EXHIBIT 99(c)
(b) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS AND
OPERATIONS. HL&P removed both generating units at the South Texas
Project from service in February 1993 when a problem was encountered
with certain of the units' auxiliary feedwater pumps. The units were out
of service from February 1993 to February 1994, when Unit No. 1 was
returned to service.
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Unit No. 2 was returned to service in May 1994. In June 1993, the NRC
placed the South Texas Project on its "watch list" of plants with
weaknesses that warrant increased attention after a review of the South
Texas Project operations. In February 1995, the NRC removed the South
Texas Project from its "watch list".
Certain current and former employees 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. On May 8, 1995, the
NRC announced that it was withdrawing a previously proposed Notice of
Violation and $100,000 civil penalty, as well as possible individual
enforcement action against two HL&P managers in connection with one such
case, involving a contractor employee whose site access was terminated.
Allegations of retaliation by that individual remain pending before an
Administrative Law Judge (ALJ) of the Department of Labor. In another
such case, involving two former HL&P employees who were terminated
during a reduction in force, another Department of Labor ALJ in April
1995 issued his recommended decision in favor of the former employees,
ordering reinstatement of one with back-pay and back-pay without
reinstatement to another. The ALJ ruled out ordering HL&P to pay
exemplary damages to the individuals, but indicated his intention to
hold a further hearing to consider whether additional compensatory
damages should be awarded. HL&P considers the ALJ's conclusions to be
erroneous and is asking the Secretary of Labor not to adopt the ALJ's
recommendation. If the recommendation is adopted by the Secretary of
Labor, HL&P could appeal that decision to the United States Court of
Appeals. Civil actions by these employees remain pending. For additional
information, see Note 2(b) of the notes to the financial statements
included in the Combined Form 8-K.
While no prediction can 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.
(3) RATE REVIEW, FUEL RECONCILIATION AND OTHER PROCEEDINGS
In February 1994, the Public Utility Commission of Texas (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
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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 and 1994.
Hearings began in Docket No. 12065 in January 1995. In February 1995,
all major parties to these proceedings signed an agreement resolving the
issues with respect to HL&P, including the prudence issues related to
operation of the South Texas Project (Proposed Settlement). Approval of
the Proposed Settlement by the Utility Commission will be required.
Hearings on the Proposed Settlement are currently scheduled to begin in
early June 1995. A decision by the Utility Commission on the Proposed
Settlement is not anticipated before late 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 HL&P would be precluded from seeking rate increases 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 Electric Generating Station (Malakoff) plant
over a period not to exceed seven years. HL&P also would increase its
decommissioning expense for the South Texas Project by $9 million per
year.
The Proposed Settlement also provides HL&P the option to write down up
to $50 million per year of its investment in the South Texas Project
during the five-year period commencing January 1, 1995. The parties to
the Proposed Settlement agreed that any write down would be treated as a
reasonable and necessary expense during routine reviews of HL&P's
earnings and any rate review proceeding initiated against HL&P.
Until the approval of the Proposed Settlement by the Utility Commission,
HL&P's existing rates will continue in effect; however, HL&P's financial
statements for the first quarter of 1995 reflect the estimated effects
of the Proposed Settlement. In the first quarter of 1995, HL&P's pre-tax
earnings were reduced by approximately $17 million in the aggregate as a
result of reflecting the estimated effects of the Proposed Settlement on
revenues and expenses for the quarter. Deferred revenues are included on
the Company's Consolidated and HL&P's Balance Sheets in other deferred
credits subject to refund when the Proposed Settlement is approved.
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 in the fourth quarter of 1994 as a one-time,
pre-tax charge to reconcilable fuel revenues to reflect the anticipation
of approval of the Proposed Settlement. Under the Proposed Settlement,
HL&P would also 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. As contemplated by the Proposed Settlement and approved by
an ALJ, HL&P implemented a new fuel factor 17 percent lower than its
previous factor and refunded to customers approximately $110 million of
the approximately $180 million in fuel cost overrecoveries in April
1995. The remaining $70 million will be refunded if the Proposed
Settlement is approved by the Utility Commission.
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In the event the Proposed Settlement is not approved by the Utility
Commission, Docket No. 12065 would be remanded to an ALJ to resume
detailed hearings in this docket and with respect to issues related to
the South Texas Project. 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 would be whether the incremental fuel costs
incurred as a result of outages at the South Texas Project represent
reasonable costs. 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. 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 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, 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 are resumed, that the outcome of such proceedings would be
favorable to HL&P.
(9) CHANGE IN ACCOUNTING 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.