, 1994, File No. 1-7629).
(b) Reports on Form 8-K.
HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER
COMPANY:
Current Report on Form 8-K dated February 22, 1994 (Item 5. Other
Events).
HOUSTON LIGHTING & POWER COMPANY:
Current Report on Form 8-K dated January 3, 1994 (Item 5. Other
Events, Item 7. Financial Statements and Exhibits).
-36-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HOUSTON INDUSTRIES INCORPORATED
(Registrant)
/S/ MARY P. RICCIARDELLO
Mary P. Ricciardello
Comptroller and
Principal Accounting Officer
Date: May 13, 1994
-37-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HOUSTON LIGHTING & POWER COMPANY
(Registrant)
/S/ KEN W. NABORS
Ken W. Nabors
Vice President and Comptroller
and Principal Accounting Officer
Date: May 13, 1994
-38-