EXHIBIT 99(a)
(8) COMMITMENTS AND CONTINGENCIES
(a) HL&P. HL&P has various commitments for capital expenditures,
fuel, purchased power, cooling water and operating leases.
Commitments in connection with HL&P's capital program are
generally revocable by HL&P subject to reimbursement to
manufacturers for expenditures incurred or other cancellation
penalties. HL&P's other commitments have various quantity
requirements and durations. However, if these requirements could
not be met, various alternatives are available to mitigate the
cost associated with the contracts' commitments.
HL&P's capital program (exclusive of AFUDC) is presently
estimated to cost $478 million in 1994, $381 million in 1995 and
$418 million in 1996. These amounts do not include expenditures
on projects for which HL&P expects to be reimbursed by customers
or other parties.
HL&P has entered into several long-term coal, lignite and natural
gas contracts which have various quantity requirements and
durations. Minimum obligations for coal and transportation
agreements are approximately $167 million in 1994, and $165
million in 1995 and 1996. In addition, the minimum obligations
under the lignite mining and lease agreements will be
approximately $14 million annually during the 1994-1996 period.
HL&P has entered into several gas purchase agreements containing
contract terms in excess of one year which provide for specified
purchase and delivery obligations. Minimum obligations for
natural gas purchase and natural gas storage contracts are
approximately $57.4 million in 1994, $58.9 million in 1995 and
$60.5 million in 1996. Collectively, the gas supply contracts
included in these figures could amount to 11% of HL&P's annual
natural gas requirements. The Utility Commission's rules provide
for recovery of the coal, lignite and natural gas costs described
above through the energy component of HL&P's electric rates.
Nuclear fuel costs are also included in the energy component of
HL&P's electric rates based on the cost of nuclear fuel consumed
in the reactor.
HL&P has commitments to purchase firm capacity from cogenerators
of approximately $145 million in 1994, $32 million in 1995 and
$22 million in 1996. The Utility Commission's rules allow
recovery of these costs through HL&P's base rates for electric
service and additionally authorize HL&P to charge or credit
customers for any variation in actual purchased power cost from
the cost utilized to determine its base rates. In the event that
the Utility Commission, at some future date, does not allow
recovery through rates of any amount of purchased power payments,
the three principal firm capacity contracts contain provisions
allowing HL&P to suspend or reduce payments and seek repayment
for amounts disallowed.
In November 1990, the Clean Air Act was extensively amended by
Congress. HL&P has already made an investment in pollution
control facilities, and all of its generating facilities
currently comply in all material respects with sulfur dioxide
emission standards established by the legislation. Provisions of
the Clean Air Act dealing with urban air pollution required
establishing new emission limitations for nitrogen oxides from
existing sources. The cost of modifications necessary to reduce
nitrogen oxide emissions from existing sources has been estimated
at $29 million in 1994 and $10.5 million in 1995. In addition,
continuous emission monitoring regulations are anticipated to
require expenditures of $12 million in 1994 and $2 million in
1995. Capital expenditures are expected to total $71 million for
the years 1994 through 1996.
The Energy Policy Act of 1992, which became law in October 1992,
includes a provision that assesses a fee upon domestic utilities
having purchased enrichment services from the Department of
Energy before October 22, 1992. This fee is to cover a portion
of the cost to decontaminate and decommission the enrichment
facilities. It is currently estimated that the assessment to the
South Texas Project Electric Generating Station (South Texas
Project) will be approximately $4 million in 1994 and
approximately $2 million each year thereafter (subject to
escalation for inflation), of which HL&P's share is 30.8%. This
assessment will continue until the earlier of 15 years or when
$2.25 billion (adjusted for inflation) has been collected from
domestic utilities. Based on HL&P's actual payment of $579,810
in 1993, it recorded an estimated liability of $8.7 million.
HL&P's service area is heavily dependent on oil, gas, refined
products, petrochemicals and related business. Significant
adverse events affecting these industries would negatively impact
the revenues of the Company and HL&P.
(9) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is project manager and one of four co-
owners in the South Texas Project, which consists of two 1,250
megawatt nuclear generating units. Unit Nos. 1 and 2 of the
South Texas Project achieved commercial operation in August 1988
and June 1989, respectively. Each co-owner funds its own share
of capital and operating costs associated with the plant, with
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 December 31, 1993, HL&P's investments (net of accumulated
depreciation and amortization) in the South Texas Project and in
nuclear fuel, including AFUDC, were $2.1 billion and $119
million, respectively.
(b) CITY OF AUSTIN LITIGATION. In 1983, the City of Austin (Austin),
one of the four co-owners of the South Texas Project, filed a
lawsuit against the Company and HL&P alleging that it was
fraudulently induced to participate in the South Texas Project
and that HL&P failed to perform properly its duties as project
manager. After a jury trial in 1989, judgment was entered in
favor of HL&P, and that judgment was affirmed on appeal. In May
1993, following the expiration of Austin's rights to appeal to
the United States Supreme Court, the judgment in favor of the
Company and HL&P became final.
On February 22, 1994, Austin filed a new suit against HL&P. In
that suit, filed in the 164th District Court for Harris County,
Texas, Austin alleges that the outages at the South Texas Project
since February 1993 are 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 asserts 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. Austin states that
it will file a "more detailed" petition at a later date. For a
discussion of the 1993 outage, see Note 9(f).
As it did in the 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 as duty to exercise reasonable care in the
operation and maintenance of the South Texas Project. In that
earlier litigation, 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 new 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), 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 canceled, and Austin seeks injunctive relief against
arbitration of its dispute with HL&P. For a further discussion
of the settlement among HL&P, CSW and CPL, see Note 9(c) below.
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.
(c) ARBITRATION WITH CO-OWNERS. During the course of the litigation
filed by Austin in 1983, the City of San Antonio (San Antonio)
and CPL, the other two co-owners in the South Texas Project,
asserted claims for unspecified damages against HL&P as project
manager of the South Texas Project, alleging HL&P breached its
duties and obligations. San Antonio and CPL requested
arbitration of their claims under the Participation Agreement.
This matter was severed from the Austin litigation and is pending
before the 101st District Court in Dallas County, Texas.
The 101st District Court ruled that the demand for arbitration is
valid and enforceable under the Participation Agreement, and that
ruling has been upheld by appellate courts. Arbitrators were
appointed by HL&P and each of the other co-owners in connection
with the District Court's ruling. The Participation Agreement
provides that the four appointed arbitrators will select a fifth
arbitrator, but that action has not yet occurred.
In 1992, the Company and HL&P entered into a settlement with CPL
and CSW, with respect to various matters including the
arbitration and related legal proceedings. Pursuant to the
settlement, CPL withdrew its demand for arbitration under the
Participation Agreement, and the Company, HL&P, CSW and CPL
dismissed litigation associated with the dispute. The settlement
also resolved other disputes between the parties concerning
various transmission agreements and related billing disputes. In
addition, the parties also agreed to support, and to seek consent
of the other owners of the South Texas Project to, certain
amendments to the Participation Agreement, including changes in
the management structure of the South Texas Project through which
HL&P would be replaced as project manager by an independent
entity.
Although settlement with CPL does not directly affect San
Antonio's pending demand for arbitration, HL&P and CPL have
reached certain other understandings which contemplate that: (i)
CPL's arbitrator previously appointed for that proceeding would
be replaced by CPL; (ii) arbitrators approved by CPL and HL&P
for any future arbitrations will be mutually acceptable to HL&P
and CPL; and (iii) HL&P and CPL will resolve any future disputes
between them concerning the South Texas Project without resorting
to the arbitration provision of the Participation Agreement. The
settlement with CPL did not have a material adverse effect on the
Company's or HL&P's financial position and results of operations.
In February 1994, San Antonio indicated a desire to move forward
with its demand for arbitration and suggested that San Antonio
considers all allegations of mismanagement against HL&P to be
appropriate subjects for arbitration in that proceeding, not just
allegations related to the planning and construction of the South
Texas Project. It is unclear what additional allegations San
Antonio may make, but it is possible that San Antonio will assert
that HL&P has liability for all or some portion of the additional
costs incurred by San Antonio due to the 1993 outage of the South
Texas Project. For a discussion of that outage see Note 9(f).
HL&P and the Company continue to regard San Antonio's claims to
be without merit. From time to time, HL&P and other parties to
these proceedings have held discussions with a view toward
settling their differences on these matters.
While HL&P and the Company cannot give definite assurance
regarding the ultimate resolution of the San Antonio litigation
and arbitration, they presently do not believe such resolutions
will have a material adverse impact on HL&P's or the Company's
financial position and results of operations.
(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. The
owners of the South Texas Project currently maintain $500 million
in primary property damage insurance from American Nuclear
Insurers (ANI). Effective November 15, 1993, the maximum amounts
of excess property insurance available through the insurance
industry increased from $2.125 billion to $2.2 billion. This
$2.2 billion of excess property insurance coverage includes $800
million of excess insurance from ANI and $1.4 billion of excess
property insurance coverage through participation in the Nuclear
Electric Insurance Limited (NEIL) II program. The owners of the
South Texas Project have approved the purchase of the additional
available excess property insurance coverage. Additionally,
effective January 1, 1994, ANI will be increasing their excess
property insurance limits to $850 million, and the owners of the
South Texas Project have also approved the purchase of the
additional limits at the March 1, 1994 renewal for ANI excess
property insurance. Under NEIL II, HL&P and the other owners of
the South Texas Project are subject to a maximum assessment, in
the aggregate, of approximately $15.9 million in any one policy
year. The application of the proceeds of such property insurance
is subject to the priorities established by the United States
Nuclear Regulatory Commission (NRC) regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act, the maximum liability to the
public for owners of nuclear power plants, such as the South
Texas Project, was increased from $7.9 billion to $9.3 billion
effective February 18, 1994. Owners are required under the Act
to insure their liability for nuclear incidents and protective
evacuations by maintaining the maximum amount of financial
protection available from private sources and by maintaining
secondary financial protection through an industry retrospective
rating plan. Effective August 20, 1993, the assessment of
deferred premiums provided by the plan for each nuclear incident
has increased from $63 million to up to $75.5 million per reactor
subject to indexing for inflation, a possible 5% surcharge (but
no more than $10 million per reactor per incident in any one
year) and a 3% state premium tax. HL&P and the other owners of
the South Texas Project currently maintain the required nuclear
liability insurance and participate in the industry retrospective
rating plan.
There can be no assurance that all potential losses or
liabilities will be insurable, or that the amount of insurance
will be sufficient to cover them. Any substantial losses not
covered by insurance would have a material effect on HL&P's and
the Company's financial condition.
(e) NUCLEAR DECOMMISSIONING. HL&P and the other co-owners of the
South Texas Project are required by the NRC to meet minimum
decommissioning funding requirements to pay the costs of
decommissioning the South Texas Project. Pursuant to the terms
of the order of the Utility Commission in Docket No. 9850, HL&P
is currently funding decommissioning costs for the South Texas
Project with an independent trustee at an annual amount of $6
million.
As of December 31, 1993, the trustee held approximately $18.7
million for decommissioning, for which the asset and liability
are reflected on the Company's Consolidated and HL&P's Balance
Sheets in deferred debits and deferred credits, respectively.
HL&P's funding level is estimated to provide approximately $146
million in 1989 dollars, an amount which currently exceeds the
NRC minimum. However, the South Texas Project co-owners have
engaged an outside consultant to review the estimated
decommissioning costs of the South Texas Project which review
should be completed by the end of 1994. While changes to present
funding levels, if any, cannot be estimated at this time, a
substantial increase in funding may be necessary. No assurance
can be given that the amounts held in trust will be adequate to
cover the decommissioning costs.
(f) 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 authorized by the NRC to
return to service. Currently, Unit No. 1 is out of service for
repairs to a small steam generator leak encountered following the
unit's shutdown to repair a feedwater control valve. Those
repairs are scheduled for completion by mid-March 1994, and no
formal NRC approval is required to resume operation of Unit No.
1. Unit No. 2 is currently scheduled to resume operation after
completion of regulatory reviews, in the spring of 1994. HL&P
removed the units from service in February 1993 when a problem
was encountered with certain pumps. At that time HL&P concluded
that the units should not resume operation until HL&P had
determined the root cause of the failure and had briefed the NRC
and corrective action had been taken. The NRC formalized that
commitment in a Confirmatory Action Letter, which confirmed that
HL&P would not resume operations until it had briefed the NRC on
its findings and actions. Subsequently, that Confirmatory Action
Letter was supplemented by the NRC to require HL&P, prior to
resuming operations, to address additional matters which were
identified during the course of analyzing the issues associated
with the original pump failure and during various subsequent NRC
inspections and reviews.
In June 1993, the NRC announced that the South Texas Project had
been placed on the NRC's "watch list" of plants with "weaknesses
that warrant increased NRC attention." 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, but HL&P does not anticipate that the South Texas
Project would be removed from that list until there has been a
period of operation for both units, and the NRC concludes that
the concerns which led the NRC to place the South Texas Project
on that list have been satisfactorily addressed.
The NRC's decision to place the South Texas Project on its "watch
list" followed the June 1993 issuance of a report by its
Diagnostic Evaluation Team (DET) which conducted a review of the
South Texas Project in the spring of 1993 and identified a number
of areas requiring improvement at the South Texas Project.
Conducted infrequently, NRC diagnostic evaluations do not
evaluate compliance with NRC regulations but are broad-based
evaluations of overall plant operations and are intended to
review the strengths and weaknesses of the licensee's performance
and to identify the root cause of performance problems.
The DET report found, among other things, weaknesses in
maintenance and testing, deficiencies in training and in the
material condition of some equipment, strained staffing levels in
operations and several weaknesses in engineering support. The
report cited the need to reduce backlogs of engineering and
maintenance work and to simplify work processes which, the DET
found, placed excessive burdens on operating and other plant
personnel. The report also identified the need to strengthen
management communications, oversight and teamwork as well as the
capability to identify and correct the root causes of problems.
The DET also expressed concern with regard to the adequacy of
resources committed to resolving issues at the South Texas
Project but noted that many issues had already been identified
and were being addressed by HL&P.
In response to the DET report, HL&P presented its plan to address
the issues raised in that report and began its action program to
address those concerns. While those programs were being
implemented, HL&P also initiated additional activities and
modifications that were not previously scheduled during 1993 but
which are designed to eliminate the need for some future outages
and to enhance operations at the South Texas Project. The NRC
conducted additional inspections and reviews of HL&P's plans and
agreed in February 1994 that HL&P's progress in addressing the
NRC's concerns had satisfied the issues raised in the
Confirmatory Action Letter with respect to Unit No. 1. The NRC
concurred in HL&P's determination that Unit No. 1 could resume
operation. Work is now underway to address the NRC's concerns
with respect to Unit No. 2, which HL&P anticipates will not
require as extensive an effort as was required by the NRC for
Unit No. 1. However, difficulties encountered in completing
actions required on Unit No. 2 and any additional issues which
may be raised in the conduct of those activities or in the
operation of Unit No. 1 could adversely affect the anticipated
schedule for resuming operation of Unit No. 2. During the
outage, HL&P has not had, and does not anticipate having,
difficulty in meeting its energy needs.
During the outage, both fuel and non-fuel expenditures have been
higher for HL&P than levels originally projected for the year.
HL&P's non-fuel expenditures for the South Texas Project during
1993 were approximately $115 million greater than originally
budgeted levels (of which HL&P's share was $35 million) for work
undertaken in connection with the DET and for other initiatives
taken during the year. It is expected that, subsequent to 1993,
operation and maintenance costs will continue to be higher than
previous levels in order to support additional initiatives
developed in 1993. Fuel costs also were necessarily higher due
to the use of higher cost alternative fuels. However, these
increased expenditures are expected to be offset to some extent
by savings from future outages that can now be avoided as a
result of activities accelerated into 1993 and from overall
improvement in operations resulting from implementing the
programs developed during the outage. For a discussion of
regulatory treatment related to the outage, see Notes 10(f) and
10(g).
During 1993, the NRC imposed a total of $500,000 in civil
penalties (of which HL&P's share was $154,000) in connection with
violations of NRC requirements.
In March 1993, a Houston newspaper reported that the NRC had
referred to the Department of Justice allegations that the
employment of three former employees 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. Such retaliation, if proved, would be contrary to
requirements of the Atomic Energy Act and regulations promulgated
by the NRC. The NRC has confirmed to HL&P that these matters
have been referred to the Department of Justice for consideration
of further action and has notified HL&P that the NRC is
considering enforcement action against HL&P and one or more HL&P
employees in connection with one of those cases. HL&P has been
advised by counsel that most referrals by the NRC to the
Department of Justice do not result in prosecutions. The Company
and HL&P strongly believe that the facts underlying these events
would not support action by the Department of Justice against
HL&P or any of its personnel; accordingly, HL&P intends to defend
vigorously against such charges. HL&P also intends to defend
vigorously against civil proceedings filed in the state court in
Matagorda County, Texas, by the complaining employees and against
administrative proceedings before the Department of Labor and the
NRC, which, independently of the Department of Justice, could
impose administrative sanctions if they find violations of the
Atomic Energy Act or the NRC regulations. These administrative
sanctions may include civil penalties in the case of the NRC and,
in the case of the Department of Labor, ordering reinstatement
and back pay and/or imposing civil penalties. Although the
Company and HL&P do not believe these allegations have merit or
will have a material adverse effect on the Company or HL&P,
neither the Company nor HL&P can predict at this time their
outcome.
(10) UTILITY COMMISSION PROCEEDINGS
Pursuant to a series of applications filed by HL&P in recent
years, the Utility Commission has granted HL&P rate increases to
reflect in electric rates HL&P's substantial investment 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 has been concluded or currently is pending on the
final orders of the Utility Commission described below.
(a) DOCKET NOS. 6765, 6766 AND 5779. In February 1993, the Austin
Court of Appeals granted a motion by the Office of Public Utility
Counsel (OPC) to voluntarily dismiss its appeal of the Utility
Commission's order in HL&P's 1984 rate case (Docket No. 5779).
In December 1993, the Supreme Court of Texas granted a similar
motion by OPC to dismiss its appeal of the Utility Commission's
order in HL&P's 1986 rate case (Docket Nos. 6765 and 6766). As a
result, appellate review of the Utility Commission's orders in
those dockets has been concluded, and the orders have been
affirmed.
(b) DOCKET NO. 8425. In October 1992, a District Court in Travis
County, Texas affirmed the Utility Commission's order in HL&P's
1988 rate case (Docket No. 8425). An appeal to the Austin Court
of Appeals is pending. In its final order in that docket, the
Utility Commission granted HL&P a $227 million increase in base
revenues, allowed a 12.92% return on common equity, authorized a
qualified phase-in plan for Unit No. 1 of the South Texas Project
(including approximately 72% of HL&P's investment in Unit No. 1
of the South Texas Project in rate base) and authorized HL&P to
use deferred accounting for Unit No. 2 of the South Texas
Project. Rates substantially corresponding to the increase
granted were implemented by HL&P in June 1989 and remained in
effect until May 1991.
In the appeal of the Utility Commission's order, certain parties
have challenged the Utility Commission's decision regarding
deferred accounting, treatment of federal income tax expense and
certain other matters. A recent decision of the Austin Court of
Appeals, in an appeal involving another utility (and to which
HL&P was not a party), adopted some of the arguments being
advanced by parties challenging the Utility Commission's order in
Docket No. 8425. In that case, PUBLIC UTILITY COMMISSION OF
TEXAS VS. GTE-SW, the Austin Court of Appeals ruled that when a
utility pays federal income taxes as part of a consolidated
group, the utility's ratepayers are entitled to a fair share of
the tax savings actually realized, which can include savings
resulting from unregulated activities. The Texas Supreme Court
has agreed to hear an appeal of that decision, but on points not
involving the federal income tax issues, though tax issues could
be decided in such opinion.
In its final order in Docket No. 8425, the Utility Commission did
not reduce HL&P's tax expense by any of the tax savings resulting
from the Company's filing of a consolidated tax return. Although
the GTE decision was not legally dispositive of the tax issues
presented in the appeal of Docket No. 8425, it is possible that
the Austin Court of Appeals could utilize the reasoning in GTE in
addressing similar issues in the appeal of Docket No. 8425.
However, in February 1993 the Austin Court of Appeals,
considering an appeal involving another telephone utility, upheld
Utility Commission findings that the tax expense for the utility
included the utility's fair share of the tax savings resulting
from a consolidated tax return, even though the utility's fair
share of the tax savings was determined to be zero. HL&P
believes that the Utility Commission findings in Docket No. 8425
and in Docket No. 9850 (see Note 10(c)) should be upheld on the
same principle (i.e., that the Utility Commission determined that
the fair share of tax savings to be allocated to ratepayers is
determined to be zero). However, no assurance can be made as to
the ultimate outcome of this matter.
The Utility Commission's order in Docket No. 8425 may be affected
also by the ultimate resolution of appeals concerning the Utility
Commission's treatment of deferred accounting. For a discussion
of appeals of the Utility Commission's orders on deferred
accounting, see Notes 10(e) and 11.
(c) DOCKET NO. 9850. In August 1992, a district court in Travis
County affirmed the Utility Commission's final order in HL&P's
1991 rate case (Docket No. 9850). That decision was appealed by
certain parties to the Austin Court of Appeals, raising issues
concerning the Utility Commission's approval of a non-unanimous
settlement in that docket, the Utility Commission's calculation
of federal income tax expense and the allowance of deferred
accounting reflected in the settlement. In August 1993, the
Austin Court of Appeals affirmed on procedural grounds the ruling
by the Travis County District Court, and applications for writ of
error were filed with the Supreme Court of Texas by one of the
other parties to the proceeding. The Supreme Court has not yet
ruled on these applications. In Docket No. 9850, the Utility
Commission approved a settlement agreement reached with most
parties. That settlement agreement provided for a $313 million
increase in HL&P's base rates, termination of deferrals granted
with respect to Unit No. 2 of the South Texas Project and of the
qualified phase-in plan deferrals granted with respect to Unit
No. 1 of the South Texas Project, and recovery of deferred plant
costs. The settlement authorized a 12.55% return on common
equity for HL&P, and HL&P agreed not to request additional
increases in base rates that would be implemented prior to May 1,
1993. Rates contemplated by that settlement agreement were
implemented in May 1991 and remain in effect.
The Utility Commission's order in Docket No. 9850 found that HL&P
would have been entitled to more rate relief than the $313
million agreed to in the settlement, but certain recent actions
of the Austin Court of Appeals could, if ultimately upheld and
applied to the appeal of Docket No. 9850, require a remand of
that settlement to the Utility Commission. HL&P believes that
the amount which the Utility Commission found HL&P was entitled
to would exceed any disallowance that would have been required
under the Austin Court of Appeals' ruling regarding deferred
accounting (see Notes 10(e) and 11) or any adverse effect on the
calculation of tax expense if the court's ruling in the GTE
decision were applied to that settlement (see Note 10(b) above).
However, the amount of rate relief to which the Utility
Commission found HL&P to be entitled in excess of the $313
million agreed to in the settlement may not be sufficient if the
reasoning in both the GTE decision and the ruling on deferred
accounting were to be applied to the settlement agreement in
Docket No. 9850. Although HL&P believes that it should be
entitled to demonstrate entitlement to rate relief equal to that
agreed to in the stipulation in Docket No. 9850, HL&P cannot rule
out the possibility that a remand and reopening of that
settlement would be required if decisions unfavorable to HL&P are
rendered on both the deferred accounting treatment and the
calculation of tax expense for ratemaking purposes.
(d) DOCKET NO. 6668. In June 1990, the Utility Commission issued the
final order in Docket No. 6668, the Utility Commission's inquiry
into the prudence of the planning, management and construction of
the South Texas Project. The Utility Commission's findings and
order in Docket No. 6668 were incorporated in Docket No. 8425,
HL&P's 1988 general rate case. Pursuant to the findings in
Docket No. 6668, the Utility Commission found imprudent $375.5
million out of HL&P's $2.8 billion investment in the two units of
the South Texas Project.
The Utility Commission's findings did not reflect $207 million in
benefits received in a settlement of litigation with the former
architect-engineer of the South Texas Project or the effects of
federal income taxes, investment tax credits or certain
deferrals. In addition, accounting standards require that the
equity portion of AFUDC accrued for regulatory purposes under
deferred accounting orders be utilized to determine the cost
disallowance for financial reporting purposes. After taking all
of these items into account, HL&P recorded an after-tax charge of
$15 million in 1990 and continued to reduce such loss with the
equity portion of deferrals in 1991 related to Unit No. 2 of the
South Texas Project. The findings in Docket No. 6668 represent
the Utility Commission's final determination regarding the
prudence of expenditures associated with the planning and
construction of the South Texas Project. Unless the order is
modified or reversed on appeal, HL&P will be precluded from
recovering in rate proceedings the amount found imprudent by the
Utility Commission.
Appeals by HL&P and other parties of the Utility Commission's
order in Docket No. 6668 were dismissed by a District Court in
Travis County in May 1991. However, in December 1992 the Austin
Court of Appeals reversed the District Court's dismissals on
procedural grounds. HL&P and other parties have filed
applications for writ of error with the Supreme Court of Texas
concerning the order by the Austin Court of Appeals, but unless
the order is modified on further review, HL&P anticipates that
the appeals of the parties will be reinstated and that the merits
of the issues raised in those appeals of Docket No. 6668 will be
considered by the District Court, with the possibility of
subsequent judicial review once the District Court has acted on
those appeals. In addition, 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 Notes 10(b) and 10(c).
(e) DOCKET NOS. 8230 AND 9010. Deferred accounting treatment for
Unit No. 1 of the South Texas Project was authorized by the
Utility Commission in Docket No. 8230 and was extended in Docket
No. 9010. Similar deferred accounting treatment with respect to
Unit No. 2 of the South Texas Project was authorized in Docket
No. 8425. For a discussion of the deferred accounting treatment
granted, see Note 11. In September 1992, the Austin Court of
Appeals, in considering the appeal of the Utility Commission's
final order in Docket Nos. 8230 and 9010, upheld the Utility
Commission's action in granting deferred accounting treatment for
operation and maintenance expenses, but rejected such treatment
for the carrying costs associated with the investment in Unit No.
1 of the South Texas Project. That ruling followed the Austin
Court of Appeals decision rendered in August 1992, on a motion
for rehearing, involving another utility which had been granted
similar deferred accounting treatment for another nuclear plant.
In its August decision, the court ruled that Texas law did not
permit the Utility Commission to allow the utility to place the
carrying costs associated with the investment in the utility's
rate base, though the court observed that the Utility Commission
could allow amortization of such costs.
The Supreme Court of Texas has granted applications for writ of
error with respect to the Austin Court of Appeals decision
regarding Docket Nos. 8230 and 9010. The Supreme Court of Texas
has also granted applications for writ of error on three other
decisions by the Austin Court of Appeals regarding deferred
accounting treatment granted to other utilities by the Utility
Commission. The Supreme Court heard oral arguments on these
appeals on September 13, 1993. The court has not yet ruled.
(f) DOCKET NO. 12065. HL&P is not currently seeking authority to
change its base rates for electric service, but the Utility
Commission has authority to initiate a rate proceeding pursuant
to Section 42 of the Public Utility Regulatory Policy Act (PURA)
to determine whether existing rates are unjust or unreasonable.
In 1993, the Utility Commission referred to an administrative law
judge (ALJ) the complaint of a former employee of HL&P seeking to
initiate such a proceeding.
On February 23, 1994, the ALJ concluded that a Section 42
proceeding should be conducted and that HL&P should file full
information, testimony and schedules justifying its rates. The
ALJ acknowledged that the decision was a close one, and is
subject to review by the Utility Commission. However, he
concluded that information concerning HL&P's financial results as
of December 1992 indicated that HL&P's adjusted revenues could be
approximately $62 million (or 2.33% of its adjusted base
revenues) more than might be authorized in a current rate
proceeding. The ALJ's conclusion was based on various accounting
considerations, including use of a different treatment of federal
income tax expense than the method utilized in HL&P's last rate
case. The ALJ also found that there could be a link between the
1993 outage at the South Texas Project, the NRC's actions with
respect to the South Texas Project and possible mismanagement by
HL&P, which in turn could result in a reduction of HL&P's
authorized rate of return as a penalty for imprudent management.
HL&P and the Company believe that the examiner's analysis is
incorrect, that the South Texas Project has not been imprudently
managed, and that ordering a Section 42 proceeding at this time
is unwarranted and unnecessarily expensive and burdensome. HL&P
has appealed the ALJ's decision to the Utility Commission.
If HL&P ultimately is required to respond to a Section 42
inquiry, it will assert that it remains entitled to rates at
least at the levels currently authorized. However, there can be
no assurance as to the outcome of a Section 42 proceeding if it
is ultimately authorized, 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.
HL&P is also a defendant in a lawsuit filed in a Fort Bend
County, Texas, district court by the same former HL&P employee
who originally initiated the Utility Commission complaint
concerning HL&P's rates. In that suit, Pace and Scott v. HL&P,
the former employee contends that HL&P is currently charging
illegal rates since the rates authorized by the Utility
Commission do not allocate to ratepayers tax benefits accruing to
the Company and to HL&P by virtue of the fact that HL&P's federal
income taxes are paid as part of a consolidated group. HL&P is
seeking dismissal of that suit because in Texas exclusive
jurisdiction to set electric utility rates is vested in
municipalities and in the Utility Commission, and the courts have
no jurisdiction to set such rates or to set aside authorized
rates except through judicial appeals of Utility Commission
orders in the manner prescribed in applicable law. Although
substantial damages have been claimed by the plaintiffs in that
litigation, HL&P and the Company consider this litigation to be
wholly without merit, and do not presently believe that it will
have a material adverse effect on the Company's or HL&P's results
of operations, though no assurances can be given as to its
ultimate outcome at this time.
(g) FUEL RECONCILIATION. HL&P recovers fuel costs incurred in
electric generation through a fixed fuel factor that is set by
the Utility Commission. The difference between fuel revenues
billed pursuant to such factor and fuel expense incurred is
recorded as an addition to or a reduction of revenues, with a
corresponding entry to under- or over-recovered fuel, as
appropriate. Amounts collected pursuant to the fixed fuel factor
must be reconciled periodically by the Utility Commission against
actual, reasonable costs as determined by the Utility Commission.
Any fuel costs which the Utility Commission determines are
unreasonable in a fuel reconciliation proceeding would not be
recoverable from customers, and a charge against earnings would
result. Under Utility Commission rules, HL&P is required to file
an application to reconcile those costs in 1994. Such a filing
would also be required in conjunction with any rate proceeding
that may be filed, such as the Section 42 proceeding described in
Note 10(f).
Unless filed earlier in conjunction with a rate proceeding, HL&P
currently anticipates filing its fuel reconciliation application
in the fourth quarter of 1994 in accordance with a schedule
proposed by the Utility Commission staff. If that schedule is
approved by the Utility Commission, HL&P anticipates that fuel
costs through some time in 1994 will be submitted for
reconciliation. No hearing would be anticipated in that
reconciliation proceeding before 1995.
The schedule for a fuel reconciliation proceeding could be
affected by the institution of a prudence inquiry concerning the
outage at the South Texas Project. The Utility Commission staff
has indicated a desire to conduct an inquiry into the prudence of
HL&P's management prior to and during the outage, but it is
currently unknown what action the Utility Commission will take on
that request or what the nature and scope of any such proceeding
would be. Such an inquiry could also be conducted in connection
with a rate proceeding under Section 42 of PURA if one is
instituted by the Utility Commission.
Through the end of 1993, HL&P had recovered through the fuel
factor approximately $115 million (including interest) less than
the amounts expended for fuel, a significant portion of which
under recovery occurred in 1993 during the outage at the South
Texas Project. In any review of costs incurred during the period
of the 1993 outage at the South Texas Project, it is anticipated
that other parties will contend that a portion of fuel costs
incurred should be attributed to imprudence on the part of HL&P
and thus should be disallowed as unreasonable, with recovery from
ratepayers denied. Those amounts could be substantial. HL&P
intends to defend vigorously against any allegation that its
actions have been imprudent or that any portion of its costs
incurred should be judged to be unreasonable, but no prediction
can be made as to the ultimate outcome of such a proceeding.
(11) DEFERRED PLANT COSTS
Deferred plant costs were authorized for the South Texas Project
by the Utility Commission in two contexts. In the first context,
or "deferred accounting," the Utility Commission orders permitted
HL&P, for regulatory purposes, to continue to accrue carrying
costs in the form of AFUDC (at a 10% rate) on its investment in
the two units of the South Texas Project until costs of such
units were reflected in rates (which was July 1990 for
approximately 72% of Unit No. 1, and May 1991 for the remainder
of Unit No. 1 and 100% of Unit No. 2) and to defer and capitalize
depreciation, operation and maintenance, insurance and tax
expenses associated with such units during the deferral period.
Accounting standards do not permit the accrual of the equity
portion of AFUDC for financial reporting purposes under these
circumstances. However, in accordance with accounting standards,
such amounts were utilized to determine the amount of plant cost
disallowance for financial reporting purposes.
The deferred expenses and the debt portion of the carrying costs
associated with the South Texas Project are included on the
Company's Statements of Consolidated Income in deferred expenses
and deferred carrying costs, respectively.
Beginning with the June 1990 order in Docket No. 8425, deferrals
were permitted in a second context, a "qualified phase-in plan"
for Unit No. 1 of the South Texas Project. Accounting standards
require allowable costs deferred for future recovery under a
qualified phase-in plan to be capitalized as a deferred charge if
certain criteria are met. The qualified phase-in plan as
approved by the Utility Commission meets these criteria.
During the period June 1990 through May 15, 1991, HL&P deferred
depreciation and property taxes related to the 28% of its
investment in Unit No. 1 of the South Texas Project not reflected
in the Docket No. 8425 rates and recorded a deferred return on
that investment as part of the qualified phase-in plan. Deferred
return represents the financing costs (equity and debt)
associated with the qualified phase-in plan. The deferred
expenses and deferred return related to the qualified phase-in
plan are included on the Company's Statements of Consolidated
Income and HL&P's Statements of Income in deferred expenses and
deferred return under phase-in plan, respectively. Under the
phase-in plan, these accumulated deferrals will be recoverable
within ten years of the June 1990 order.
On May 16, 1991, HL&P implemented under bond, in Docket No. 9850,
a $313 million base rate increase consistent with the terms of
the settlement. Accordingly, HL&P ceased all cost deferrals
related to the South Texas Project and began the recovery of such
amounts. These deferrals are being amortized on a straight-line
basis as allowed by the final order in Docket No. 9850. The
amortization of these deferrals totaled $25.8 million for both
1993 and 1992 and $16.1 million in 1991, and is included on the
Company's Statements of Consolidated Income and HL&P's Statements
of Income in depreciation and amortization expense. See also
Notes 10(b), 10(c) and 10(e).
The following table shows the original balance of the deferrals
and the unamortized balance at December 31, 1993.
Balance at
Original December 31,
Balance 1993
(Thousands of Dollars)
Deferred Accounting: (a)
Deferred Expenses $ 250,151 $ 233,341
Deferred Carrying Costs on
Plant Investment 399,972 373,094
Total 650,123 606,435
Qualified Phase-In Plan: (b) 82,254 58,264
Total Deferred Plant Cost $ 732,377 $ 664,699
(a) Amortized over the estimated depreciable life of the South
Texas Project.
(b) Amortized over nine years beginning in May 1991.
As of December 31, 1993, HL&P has recorded deferred income
taxes of $200.9 million with respect to deferred accounting
and $14.5 million with respect to the deferrals associated
with the qualified phase-in plan.
(12) MALAKOFF ELECTRIC GENERATING STATION
The scheduled in-service dates for the Malakoff Electric
Generating Station (Malakoff) units were postponed during the
1980's as expectations of continued strong load growth were
tempered. These units have been indefinitely deferred due to
the availability of other cost effective resource options. In
1987, all developmental work was stopped and AFUDC accruals
ceased.
Due to the indefinite postponement of the in-service date for
Malakoff, the engineering design work is no longer considered
viable. The costs associated with this engineering design
work are currently included in rate base and are earning a
return per the Utility Commission's final order in Docket No.
8425. Pursuant to HL&P's determination that such costs will
have no future value, $84.1 million was reclassified from
plant held for future use to recoverable project costs as of
December 31, 1992. An additional $7.0 million was
reclassified to recoverable project costs in 1993.
Amortization of these amounts began in 1993. Amortization
amounts will correspond to the amounts being earned as a
result of the inclusion of such costs in rate base. The
Utility Commission's action in allowing treatment of those
costs as plant held for future use has been challenged in the
pending appeal of the Utility Commission's final order in
Docket No. 8425. Also, recovery of such Malakoff costs may be
addressed if rate proceedings are initiated such as that
proposed under Section 42 of PURA. See Notes 10(b) and 10(f)
for a discussion of these respective proceedings.
In June 1990, HL&P purchased from its then fuel supply
affiliate, Utility Fuels, all of Utility Fuels' interest in
the lignite reserves and lignite handling facilities for
Malakoff. The purchase price was $138.2 million, which
represented the net book value of Utility Fuels' investment in
such reserves and facilities. As part of the June 1990 rate
order (Docket No. 8425), the Utility Commission ordered that
issues related to the prudence of the amounts invested in the
lignite reserves be considered in HL&P's next general rate
case which was filed in November 1990 (Docket No. 9850).
However, under the October 1991 Utility Commission order in
Docket No. 9850, this determination was postponed to a
subsequent docket.
HL&P's remaining investment in Malakoff through December 31,
1993 of $167 million, consisting primarily of lignite reserves
and land, is included on the Company's Consolidated and HL&P's
Balance Sheets in plant held for future use. For the 1994-
1996 period, HL&P anticipates $14 million of expenditures
relating to lignite reserves, primarily to keep lignite leases
and other related agreements in effect.