EXHIBIT 99(c)
(2) JOINTLY-OWNED NUCLEAR PLANT
(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
-14-
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. 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".
For a discussion concerning litigation by certain current and former
employees or contractors of HL&P asserting that their employment was
terminated or disrupted in retaliation for their having made
safety-related complaints to the NRC, see Note 2(b) of the notes to the
financial statements included in the Combined Form 8-K and Note 2(b) to
the financial statements included in the Company's and HL&P's Combined
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995
(Combined Form 10-Q).
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 and to reconcile 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 (a period including the outage
at the South Texas Project during 1993 and 1994).
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). In
July 1995, an Administrative Law Judge (ALJ) recommended that the Utility
Commission issue a final order consistent with the Proposed Settlement. A
decision is expected by the Utility Commission at a Final Order Meeting
scheduled for August 30, 1995.
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 ($211 million as of June 30, 1995)
in the cancelled Malakoff Electric Generating Station (Malakoff) plant over
a period not to exceed
-16-
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 a
portion 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 up to $50 million per year of 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. In the second quarter
of 1995, HL&P recorded a $7 million write down of its investment in the
South Texas Project pursuant to this provision of the Proposed Settlement,
which amount is included on the Company's Consolidated and HL&P's Statements
of Income in depreciation and amortization expense.
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 1995 reflect the estimated effects of the Proposed
Settlement. In the second quarter and first six months of 1995, HL&P's
pre-tax earnings were reduced by approximately $39 million and $56 million,
respectively, which represent the estimated effects of the Proposed
Settlement on revenues and expenses. Included in these reductions are
charges of $7 million related to the South Texas Project investment as
discussed above and a one-time, pre-tax charge of $9 million incurred in
connection with certain mine-related costs which were not previously
recorded and are not recoverable under the terms of the Proposed Settlement.
(See Note 5 to these financial statements.) Deferred revenues are included
on the Company's Consolidated and HL&P's Balance Sheets in other deferred
credits subject to refund in the event the Proposed Settlement is approved.
Under the terms of the Proposed Settlement, HL&P previously agreed that
approximately $70 million of fuel expenditures and related interest incurred
during the fuel reconciliation period would not be recoverable from
ratepayers. This $70 million was recorded in December 1994 as a one-time,
pre-tax charge to reconcilable fuel revenues and will be refunded to
ratepayers in the event that the Proposed Settlement is approved by the
Utility Commission.
For additional information regarding Docket Nos. 12065 and 13126, see Note 3
to the financial statements included in the Combined Form 10-Q, which note
is incorporated herein by reference.
(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 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.
-17-
(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 for Unit No. 1 of the South Texas Project (including
-18-
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 from cost of service. The court held that
the Utility Commission had failed to require that such tax savings be
passed on to ratepayers. Both HL&P and other parties sought review by
the Texas Supreme Court, which granted discretionary review as to the
issue of certain Malakoff plant expenditures treated as "Plant Held for
Future Use", and brought the entire case before it for consideration,
including the tax issue raised by HL&P. The case has been scheduled for
oral argument in September 1995 by the Texas Supreme Court.
Although no assurance can be given in this matter, the Company believes
that if the principles and rationale of the GTE-SW decision discussed in
Note 4(a) above were applied, the Utility Commission's treatment of the
tax issue in Docket No. 8425 should be upheld.