EXHIBIT 99(a)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(f) DEFERRED PLANT COSTS. The Utility Commission authorized deferred
accounting treatment for certain costs related to the South Texas
Project Electric Generating Station (South Texas Project) in two
contexts. The first was "deferred accounting" where HL&P was permitted
to continue to accrue carrying costs in the form of AFUDC and defer
and capitalize depreciation and other operating costs on its
investment in the South Texas Project until such costs were reflected
in rates. The second was the "qualified phase-in plan" where HL&P was
permitted to capitalize as deferred charges allowable costs, including
return, deferred for future recovery
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under the approved plan. The accumulated deferrals for "deferred
accounting" and "qualified phase-in plan" are being recovered over the
estimated depreciable life of the South Texas Project and within the
ten year phase-in period, respectively. The amortization of these
deferrals totaled $25.8 million for each of the years 1994, 1993, and
1992 and is included on the Company's Statements of Consolidated
Income and HL&P's Statements of Income in depreciation and
amortization expense. Under the terms of the settlement agreement
regarding the issues raised in Docket Nos. 12065 and 13126 (Proposed
Settlement), see Note 3, the South Texas Project deferrals will
continue to be amortized using the schedules discussed above.
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(2) JOINTLY-OWNED NUCLEAR PLANT
(a) HL&P INVESTMENT. HL&P is the project manager (and one of four
co-owners) of the South Texas Project, which consists of two 1,250
megawatt nuclear generating units. HL&P has a 30.8 percent interest in
the project and bears a corresponding share of capital and operating
costs associated with the project. As of December 31, 1994, 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 $99 million, respectively.
(b) 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 was returned to service in May 1994.
HL&P removed the units from service in February 1993 when a problem
was encountered with certain of the units' auxiliary feedwater pumps.
In February 1995, the NRC removed the South Texas Project from its
"watch list" of plants with weaknesses that warranted increased NRC
attention. The NRC placed the South Texas Project on the "watch list"
in June 1993, following the issuance of a report by an NRC Diagnostic
Evaluation Team (DET) which conducted a review of the South Texas
Project operations.
Certain current and former employees of HL&P or contractors of HL&P
have asserted claims that their employment was terminated or disrupted
in retaliation for their having made safety-related complaints to the
NRC. Civil proceedings by the complaining personnel and administrative
proceedings by the Department of Labor remain pending against HL&P,
and the NRC has jurisdiction to take enforcement action against HL&P
and/or individual employees with respect to these matters. Based on
its own internal investigation, in October 1994 the NRC issued a
notice of violation and proposed a $100,000 civil penalty against HL&P
in one such case in which HL&P had terminated the site access of a
former contractor employee. In that action, the NRC also requested
information relating to possible further enforcement action in this
matter against two HL&P managers involved in such termination. HL&P
strongly disagrees with the NRC's conclusions, and has requested the
NRC to give further consideration of its notice. In February 1995, the
NRC conducted an enforcement conference with respect to that matter,
but no result has been received.
HL&P has provided documents and other assistance to a subcommittee of
the U. S. House of Representatives (Subcommittee) that is conducting
an inquiry related to the South Texas Project. Although the precise
focus and timing of the inquiry has not been identified by the
Subcommittee, it is anticipated that the Subcommittee will inquire
into matters related to HL&P's handling of employee concerns and to
issues related to the NRC's 1993 DET review of the South Texas
Project. In connection with that inquiry, HL&P has been advised that
the U. S. General Accounting Office (GAO) is conducting a review of
the NRC's inspection process as it relates to the South Texas Project
and other plants, and HL&P is cooperating with the GAO in its
investigation and with the NRC in a similar review it has initiated.
While no prediction can
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be made at this time as to the ultimate outcome of these matters, the
Company and HL&P do not believe that they will have a material adverse
effect on the Company's or HL&P's financial condition or results of
operations.
(c) LITIGATION WITH CO-OWNERS OF THE SOUTH TEXAS PROJECT. In February
1994, the City of Austin (Austin), one of the four co-owners of the
South Texas Project, filed suit (Austin II Litigation) against HL&P.
That suit is pending in the 152nd District Court for Harris County,
Texas, which has set a trial date for October 1995. Austin alleges
that the outages at the South Texas Project from early 1993 to early
1994 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 undertakings voluntarily assumed by HL&P
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 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. In May 1994, the City of San Antonio (San
Antonio), another co-owner of the South Texas Project, intervened in
the litigation filed by Austin against HL&P and asserted claims
similar to those asserted by Austin. San Antonio has not identified
the amount of damages it intends to seek from HL&P. HL&P is contesting
San Antonio's intervention and has called for arbitration of San
Antonio's claim under the arbitration provisions of the Participation
Agreement. The trial court has denied HL&P's requests, but review of
these decisions is currently pending before the 1st Court of Appeals
in Houston.
In a previous lawsuit (Austin I Litigation) filed in 1983 against the
Company and HL&P, Austin alleged that it had been fraudulently induced
to participate in the South Texas Project and that HL&P had failed to
perform properly its duties as project manager. In May 1993, the
courts entered a judgement in favor of the Company and HL&P,
concluding, among other things, that the Participation Agreement did
not impose on HL&P a duty to exercise reasonable skill and care as
project manager. During the course of the Austin I Litigation, San
Antonio and Central Power and Light Company (CPL), a subsidiary of
Central and South West Corporation, two of the co-owners in the South
Texas Project, also 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. In
1992, the Company and HL&P entered into a settlement agreement with
CPL (CPL Settlement) providing for CPL's withdrawal of its demand for
arbitration. San Antonio's claims for arbitration remain pending.
Under the Participation Agreement, San Antonio's arbitration claims
will be heard by a panel of five arbitrators consisting of four
arbitrators named by each co-owner and a fifth arbitrator selected by
the four appointed arbitrators.
Although the CPL Settlement did not directly affect San Antonio's
pending demand for arbitration, HL&P and CPL reached certain
understandings in such agreement which contemplated that: (i) CPL's
previously appointed arbitrator would be replaced by CPL; (ii)
arbitrators approved by CPL or HL&P in any future arbitrations would
be mutually acceptable to HL&P and CPL; and (iii) HL&P and CPL would
resolve any future disputes between them concerning the South Texas
Project without resorting to the arbitration provision of the
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Participation Agreement. Austin and San Antonio have asserted in the
pending Austin II Litigation that such understandings have rendered
the arbitration provisions of the Participation Agreement void and
that neither Austin nor San Antonio should be required to participate
in or be bound by such proceedings.
Although HL&P and the Company do not believe there is merit to either
Austin's or San Antonio's claims and have opposed San Antonio's
intervention in the Austin II Litigation, there can be no assurance as
to the ultimate outcome of these matters.
(d) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability insurance
coverage as required by law and periodically review available limits
and coverage for additional protection. The owners of the South Texas
Project currently maintain the maximum amount of property damage
insurance currently available through the insurance industry,
consisting of $500 million in primary property damage insurance and
excess property insurance in the amount of $2.25 billion. Under the
excess property insurance which became effective on March 1, 1995 and
under portions of the excess property insurance coverage in effect
prior to March 1, 1995, HL&P and the other owners of the South Texas
Project are subject to assessments, the maximum aggregate assessment
under current policies being $26.9 million during any one policy year.
The application of the proceeds of such property insurance is subject
to the priorities established by the NRC regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was decreased from $9.0 billion to $8.92 billion effective in
November 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. The assessment of
deferred premiums provided by the plan for each nuclear incident is up
to $75.5 million per reactor subject to indexing for inflation, a
possible 5 percent surcharge (but no more than $10 million per reactor
per incident in any one year) and a 3 percent 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, which is recorded in
depreciation and amortization expense. HL&P's funding level is
estimated to provide approximately $146 million, in 1989 dollars, an
amount which exceeds the current NRC minimum.
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The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective January 1, 1994. At December
31, 1994, the securities held in the Company's nuclear decommissioning
trust totaling $25.1 million (reflected on the Company's Consolidated
and HL&P's Balance Sheets in deferred debits and deferred credits) are
classified as available for sale. Such securities are reported on the
balance sheets at fair value, which at December 31, 1994 approximates
cost, and any unrealized gains or losses will be reported as a
separate component of common stock equity. Earnings, net of taxes and
administrative costs, are reinvested in the funds.
In May 1994, an outside consultant estimated HL&P's portion of
decommissioning costs to be approximately $318 million, in 1994
dollars. The consultant's calculation of decommissioning costs for
financial planning purposes used the DECON methodology (prompt
removal/dismantling), one of the three alternatives acceptable to the
NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration
of their 40 year operating licenses. Under the terms of the Proposed
Settlement, HL&P would increase funding of decommissioning costs to an
annual amount of approximately $14.8 million consistent with such
study. While the current and projected funding levels presently exceed
minimum NRC requirements, no assurance can be given that the amounts
held in trust will be adequate to cover the actual decommissioning
costs of the South Texas Project or the assumptions used in estimating
decommissioning costs will ultimately prove to be correct.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Utility Commission initiated a proceeding
(Docket No. 12065) to determine whether HL&P's existing rates are just
and reasonable. Subsequently, the scope of the docket was expanded to
include reconciliation of HL&P's fuel costs from April 1, 1990 to July
31, 1994. The Utility Commission also initiated a separate proceeding
(Docket No. 13126) to review issues regarding the prudence of
operation of the South Texas Project from the date of commercial
operation through the present. That review would encompass the outage
at the South Texas Project during 1993 through 1994.
Hearings began in Docket No. 12065 in January 1995, and the Utility
Commission has retained a consultant to review the South Texas Project
for the purpose of providing testimony in Docket No. 13126 regarding
the prudence of HL&P's management of operation of the South Texas
Project. In February 1995, all major parties to these proceedings
signed the Proposed Settlement resolving the issues with respect to
HL&P, including the prudence issues related to operation of the South
Texas Project. Approval of the Proposed Settlement by the Utility
Commission will be required. To that end, the parties have established
procedural dates for a hearing on issues raised by the parties who are
opposed to the Proposed Settlement. A decision by the Utility
Commission on the Proposed Settlement is not anticipated before early
summer.
Under the Proposed Settlement, HL&P's base rates would be reduced by
approximately $62 million per year, effective retroactively to January
1, 1995, and rates would be frozen for three years, subject to certain
conditions. Under the Proposed Settlement, HL&P would amortize its
remaining investment of $218 million in the cancelled Malakoff plant
over a period not to exceed
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seven years. HL&P also would increase its decommissioning expense for
the South Texas Project by $9 million per year.
Under the Proposed Settlement, approximately $70 million of fuel
expenditures and related interest incurred by HL&P during the fuel
reconciliation period would not be recoverable from ratepayers. This
$70 million was recorded as a one-time, pre-tax charge to reconcilable
fuel revenues to reflect the anticipation of approval of the Proposed
Settlement. HL&P also would establish a new fuel factor approximately
17 percent below that currently in effect and would refund to
customers the balance in its fuel over-recovery account, estimated to
be approximately $180 million after giving effect to the amounts not
recoverable from ratepayers.
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
revenue, with a corresponding entry to under- or over-recovered fuel,
as appropriate. Amounts collected pursuant to the fixed fuel factor
must be reconciled periodically against actual, reasonable costs as
determined by the Utility Commission. Currently, HL&P has an
over-recovery fuel account balance that will be refunded pursuant to
the Proposed Settlement.
In the event that the Proposed Settlement is not approved by the
Utility Commission, including issues related to the South Texas
Project, Docket No. 12065 will be remanded to an Administrative Law
Judge (ALJ) to resume detailed hearings in this docket. Prior to
reaching agreement on the terms of the Proposed Settlement, HL&P
argued that its existing rates were just and reasonable and should not
be reduced. Other parties argued that rate decreases in annual amounts
ranging from $26 million to $173 million were required and that
additional decreases might be justified following an examination of
the prudence of the management of the South Texas Project and the
costs incurred in connection with the outages at the South Texas
Project. Testimony filed by the Utility Commission staff included a
recommendation to remove from rate base $515 million of HL&P's
investment in the South Texas Project to reflect the staff's view that
such investment was not fully "used and useful" in providing service,
a position HL&P vigorously disputes.
In the event the Proposed Settlement is not approved by the Utility
Commission, the fuel reconciliation issues in Docket Nos. 12065 and
13126 would be remanded to an ALJ for additional proceedings. A major
issue in Docket No. 13126 will be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. HL&P filed testimony in Docket No. 13126, which
testimony concluded that the outages at the South Texas Project did
not result from imprudent management. HL&P also filed testimony
analyzing the extent to which regulatory issues extended the outages.
In that testimony an outside consultant retained by HL&P concluded
that the duration of the outages was controlled by both the resolution
of NRC regulatory issues as well as necessary equipment repairs
unrelated to NRC regulatory issues and that the incremental effect of
NRC regulatory issues on the duration of the outages was only 39 days
per unit. Estimates as to the cost of replacement power may vary
significantly based on a number of factors, including the capacity
factor at which the South Texas Project might be assumed to have
operated had it not been out of service due to the outages. However,
HL&P believes that applying a reasonable range
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of assumptions would result in replacement fuel costs of less than $10
million for the 39 day periods identified by HL&P's consultant and
less than $100 million for the entire length of the outages. Any fuel
costs determined to have been unreasonably incurred would not be
recoverable from customers and would be charged against the Company's
earnings.
Although the Company and HL&P believe that the Proposed Settlement is
in the best interest of HL&P, its ratepayers, and the Company and its
shareholders, no assurance can be given that (i) the Utility
Commission ultimately will approve the terms of the Proposed
Settlement or (ii) in the event the Proposed Settlement is not
approved and proceedings against HL&P resumed, that the outcome of
such proceedings would be favorable to HL&P.
(4) APPEALS OF PRIOR UTILITY COMMISSION RATE ORDERS
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) 1991 RATE CASE. In HL&P's 1991 rate case (Docket No. 9850), the
Utility Commission approved a non-unanimous settlement agreement
providing 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
percent return on common equity for HL&P. Rates contemplated by the
settlement agreement were implemented in May 1991 and remain in effect
(subject to the outcome of the current rate proceeding described in
Note 3).
The Utility Commission's order in Docket No. 9850 was affirmed on
review by a District Court, and the Austin Court of Appeals affirmed
that decision on procedural grounds due to the failure of the
appellant to file the record with the court in a timely manner. On
review, the Texas
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Supreme Court has remanded the case to the Austin Court of Appeals for
consideration of the appellant's challenges to the Utility
Commission's order, which include issues regarding deferred
accounting, the treatment of federal income tax expense and certain
other matters. As to federal tax issues, a recent decision of the
Austin Court of Appeals, in an appeal involving GTE-SW (and to which
HL&P was not a party), held 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.
Because the Utility Commission's order in Docket No. 9850 found that
HL&P would have been entitled to rate relief greater than the $313
million agreed to in the settlement, HL&P believes that any
disallowance that might be required if the court's ruling in the GTE
decision were applied in Docket No. 9850 would be offset by that
greater amount. However, that amount may not be sufficient if the
Austin Court of Appeals also concludes that the Utility Commission's
inclusion of deferred accounting costs in the settlement was improper.
For a discussion of the Texas Supreme Court's decision on deferred
accounting treatment, see Note 4(c). Although HL&P believes that it
could 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
rate making purposes.
The parties to the Proposed Settlement have agreed to withdraw their
appeals of the Utility Commission's orders in such docket, subject to
HL&P's dismissing its appeal in Docket No. 6668.
(b) 1988 RATE CASE. In HL&P's 1988 rate case (Docket No. 8425), the
Utility Commission granted HL&P a $227 million increase in base
revenues, allowed a 12.92 percent return on common equity, authorized
a qualified phase-in plan for Unit No. 1 of the South Texas Project
(including approximately 72 percent 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 August 1994, the Austin Court of Appeals affirmed the Utility
Commission's order in Docket No. 8425 on all matters other than the
Utility Commission's treatment of tax savings associated with
deductions taken for expenses disallowed in cost of service. The court
held that the Utility Commission had failed to require that such tax
savings be passed on to ratepayers, and ordered that the case be
remanded to the Utility Commission with instructions to adjust HL&P's
cost of service accordingly. Discretionary review is being sought from
the Texas Supreme Court by all parties to the proceeding.
The parties to the Proposed Settlement have agreed to dismiss their
respective appeals of Docket No. 8425, subject to HL&P's dismissing
its appeal in Docket No. 6668. A separate party to this appeal,
however, has not agreed to dismiss its appeal.
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(c) DEFERRED ACCOUNTING. Deferred accounting treatment for certain costs
associated with 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 1(f).
In June 1994, the Texas Supreme Court decided the appeal of Docket
Nos. 8230 and 9010, as well as all other pending deferred accounting
cases involving other utilities, upholding deferred accounting
treatment for both carrying costs and operation and maintenance
expenses as within the Utility Commission's statutory authority and
reversed the Austin Court of Appeals decision to the extent that the
Austin Court of Appeals had rejected deferred accounting treatment for
carrying charges. Because the lower appellate court had upheld
deferred accounting only as to operation and maintenance expenses, the
Texas Supreme Court remanded Docket Nos. 8230 and 9010 to the Austin
Court of Appeals to consider the points of error challenging the
granting of deferred accounting for carrying costs which it had not
reached in its earlier consideration of the case. The Texas Supreme
Court opinion did state, however, that when deferred costs are
considered for addition to the utility's rate base in an ensuing rate
case, the Utility Commission must then determine to what extent
inclusion of the deferred costs is necessary to preserve the utility's
financial integrity. Under the terms of the Proposed Settlement, South
Texas Project deferrals will continue to be amortized under the
schedule previously established.
The Office of the Public Utility Counsel (OPUC) has agreed, pursuant
to the Proposed Settlement, to withdraw and dismiss its appeal if the
Proposed Settlement becomes effective and on the condition that HL&P
dismisses its appeal in Docket No. 6668. However, the appeal of the
State of Texas remains pending.
(d) PRUDENCE REVIEW OF THE CONSTRUCTION OF THE SOUTH TEXAS PROJECT. In
June 1990, the Utility Commission ruled in a separate docket (Docket
No. 6668) that had been created to review the prudence of HL&P's
planning and construction of the South Texas Project that $375.5
million out of HL&P's $2.8 billion investment in the two units of the
South Texas Project had been imprudently incurred. That ruling was
incorporated into HL&P's 1988 and 1991 rate cases and resulted in
HL&P's recording an after-tax charge of $15 million in 1990. Several
parties appealed the Utility Commission's decision, but a District
Court dismissed these appeals on procedural grounds. The Austin Court
of Appeals reversed and directed consideration of the appeals, and the
Texas Supreme Court denied discretionary review in 1994. At this time,
no action has been taken by the appellants to proceed with the
appeals. Unless the order in Docket No. 6668 is modified or reversed
on appeal, the amount found imprudent by the Utility Commission will
be sustained.
Under the Proposed Settlement, OPUC, HL&P and the City of Houston each
has agreed to dismiss its respective appeals of Docket No. 6668. A
separate party to this appeal, however, has not agreed to dismiss its
appeal. If this party does not elect to dismiss its appeal, HL&P may
elect to maintain its appeal, whereupon OPUC and City of Houston shall
also be entitled to maintain their appeals.
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(5)MALAKOFF
The scheduled in-service dates for the Malakoff units were postponed
during the 1980's as expectations of continued strong load growth were
tempered. In 1987, all developmental work was stopped and AFUDC
accruals ceased. These units have been cancelled due to the
availability of other cost effective resource options.
In Docket No. 8425, the Utility Commission allowed recovery of certain
costs associated with the cancelled Malakoff units by amortizing those
costs over ten years for rate making purposes. Such recoverable costs
were not included in rate base and, as a result, no return on
investment is being earned during the recovery period. The remaining
balance at December 31, 1994 is $34 million with a recovery period of
66 months.
Also as a result of the final order in Docket No. 8425, the costs
associated with the engineering design work for the Malakoff units
were included in rate base and are earning a return. Subsequently, in
December 1992, HL&P determined that such costs would have no future
value and reclassified $84.1 million from plant held for future use to
recoverable project costs. In 1993, an additional $7 million was
reclassified to recoverable project costs. Amortization of these
amounts began in 1993. The balance at December 31, 1994 was $65
million with a remaining recovery period of 60 months. The
amortization amount is approximately equal to the amount currently
earning a cash return in rates. The Utility Commission's decision to
allow treatment of these costs as plant held for future use has been
challenged in the pending appeal of the Docket No. 8425 final order.
See Note 4(b) for a discussion of this proceeding.
In June 1990, HL&P purchased from its then fuel supply affiliate,
Utility Fuels, Inc. (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 lignite reserves as of
December 31, 1994 of $153 million is included on the Company's
Consolidated and HL&P's Balance Sheets in plant held for future use.
HL&P anticipates that an additional $8 million of expenditures
relating to lignite reserves will be incurred in 1995 and 1996.
In Docket No. 12065, HL&P filed testimony in support of the
amortization of substantially all of its remaining investment in
Malakoff, including the portion of the engineering design costs for
which amortization had not previously been authorized and the amount
attributable to related lignite reserves which had not previously been
addressed by the Utility Commission. Under the Proposed Settlement of
Docket No. 12065, HL&P would amortize its investment in Malakoff over
a period not to exceed seven years such that the entire investment
will be written off no later than December 31, 2002. See Note 3. In
the event that the Utility Commission does not
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approve the Proposed Settlement, and if appropriate rate treatment of
these amounts is not ultimately received, HL&P could be required to
write off any unrecoverable portions of its Malakoff investment.
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