UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 1-7629
HOUSTON INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-1885573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Post Oak Park
4400 Post Oak Parkway
Houston, Texas 77027
(Address of principal executive offices) (Zip Code)
(713) 629-3000
(Registrant's telephone number, including area code)
Commission file number 1-3187
HOUSTON LIGHTING & POWER COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-0694415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
611 Walker Avenue
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 228-9211
(Registrant's telephone number, including area code)
______________________________
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrants were required to file such
reports), and (2) have been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
As of April 30, 1994, Houston Industries Incorporated had 130,708,985
shares of common stock outstanding. As of April 30, 1994, all 1,000
authorized and outstanding shares of Houston Lighting & Power
Company's Class A voting common stock, without par value, were held by
Houston Industries Incorporated and all 100 authorized and outstanding
shares of Houston Lighting & Power Company's Class B non-voting common
stock were held by Houston Industries (Delaware) Incorporated.
<PAGE>
HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1994
This combined Form 10-Q is separately filed by Houston Industries
Incorporated and Houston Lighting & Power Company. Information
contained herein relating to Houston Lighting & Power Company is filed
by Houston Industries Incorporated and separately by Houston Lighting
& Power Company on its own behalf. Houston Lighting & Power Company
makes no representation as to information relating to Houston
Industries Incorporated (except as it may relate to Houston Lighting &
Power Company) or to any other affiliate or subsidiary of Houston
Industries Incorporated.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Houston Industries Incorporated and Subsidiaries
Statements of Consolidated Income
Three Months Ended March 31, 1994 and 1993 3
Consolidated Balance Sheets
March 31, 1994 and December 31, 1993 5
Statements of Consolidated Cash Flows
Three Months Ended March 31, 1994 and 1993 7
Statements of Consolidated Retained Earnings
Three Months Ended March 31, 1994 and 1993 9
Notes to Consolidated Financial Statements 16
Houston Lighting & Power Company
Statements of Income
Three Months Ended March 31, 1994 and 1993 10
Balance Sheets
March 31, 1994 and December 31, 1993 11
Statements of Cash Flows
Three Months Ended March 31, 1994 and 1993 13
Statements of Retained Earnings
Three Months Ended March 31, 1994 and 1993 15
Notes to Financial Statements 16
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 37
-2-
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Thousands of Dollars)
Three Months Ended
March 31,
1994 1993
REVENUES:
Electric . . . . . . . . . . . . . . $ 821,581 $ 805,685
Cable television . . . . . . . . . . 60,520 60,274
Total . . . . . . . . . . . . . . 882,101 865,959
EXPENSES:
Electric:
Fuel . . . . . . . . . . . . . . . 217,188 198,563
Purchased power . . . . . . . . . . 98,549 129,699
Operation and maintenance . . . . . 193,851 195,236
Taxes other than income taxes . . . 63,112 61,864
Cable television operating expenses . 39,227 36,841
Depreciation and amortization . . . . 119,501 115,775
Total . . . . . . . . . . . . . . 731,428 737,978
OPERATING INCOME . . . . . . . . . . . 150,673 127,981
OTHER INCOME (EXPENSE):
Allowance for other funds used
during construction . . . . . . . . 1,316 708
Interest income . . . . . . . . . . . 8,418 8,140
Equity in income of cable television
partnerships . . . . . . . . . . . 7,910 7,022
Other - net . . . . . . . . . . . . . (8,329) 1,932
Total . . . . . . . . . . . . . . 9,315 17,802
INTEREST AND OTHER FIXED CHARGES:
Interest on long-term debt . . . . . 87,013 97,076
Other interest . . . . . . . . . . . 5,726 3,789
Allowance for borrowed funds used
during construction . . . . . . . . (1,688) (744)
Preferred dividends of subsidiary . . 8,273 9,145
Total . . . . . . . . . . . . . . 99,324 109,266
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS . . . . . . . 60,664 36,517
INCOME TAXES . . . . . . . . . . . . . 22,289 9,462
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR POSTEMPLOYMENT BENEFITS 38,375 27,055
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POSTEMPLOYMENT BENEFITS (NET OF
INCOME TAXES OF $4,415) . . . . . . . (8,200)
NET INCOME . . . . . . . . . . . . . . $ 30,175 $ 27,055
-3-
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Thousands of Dollars)
(continued)
Three Months Ended
March 31,
1994 1993
EARNINGS PER COMMON SHARE:
EARNINGS PER COMMON SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS . . . . . . $ .29 $ .21
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POSTEMPLOYMENT BENEFITS . . . . (.06)
EARNINGS PER COMMON SHARE . . . . . . $ .23 $ .21
DIVIDENDS DECLARED PER COMMON SHARE . $ .75 $ .75
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000) . . . . . . . . . 130,707 129,600
See Notes to Consolidated Financial Statements.
-4-
<PAGE>
<TABLE>
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<CAPTION>
ASSETS
March 31, December 31,
1994 1993
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Plant in service . . . . . . . . . . . . . . . . . . $ 11,616,776 $ 11,480,244
Construction work in progress . . . . . . . . . . . 178,123 242,661
Nuclear fuel . . . . . . . . . . . . . . . . . . . . 211,794 211,785
Plant held for future use . . . . . . . . . . . . . 197,607 196,330
Electric plant acquisition adjustments . . . . . . . . 3,166 3,166
Cable television property . . . . . . . . . . . . . . . 378,165 372,178
Other property . . . . . . . . . . . . . . . . . . . . 50,377 47,494
Total . . . . . . . . . . . . . . . . . . . . . 12,636,008 12,553,858
Less accumulated depreciation and amortization . . . . 3,434,546 3,355,616
Property, plant and equipment - net . . . . . . 9,201,462 9,198,242
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . 19,078 14,884
Special deposits . . . . . . . . . . . . . . . . . . . 6,811 11,834
Accounts receivable:
Customers - net . . . . . . . . . . . . . . . . . . 7,916 4,985
Others . . . . . . . . . . . . . . . . . . . . . . . 21,736 11,153
Accrued unbilled revenues . . . . . . . . . . . . . . . 24,881 29,322
Fuel stock, at lifo cost . . . . . . . . . . . . . . . 58,531 58,585
Materials and supplies, at average cost . . . . . . . . 163,388 166,477
Prepayments . . . . . . . . . . . . . . . . . . . . . . 13,552 20,432
Total current assets . . . . . . . . . . . . . 315,893 317,672
OTHER ASSETS:
Cable television franchises and intangible
assets - net . . . . . . . . . . . . . . . . . . . . 971,495 984,032
Deferred plant costs . . . . . . . . . . . . . . . . . 658,254 664,699
Deferred debits . . . . . . . . . . . . . . . . . . . . 370,661 371,773
Unamortized debt expense and premium on
reacquired debt . . . . . . . . . . . . . . . . . . 169,101 169,465
Equity investment in cable television
partnerships . . . . . . . . . . . . . . . . . . . . 134,341 122,531
Equity investment in foreign electric utility . . . . . 36,065 36,984
Regulatory asset - net . . . . . . . . . . . . . . . . 244,869 246,763
Recoverable project costs . . . . . . . . . . . . . . . 112,931 118,016
Total other assets . . . . . . . . . . . . . . 2,697,717 2,714,263
Total . . . . . . . . . . . . . . . . . . . $ 12,215,072 $ 12,230,177
</TABLE>
See Notes to Consolidated Financial Statements.
-5-
<PAGE>
<TABLE>
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
CAPITALIZATION:
Common Stock Equity:
Common stock, no par value . . . . . . . . . . . . . . . . . . . . . . . . $ 2,418,551 $ 2,415,256
Note receivable from ESOP . . . . . . . . . . . . . . . . . . . . . . . . (332,489) (332,489)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,125,167 1,191,230
Total common stock equity . . . . . . . . . . . . . . . . . . . . . 3,211,229 3,273,997
Preference Stock, no par value, authorized
10,000,000 shares; none outstanding
Cumulative Preferred Stock of Subsidiary, no
par value:
Not subject to mandatory redemption . . . . . . . . . . . . . . . . . . 351,345 351,354
Subject to mandatory redemption . . . . . . . . . . . . . . . . . . . . 167,236 167,236
Total cumulative preferred stock . . . . . . . . . . . . . . . . . . 518,581 518,590
Long-Term Debt:
Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 548,590 548,544
Long-term debt of subsidiaries:
Electric:
First mortgage bonds . . . . . . . . . . . . . . . . . . . . . . . . 3,019,982 3,019,843
Pollution control revenue bonds . . . . . . . . . . . . . . . . . . 155,225 155,218
Cable television:
Senior bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . 364,000 364,000
Senior and subordinated notes . . . . . . . . . . . . . . . . . . . 124,783 140,580
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,935 15,010
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 4,226,515 4,243,195
Total capitalization . . . . . . . . . . . . . . . . . . . . . . 7,956,325 8,035,782
CURRENT LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 813,316 591,385
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,413 239,814
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,675 187,503
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,116 84,178
Dividends accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,170 105,207
Accrued liabilities to municipalities . . . . . . . . . . . . . . . . . . . . 18,677 22,589
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,546 65,604
Current portion of long-term debt and
preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,822 55,109
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,724 62,688
Total current liabilities . . . . . . . . . . . . . . . . . . . 1,458,459 1,414,077
DEFERRED CREDITS:
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 1,988,962 1,987,336
Unamortized investment tax credit . . . . . . . . . . . . . . . . . . . . . . 429,659 434,597
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381,667 358,385
Total deferred credits . . . . . . . . . . . . . . . . . . . . . 2,800,288 2,780,318
COMMITMENTS AND CONTINGENCIES
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,215,072 $ 12,230,177
</TABLE>
See Notes to Consolidated Financial Statements.
-6-
<PAGE>
<TABLE>
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,175 $ 27,055
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 119,501 115,775
Amortization of nuclear fuel . . . . . . . . . . . . . . . . . . . . 257 2,101
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 6,041 8,750
Investment tax credits . . . . . . . . . . . . . . . . . . . . . . . (4,938) (5,072)
Allowance for other funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . (1,316) (708)
Fuel cost (refund) and over/(under) recovery
- net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,008 (2,739)
Equity in income of cable television
partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,910) (7,022)
Cumulative effect of change in accounting
for postemployment benefits . . . . . . . . . . . . . . . . . . . 8,200
Changes in other assets and liabilities:
Accounts receivable and accrued unbilled
revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,073) 289,489
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,143 2,806
Other current assets . . . . . . . . . . . . . . . . . . . . . . . 11,903 6,137
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (56,401) (57,716)
Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . (108,890) (120,235)
Other current liabilities . . . . . . . . . . . . . . . . . . . . 3,991 (19,063)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,357 15,385
Net cash provided by operating activities . . . . . . . . . . . . . . 15,048 254,943
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital expenditures
(including allowance for borrowed funds
used during construction) . . . . . . . . . . . . . . . . . . . . . . (88,038) (65,884)
Cable television additions . . . . . . . . . . . . . . . . . . . . . . . (12,127) (7,496)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,380) (3,188)
Net cash used in investing activities . . . . . . . . . . . . . . . . (108,545) (76,568)
</TABLE>
-7-
<TABLE>
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(CONTINUED)
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock . . . . . . . . . . . . $ 9,455
Proceeds from first mortgage bonds . . . . . . . . 396,798
Proceeds from senior bank debt . . . . . . . . . . 20,000
Payment of matured bonds . . . . . . . . . . . . . $ (19,500) (136,000)
Payment of senior bank debt . . . . . . . . . . . (167,349)
Payment of senior and subordinated notes . . . . . (10,384) (6,372)
Payment of common stock dividends . . . . . . . . (98,032) (97,190)
Increase in notes payable - net . . . . . . . . . 221,931 851
Other - net . . . . . . . . . . . . . . . . . . . 3,676 (1,014)
Net cash provided by financing activities . . . 97,691 19,179
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . 4,194 197,554
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . 14,884 69,317
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . $ 19,078 $ 266,871
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) . . . . . $ 96,835 $ 97,354
Income taxes . . . . . . . . . . . . . . . . . 23,365 33,715
</TABLE>
See Notes to Consolidated Financial Statements.
-8-
<PAGE>
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Three Months Ended
March 31,
1994 1993
Balance at Beginning of Period . $ 1,191,230 $ 1,254,584
Net Income for the Period . . . . 30,175 27,055
Total . . . . . . . . . . . 1,221,405 1,281,639
Common Stock Dividends . . . . . (98,070) (97,190)
Tax Benefit of ESOP Dividends . . 1,832 1,563
Balance at End of Period . . . . $ 1,125,167 $ 1,186,012
See Notes to Consolidated Financial Statements.
-9-
<PAGE>
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(Thousands of Dollars)
Three Months Ended
March 31,
1994 1993
OPERATING REVENUES . . . . . . . . . . $ 821,581 $ 805,685
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . 217,188 198,563
Purchased power . . . . . . . . . . 98,549 129,699
Operation . . . . . . . . . . . . . 132,967 140,607
Maintenance . . . . . . . . . . . . 60,884 54,629
Depreciation and amortization . . . 98,929 96,216
Income taxes . . . . . . . . . . . . 27,073 10,947
Other taxes . . . . . . . . . . . . 63,112 61,864
Total . . . . . . . . . . . . . 698,702 692,525
OPERATING INCOME . . . . . . . . . . . 122,879 113,160
OTHER INCOME (EXPENSE):
Allowance for other funds used during
construction . . . . . . . . . . . 1,316 708
Other - net . . . . . . . . . . . . (2,986) 367
Total . . . . . . . . . . . . . (1,670) 1,075
INCOME BEFORE INTEREST CHARGES . . . . 121,209 114,235
INTEREST CHARGES:
Interest on long-term debt . . . . . 61,842 69,605
Other interest . . . . . . . . . . . 2,896 4,655
Allowance for borrowed funds used
during construction . . . . . . . . (1,688) (744)
Total . . . . . . . . . . . . . 63,050 73,516
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS . . . . . . 58,159 40,719
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POSTEMPLOYMENT
BENEFITS (NET OF INCOME TAXES
OF $4,415) . . . . . . . . . . . . . (8,200)
NET INCOME . . . . . . . . . . . . . . 49,959 40,719
DIVIDENDS ON PREFERRED STOCK . . . . . 8,273 9,145
INCOME AFTER PREFERRED DIVIDENDS . . . $ 41,686 $ 31,574
See Notes to Financial Statements.
-10-
<PAGE>
<TABLE>
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<CAPTION>
ASSETS
March 31, December 31,
1994 1993
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant in service . . . . . . . . . . . . . $ 11,616,776 $ 11,480,244
Construction work in progress . . . . . . . . . . . 178,123 242,661
Plant held for future use . . . . . . . . . . . . . 197,607 196,330
Nuclear fuel . . . . . . . . . . . . . . . . . . . . 211,794 211,785
Electric plant acquisition adjustments . . . . . . . 3,166 3,166
Total . . . . . . . . . . . . . . . . . . . . . 12,207,466 12,134,186
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . 3,268,419 3,194,127
Property, plant and equipment - net . . . . . . 8,939,047 8,940,059
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . 8,594 12,413
Special deposits . . . . . . . . . . . . . . . . . . 6,811 11,834
Accounts receivable:
Affiliated companies . . . . . . . . . . . . . . . 903 1,792
Others . . . . . . . . . . . . . . . . . . . . . . 14,753 2,540
Accrued unbilled revenues . . . . . . . . . . . . . 24,881 29,322
Inventory:
Fuel stock, at lifo cost . . . . . . . . . . . . . 58,531 58,585
Materials and supplies, at average cost . . . . . 157,219 160,371
Prepayments . . . . . . . . . . . . . . . . . . . . 4,606 9,234
Total current assets . . . . . . . . . . . . . . 276,298 286,091
OTHER ASSETS:
Deferred plant costs . . . . . . . . . . . . . . . . 658,254 664,699
Deferred debits . . . . . . . . . . . . . . . . . . 319,414 333,620
Unamortized debt expense and premium on
reacquired debt . . . . . . . . . . . . . . . . . 164,222 164,368
Regulatory asset - net . . . . . . . . . . . . . . . 244,869 246,763
Recoverable project costs . . . . . . . . . . . . . 112,931 118,016
Total other assets . . . . . . . . . . . . . . . 1,499,690 1,527,466
Total . . . . . . . . . . . . . . . . . . . . $ 10,715,035 $ 10,753,616
</TABLE>
See Notes to Financial Statements.
-11-
<PAGE>
<TABLE>
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<CAPTION>
CAPITALIZATION AND LIABILITIES
March 31, December 31,
1994 1993
<S> <C> <C>
CAPITALIZATION:
Common Stock Equity:
Common stock, class A; no par value . . . . . . . . $ 1,524,949 $ 1,524,949
Common stock, class B; no par value . . . . . . . . 150,978 150,978
Retained earnings . . . . . . . . . . . . . . . . . 1,990,614 2,028,924
Total common stock equity . . . . . . . . . . . . 3,666,541 3,704,851
Cumulative Preferred Stock:
Not subject to mandatory redemption . . . . . . . . 351,345 351,354
Subject to mandatory redemption . . . . . . . . . . 167,236 167,236
Total cumulative preferred stock . . . . . . . . . 518,581 518,590
Long-Term Debt:
First mortgage bonds . . . . . . . . . . . . . . . . 3,019,982 3,019,843
Pollution control revenue bonds . . . . . . . . . . 155,225 155,218
Other . . . . . . . . . . . . . . . . . . . . . . . 13,935 15,010
Total long-term debt . . . . . . . . . . . . . . . 3,189,142 3,190,071
Total capitalization . . . . . . . . . . . . . . 7,374,264 7,413,512
CURRENT LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . . . . 335,830 171,100
Accounts payable . . . . . . . . . . . . . . . . . . . 120,577 190,583
Accounts payable to affiliated companies . . . . . . . 8,425 8,449
Taxes accrued . . . . . . . . . . . . . . . . . . . . 95,180 187,517
Interest and dividends accrued . . . . . . . . . . . . 57,458 65,238
Accrued liabilities to municipalities . . . . . . . . 18,677 22,589
Customer deposits . . . . . . . . . . . . . . . . . . 65,546 65,604
Current portion of long-term debt and
preferred stock . . . . . . . . . . . . . . . . . . 26,025 44,725
Other . . . . . . . . . . . . . . . . . . . . . . . . 71,994 63,607
Total current liabilities . . . . . . . . . . . 799,712 819,412
DEFERRED CREDITS:
Accumulated deferred federal income taxes . . . . . . 1,803,483 1,798,976
Unamortized investment tax credit . . . . . . . . . . 426,156 430,996
Other . . . . . . . . . . . . . . . . . . . . . . . . 311,420 290,720
Total deferred credits . . . . . . . . . . . . . 2,541,059 2,520,692
COMMITMENTS AND CONTINGENCIES
Total . . . . . . . . . . . . . . . . . . . . $ 10,715,035 $ 10,753,616
</TABLE>
See Notes to Financial Statements.
-12-
<PAGE>
<TABLE>
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . $ 49,959 $ 40,719
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . 98,929 96,216
Amortization of nuclear fuel . . . . . . . . . . 257 2,101
Deferred income taxes . . . . . . . . . . . . . 8,922 7,526
Investment tax credits . . . . . . . . . . . . . (4,840) (4,973)
Allowance for other funds used during
construction . . . . . . . . . . . . . . . . (1,316) (708)
Fuel cost (refund) and over (under) recovery
- net . . . . . . . . . . . . . . . . . . . . 16,008 (2,739)
Cumulative effect of change in accounting for
postemployment benefits . . . . . . . . . . . 8,200
Accounts receivable - net . . . . . . . . . . (6,883) 160,329
Material and supplies . . . . . . . . . . . . 3,152 2,490
Fuel stock . . . . . . . . . . . . . . . . . . 54 1,021
Accounts payable . . . . . . . . . . . . . . . (70,030) (49,933)
Interest and taxes accrued . . . . . . . . . . (100,117) (117,196)
Changes in other assets and liabilities:
Other current liabilities . . . . . . . . . . 5,180 447
Other - net . . . . . . . . . . . . . . . . . 22,262 17,201
Net cash provided by operating activities . . . . 29,737 152,501
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction) . . . . . . . . . . . (88,038) (65,884)
Other - net . . . . . . . . . . . . . . . . . . . (2,556) (3,125)
Net cash used in investing activities . . . . . (90,594) (69,009)
</TABLE>
-13-
<PAGE>
<TABLE>
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(CONTINUED)
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from first mortgage bonds . . . . . . . . $ 396,798
Payment of matured bonds . . . . . . . . . . . . . $ (19,500) (136,000)
Payment of dividends . . . . . . . . . . . . . . . (88,233) (112,510)
Increase in notes payable . . . . . . . . . . . . 164,730 28,560
Decrease in notes payable to affiliated
company . . . . . . . . . . . . . . . . . . . . (19,000)
Other - net . . . . . . . . . . . . . . . . . . . 41 18,310
Net cash provided by financing activities . . . 57,038 176,158
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . (3,819) 259,650
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . 12,413 4,253
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . $ 8,594 $ 263,903
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized
or deferred) . . . . . . . . . . . . . . . . . $ 72,111 $ 78,669
Income taxes . . . . . . . . . . . . . . . . . . 14,821 30,999
</TABLE>
See Notes to Financial Statements.
-14-
<PAGE>
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Three Months Ended
March 31,
1994 1993
Balance at Beginning of Period . $ 2,028,924 $ 1,922,558
Net Income for the Period . . . . 49,959 40,719
Total . . . . . . . . . . . 2,078,883 1,963,277
Deduct - Cash Dividends:
Preferred . . . . . . . . . . 8,273 9,145
Common . . . . . . . . . . . . 79,996 102,996
Total . . . . . . . . . . . 88,269 112,141
Balance at End of Period . . . . $ 1,990,614 $ 1,851,136
See Notes to Financial Statements.
-15-
<PAGE>
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) REGULATORY PROCEEDINGS AND LITIGATION REFERENCE
The information presented in the following Notes in this
Form 10-Q should be read in conjunction with the Houston
Industries Incorporated (Company) Annual Report on Form 10-K
for the year ended December 31, 1993 (File No. 1-7629), filed
in combined form with the Houston Lighting & Power Company
(HL&P) Annual Report on Form 10-K for the year ended December
31, 1993 (File No. 1-3187) (collectively, the 1993 Combined
Form 10-K), including the Notes to the Company's Consolidated
and HL&P's Financial Statements included in Item 8 thereof.
Notes 9, 10 and 11 to the Company's Consolidated and HL&P's
Financial Statements in the 1993 Combined Form 10-K are
incorporated herein by reference as they relate to the Company
and HL&P, respectively.
(2) COMMON STOCK
COMPANY. At March 31, 1994, and December 31, 1993, the
Company had authorized 400,000,000 shares of common stock, of
which 130,708,985 and 130,658,755 shares, respectively, were
outstanding.
HL&P. All issued and outstanding Class A voting common stock
of HL&P is held by the Company and all issued and outstanding
Class B non-voting common stock of HL&P is held by Houston
Industries (Delaware) Incorporated (Houston Industries
Delaware), a wholly-owned subsidiary of the Company.
(3) HL&P PREFERRED STOCK
At March 31, 1994, and December 31, 1993, HL&P had 10,000,000
shares of preferred stock authorized of which 5,432,397 shares
were outstanding.
(4) EARNINGS PER COMMON SHARE
COMPANY. Earnings per common share for the Company is
computed by dividing net income by the weighted average number
of shares outstanding during the respective period.
HL&P. Earnings per share data for HL&P is not computed since
all of its common stock is held by the Company and Houston
Industries Delaware.
(5) LONG-TERM DEBT
COMPANY. In March 1994, KBL Cable, Inc. made a scheduled
repayment of $10.4 million principal amount of its senior
notes and senior subordinated notes.
-16-
HL&P. In January 1994, HL&P repaid at maturity $19.5 million
principal amount of Series A collateralized medium-term notes.
HL&P has registered with the Securities and Exchange
Commission $230 million aggregate liquidation value of
preferred stock and $580 million aggregate principal amount of
debt securities that may be issued as first mortgage bonds
and/or as debt securities collateralized by first mortgage
bonds. Proceeds from the sales of these securities are
expected to be used for general corporate purposes, including
the purchase, redemption (to the extent permitted by the terms
of the outstanding securities), repayment or retirement of
outstanding indebtedness or preferred stock of HL&P.
(6) POSTEMPLOYMENT BENEFITS FOR THE COMPANY AND HL&P
The Company and HL&P adopted Statement of Financial Accounting
Standards (SFAS) No. 112, "Employer's Accounting for
Postemployment Benefits", effective January 1, 1994. SFAS No.
112 requires companies to recognize the liability for benefits
provided to former or inactive employees, their beneficiaries
and covered dependents after employment but before retirement.
Those benefits include, but are not limited to, salary
continuation, supplemental unemployment benefits, severance
benefits, disability-related benefits (including worker's
compensation), job training and counseling, and continuation
of benefits such as health care and life insurance. SFAS No.
112 requires the transition obligation (liability from prior
years) to be expensed upon adoption. As a result, the Company
and HL&P recorded in the first quarter of 1994 a one-time,
after-tax charge to income of $8.2 million.
(7) ENVIRONMENTAL AND CABLE REGULATIONS
(a) ENVIRONMENTAL REGULATIONS. For information regarding the
impact of environmental regulations on the Company and its
subsidiaries, see the fifth paragraph of Note 8(a) to the
Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which portion of Note
8(a) is incorporated herein by reference.
(b) IMPACT OF THE CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION
ACT OF 1992 ON KBLCOM INCORPORATED (KBLCOM). In March 1994,
the Federal Communications Commission (FCC) issued its
revised benchmark rules (Rate Rule II) as well as its
interim cost-of-service rule (Interim COS Rule). Each of
these rules will become effective on May 15, 1994. Rate Rule
II revises the "benchmark formulas" established by the FCC in
May 1993. Under Rate Rule II (which will be applied
prospectively), cable operators must reduce their existing
rates to the higher of (i) the rates calculated using the
revised benchmark formulas (Revised Benchmarks) or (ii) a
level 17% below such cable operators' rates as of September
30, 1992, adjusted for inflation. Cable operators which
cannot or do not wish to comply with the Revised Benchmarks
may choose to justify their existing rates under the Interim
COS Rule. The Interim COS Rule establishes a cost-of-service
rate system similar to that used in the telephone industry.
KBLCOM expects that it will sustain higher operating costs and
increased administrative burdens under these new rules, and
that the Revised Benchmarks will impose some additional
reductions in KBLCOM's rates for regulated services. In light
of the lengthy and complex nature of these rules, it is
impossible at this time to assess the detailed impact of Rate
Rule II or the Interim COS Rule on KBLCOM's financial position
and results of operations.
-17-
(8) JOINTLY-OWNED NUCLEAR PLANT
(A) HL&P INVESTMENT. HL&P is project manager and one of four co-
owners in the South Texas Project Electric Generating Station
(South Texas Project), which consists of two 1,250 megawatt
nuclear generating units. Each co-owner funds its own share
of capital and operating costs associated with the plant, with
HL&P's interest in the project being 30.8%. HL&P's share of
the operation and maintenance expenses is included in electric
operation and maintenance expenses on the Company's Statements
of Consolidated Income and in the corresponding operating
expense amounts on HL&P's Statements of Income. As of March
31, 1994, HL&P's investments (net of accumulated depreciation
and amortization) in the South Texas Project and in nuclear
fuel, including Allowance for Funds Used During Construction,
were $2.1 billion and $119 million, respectively.
(B) CITY OF AUSTIN LITIGATION. In February 1994, the City of
Austin (Austin), one of the other owners of the South Texas
Project, filed suit against HL&P in the 164th District Court
for Harris County, Texas. Austin alleges that the outages at
the South Texas Project since February 1993 were due to HL&P's
failure to perform obligations it owed to Austin under the
Participation Agreement among the four co-owners of the South
Texas Project (Participation Agreement). Austin also asserts
that HL&P breached certain contractual obligations allegedly
owed to Austin under the terms and conditions of the Operating
Licenses and Technical Specifications relating to the South
Texas Project. Austin claims that such failures have caused
Austin damages of at least $125 million, which are continuing,
due to the incurrence of increased operating and maintenance
costs, the cost of replacement power and lost profits on
wholesale transactions that did not occur.
As it did in litigation filed against HL&P in 1983, Austin
asserts that HL&P breached obligations HL&P owed under the
Participation Agreement to Austin, and Austin seeks a
declaration that HL&P had a duty to exercise reasonable care
in the operation and maintenance of the South Texas Project.
In that earlier litigation (which was won by HL&P at trial,
affirmed on appeal and became final in 1993), however, the
courts concluded that the Participation Agreement did not
impose on HL&P a duty to exercise reasonable skill and care as
project manager.
Austin also asserts in its current suit that certain terms of
a settlement reached in 1992 among HL&P and Central and South
West Corporation (CSW) and its subsidiary, Central Power and
Light Company (CPL), another co-owner of the South Texas
Project, are invalid and void. The Participation Agreement
permits arbitration of certain disputes among the owners, and
the challenged settlement terms provide that in any future
arbitration, HL&P and CPL would each appoint an arbitrator
acceptable to the other. Austin asserts that, as a result of
this agreement, the arbitration provisions of the
Participation Agreement are void and Austin should not be
required to participate in or be bound by arbitration
proceedings. Alternatively, Austin asserts that HL&P's rights
with respect to CPL's appointment of an arbitrator should be
shared with all the owners or cancelled, and Austin seeks
injunctive relief against arbitration of its dispute with
HL&P.
HL&P and the Company do not believe there is merit to Austin's
claims, and they intend to defend vigorously against them.
However, there can be no assurance as to the ultimate outcome
of this matter.
-18-
For more detailed information regarding the outage of the
South Texas Project, the previous litigation filed by Austin
and the settlement with CSW and CPL referred to above, see
Notes 9(b), 9(c) and 9(f) of the Notes to the Company's
Consolidated and HL&P's Financial Statements included in the
1993 Combined Form 10-K, which Notes are incorporated herein
by reference. Also, see Note 8(f) of the Notes to the
Company's Consolidated and HL&P's Financial Statements in this
Report.
(C) ARBITRATION WITH CO-OWNERS. For a discussion of the
arbitration requested by the City of San Antonio for its claim
under the Participation Agreement, see Note 8(b) of the Notes
to the Company's Consolidated and HL&P's Financial Statements
in this Report and Note 9(c) of the Notes to the Company's
Consolidated and HL&P's Financial Statements included in the
1993 Combined Form 10-K, which Note is incorporated herein by
reference.
(D) NUCLEAR INSURANCE. HL&P and the other owners of the South
Texas Project maintain nuclear property and nuclear liability
insurance coverages as required by law and periodically review
available limits and coverage for additional protection. For
a discussion of the nuclear property and nuclear liability
insurance maintained in connection with the South Texas
Project and potential assessments associated therewith, see
Note 9(d) of the Notes to the Company's Consolidated and
HL&P's Financial Statements included in the 1993 Combined Form
10-K, which Note is incorporated herein by reference.
(E) NUCLEAR DECOMMISSIONING. For information regarding the
nuclear decommissioning costs of the South Texas Project
and the current review of such costs by HL&P, see Note 9(e) of
the Notes to the Company's Consolidated and HL&P's Financial
Statements included in the 1993 Combined Form 10-K, which Note
is incorporated herein by reference.
(F) UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) INSPECTIONS
AND OPERATIONS. Both generating units at the South Texas
Project were out of service from February 1993 to February
1994, when Unit No. 1 was returned to service. Unit No. 2 is
currently scheduled to resume operation after completion of
regulatory reviews in late spring of 1994. HL&P removed the
units from service in February 1993 when a problem was
encountered with certain of the units' auxiliary feedwater
pumps. At that time, HL&P concluded, and the NRC confirmed,
that the units should not resume operation until HL&P had
determined the root cause of the failure, had briefed the
NRC and had taken corrective action.
The South Texas Project is currently listed on the NRC's
"watch list" of plants with "weaknesses that warrant NRC
attention." The decision to place the South Texas Project on
the "watch list" followed the June 1993 issuance of a report
by a Diagnostic Evaluation Team (DET) which conducted a review
of the South Texas Project and identified a number of areas
requiring improvement at the South Texas Project. Plants
in this category are authorized to operate but are subject
to close monitoring by the NRC. The NRC reviews the
status of plants on this list semi-annually. HL&P, however,
does not anticipate that the South Texas Project will be
removed from the list until there has been a period of
operation for both units, and the NRC concludes that the
concerns which led the NRC in June 1993 to place the South
Texas Project on the list have been satisfactorily addressed.
In 1993, it was reported that the NRC had referred to the
Department of Justice allegations that the employment of three
former employees
-19-
and an employee of a contractor to HL&P had been terminated or
disrupted in retaliation for their having made safety related
complaints to the NRC. HL&P understands that these matters
are no longer under consideration by the Department of
Justice. Civil proceedings by the complaining employees and
administrative proceedings before the Department of Labor
remain pending against HL&P, and the NRC could take
enforcement action against HL&P and/or individual employees
with respect to these matters. Also, a subcommittee of the
U.S. House of Representatives has notified the Company that
it is conducting an inquiry regarding the South Texas Project
that will address whistleblower matters.
For additional information regarding the foregoing matters,
including the DET's report on weaknesses at the South Texas
Project, increases in fuel and non-fuel expenditures relating
to the outage, the possible impact of the outage on the
results of a proceeding conducted under Section 42 of the
Texas Public Utility Regulatory Act of 1975, as amended, (PURA)
involving the Company's rates, and various civil and
administrative proceedings relating to the South Texas
Project, see Notes 9(f), 10(f) and 10(g) of the Notes to the
Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which Notes are
incorporated herein by reference. Also see Note 9(e) of the
Notes to the Company's Consolidated and HL&P's Financial Statements
included in this Report.
(9) UTILITY COMMISSION PROCEEDINGS
Pursuant to a series of applications filed by HL&P in recent
years, the Public Utility Commission of Texas (Utility
Commission) has granted HL&P rate increases to reflect in
electric rates HL&P's substantial investment in new plant
construction, including the South Texas Project. Although
Utility Commission action on those applications has been
completed, judicial review of a number of the Utility
Commission orders is pending. In Texas, Utility Commission
orders may be appealed to a District Court in Travis County,
and from that court's decision an appeal may be taken to the
Court of Appeals for the 3rd District at Austin (Austin Court
of Appeals). Discretionary review by the Supreme Court of
Texas may be sought from decisions of the Austin Court of
Appeals. The pending appeals from the Utility Commission
orders are in various stages. In the event the courts
ultimately reverse actions of the Utility Commission in any of
these proceedings, such matters would be remanded to the
Utility Commission for action in light of the courts' orders.
Because of the number of variables which can affect the
ultimate resolution of such matters on remand, the Company and
HL&P generally are not in a position at this time to predict
the outcome of the matters on appeal or the ultimate effect
that adverse action by the courts could have on the Company
and HL&P. On remand, the Utility Commission's action could
range from granting rate relief substantially equal to the
rates previously approved to a reduction in the revenues to
which HL&P was entitled during the time the applicable rates
were in effect, which could require a refund to customers of
amounts collected pursuant to such rates.
Judicial review is pending on the final orders of the Utility
Commission described below.
(a) DOCKET NO. 8425. For information concerning HL&P's
application for rate increase in Docket No. 8425 (1988 rate
case) and the status of appeals relating thereto, see Note
10(b) of the Notes to the Company's Consolidated and HL&P's
Financial Statements included in the 1993 Combined Form 10-K,
which Note is incorporated herein by reference.
(b) DOCKET NO. 9850. For a discussion of HL&P's 1991 rate case
(Docket No. 9850), the settlement agreement approved by the
Utility Commission, and the status of appeals relating
thereto, see Note 10(c) of the Notes to
-20-
the Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which Note is
incorporated herein by reference.
(c) DOCKET NO. 6668. For a discussion of Docket No. 6668, the
Utility Commission's inquiry into the prudence of the
planning, management and construction of the South Texas
Project, see Note 10(d) of the Notes to the Company's
Consolidated and HL&P's Financial Statements included in the
1993 Combined Form 10-K, which Note is incorporated herein by
reference.
Separate appeals are pending from Utility Commission orders in
Docket Nos. 8425 and 9850 in which the findings of the order
in Docket No. 6668 are reflected in rates. See also Notes
9(a) and 9(b) above.
(d) DOCKET NOS. 8230 AND 9010. For a description of the Utility
Commission's authorization of deferred accounting for the
South Texas Project (Docket Nos. 8230 and 9010), which dockets
are in various stages of appeal, see Note 10(e) of the Notes
to the Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which Note is
incorporated herein by reference.
(e) DOCKET NO. 12065. In February 1994, an administrative law
judge (ALJ) of the Utility Commission ruled that a proceeding
should be conducted pursuant to Section 42 of PURA in order to
inquire into HL&P's existing rates. Efforts by HL&P to secure
reversal or reconsideration of that decision, which the ALJ
acknowledged to be a close one, were unsuccessful, and HL&P is
scheduled to file material in support of its existing rates on
July 13, 1994. A final decision by the Utility Commission is
not expected before the summer of 1995. In ordering that a
proceeding be held under Section 42, the ALJ also found that
there could be a link between the outage at the South Texas
Project, the NRC's actions with respect to the South Texas
Project and possible mismanagement by HL&P, which could be
taken into account in the review of HL&P's authorized rate of
return. Although HL&P and the Company believe that the Section 42
inquiry into HL&P's rates is unwarranted and that the South
Texas Project has not been imprudently managed, there can be
no assurance as to the outcome of this proceeding, and HL&P's
rates could be reduced following a hearing. HL&P believes
that any reduction in base rates as a result of a Section 42
inquiry would take effect prospectively.
(f) FUEL RECONCILIATION. At March 31,1994, HL&P had recovered
through the fuel factor included in its rates approximately
$100 million (including interest) less than the amounts
expended for fuel, a significant portion of which
underrecovery occurred in 1993 during the outage of the South
Texas Project. For additional information regarding HL&P's
recovery of fuel costs incurred in electric generation
(including possible assertions that a portion of such costs
should be disallowed as unreasonable), see Note 10(g) of the
Notes to the Company's Consolidated and HL&P's Financial
Statements included in the 1993 Combined Form 10-K, which Note
is incorporated herein by reference.
(10) DEFERRED PLANT COSTS
The Utility Commission authorized deferred accounting with
respect to the South Texas Project (Docket Nos. 8230 and 9010
for Unit No. 1 and Docket No. 8425 for Unit No. 2). Each
of the Utility Commission's
-21-
orders granting deferred accounting has been appealed and such
orders are in various stages of judicial review.
In May 1991, HL&P implemented under bond, in Docket No. 9850,
a $313 million base rate increase. At that time, HL&P ceased
all cost deferrals related to the South Texas Project and
began the recovery of such amounts. These deferrals are being
amortized on a straight-line basis as allowed by the final
order in Docket No. 9850. The amortization of these deferrals
totaled $6.4 million for each of the three months ended March
31, 1994 and March 31, 1993 and is recorded on the Company's
Statements of Consolidated Income and HL&P's Statements of
Income in depreciation and amortization expense.
The following table shows the original balance of the
deferrals and the unamortized balance at March 31, 1994.
Balance at
Original March 31,
BALANCE 1994
(Thousands of Dollars)
Deferred Accounting: (a)
Deferred Expenses . . . . $ 250,151 $ 231,740
Deferred Carrying Costs
on Plant Investment . 399,972 370,534
Total . . . . . . . . . . 650,123 602,274
Qualified Phase-In Plan: (b) 82,254 55,980
Total Deferred Plant Costs $ 732,377 $ 658,254
____________
(a) Amortized over the estimated depreciable life of the South
Texas Project.
(b) Amortized over nine years beginning in May 1991.
As of March 31, 1994, HL&P has recorded deferred income taxes
of $199.6 million with respect to deferred accounting and
$14.0 million with respect to the deferrals associated with
the qualified phase-in plan.
The accounting for deferred plant costs is described in
greater detail in Notes 10(e) and 11 of the Notes to the
Company's Consolidated and HL&P's Financial Statements
included in the 1993 Combined Form 10-K, which Notes are
incorporated herein by reference.
(11) MALAKOFF ELECTRIC GENERATING STATION
For a discussion of the current rate treatment of HL&P's
investment in the Malakoff Electric Generating Station and
related matters, see Note 12 of the Notes to the Company's
Consolidated and HL&P's Financial Statements included in the
1993 Combined Form 10-K, which Note is incorporated herein by
reference.
(12) CABLE TELEVISION ACQUISITION
On February 17, 1994, KBLCOM entered into an agreement to
acquire three cable companies serving approximately 47,000
customers in the Minneapolis area. KBLCOM will acquire the
stock of the companies in
-22-
exchange for the issuance of common stock of the Company. The
amount of common stock of the Company to be issued, currently
estimated to be approximately $24 million, is dependent on the
amount of liabilities assumed, currently estimated to be
approximately $63 million.
Approximately 40,000 of the cable customers served by the
properties to be acquired are in the Minneapolis metropolitan
area. The remaining 7,000 customers are located in small
communities south and west of the metropolitan area. Closing
of the transaction, which is anticipated to occur in the
summer of 1994, is subject to the satisfaction of certain
conditions.
(13) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative
of results expected for the year due to the seasonal nature of
HL&P's business. In the opinion of management, the interim
information reflects all adjustments (consisting only of
normal recurring adjustments) necessary for a full
presentation of the results for the interim periods. Certain
amounts from the previous year have been reclassified to
conform to the 1994 presentation of consolidated financial
statements. Such reclassifications do not affect earnings.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPANY. Selected financial data for Houston Industries
Incorporated (Company) is set forth below:
Three Months Ended
MARCH 31,
Percent
1994 1993 CHANGE
(Thousands of Dollars)
Revenues . . . . . . . . $ 882,101 $ 865,959 2
Operating Expenses . . . 731,428 737,978 (1)
Operating Income . . . . 150,673 127,981 18
Other Income . . . . . . 9,315 17,802 (48)
Interest and Other
Charges . . . . . . . 99,324 109,266 (9)
Income Taxes . . . . . . 22,289 9,462 136
Net Income . . . . . . . 30,175 27,055 12
The Company had consolidated earnings per share of $.23 for the
first quarter of 1994, compared to consolidated earnings per share of
$.21 for the first quarter of 1993.
Electric Utility Operations:
HL&P. GENERAL. Selected financial data for Houston Lighting &
Power Company (HL&P) is set forth below:
Three Months Ended
March 31,
Percent
1994 1993 Change
(Thousands of Dollars)
Revenues . . . . . . . . $ 821,581 $ 805,685 2
Operating Expenses . . . 698,702 692,525 1
Operating Income . . . . 122,879 113,160 9
Other Income (Expense) . (1,670) 1,075 -
Interest Charges . . . . 63,050 73,516 (14)
Income After Preferred
Dividends . . . . . . 41,686 31,574 32
The increase in HL&P's first quarter earnings resulted primarily
from increased energy sales and reduced interest expense resulting
from refinancing activities and reduction of long-term debt levels,
partially offset by increased operating expenses which included the
recognition of postemployment benefit costs as required by the
adoption, beginning in January 1994, of Statement of Financial
Accounting Standards No. 112, "Employer's Accounting for
Postemployment Benefits."
OPERATING REVENUES AND SALES. Electric operating revenue for the
quarter ended March 31, 1994, increased $15.9 million over the same
period in 1993 due to increased kilowatt-hour (KWH) sales in all three
major customer categories, excluding sales of interruptible power.
Residential
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and commercial KWH sales for the first quarter of 1994 increased 5%
and 3%, respectively, due, in large part, to the unusually mild winter
weather experienced in the first quarter of 1993 and a 1.7% increase
in the number of customers compared to the first quarter of 1993.
Firm industrial KWH sales increased 3% for the same period. Base
revenues for the quarter ended March 31, 1994 increased $27.9 million
compared to the same period in 1993.
FUEL AND PURCHASED POWER EXPENSES. Fuel expenses increased $18.6
million for the first quarter of 1994 compared to the same period of
the previous year. The 9% increase in the first quarter of 1994 was
primarily due to increases in the utilization of coal and the unit
cost of gas, partially offset by decreases in the unit cost of oil,
coal, and lignite. Fuel costs in the first quarter of 1994 reflect,
in part, the use of non-nuclear sources of fuel during the outage of
Unit Nos. 1 and 2 of the South Texas Project Electric Generating
Station (South Texas Project). For additional information regarding
the South Texas Project, see Notes 8(f) and 9(f) to the Company's
Consolidated and HL&P's Financial Statements in Item 1 of this Report.
Purchased power expense decreased $31.2 million for the first quarter
of 1994 compared to the first quarter of 1993 due to the expiration of
a purchase power contract. The average cost of fuel for the first
quarter of 1994 was $1.81 per million British Thermal Units (MMBtu)
compared to $1.78 per MMBtu for the same period in 1993. The combined
costs of fuel used by HL&P and the fuel portion of purchased power was
1.92 cents per KWH for the first quarter of both 1994 and 1993.
OPERATION AND MAINTENANCE, DEPRECIATION AND AMORTIZATION, AND
INTEREST EXPENSES. Electric operation and maintenance expense for the
first quarter of 1994 decreased $1.4 million compared to the same
period in 1993. Depreciation and amortization expense for the first
quarter of 1994 increased $2.7 million compared to the same period in
1993, primarily due to an increase in depreciable property and the
amortization, beginning in January 1994, of Demand Side Management
expenditures. Interest expense for the first quarter of 1994
decreased $9.5 million compared to the same period in 1993, primarily
due to refinancing activities and reduction of long-term debt levels.
RATE PROCEEDINGS. In February 1994, an administrative law judge
(ALJ) of the Public Utility Commission of Texas (Utility Commission)
ruled that a proceeding should be conducted pursuant to Section 42 of
the Texas Public Utility Regulatory Act of 1975, as amended, in order
to inquire into HL&P's existing rates. Efforts by HL&P to secure
reversal or reconsideration of that decision, which the ALJ
acknowledged to be a close one, were unsuccessful, and HL&P is
scheduled to file material in support of its existing rates on July
13, 1994. A final decision by the Utility Commission is not expected
before the summer of 1995. In ordering that a proceeding be held
under Section 42, the ALJ also found that there could be a link
between the outage at the South Texas Project, the NRC's actions with
respect to the South Texas Project and possible mismanagement by HL&P,
which could be taken into account in the review of HL&P's authorized rate
of return. Although HL&P and the Company believe that the Section 42 inquiry
into HL&P's rates is unwarranted and that the South Texas Project has not
been imprudently managed, there can be no assurance as to the outcome
of this proceeding, and HL&P's rates could be reduced following a
hearing. HL&P believes that any reduction in base rates as a result
of a Section 42 inquiry would take effect prospectively.
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UNITED STATES NUCLEAR REGULATORY COMMISSION (NRC) DIAGNOSTIC
EVALUATION OF THE SOUTH TEXAS PROJECT. In June 1993, the NRC
announced that the South Texas Project had been placed on its "watch
list" of plants with "weaknesses that warrant increased NRC
attention." The announcement was made following the issuance of a
report on the South Texas Project by the NRC's Diagnostic Evaluation
Team which had been sent to review the South Texas Project in the
spring of 1993. For a further discussion of the NRC diagnostic
evaluation of the South Texas Project, see Note 8(f) to the Company's
Consolidated and HL&P's Financial Statements in Item 1 of this Report
and Note 9(f) of the Notes to the Company's Consolidated and HL&P's
Financial Statements included in the 1993 Combined Form 10-K.
Cable Television Operations:
KBLCOM. KBLCOM Incorporated (KBLCOM), the Company's cable
television subsidiary, experienced a loss, before long-term financing
cost with parent, of $3.2 million in the first quarter of 1994
compared to a loss of $4.1 million for the same period in 1993.
KBLCOM's 1994 first quarter results improved from the same period
in 1993 due primarily to reduced interest expense and increased
profits from its jointly-owned cable television partnership, Paragon
Communications (Paragon).
REVENUES AND EXPENSES. First quarter revenues were unchanged
from the same period in the prior year while operating expenses
increased 6.5%. Operating margin (revenue less operating expenses
exclusive of depreciation and amortization) percentages were 35.2% and
38.9%, respectively, for the quarters ended March 31, 1994 and 1993.
Interest expense decreased $3.5 million or 22.2% due to lower interest
rates and a reduction of long-term debt levels. KBLCOM's equity
interest in the first quarter pre-tax earnings of Paragon was $7.9
million, an increase of $1.0 million or 13.8% compared to the first
quarter of 1993.
Basic service revenues for the first quarter of 1994 decreased
$1.9 million or 4.6% over the same period last year due to the
regulation of basic service rates. This was partially offset by the
addition of approximately 32,000 customers from the first quarter of
1993. At March 31, 1994 and 1993, KBLCOM operated systems serving
approximately 613,000 and 581,000 basic subscribers, respectively.
Premium service revenues increased $.4 million in the first
quarter or 3.6% compared to the same period in the prior year due
primarily to increased sales of premium products.
Ancillary revenues including advertising, pay-per-view and
installation fees increased $1.8 million or 19.8% over the same period
last year.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
(1992 CABLE ACT). In October 1992, the 1992 Cable Act became law.
The 1992 Cable Act significantly revised various provisions of the
Cable Communications Policy Act of 1984. The 1992 Cable Act provides
that the Federal Communications Commission (FCC) will set guidelines
for retail prices on basic cable service, which includes network
broadcast stations and educational, public and governmental access
channels. Local governments will regulate retail prices for basic
service based on the FCC's guidelines. The 1992 Cable Act also
requires that the FCC, upon complaint from a franchising authority or
a cable subscriber, review the
-26-
reasonableness of rates for additional tiers consisting of cable
programming services. Only rates for premium pay channels, single
event pay-per-view services and a la carte (pay-per-channel) services
are excluded entirely from rate regulation. Prior to the release of
its rate regulation rules (Rate Rule), the FCC entered an order,
effective April 5, 1993, freezing rates for all cable television
services, other than premium and pay-per-view services which was
subsequently extended by the FCC through May 15, 1994. The 1992 Cable
Act also requires cable programmers to license their services on a
fair basis to cable competitors, such as direct broadcast satellite
and wireless distribution systems. In addition, at the option of the
broadcasters, cable operators will be required to obtain the
permission of, and potentially pay a charge to, local broadcast
television affiliates to retransmit their programming to cable
customers. For a further discussion regarding the 1992 Cable Act, see
"Business-Business of KBLCOM - Regulation" in Item 1 of the 1993
Combined Form 10-K filed by the Company and HL&P.
In February 1994, the FCC announced further changes in the Rate
Rule and announced its interim cost-of-service standards. In March
1994, the FCC issued its revised benchmark rules (Rate Rule II) as
well as its interim cost-of-service rule (Interim COS Rule). Each of
these rules will become effective on May 15, 1994. Rate Rule II
revises the "benchmark formulas" established by the FCC in May 1993.
Under Rate Rule II (which will be applied prospectively), cable
operators must reduce their existing rates to the higher of (i) the
rates calculated using the revised benchmark formulas (Revised
Benchmarks) or (ii) a level 17% below such cable operators' rates as
of September 30, 1992, adjusted for inflation. The FCC believes that
the application of the Revised Benchmarks will result in a reduction
of cable system rates to approximately 17% below September 1992 rate
levels. Cable operators which cannot or do not wish to comply with
the Revised Benchmarks may choose to justify their existing rates
under the Interim COS Rule. The Interim COS Rule establishes a cost-
of-service rate system similar to that used in the telephone industry.
Rate Rule II and the Interim COS Rule are lengthy and complex.
For a more detailed description of Rate Rule II and the Interim COS
Rule, see "Other Information" in Item 5 of this Report. Although
KBLCOM expects that it will sustain higher operating costs and
increased administrative burdens under these new rules, as well as
additional reductions in KBLCOM's rates for regulated services, it is
impossible at this time to assess the detailed impact of Rate Rule II
or the Interim COS Rule on KBLCOM or Paragon. In connection with its
analysis of the new rules, KBLCOM is considering whether to use the
Interim COS Rule as an alternative procedure to the Revised Benchmarks
to justify the rates in at least some of its cable systems. Where
rates are found to exceed the permitted levels, either under the
Revised Benchmarks or the Interim COS Rule, KBLCOM may be subject to
refund obligations and other penalties. The extent of the anticipated
decline in revenues and of potential refunds and penalties cannot be
determined at this time, but will have an adverse impact on KBLCOM's
financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company:
GENERAL. The Company's cash requirements stem primarily from
operating expenses, capital expenditures, payment of common stock
dividends, payment of preferred stock dividends and interest and
principal payments on debt. Net cash provided by operating activities
totaled $15.0 million for the three months ended March 31, 1994.
-27-
Net cash used in investing activities for the three months ended
March 31, 1994, totaled $108.5 million, primarily due to electric
capital expenditures of $88.0 million and cable television additions
of $12.1 million.
Financing activities for the first three months of 1994 resulted
in a net cash inflow of $97.7 million. The Company's primary
financing activities were the increase in short-term borrowings offset
by the payment of dividends and the repayment of matured long-term
debt. For further information with respect to these matters,
reference is made to Note 5 to the Company's Consolidated and HL&P's
Financial Statements in Item 1 of this report.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY. The Company has
registered with the Securities and Exchange Commission (SEC) $250
million of debt securities which remain unissued. Proceeds from any
sales of these securities are expected to be used for general
corporate purposes including investments in and loans to subsidiaries.
The Company also has registered with the SEC five million shares
of its common stock. Proceeds from the sale of these securities will
be used for general corporate purposes, including, but not limited to,
the redemption, repayment or retirement of outstanding indebtedness of
the Company or the advance or contribution of funds to one or more of
the Company's subsidiaries to be used for their general corporate
purposes, including, without limitation, the redemption, repayment or
retirement of indebtedness or preferred stock.
The Company's outstanding commercial paper at March 31, 1994 was
approximately $477.5 million, which is supported by a $600 million
bank credit facility.
RATIOS OF EARNINGS TO FIXED CHARGES. The Company's ratios of
earnings to fixed charges for the three and twelve months ended March
31, 1994 were 1.57 and 2.52, respectively. The Company believes that
the ratio for the three-month period is not necessarily indicative of
the ratio for a twelve-month period due to the seasonal nature of
HL&P's business.
Electric Utility:
HL&P. GENERAL. HL&P's cash requirements stem primarily from
operating expenses, capital expenditures, payment of dividends and
interest and principal payments on debt. HL&P's net cash provided by
operating activities for the first three months of 1994 totaled $29.7
million.
Net cash used in HL&P's investing activities for the first three
months of 1994 totaled $90.6 million. HL&P's construction and nuclear
fuel expenditures (excluding Allowance for Funds Used During
Construction) for the first three months of 1994 totaled $88.0 million
out of the $478 million annual budget. HL&P expects to finance
substantially all of its 1994 capital expenditures through funds
generated internally from operations.
HL&P's financing activities for the first three months of 1994
resulted in a net cash inflow of approximately $57.0 million.
Included in these activities were the increase in short-term
borrowings offset by the payment of dividends and the repayment of
matured long-term debt. For further information with respect to these
matters, reference is made to Note 5 to the Company's Consolidated and
HL&P's Financial Statements in Item 1 of this Report.
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SOURCES OF CAPITAL RESOURCES AND LIQUIDITY. In January 1994,
HL&P repaid at maturity $19.5 million principal amount of Series A
collateralized medium-term notes.
HL&P has registered with the SEC $230 million aggregate
liquidation value of preferred stock and $580 million aggregate
principal amount of debt securities that may be issued as first
mortgage bonds and/or as debt securities collateralized by first
mortgage bonds. Proceeds from the sales of these securities are
expected to be used for general corporate purposes including the
purchase, redemption (to the extent permitted by the terms of the
outstanding securities), repayment or retirement of outstanding
indebtedness or preferred stock of HL&P.
HL&P's outstanding commercial paper at March 31, 1994 was
approximately $335.8 million, which is supported by a $400 million
bank credit facility.
RATIOS OF EARNINGS TO FIXED CHARGES. HL&P's ratios of earnings
to fixed charges for the three and twelve months ended March 31, 1994,
were 2.25 and 3.59, respectively. HL&P's ratios of earnings to fixed
charges and preferred dividends for the three and twelve months ended
March 31, 1994, were 1.91 and 3.06, respectively. HL&P believes that
the ratios for the three-month period are not necessarily indicative
of the ratios for a twelve-month period due to the seasonal nature of
HL&P's business.
Cable Television:
KBLCOM. GENERAL. KBLCOM's cash requirements stem primarily from
operating expenses, capital expenditures, and interest and principal
payments on debt. KBLCOM's net cash provided by operating activities
was $3.5 million for the three months ended March 31, 1994.
Net cash used in KBLCOM's investing activities for the three
months ended March 31, 1994 totaled $15.6 million, primarily due to
cable television additions of $12.1 million. These amounts were
financed principally through internally generated funds and
intercompany borrowings.
KBLCOM's financing activities for the three months ended March
31,1994 resulted in a net cash inflow of $12.1 million. Included in
these activities were the reduction of third party debt, proceeds from
additional paid-in capital and an increase in borrowings from the
Company.
The Company has engaged an investment banking firm to assist in
finding a strategic partner or investor for KBLCOM in the
telecommunications industry.
On February 17, 1994, KBLCOM entered into an agreement to acquire
three cable companies serving approximately 47,000 customers in the
Minneapolis area. KBLCOM will acquire the stock of the companies in
exchange for the issuance of common stock of the Company. The amount
of common stock of the Company to be issued, currently estimated to be
approximately $24 million, is dependent on the amount of liabilities
assumed, currently estimated to be approximately $63 million.
Approximately 40,000 of the cable customers served by the
properties to be acquired are in the Minneapolis metropolitan area.
The remaining 7,000 customers are located in small communities south
and west of the metropolitan area. Closing of the transaction, which
is anticipated to occur in the summer of 1994, is subject to the
satisfaction of certain conditions.
-29-
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY. In March 1994, KBL
Cable, Inc. (KBL Cable) reduced its outstanding indebtedness by $10.4
million through scheduled principal payments. Additional borrowings
under KBL Cable's bank facilities are subject to certain covenants
which relate primarily to the maintenance of certain financial ratios,
principally debt to cash flow and interest coverages. KBL Cable
presently is in compliance with such covenants. KBLCOM's cash
requirements for the remainder of 1994 are expected to be met
primarily through intercompany borrowings.
-30-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the
Company and its subsidiaries, including HL&P, reference is
made to the information set forth in Item 3 of the 1993
Combined Form 10-K and Notes 9, 10 and 11 to the Company's
Consolidated and HL&P's Financial Statements in Item 8 of
the 1993 Combined Form 10-K, which information, as qualified
and updated by the description of developments in regulatory
and litigation matters contained in Notes 10, 11 and 12 of
the Notes to the Company's Consolidated and HL&P's Financial
Statements included in Part I of this Form 10-Q, is
incorporated herein by reference.
In April 1994, two former employees of HL&P filed a
lawsuit against the Company, HL&P and certain executive
officers and directors of the Company and HL&P. In this
lawsuit (PACE AND FUENTEZ V. THE COMPANY, HL&P, ET AL.), the
former employees alleged that certain officers and directors
of the Company and HL&P had engaged in various acts of
mismanagement. The lawsuit, which purports to have been
filed as a class action and shareholder derivative suit on
behalf of all shareholders of the Company, is pending in the
212th Judicial District Court of Galveston County, Texas.
Management believes that the suit is without merit.
In April 1994, the state district judge of the 268th
Judicial District Court, Fort Bend County, Texas, dismissed
for lack of subject matter jurisdiction a suit (PACE AND
SCOTT V. HL&P) filed by two former employees of HL&P, who
alleged that HL&P was charging illegal rates. The claim was
based on the argument that the Utility Commission had failed
to allocate to ratepayers the alleged tax benefits accruing
to the Company and HL&P by virtue of the fact that HL&P's
federal income taxes are paid as part of a consolidated
group.
In March 1994, the United States District Court for the
Southern District of Texas granted summary judgment in favor
of the Company and HL&P and dismissed a lawsuit filed by
former HL&P employees who claimed that their employment had
been terminated in violation of the WORKER ADJUSTMENT AND
RETRAINING NOTIFICATION ACT (WARN). In a separate order,
another judge of the United States District Court for the
Southern District of Texas granted summary judgment in favor
of the Company and HL&P on the validity of releases executed
by most of the employees who had been terminated in the 1992
reduction which gave rise to the claims under the WARN Act. The
question of the validity of those releases in the WARN Act case
and in other pending cases involving that staff reduction was
consolidated for decision. Notices of appeal to the United States
Court of Appeals for the Fifth Circuit have been filed from both
decisions. Other legal proceedings, which the Company and HL&P
believe to be immaterial and without merit, have been filed by
former employees of HL&P seeking damages alleged to have been
caused by that staff reduction. Although there can be no assurance
that additional proceedings asserting labor related claims will not
-31-
be filed, the Company and HL&P believe that the resolution
of these claims will not have a material adverse effect on
the Company's or HL&P's results of operations.
ITEM 5. OTHER INFORMATION.
RECENT DEVELOPMENTS IN RATE REGULATION. On March 30, 1994,
the Federal Communications Commission (FCC) issued its
lengthy new benchmark rate rules (Rate Rule II), as well as
its interim cost-of service rule (Interim COS Rule) which it
had previously announced in February 1994 in several
Executive Summaries. Both Rate Rule II and the Interim COS
Rule become effective on May 15, 1994.
REVISED BENCHMARKS. Rate Rule II contains revised
benchmark formulas (Revised Benchmarks) which are based upon
(1) the number of subscribers a particular system has; (2)
the average total number of channels the system carries; (3)
the number of non-broadcast channels the system carries; (4)
the average subscriber revenue of the system; (5) the
penetration of discretionary services, such as additional
outlets, remote control devices and satellite tiers; (6) the
size of the multiple system operator with which the system
is affiliated, if any; and (7) the median household income
of the community the system serves. Under Rate Rule II,
cable operators must reduce their existing rates to the
higher of the recalculated benchmark (Revised Benchmark
Rate), or to a level 17% below their September 30, 1992
rate, adjusted for inflation (Full Reduction Rate). Using
these complex new formulas, the cable operator must complete
and submit newly issued forms to each franchising authority
which has been certified to regulate basic rates of the
applicable cable systems, and to the FCC upon the filing of
a complaint by a franchising authority or a subscriber
regarding the operator's cable programming services tier
rates. The FCC believes that most cable operators which
apply the Revised Benchmarks will have to reduce a system's
rates to approximately 17% below the level of those rates as
of September 1992. As with the original rate rule, under
Rate Rule II, equipment must be priced at cost and unbundled
from the rate for regulated services permitted under the
Revised Benchmarks.
The FCC has made Rate Rule II prospective only. Hence,
existing disputes with franchising authorities about basic
rates, and disputes before the FCC regarding cable
programming service rates, must be resolved using the Rate
Rule and the already filed Form 393. To the extent that any
refunds may be due, refunds under rates applicable from
September 1, 1993 to May 15, 1994, shall be calculated under
the Rate Rule; refunds under rates effective from May 15,
1994 shall be calculated under the Revised Benchmarks.
Because Rate Rule II takes effect on May 15, 1994,
cable operators who wish to restructure their services and
rates to meet the Revised Benchmarks by that date must
provide notice of such changes to franchising authorities
and subscribers by April 15, 1994. In the alternative, Rate
Rule II provides that cable operators which make no changes
in their regulated services or rates may provide notice to
their franchising authorities and subscribers by June 14,
1994 of the changes
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they plan to make to comply with the Revised Benchmarks and
implement such changes by July 14, 1994, without incurring
additional refund liability for the May 15 to July 14
period.
INTERIM COS RULE. Cable operators which cannot or do
not wish to comply with the Revised Benchmarks may choose to
justify their existing rates under the Interim COS Rule,
issued at the same time as the Revised Benchmarks. As
indicated in its Executive Summary issued in February 1994,
the Interim COS Rule establishes a cost-of-service rate
system very similar to that applied by the FCC to the
telephone industry. Cable operators choosing the cost-of-
service approach must base their showings on the applicable
cable system's most recent fiscal year (Test Year). The
rate base is the original book cost of plant. Expenses
which can be included are ongoing operating expenses,
depreciation, amortization, and an allowance for taxes.
Plant which is not in service during the Test Year, but
which will be in service by the end of the year following
the Test Year, may be included in the rate base, thereby
allowing inclusion of certain rebuild costs.
The Interim COS Rule presumptively disallows including
intangibles in the rate base, other than the value of
customer lists, the costs of establishing the legal entity
that obtained the franchise and the costs of obtaining the
franchise itself. In particular, as it had indicated
previously in the Executive Summary issued in February 1994,
the FCC excluded acquisition costs above book value from the
rate base because it concluded that such "excess acquisition
costs" represent the value of the monopoly rents the
acquirer expected to earn during the period when an acquired
cable system was effectively an unregulated monopoly. A
cable operator may make a showing that certain presumptively
excluded intangibles should be included because they result
in significant benefits to cable subscribers. Finally, the
FCC adopted an after-tax return of 11.25% on overall
capital.
Under the Interim COS Rule, cable operators which opt
for the cost-of-service approach may make such filings only
once every two years. Quarterly inflation adjustments and
external cost pass-throughs allowed under the Revised
Benchmarks may also be permitted under the Interim COS Rule.
A LA CARTE CARRIAGE. Under the Rate Rule, the FCC
appeared to allow cable operators to create per channel
offerings (A La Carte Channels). In Rate Rule II, the FCC
addressed the creation of A La Carte Channels by enumerating
both favorable and unfavorable criteria to which the FCC and
franchising authorities would look in determining whether an
A La Carte Channel evades the regulatory purposes of the
Cable Television Consumer Protection and Competition Act of
1992. Unfavorable factors identified by the FCC as
indicating that an A La Carte Channel is illegal are: (1)
whether a package of A La Carte Channels "avoids" rate
regulation; (2) whether an entire regulated tier of channels
was converted into a package of A La Carte Channels; (3) how
deep a price discount is offered with a package of A La
Carte Channels in comparison to single offerings of such
channels; (4) whether the operator imposes a significant
equipment charge in order to take a
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single A La Carte Channel; (5) whether the A La Carte
Channels were removed from a regulated tier of service; (6)
whether the A La Carte Channel has been traditionally
offered on an a la carte basis; (7) whether customers were
automatically enrolled in A La Carte Channel packages; and
(8) whether the programmers object to a la carte
distribution of the A La Carte Channel. Among the favorable
factors identified by the FCC as indicating that an A La
Carte Channel is legal are: (1) whether the subscriber can
choose which channels make up a package of A La Carte
Channels and (2) whether the cable operator considered or
implemented A La Carte Channels prior to rate regulation.
The FCC will decide challenges to A La Carte Channel
carriage on a case-by-case basis and has delegated
enforcement of these new criteria to the franchising
authorities in the first instance. A La Carte Channels
which are found to evade rate regulation rather than enhance
subscriber choice will be treated as regulated tiers, and
operators found to have engaged in such evasions may be
subject to refunds and other sanctions.
CHANNEL ADDITION AND DELETION. Under Rate Rule II, a
cable operator which adds channels to regulated service
levels must recalculate its per channel regulated rate
multiplied by the new number of channels to reflect an
increase in the rate for that level of service, and then add
new programming costs as an "external" cost pass-through.
The FCC indicates that the operator may also add a 7.5%
mark-up to the cost for the new programming added via the
newly added channels. Conversely, if an operator removes
channels from a regulated service level, it must reduce its
regulated rate to reflect reduced programming costs, plus a
7.5% mark-down, and recalculate its regulated rate to
reflect the decrease in the number of channels.
INFLATION RATE ADJUSTMENTS. While the FCC affirmed its
ruling in the Rate Rule that cable operators may seek rate
increases based upon the increase in inflation as measured
by the GNP-PI index on a quarterly basis, the FCC proposed
in Rate Rule II that such adjustments be reduced by a 2%
annual productivity offset. The FCC also ruled in Rate Rule
II that inflation-based rate increases in the basic level of
service can be taken by the cable operator only after
application to and approval by the regulating franchise
authority. Cable operators whose Revised Benchmark Rate is
above the Full Reduction Rate cannot take inflation
adjustments until the Full Reduction Rate equals the Revised
Benchmark Rate.
EXTERNAL COST PASS-THROUGHS. Under Rate Rule II,
certain external costs which are beyond the cable operator's
control may be passed-through to the subscriber in addition
to the regulated rate. The external costs include: (1) all
changes in franchise fees; (2) all changes in the costs of
satisfying franchise mandated requirements, such as public,
educational and governmental access channels; (3) all
changes in cable-specific taxes; (4) all changes in
programming costs and copyright fees, plus a "margin" of
7.5%; and (5) all changes in retransmission consent fees
beyond the initial amounts paid by the cable operator from
October 5, 1993 through October 5, 1994. Regarding the
pass-through of programming cost changes, all increases and
decreases for
-34-
programming in a particular regulated level of service must
ultimately be aggregated, and all payments, such as
marketing support payments, received by the cable operator
from the programmer must be netted out against such
increases on a channel-by-channel basis before any amount
can be passed-through. Pass-throughs may be implemented
generally beginning on February 28, 1994.
FINANCIAL IMPACT ON KBLCOM. In view of the continuing
changes, as well as the length and complexity of the
recently published Rate Rule II and Interim COS Rule, KBLCOM
cannot currently assess the full impact upon its future
financial results. KBLCOM expects that it will sustain
higher operating costs and increased administrative burdens
under these new rules, and that the Revised Benchmarks will
impose some additional reductions in KBLCOM's rates for
regulated services. KBLCOM is considering whether to use
the Interim COS Rule as an alternative procedure to Rate
Rule II to justify the rates in at least some of its cable
systems. Where rates are found to exceed the permitted
levels, either under Rate Rule II or the Interim COS Rule,
KBLCOM may be subject to refund obligations and other
penalties. The extent of the anticipated decline in
revenues and of potential refunds and penalties cannot be
determined at this time, but will have an adverse impact on
KBLCOM's financial position and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
HOUSTON INDUSTRIES INCORPORATED:
Exhibit 10 - The Company's Master Savings Trust, as
Amended and Restated Effective as of January
1, 1994, between the Company and Texas
Commerce Bank National Association.
Exhibit 11 - Computation of Earnings per Common Share and
Common Equivalent Share.
Exhibit 12 - Computation of Ratios of Earnings to Fixed
Charges.
Exhibit 99(a) - Notes 8(a), 9, 10, 11 and 12 of the Notes to the
Consolidated Financial Statements included on
pages 83 through 97 of the Company's Annual
Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-7629).
Exhibit 99(b) - Part I, Item 1 - Business of HL&P - Fuel -
Recovery of Fuel Costs included on pages 13
and 14 of the Company's Annual Report on Form
10-K for the year ended December 31, 1993
(File No. 1-7629).
Exhibit 99(c) - Part I, Item 3 - Legal Proceedings included
on pages 37 and 38 of the Company's Annual
Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-7629).
-35-
Exhibit 99(d) - First Amendment to Houston Industries
Incorporated Savings Plan, as Amended and
Restated Effective January 1, 1994 effective
as of April 6, 1994.
HOUSTON LIGHTING & POWER COMPANY:
Exhibit 10 - The Company's Master Savings Trust, as
Amended and Restated Effective as of January
1, 1994, between the Company and Texas
Commerce Bank National Association
(incorporated by reference to Exhibit 10 to
the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 31, 1994,
File No. 1-7629).
Exhibit 12 - Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Fixed
Charges and Preferred Dividends.
Exhibit 99(a) - Notes 8(a), 9, 10, 11 and 12 of the Notes to the
Financial Statements included on page 104 of
HL&P's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-3187)
(incorporated by reference to Exhibit 99(a) to
the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 31, 1994,
File No. 1-7629).
Exhibit 99(b) - Part I, Item 1 - Fuel - Recovery of Fuel
Costs included on pages 13 and 14 of HL&P's
Annual Report on Form 10-K for the year
ended December 31, 1993 (File No. 1-3187)
(incorporated by reference to Exhibit 99(b) to
the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 31, 1994,
File No. 1-7629).
Exhibit 99(c) - Part I, Item 3 - Legal Proceedings included
on pages 37 and 38 of HL&P's Annual Report
on Form 10-K for the year ended December 31,
1993 (File No. 1-3187) (incorporated by
reference to Exhibit 99(c) to the Quarterly
Report on Form 10-Q of the Company for the
quarter ended March 31, 1994, File No. 1-7629).
(b) Reports on Form 8-K.
HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER
COMPANY:
Current Report on Form 8-K dated February 22, 1994 (Item 5. Other
Events).
HOUSTON LIGHTING & POWER COMPANY:
Current Report on Form 8-K dated January 3, 1994 (Item 5. Other
Events, Item 7. Financial Statements and Exhibits).
-36-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HOUSTON INDUSTRIES INCORPORATED
(Registrant)
/S/ MARY P. RICCIARDELLO
Mary P. Ricciardello
Comptroller and
Principal Accounting Officer
Date: May 13, 1994
-37-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HOUSTON LIGHTING & POWER COMPANY
(Registrant)
/S/ KEN W. NABORS
Ken W. Nabors
Vice President and Comptroller
and Principal Accounting Officer
Date: May 13, 1994
-38-
EXHIBIT 10
HOUSTON INDUSTRIES INCORPORATED
MASTER SAVINGS TRUST
(As Amended and Restated Effective January 1, 1994)
<PAGE>
HOUSTON INDUSTRIES INCORPORATED
MASTER SAVINGS TRUST
(As Amended and Restated Effective January 1, 1994)
I N D E X
PAGE
ARTICLE I DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . 3
Section:
1.1 Definitions . . . . . . . . . . . . . . . . . . . . 3
Affiliated Corporation . . . . . . . . . . . . . . 3
Code . . . . . . . . . . . . . . . . . . . . . . . 3
Committee . . . . . . . . . . . . . . . . . . . . . 3
Company . . . . . . . . . . . . . . . . . . . . . . 3
Company Stock . . . . . . . . . . . . . . . . . . . 3
ERISA . . . . . . . . . . . . . . . . . . . . . . . 3
ESOP Trust . . . . . . . . . . . . . . . . . . . . 3
ESOP Trust Agreement . . . . . . . . . . . . . . . 3
Exchange Act . . . . . . . . . . . . . . . . . . . 3
Group Trust(s) . . . . . . . . . . . . . . . . . . 3
Insurance Contracts . . . . . . . . . . . . . . . . 4
Investment Fund or Fund . . . . . . . . . . . . . . 4
Investment Manager . . . . . . . . . . . . . . . . 4
KBLCOM Plan . . . . . . . . . . . . . . . . . . . . 4
Master Trust . . . . . . . . . . . . . . . . . . . 4
Master Trust Fund . . . . . . . . . . . . . . . . . 4
Participant . . . . . . . . . . . . . . . . . . . . 4
Participating Plan . . . . . . . . . . . . . . . . 4
Plan . . . . . . . . . . . . . . . . . . . . . . . 4
Plan Administrator . . . . . . . . . . . . . . . . 4
Prior Plan . . . . . . . . . . . . . . . . . . . . 4
Prior Trust Agreement . . . . . . . . . . . . . . . 5
Trustee . . . . . . . . . . . . . . . . . . . . . . 5
Valuation Date . . . . . . . . . . . . . . . . . . 5
1.2 Construction . . . . . . . . . . . . . . . . . . . 5
ARTICLE II MASTER TRUST; PARTICIPATING PLANS . . . . . . . . . 6
Section:
2.1 Continuation of Master Trust . . . . . . . . . . . 6
2.2 Participating Plans . . . . . . . . . . . . . . . . 6
(i)
ARTICLE III GENERAL DUTIES OF THE PARTIES . . . . . . . . . . . 8
Section:
3.1 General Duties of the Company . . . . . . . . . . . 8
3.2 Investment Guidelines; Contributions; Employee Records
3.3 General Duties of Trustee . . . . . . . . . . . . . 9
ARTICLE IV ACCOUNTS OF PARTICIPATING PLANS;
AUTHORITY OF COMPANY AND COMMITTEE . . . . . . . . 10
Section:
4.1 Accounts of Participating Plans; Valuation . . . . 10
4.2 Exclusive Benefit of Employees Under Participating Plans
4.3 Authority of Company and Committee . . . . . . . . 11
ARTICLE V INVESTMENT, ADMINISTRATION AND
DISBURSEMENT OF MASTER TRUST FUND . . . . . . . . . 12
Section:
5.1 Division of the Master Trust Fund . . . . . . . . . 12
5.2 Investment of the Master Trust Fund . . . . . . . . 12
5.3 Direction of Investment . . . . . . . . . . . . . . 16
5.4 Insurance or Annuity Contracts . . . . . . . . . . 18
5.5 Voting of Securities Other than Company Stock . . . 20
5.6 Voting and Tendering of Company Stock . . . . . . . 21
5.7 Powers of Trustee . . . . . . . . . . . . . . . . . 22
5.8 Payments and Distributions from Master Trust Fund . 25
5.9 Trustee's Dealings with Third Parties . . . . . . . 26
5.10 Ancillary Trustee . . . . . . . . . . . . . . . . . 26
ARTICLE VI FOR THE PROTECTION OF THE TRUSTEE . . . . . . . . . 27
Section:
6.1 Composition of Committee and Plan Administrators . 27
6.2 Evidence of Action by Company or Committee . . . . 27
6.3 Communications . . . . . . . . . . . . . . . . . . 28
6.4 Advice of Counsel or Plan Administrator . . . . . . 28
6.5 Miscellaneous . . . . . . . . . . . . . . . . . . . 28
6.6 Fiduciary Responsibilities . . . . . . . . . . . . 29
ARTICLE VII TAXES, EXPENSES AND COMPENSATION OF TRUSTEE . . . . 31
Section:
7.1 Taxes and Expenses . . . . . . . . . . . . . . . . 31
7.2 Compensation of the Trustee . . . . . . . . . . . . 31
(ii)
ARTICLE VIII SETTLEMENT OF ACCOUNTS;
DETERMINATION OF INTERESTS UNDER MASTER TRUST . . . 32
Section:
8.1 Settlement of Accounts of Trustee . . . . . . . . . 32
8.2 Determination of Rights and Benefits of Persons
Claiming an Interest in the Master Trust Fund;
Enforcement of Master Trust Fund . . . . . . . . . . . . . . . . 33
ARTICLE IX RESIGNATION, REMOVAL AND SUBSTITUTION OF THE
TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section:
9.1 Resignation of Trustee . . . . . . . . . . . . . . 34
9.2 Removal of Trustee . . . . . . . . . . . . . . . . 34
9.3 Appointment of Successor Trustee . . . . . . . . . 34
9.4 Transfer of Master Trust Fund to Successor . . . . 34
ARTICLE X DURATION AND TERMINATION OF MASTER TRUST;
AMENDMENT . . . . . . . . . . . . . . . . . . . . . 35
Section:
10.1 Duration and Termination . . . . . . . . . . . . . 35
10.2 Distribution Upon Termination . . . . . . . . . . . 35
10.3 Loss of Qualification of a Participating Plan; Certain
Withdrawals . . . . . . . . . . . . . . . . . . . . 35
10.4 Amendment . . . . . . . . . . . . . . . . . . . . . 36
10.5 Acceptance or Rejection of Amendment by Affiliated
Corporations . . . . . . . . . . . . . . . . . . . 36
ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . 37
Section:
11.1 Governing Law; No Bond Required of Trustee . . . . 37
11.2 Interest in Master Trust Fund; Assignment . . . . . 37
11.3 Invalid Provisions . . . . . . . . . . . . . . . . 37
11.4 Prohibition of Diversion . . . . . . . . . . . . . 37
11.5 Headings for Convenience Only . . . . . . . . . . . 37
11.6 Successors and Assigns . . . . . . . . . . . . . . 37
(iii)
<PAGE>
HOUSTON INDUSTRIES INCORPORATED
MASTER SAVINGS TRUST
(As Amended and Restated Effective January 1, 1994)
THIS TRUST AGREEMENT made and entered into as of the 1st
day of January, 1994, by and between HOUSTON INDUSTRIES INCORPORATED,
a Texas corporation, and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a
national banking association having its principal place of business in
Houston, Harris County, Texas, as trustee;
W I T N E S S E T H:
WHEREAS, by Agreement (the "Prior Trust Agreement")
dated June 21, 1989 but effective as of July 1, 1989, between the
Company and Trustee, the Company amended, restated and continued a
trust established in connection with the Savings Plan of Houston
Industries Incorporated, as amended and restated effective January 1,
1976, and as thereafter amended (said Plan as it existed in the form
of the Savings Plan of Houston Industries Incorporated, as amended and
restated effective October 5, 1990, and thereafter amended prior to
January 1, 1994, being hereinafter referred to as the "Prior Plan");
and
WHEREAS, the Prior Trust Agreement was adopted effective
as of July 1, 1989, as the funding medium for the KBLCOM Incorporated
Savings Plan, as established effective July 1, 1989 (said Plan, as it
existed immediately prior to January 1, 1994 being hereinafter
referred to as the "KBLCOM Plan"); and
WHEREAS, the Company has authorized the amendment,
restatement and continuation of the KBLCOM Plan in the form of and by
the adoption of and merger into and with the Savings Plan of Houston
Industries Incorporated, as amended and restated effective January 1,
1994 (said Plan as is presently exists being incorporated herein by
reference as fully as if set out in full herein, and together with any
amendments thereto hereafter made being hereinafter referred to as
the "Plan"); and
WHEREAS, the Company has reserved the right at any time
to amend the Prior Trust Agreement and the Trust Fund created thereby
to any extent that it may deem advisable provided that no amendment
shall increase the duties or responsibilities of the Trustee without
the consent of the Trustee thereto in writing; and
WHEREAS, the Company deems it advisable at this time to
amend, restate and continue the Prior Trust Agreement and the Trust
Fund created thereby in the form of this Master Trust to the extent
hereinafter set forth to accommodate the merger of the KBLCOM Plan
into the Plan and to make certain other changes therein;
-1-
NOW, THEREFORE, the Company and the Trustee hereby agree
that the Prior Trust Agreement shall be amended and restated in its
entirety, to read and continue in full force and effect as follows:
-2-
<PAGE>
ARTICLE I
DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS: As used in this Master Trust, the following
words and phrases shall have the following meanings unless the context
clearly requires a different meaning:
AFFILIATED CORPORATION: Houston Industries
Incorporated, a Texas corporation, and any corporation in
which the shares owned or controlled directly or
indirectly by Houston Industries Incorporated shall
represent 50% or more of the voting power of the issued
and outstanding capital stock of such corporation.
CODE: The Internal Revenue Code of 1986, as from
time to time amended.
COMMITTEE: The Compensation and Benefits Committee
appointed by the Board of Directors of the Company, which
shall serve as a "named fiduciary" hereunder and assist
in the administration of the Master Trust Fund and whose
duties also include the administration of the Plan.
COMPANY: Houston Industries Incorporated, a Texas
corporation, and its successor or successors.
COMPANY STOCK: The common stock of the Company.
ERISA: Public Law No. 93-406, the Employee
Retirement Income Security Act of 1974, as from time to
time amended.
ESOP TRUST: The assets attributable to the employee
stock ownership plan component of the Plan which are held
in trust pursuant to the ESOP Trust Agreement.
ESOP TRUST AGREEMENT: The Savings Plan of Houston
Industries Incorporated ESOP Trust Agreement, established
effective October 5, 1990, between the Company and State
Street Bank and Trust Company or any successor trustee
thereto.
EXCHANGE ACT: The Securities and Exchange Act of
1934, as amended.
GROUP TRUST(S): The Dietche & Field Investment
Trust A, the Sarofim Trust Co. Employee Benefit
Investment Trust, the Oechsle International Group Trust
Fund for Employee Benefit Trusts, The Beutel Trust and
The Accel Fund, or any other common, collective, group or
commingled trust selected by the Committee which is
qualified under Code Section 401(a) and exempt from tax
under Code Section 501(a).
-3-
INSURANCE CONTRACTS: The insurance and annuity
contracts as provided in Section 5.4 hereof.
INVESTMENT FUND OR FUND: Any of the investment funds
comprising the Master Trust Fund, as described in
Article V.
INVESTMENT MANAGER: The fiduciary or fiduciaries, if
any, appointed hereunder by the Committee and meeting the
definition set forth in Section 3(38) of ERISA.
KBLCOM PLAN: The KBLCOM Incorporated Savings Plan,
as established effective July 1, 1989, as thereafter
amended and in effect on December 31, 1993.
MASTER TRUST: The Houston Industries Incorporated
Master Savings Trust, as amended and restated effective
January 1, 1994, and as the same may hereafter be amended
from time to time.
MASTER TRUST FUND: The fund or funds to be
established under the Master Trust and from which
benefits under the Participating Plans are to be paid.
Such fund shall consist of all assets, money and
property, all investments made therewith and proceeds
thereof and all earnings and profits thereon, less the
payments or other distributions which, at the time of
reference, shall have been made by the Trustee, as
authorized herein.
PARTICIPANT: Each employee, former employee, spouse
or beneficiary of an employee who is or was participating
in a Participating Plan in accordance with the terms
thereof.
PARTICIPATING PLAN: An employee benefit plan which
is maintained by the Company or an Affiliated Corporation
and which participates hereunder pursuant to Section 2.2
and as listed in Exhibit A attached hereto.
PLAN: The Houston Industries Incorporated Savings
Plan, as amended and restated effective January 1, 1994,
and as the same may hereafter be amended from time to
time.
PLAN ADMINISTRATOR: The person or persons, or
committee whose duties include service as a "named
fiduciary" hereunder and the authority to control and
manage the operation and administration of each
applicable Participating Plan.
PRIOR PLAN: The Savings Plan of Houston Industries
Incorporated, as amended and restated effective
October 5, 1990, as thereafter amended, and as in effect
on December 31, 1993.
-4-
PRIOR TRUST AGREEMENT: The trust agreement dated
June 21, 1989 but effective as of July 1, 1989, as
amended, between the Company and Trustee.
TRUSTEE: Texas Commerce Bank National Association, a
national banking association having its principal place
of business in Houston, Harris County, Texas, its
successor or successors.
VALUATION DATE: The close of business on the last
business day of each calendar month and any such other
date or dates as the Committee may deem appropriate;
provided, however, that any such interim valuation shall
be exercised on a uniform and non-discriminatory basis.
1.2 CONSTRUCTION: The masculine gender, where appearing in the
Master Trust, shall be deemed to include the feminine gender, and the
singular may include the plural, unless the context clearly indicates
to the contrary. The words "hereof," "herein," "hereunder" and other
similar compounds of the words "here" shall mean and refer to the
entire Master Trust, not to any particular provision or section.
Article and Section headings are included for convenience of reference
and are not intended to add to or subtract from the terms of the
Master Trust.
-5-
<PAGE>
ARTICLE II
MASTER TRUST; PARTICIPATING PLANS
2.1 CONTINUATION OF MASTER TRUST: The Company hereby continues
with the Trustee a Master Trust for the exclusive purposes of
providing benefits to employees of the Company and the Affiliated
Corporations, and to the beneficiaries of such employees, under each
Participating Plan and defraying reasonable expenses of administering
such Participating Plans. Each such Participating Plan, and each such
Affiliated Corporation, as of the date hereof, is listed in Exhibit A
attached hereto. The Master Trust shall consist of (a) such cash and
other property held in trust by the Trustee under the Prior Trust
Agreement at the close of business on December 31, 1993, (b) such
assets as may hereafter be transferred to the Trustee from any
separate trust or other funding medium established under any
Participating Plan and (c) such sums of money and such property
acceptable to the Trustee as shall from time to time be paid or
delivered to the Trustee as a contribution in respect of any
Participating Plan, together with the income and gains therefrom. The
Master Trust shall be maintained at all times as a domestic trust in
the United States.
2.2 PARTICIPATING PLANS: An employee benefit plan which is not
already a Participating Plan hereunder (as listed in Exhibit A
attached hereto) may become a Participating Plan hereunder only if all
of the following requirements are met:
(a) The Company, any Affiliated Corporation or any
combination thereof, has established the plan;
(b) The plan is a "defined contribution plan" as
defined in Section 3(34) of ERISA;
(c) The plan (and any other trust all or a part of
whose assets are to be transferred to the Master Trust)
is qualified under Code Section 401(a);
(d) The Master Trust is exempt from taxation under
Code Section 501(a);
(e) The Master Trust has been adopted as a trust
under the plan and as part of the plan by due corporate
action of the Company or an Affiliated Corporation which
maintains the plan, and the Committee has consented
thereto and an instrument in the form attached hereto as
Exhibit B has been executed by the Company or such
Affiliated Corporation and the Committee and delivered to
the Trustee; and
(f) The Committee has notified the Trustee in
writing of the adoption of the Master Trust as a trust
under such plan and the Trustee has consented thereto by
execution of such instrument.
With respect to the Plan, certain assets attributable to the employee
stock ownership plan component of the Plan shall be held in the ESOP
Trust pursuant to the ESOP Trust Agreement.
-6-
The KBLCOM Plan was a separate Participating Plan under the Prior
Trust Agreement; however, as of January 1, 1994, the KBLCOM Plan was
merged into and consolidated with the Plan.
-7-
<PAGE>
ARTICLE III
GENERAL DUTIES OF THE PARTIES
3.1 GENERAL DUTIES OF THE COMPANY:
A. The Company shall provide the Trustee with a certified copy
of each Participating Plan (including any agreement establishing any
other trust or other funding medium all or a part of whose assets are
to be transferred to the Master Trust), and with evidence acceptable
to the Trustee that such Plan (and any such other trust) has been duly
adopted by the Company or Affiliated Corporation and has been
determined to be qualified under Code Section 401(a). True and
correct copies of all amendments to any Participating Plan shall be
delivered to the Trustee by the Company promptly following their
adoption. In addition, the Company shall provide the Trustee with a
true and correct copy of the ESOP Trust Agreement and any amendments
thereto promptly following their adoption.
B. The Board of Directors of the Company shall appoint a
Compensation and Benefits Committee, consisting of at least three
individuals, which shall be authorized under each Participating Plan
to serve as a "named fiduciary" (within the meaning of
Section 402(a)(2) of ERISA) of the Participating Plans to assist in
the administration of the Master Trust as hereinafter provided. Each
member of the Committee shall serve at the pleasure of the Board of
Directors of the Company and the Company shall certify to the Trustee
the names and specimen signatures of the members of the Committee
serving from time to time hereunder. The Company shall indemnify and
hold harmless each member of the Committee from any and all claims,
losses, damages, expenses (including counsel fees approved by the
Committee), and liabilities (including any amounts paid in settlement
with the Committee's approval but excluding any excise tax assessed
against any member or members of the Committee pursuant to the
provisions of Code Section 4975) arising from any act or omission of
such member in connection with his duties and responsibilities under
this Trust Agreement, except when the same is judicially determined to
be due to the gross negligence and willful misconduct of such member.
C. The Company shall from time to time certify to the Trustee
the name(s) and specimen signature(s) of the Plan Administrator.
3.2 INVESTMENT GUIDELINES; CONTRIBUTIONS; EMPLOYEE
RECORDS: From time to time the Committee shall communicate in writing
to any Investment Manager who may be acting pursuant to Section 5.3
(and to the Trustee, if it is managing the investment of any of the
assets of the Master Trust pursuant to such Section) the investment
guidelines governing the portion of the assets of the Master Trust
managed by such Investment Manager. The Company shall make, and shall
cause the Affiliated Corporations to make, contributions to the
Participating Plans as the same may be determined in accordance with
the applicable Participating Plan and shall specify in writing to the
Trustee the amount of such contributions allocable to each
Participating Plan. The Company shall keep and shall cause the
Affiliated Corporations to keep accurate books and records with
respect to their respective employees, including, without limitation,
records as to the periods of employment, compensation and ages of such
employees.
-8-
3.3 GENERAL DUTIES OF TRUSTEE: The Trustee shall hold all
property received by it hereunder, which, together with the income and
gains therefrom and additions thereto, and less payments and other
distributions therefrom, shall constitute the Master Trust Fund.
Except as otherwise hereinafter provided, the Trustee shall manage,
invest and reinvest the Master Trust Fund, collect the income thereof,
and make payments therefrom, all in accordance with the terms of this
Agreement. The Trustee shall be responsible only for the property
actually received by it hereunder. It shall have no duty or authority
to compute any amount to be paid to it by the Company, by any
Affiliated Corporation or by any participant in any Participating
Plan, or to bring any action or proceeding to enforce the collection
from any such person of any contribution to the Master Trust in
respect of any Participating Plan. The assets of the ESOP Trust shall
not constitute a portion of the Master Trust Fund, and the Trustee, in
its capacity as trustee of the Master Trust Fund shall have no
responsibility with respect to the ESOP Trust, except as otherwise
specifically agreed by the Trustee.
-9-
<PAGE>
ARTICLE IV
ACCOUNTS OF PARTICIPATING PLANS;
AUTHORITY OF COMPANY AND COMMITTEE
4.1 ACCOUNTS OF PARTICIPATING PLANS; VALUATION: The Trustee
shall maintain separate accounts reflecting the equitable share in the
Master Trust Fund of each Participating Plan and, where appropriate,
of each corporation which has adopted a Participating Plan. The
Trustee shall determine the value of the assets of the Master Trust
Fund as of each Valuation Date. Each such valuation shall be made as
promptly as practicable after the Valuation Date as of which it is
made. Each contribution to and payment and distribution from the
Master Trust Fund shall be made as of the Valuation Date next
preceding the date on which, as applicable, the Trustee receives such
contribution or receives notice from the Company, the Committee or the
appropriate Plan Administrator that such payment or distribution is to
be made, on the basis of the valuation of the Master Trust Fund and of
the equitable share of each Participating Plan in the Master Trust
Fund as of such Valuation Date (taking into account the liabilities of
the Master Trust Fund as of such Date). The assets in the Master
Trust Fund shall be allocated on a pro rata basis among the equitable
shares in the Master Trust Fund of each Participating Plan unless the
Committee shall direct in writing that a separate account or accounts
are to be created within the Master Trust Fund to hold assets
allocable solely to a particular Participating Plan or Plans. If such
an account is created, income, distributions and gains and losses with
respect to the assets or group of assets held therein shall be
attributable solely to the equitable share of such Participating Plan
or Plans.
Assets shall be valued by the Trustee at their fair market
values at the close of business on the Valuation Date, or, in the
absence of readily ascertainable fair market values, at such fair
values as the Trustee shall in good faith determine, in accordance
with methods consistently followed and uniformly applied.
Notwithstanding any other provision of this Section, the Committee or
its agent, in determining the equitable share in the Master Trust Fund
of any Participating Plan, may rely upon the determination of the
issuer of any insurance contract held as part of the Master Trust Fund
with respect to the value of such contract and may rely upon the
determination of any Investment Manager with respect to the value of
any interest of the Master Trust in any common, collective, commingled
or group trust fund maintained by such Investment Manager in which
assets of the Master Trust are permitted to be invested by
Section 5.2(f) of this Agreement.
Any Investment Manager who may be acting pursuant to
Section 5.3 (and the Trustee, if it is managing the investment of any
assets of the Master Trust pursuant to such Section) may in its
discretion transfer or direct the transfer to a liquidating account of
any investment of the portion of the Master Trust under its management
which it determines should be liquidated for the benefit of those
Participating Plans whose assets are commingled in the Master Trust on
the date of determination and whose equitable share in the Master
Trust Fund on such date includes such investment. Any investment that
has been transferred to a liquidating account shall be segregated and
administered or realized upon solely for the benefit ratably of such
Participating Plans and shall be excluded in determining the equitable
share in the Master Trust Fund of any Participating Plan thereafter.
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The Committee or its agent shall maintain for each of the
Participants under the Participating Plans an accurate account
reflecting the interest in the Master Trust Fund and in its component
Investment Funds of each such Participant. The Committee shall
furnish to the appropriate Plan Administrator for distribution to each
individual Participant a report of his account, at such times as the
appropriate Plan Administrator shall direct; provided, however, that
such reports to Participants must be furnished at least annually.
4.2 EXCLUSIVE BENEFIT OF EMPLOYEES UNDER PARTICIPATING
PLANS: At no time prior to the satisfaction of all liabilities with
respect to employees and their beneficiaries under any Participating
Plan shall any part of the equitable share of such Participating Plan
in the Master Trust Fund be used for, or diverted to, any purposes
other than for the exclusive benefit of such employees and their
beneficiaries or the payment of Participating Plan or Master Trust
administrative expenses.
4.3 AUTHORITY OF COMPANY AND COMMITTEE: When the Master Trust
is the trust under the plan of any Affiliated Corporation, such
Affiliated Corporation shall be bound by the decisions, instructions,
actions and directions of the Company and the Committee under this
Agreement and the Trustee shall be indemnified by the Company and such
Affiliated Corporation in relying upon such decisions, instructions,
actions and directions. The Trustee shall not be required to give
notice to or obtain the consent of any such Affiliated Corporation
with respect to any action which is taken by the Trustee pursuant to
this Agreement.
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<PAGE>
ARTICLE V
INVESTMENT, ADMINISTRATION AND
DISBURSEMENT OF MASTER TRUST FUND
5.1 DIVISION OF THE MASTER TRUST FUND: Except as otherwise
provided in Sections 4.1 and 5.4 hereof, the Master Trust Fund shall
be divided into four Investment Funds to be designated as follows:
(a) Fund A
(b) Fund B
(c) Fund C
(d) Fund D
The Trustee, upon receipt of direction from the Committee, shall
transfer to Fund A, Fund B, Fund C and Fund D, respectively, all such
cash and other property as the Trustee held in the respective
Investment Funds under the Prior Trust Agreement at the close of
business on December 31, 1993. Each such Fund shall be invested in
accordance with the provisions of Section 5.2 in the kinds of property
specified for such Fund therein. Upon each contribution to the Master
Trust Fund, the Committee shall advise the Trustee in writing as to
the amount of such contribution which shall be allocated to each of
said Funds, and the Trustee shall hold the amount so specified as a
part of the Investment Fund to which it shall have been allocated.
5.2 INVESTMENT OF THE MASTER TRUST FUND: The cash and other
properties held by the Trustee under the Prior Trust Agreement at the
close of business on December 31, 1993 which have been allocated to
each of the Investment Funds named in Section 5.1 as of January 1,
1994, and the contributions hereafter allocated to each of said Funds,
and all proceeds, interest, income or other payments in respect of
each such Fund shall be invested and reinvested in the manner
described below:
(a) FUND A: Except as hereinafter provided, all
amounts allocated to Fund A shall be invested and
reinvested in the shares of Company Stock (which the
Trustee shall purchase as soon as practicable when and as
it holds funds available for that purpose, either (i) in
the open market, (ii) from the ESOP Trust for adequate
consideration and in the sole discretion of the Trustee
and State Street Bank and Trust Company as ESOP Trustee
(or any successor trustee thereto), or (iii) privately
from the Company at a price per share equal to the
closing price of said share on the New York Stock
Exchange on the day of the purchase, it being understood
that shares purchased from the Company may either be
treasury shares or authorized but unissued shares, if the
Company shall make such shares available for the purpose,
and that the Trustee in its discretion may refrain from
making purchases of shares of Company Stock whenever it
deems such refraining to be in the best interest of the
participants in the Participating Plans). At any
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time that the Trustee makes open market purchases of Company
Stock, the Trustee will either (i) be an "agent independent of
the issuer" as that term is defined in Rule 10(b)(18)
promulgated pursuant to Exchange Act or (ii) make such open
market purchases in accordance with the provisions, and subject
to the restrictions, of Rule 10(b)(18) of the Exchange Act.
Except in the case of fractional shares received in any stock
dividend, stock split or other recapitalization, or as
necessary to make any distribution or payment from the Trust
Fund, the Trustee shall have no power or duty to sell or
otherwise dispose of any stock acquired for Fund A.
(b) FUND B: Except as hereinafter provided, all
amounts allocated to Fund B shall be invested and
reinvested (in the discretion of the person who is
directing the investment of a portion or all of Fund B
under the provisions of Section 5.3) in, directly or
indirectly through collective investment media including
but not limited to mutual funds and any common,
collective, group or commingled trust fund that invests
primarily in (i) common stock and preferred stock issued
by corporations and limited partnership interests issued
by limited partnerships, (ii) leaseholds, fees and other
interests in realty, (iii) income producing debt
securities, or (iv) contracts, conditional sale
agreements, choses in action, trust and participation
certificates, or other evidences of ownership, part
ownership or interest or part interest in any property
real, personal or mixed, all exclusive of direct
investment in securities of the Company. It is intended
that the assets of Fund B be predominantly invested in
equity securities and/or real estate. Investment
practices and techniques that may be utilized in Fund B
include but are not limited to (i) securities lending,
(ii) investments in futures contracts, forwards contracts
and options, (iii) swap agreements and (iv) indexed
securities in which value is linked to currencies,
interest rates, commodities indices or other financial
indicators.
(c) FUND C: Except as hereinafter provided, all
amounts allocated to Fund C shall be invested and
reinvested (in the discretion of the person who is
directing the investment of a portion or all of Fund C
under the provisions of Section 5.3) in, directly or
indirectly through collective investment media including
but not limited to mutual funds and any common,
collective, group or commingled trust fund that invests
primarily in, income-producing debt securities, including
but not limited to (i) obligations issued or fully
guaranteed by the United States of America or any agency
thereof, (ii) debt securities issued by corporations,
partnerships, transnational organizations or other
entities, (iii) interests in notes secured by mortgages
on real estate and equity interests in real estate,
(iv) asset-backed securities, (v) debt securities issued
by foreign governments or any agency thereof, or
(vi) demand or time deposits, repurchase agreements or
commercial paper. Investment practices and techniques
that may be utilized in Fund C include but are not
limited to (i) securities lending, (ii) investments in
futures contracts, forwards contracts and options, (iii)
swap
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agreements and (iv) indexed securities in which value is linked
to currencies, interest rates, commodities indices or other
financial indicators.
(d) FUND D: Except as hereinafter provided and
except as provided in Section 5.3 or 5.4, all amounts
allocated to Fund D shall be invested and reinvested (in
the discretion of the person who is directing the
investment of a portion or all of Fund D under the
provisions of Section 5.3) in, directly or indirectly
through collective investment media including but not
limited to mutual funds and any common, collective, group
or commingled trust fund that invests primarily in,
(i) money market or short-term investments (including but
not limited to repurchase agreements, bankers
acceptances, certificates of deposit, commercial paper,
demand or time deposits, obligations issued or fully
guaranteed by the United States of America or any agency
thereof, securities with an interest rate or dividend
rate that resets to a market-based rate within one (1)
year from the date of issuance or the most recent date on
which interest rates or dividend rates were set, medium
to long-term securities which at time of purchase have
less than one (1) year to maturity and other securities
which at time of purchase have less than one (1) year to
maturity) or (ii) annuity or investment contracts with
life insurance companies or other financial institutions
under which certain guaranteed interest is provided and a
repayment of the principal amount is guaranteed, such
contract to be owned and held by the Trustee for the
benefit of Participants holding accounts in Fund D. As
owner of any such investment contract, the Trustee shall
have authority to exercise any and all rights, options or
privileges which belong to the owner of the contract but
shall have no duty to exercise any such powers unless and
until it shall have received instructions concerning such
exercise from the Committee.
(e) Pending the acquisition of an investment in an
orderly manner for the purposes of Fund A, Fund B, Fund C
or Fund D, as the case may be, the Trustee may
temporarily hold funds thereof uninvested or in
repurchase agreements, bankers acceptances, certificates
of deposit, commercial paper, demand or time deposits,
obligations issued or fully guaranteed by the United
States of America or any agency thereof, master notes or
like holdings either separately or through the medium of
a common, collective, group or commingled trust fund that
invests primarily in such like investments.
(f) In the discretion of the person who is directing
the investment of a portion or all of any of Fund B, Fund
C or Fund D under the provisions of Section 5.3, all or
any part of amounts allocated to Fund B, Fund C or Fund D
may be invested in such assets as are appropriate to the
Fund in question collectively with funds of other pension
and profit-sharing trusts exempt from tax under Code
Section 501(a) by reason of qualifying under Code
Section 401(a) through the medium of any common,
collective or group trust fund which has been or
hereafter may be established by the Trustee or by any
other bank or trust company in the United States, the
instrument or instruments establishing such trust fund or
funds, as amended
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from time to time, being made a part of this Agreement so long
as any portion of the Master Trust Fund shall be invested
through the medium thereof.
The investments of Fund B, Fund C and Fund D, respectively,
shall be so diversified as to minimize the risk of large losses unless
under the circumstances it is clearly prudent not to do so, in the
sole judgment of the person who is directing the investment of such
Funds under the provisions of Section 5.3. Any property at any time
received by the Trustee may be retained in the Master Trust Fund. To
the extent that the Trustee is managing the Master Trust Fund under
the provisions of Section 5.3, the Trustee may temporarily invest and
reinvest all or any portion of the amounts allocated to any Investment
Fund either in short term investments selected by it or collectively
with funds of other pension and profit-sharing trusts exempt from tax
under Code Section 501(a) by reason of qualifying under Code
Section 401(a) through the medium of any common, collective,
commingled or group trust fund which has been or hereafter may be
established by the Trustee or by any other bank or trust company in
the United States, the instrument or instruments establishing such
trust fund or funds, as amended from time to time, being made a part
of this Agreement so long as any portion of the Master Trust Fund
shall be invested through the medium thereof. With respect to any
portion of the Master Trust Fund which is under the management of an
Investment Manager as provided in Section 5.3, such Investment Manager
may by written authorization delegate to the Trustee authority to
invest temporarily any specified portion thereof, in the Trustee's
sole discretion, in short term obligations, either separately or by
investment collectively with funds of other pension and profit-sharing
trusts exempt from tax under Code Section 501(a) by reason of
qualifying under Code Section 401(a) through the medium of any common,
collective, commingled or group trust fund which has been or hereafter
may be established by the Trustee or by any other bank or trust
company in the United States, the instrument or instruments
establishing such trust fund or funds, as amended from time to time,
being made a part of this Agreement so long as any portion of the
Master Trust Fund shall be invested through the medium thereof. Any
such collective investment shall be managed by the Trustee in its sole
discretion, provided that Trustee shall have no responsibility to make
any such separate or collective investment in the absence of a written
notice from the appropriate Investment Manager specifying that a
portion of that part of the Master Trust Fund which is under the
management of such Manager is to be invested by the Trustee pursuant
to the provisions of the preceding sentence.
At any time and from time to time, the Committee may direct
the Trustee to transfer a specified portion or all of Fund B of the
Master Trust Fund as it shall deem advisable to the trustees of the
Dietche & Field Investment Trust A, the Sarofim Trust Co. Employee
Benefit Investment Trust, the Oechsle International Group Trust Fund
for Employee Benefit Trusts, The Beutel Trust and The Accel Fund or a
specified portion or all of Fund B, Fund C or Fund D of the Master
Trust Fund as it shall deem advisable to the trustees of any other
common, collective, group or commingled trust (hereinafter
collectively the "Group Trusts"), if and only if a Group Trust is
qualified under Code Section 401(a) and exempt from tax under Code
Section 501(a) and is maintained as a medium for the commingled,
collective and common investment of assets of eligible participating
trusts; and the Committee may direct the Trustee to withdraw all or
any part of the Master Trust Fund so transferred. The terms and
provisions of the agreements of trust establishing the Dietche & Field
Investment Trust A, the
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Sarofim Trust Co. Employee Benefit Investment Trust, the Oechsle
International Group Trust Fund for Employee Benefit Trusts, The Beutel
Trust and The Accel Fund or any other Group Trust and the provisions
of any amendments thereto are hereby incorporated herein by reference
and shall be deemed a part of this Trust Agreement so long as any
portion of the Master Trust Fund shall be invested through the medium
thereof. The Trustee shall make any such transfer or withdrawal of
all or any part of the Master Trust Fund only upon the expressed
direction of the Committee. The Trustee shall be under no duty or
obligation to review any investment acquired, held or disposed of by
the trustees of the Group Trusts pursuant to the provisions thereof,
and the trustees of the Group Trusts shall have all fiduciary powers,
responsibilities and liabilities arising under this Trust Agreement
with respect to the portion of the Master Trust Fund transferred to
them pursuant to directions of the Committee to be held under the
terms and provisions of the Group Trusts. The Company shall indemnify
and hold harmless the Trustee from any and all claims, losses,
damages, expenses (including counsel fees approved by the Trustee),
and liabilities (including any amount paid in settlement with the
Trustee's approval but excluding any excise tax assessed against the
Trustee pursuant to the provisions of Code Section 4975) arising from
any act or omission of the trustees of the Group Trusts in connection
with their duties and responsibilities under this Trust Agreement with
respect to the portion of the Master Trust Fund transferred to them,
except to any extent prohibited under ERISA.
5.3 DIRECTION OF INVESTMENT: The investment of Fund A shall be
managed solely by the Trustee in the manner provided in Section 5.2.
The Committee shall from time to time specify by written notice to the
Trustee whether the investment of Fund B, Fund C and Fund D (other
than the portion or portions thereof consisting of Insurance
Contracts), in the manner provided in Section 5.2, shall be managed
solely by the Trustee, or shall be directed by one or more Investment
Managers, or whether both the Trustee and one or more Investment
Managers are to participate in investment management and if so how the
investment responsibility is to be divided with respect to assets.
The assets, classes of assets, separate investment funds or sub-funds
so specified and defined shall be allocated by the Trustee on a pro
rata basis among the equitable shares in Fund A, Fund B, Fund C and
Fund D, respectively, of each Participating Plan, unless the Committee
shall specify in such notice that a different allocation be made with
respect to any such assets, classes of assets, separate investment
funds or sub-funds. In the event that the Committee shall fail to
specify pursuant to this Section the person or persons who are to
manage the investment of Fund B, Fund C and/or Fund D or any portion
or portions thereof (other than the portion or portions consisting of
Insurance Contracts), the Trustee shall promptly give notice of this
fact to the Committee and shall manage the investment of Fund B,
Fund C and/or Fund D or such portion or portions in the manner
described in Section 5.2, until the Committee shall specify such
person or persons as provided herein.
Any Investment Manager appointed to manage the investment of
a part (or all) of Fund B, Fund C and/or Fund D hereunder (other than
the portion or portions thereof consisting of Insurance Contracts)
shall either (i) be registered as an investment adviser under the
Investment Advisers Act of 1940, (ii) be a bank, as defined in that
Act, or (iii) be an insurance company qualified to perform investment
management services under the laws of more than one State. If
investment of Fund B, Fund C and/or Fund D (other than the portion or
portions thereof consisting of Insurance Contracts) is to be directed
in whole or in part by
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an Investment Manager, the Trustee shall be given copies of the
instruments appointing the Investment Manager and evidencing his
acceptance of such appointment and acknowledgment that he is a
fiduciary of each Participating Plan, and a certificate evidencing the
Investment Manager's registration under said Act or status as a bank
or insurance company described in the next preceding sentence. The
Trustee may continue to rely upon such instruments and certificate
until otherwise notified in writing by the Committee.
The Trustee shall follow the directions of the Investment
Manager regarding the investment and reinvestment of the portion or
portions of Fund B, Fund C and/or Fund D as shall be under management
by the Investment Manager, and shall be under no duty or obligation to
review any investment to be acquired, held or disposed of pursuant to
such directions nor to make any recommendations with respect to the
disposition or continued retention of any such investment. The
Trustee shall have no liability or responsibility for acting without
question on the direction of, or failing to act in the absence of any
direction from, the Investment Manager, unless the Trustee knows that
by such action or failure to act it will be participating in a breach
of fiduciary duty by the Investment Manager.
The Investment Manager at any time and from time to time may
issue orders for the purchase or sale of securities directly to a
broker, and in order to facilitate such transaction the Trustee upon
request shall execute and deliver appropriate trading authorizations.
Written notification of the issuance of each such order shall be given
promptly to the Trustee by the Investment Manager, and the execution
of each such order shall be confirmed to the Trustee by the broker.
Such notification shall be authority for the Trustee to pay for
securities purchased against receipt thereof and to deliver securities
sold against payment therefor, as the case may be. All notifications
concerning investments made by the Investment Manager shall be signed
by such person or persons, acting on behalf of the Investment Manager
as may be duly authorized in writing; provided, however, that the
transmission to the Trustee of such notifications by photostatic
teletransmission with duplicate or facsimile signature or signatures
shall be considered a delivery in writing of the aforesaid
notifications until the Trustee is notified in writing by the
Investment Manager that the use of such devices with duplicate or
facsimile signatures is no longer authorized. The Trustee shall be
entitled to rely upon such directions which it receives by such means
if so authorized by the Investment Manager and shall in no way be
responsible for the consequences of any unauthorized use of such
device which was not, in fact, known by the Trustee at the time to be
unauthorized. The Trustee shall, as promptly as possible, comply with
any written directions given by the Investment Manager hereunder, and,
where such directions are given by photostatic teletransmission with
facsimile signature or signatures, the Trustee shall be entitled to
presume any directions so given are fully authorized.
In the event that an Investment Manager should resign or be
removed by the Committee, the Trustee shall, upon receiving written
notice of such resignation or removal, manage, pursuant to
Section 5.2, the investment of the portion or portions of Fund B,
Fund C and/or Fund D under management by such Investment Manager at
the time of its resignation or removal, unless and until it shall be
notified of the appointment of another Investment Manager as provided
in this Section 5.3, for such portion or portions of such Fund B,
Fund C and/or Fund D.
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5.4 INSURANCE OR ANNUITY CONTRACTS: With respect to the
investment of the Master Trust Fund in Insurance Contracts as
hereinafter provided in this Section 5.4, the Committee shall direct
the Trustee in the exercise of the powers set forth in Section 5.2 and
the Trustee shall exercise such powers in the manner directed in
writing by the Committee. It shall be the duty of the Trustee to act
strictly in accordance with each direction of the Committee relating
to the investment of the Master Trust Fund in Insurance Contracts and
the Trustee shall not have any duty to question any such direction.
The Trustee shall not have any duty to review any such Insurance
Contracts held in the Master Trust Fund pursuant to such direction, or
to make suggestions to the Committee with respect to the exercise or
non-exercise of any of the said powers. The Trustee shall be under no
liability for any loss of any kind which may result by reason of any
action taken by it in accordance with any direction of the Committee
or by reason of its failure to exercise any of the said powers in
respect of such Insurance Contracts because of the failure of the
Committee to give such direction, unless the Trustee knows that by
such action or failure to act it will be participating in a breach of
fiduciary duty by the Committee.
(a) The Trustee, upon written direction of the
Committee, shall pay from the Master Trust Fund such sums
to such insurance company or companies or other financial
institutions (hereinafter collectively referred to as an
"insurance company") as the Committee or the appropriate
Plan Administrator may direct for the purpose of
procuring individual or group annuity contracts and/or
policies or contracts of life insurance (hereinafter in
this Section 5.4 referred to as "Contracts"). The
Committee shall prepare, or cause to be prepared in such
form as it shall prescribe, the application for any
Contract to be applied for under any or all of the
Participating Plans and this Master Trust and the Trustee
shall execute such application. The Trustee shall
receive and hold in the Master Trust Fund, subject to the
provisions hereinafter set forth in this Section, all
Contracts obtained pursuant to the Participating Plans.
(b) The Trustee shall be the complete and absolute
owner of Contracts held in the Master Trust Fund and,
upon written direction of the Committee, shall have
power, without the consent of any other person, to
collect and receive all dividends or other payments of
any kind payable with respect to any Contract held in the
Master Trust Fund or to leave the same with the issuing
insurance company; to convert from one form to another
any Contract held in the Master Trust Fund; to change the
person or persons designated in any Contract to receive
the proceeds; to designate any mode of settlement of the
proceeds of any Contract held in the Master Trust Fund;
to sell or assign any Contract held in the Master Trust
Fund; to surrender for cash any Contract held in the
Master Trust Fund; to borrow sums of money from the
issuing insurance company upon any Contract or Contracts
issued by it and held in the Master Trust Fund, provided
that the Trustee shall borrow such sums only in respect
of all Contracts for the time being held in the Master
Trust Fund and upon a uniform basis; to agree with the
insurance company issuing any Contract to any release,
reduction, modification or amendment thereof; and,
without limitation of any of the foregoing, to
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exercise any and all of the rights, options or privileges that
belong to the absolute owner of any Contract held in the Master
Trust Fund or that are granted by the terms of any such
Contract or by the terms of this Agreement. The Trustee shall
have no discretion with respect to the exercise of any of the
foregoing powers or to take any other action permitted by any
Contract held in the Master Trust Fund, but shall exercise such
powers or take such action only upon the written direction of
the Committee; the Trustee shall have no duty to exercise any
of such powers or to take any such action unless and until it
shall have received such direction. The Trustee, upon the
written direction of the Committee, shall deliver any Contract
held in the Master Trust Fund to such person or persons as may
be specified in the direction.
(c) The Trustee shall hold in the Master Trust Fund
the proceeds of any sale, assignment or surrender of any
Contract held in the Master Trust Fund and any and all
dividends and other payments of any kind received in
respect to any Contract held in the Master Trust Fund,
and shall distribute and/or allocate such proceeds in
accordance with the directions of the Committee.
(d) If the Trustee shall have borrowed any sums of
money upon any Contract held in the Master Trust Fund, it
shall have no duty to repay any part of the money so
borrowed, notwithstanding the fact that thereafter it may
have sufficient funds to make such repayment, unless and
until it shall have received written direction from the
Committee to make the repayment.
(e) Upon the written direction of the Committee, the
Trustee shall pay from the Master Trust Fund premiums,
assessments, dues, charges and interest, if any, upon any
Contract held in the Master Trust Fund. The Trustee
shall have no duty to make any such payment unless and
until it shall have received such direction. The written
direction of the Committee to pay the premiums becoming
due on any Contract specified in the direction shall be
sufficient authority for the Trustee to pay any and all
bills presented to it for premiums or the amount
specified in any premium notice received from the
insurance company issuing the Contract, and for such
purposes the Trustee may use any money held by it as part
of the Master Trust Fund at the time the payment is due,
unless the Committee shall have directed that such money
shall not be used for such purpose. If the moneys held
by the Trustee in the Master Trust Fund at any time and
available for the payment of premiums are not sufficient
to pay all sums then due on all Contracts held in the
Master Trust Fund, the Trustee immediately shall notify
the Committee of the amount of the deficiency, and the
Committee shall call upon the Company to make payment of
the sum before the expiration of the last day of grace
for such payment; and the Trustee shall be under no duty
or obligation to pay any such amount if the Trustee shall
have given such notice, unless (i) the Committee shall
direct the Trustee to pay from the funds available a
specified sum or sums upon a specified Contract or
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Contracts or (ii) the Company shall pay the amount of the
deficiency to the Trustee at least five (5) days before the
date of expiration of the grace period, and in either event,
the Trustee immediately shall pay over the same to the issuing
insurance company or companies.
(f) Upon the direction of the Committee, the Trustee
shall have power to execute all necessary receipts and
releases to any insurance company issuing any Contract or
Contracts held in the Master Trust Fund, and, upon
written advice from the Committee that the proceeds of
any Contract held in the Master Trust Fund have become
payable, shall make reasonable efforts to collect such
sums as may appear to be due; but the Trustee shall have
no duty to begin or maintain any action, suit or legal
proceeding to collect the proceeds of any Contract unless
it is in possession of funds sufficient for the purpose
or unless it has been indemnified to its satisfaction for
its counsel fees, costs, disbursements and all other
expenses and liabilities to which it in its judgment may
be subjected by beginning or maintaining the action, suit
or other legal proceeding. The Trustee may use the
proceeds of any Contract held in the Master Trust Fund to
defray the expenses incurred in connection with enforcing
payment of that Contract. The Trustee shall have power,
with the written approval of the Committee, to compromise
and adjust claims arising out of any Contract held in the
Master Trust Fund upon such terms and conditions as it
may deem just, and the discretion of the Trustee shall be
binding and conclusive upon all persons interested in the
Master Trust Fund.
(g) Any insurance company may deal with the Trustee
as sole owner of any Contract issued by it and held in
the Master Trust Fund, without inquiry as to the
authority of the Trustee to act, and may accept and rely
upon any written notice, instruction, direction,
certificate or other communication from the Trustee
believed by it to be genuine and to be signed by an
officer of the Trustee. No insurance company shall be
required to look into the terms of this Agreement, or to
question any action of the Trustee or to see that any
action of the Trustee is authorized by the terms of this
Agreement.
(h) The Trustee shall follow directions of the
Committee concerning the exercise or non-exercise of any
powers or options concerning any Contract held in the
Master Trust Fund. Notwithstanding any other provision
of this Agreement to the contrary, the Company hereby
agrees to indemnify the Trustee and hold it harmless from
and against any claim or liability which may be asserted
against the Trustee by reason of its acting on any
direction from the Committee or failing to act in the
absence of any such direction with respect to any
Contract or the acquisition of any Contract or exercise
of any right of option thereunder.
5.5 VOTING OF SECURITIES OTHER THAN COMPANY STOCK: The Trustee
shall have power in its discretion to exercise all voting rights with
respect to any investment held in Fund B,
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Fund C and Fund D and to grant proxies, discretionary or otherwise,
with respect thereto, except that (a) at any time when an Investment
Manager shall be acting with respect to Fund B, Fund C and Fund D as
provided in Section 5.3, the Trustee shall not exercise its discretion
with respect to voting any securities under management of such
Investment Manager but shall itself vote such securities only upon and
in the manner directed by the Investment Manager or shall send such
Investment Manager all proxies and proxy materials relating to such
securities, signed by the Trustee without indication of voting
preference, and the Investment Manager shall exercise all voting
rights with respect thereto or (b) at any time when securities are
loaned as provided in Section 5.2, the Trustee shall not have such
power. All shares of Company Stock held in Fund A shall be voted as
provided below in Section 5.6.
5.6 VOTING AND TENDERING OF COMPANY STOCK:
A. The Trustee shall not vote the shares of Company Stock held
in Fund A at any meeting of stockholders except as it shall receive
voting instructions from employees participating in Fund A as provided
below. Each employee, former employee or beneficiary of a deceased
employee participating in Fund A (hereinafter in this Section referred
to as "Fund A Participant") is, for purposes of this Section 5.6(A),
hereby designated as a "named fiduciary" (within the meaning of
Section 403(a)(1) of ERISA) with respect to the shares of Company
Stock attributable to his account and shall have the right to direct
the Trustee with respect to the vote of the shares of Company Stock
attributable to his account, on each matter brought before any meeting
of the stockholders of the Company. Before each such meeting of
stockholders, the Company shall cause to be furnished to each Fund A
Participant a copy of the proxy solicitation material, together with a
form requesting confidential directions to the Trustee on how such
shares of Company Stock attributable to such Fund A Participant's
account shall be voted on each such matter. Upon timely receipt of
such directions, the Trustee shall on each such matter vote as
directed the number of shares (including fractional shares) of Company
Stock attributable to such Fund A Participant's account, giving effect
to all affirmative directions by Fund A Participants, including
directions to vote for or against, to abstain or to withhold the vote,
and the Trustee shall have no discretion in such matter. The Trustee
shall vote shares of Company Stock for which it has not received
direction in the same proportion as directed shares attributable to
Fund A Participants' accounts in the Plan are voted, and the Trustee
shall have no discretion in such matter. The instructions received by
the Trustee from Fund A Participants shall be held by the Trustee in
confidence and shall not be divulged or released to any person,
including the Committee, officers or employees of the Company or
Affiliated Corporations. The Trustee shall be authorized to
coordinate the voting of Company Stock pursuant to this Section 5.6(A)
with the voting provisions of the ESOP Trust Agreement so as to fully
effectuate and carry out the purposes and intent thereof.
B. The provisions of this Section 5.6(B) shall apply in the
event a tender or exchange offer including but not limited to a tender
offer or exchange offer within the meaning of the Exchange Act
(a "tender offer"), for Company Stock is commenced by a person or
persons.
In the event a tender offer for Company Stock is commenced,
the Committee, promptly after receiving notice of the commencement of
any such tender offer, shall transfer certain of the Committee's
record keeping functions to an independent record keeper (which,
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if the Trustee consents in writing, may be the Trustee). The
functions so transferred shall be those necessary to preserve the
confidentiality of any directions given by the Fund A Participants in
connection with the tender offer. The Trustee shall have no
discretion or authority to sell, exchange or transfer any of such
shares pursuant to such tender offer except to the extent, and only to
the extent, as provided in this Trust Agreement.
Each Fund A Participant is, for purposes of this
Section 5.6(B), hereby designated as a "named fiduciary" (within the
meaning of Section 403(a)(1) of ERISA) with respect to the shares of
Company Stock attributable to his account and shall have the right, to
the extent of the number of whole shares of Company Stock attributable
to his account, to direct the Trustee in writing as to the manner in
which to respond to a tender offer with respect to shares of Company
Stock. The Company shall use its best efforts to timely distribute or
cause to be distributed to each Fund A Participant such information as
will be distributed to stockholders of the Company in connection with
any such tender offer. Upon timely receipt of such instructions, the
Trustee shall respond as instructed with respect to such shares of
Company Stock. The instructions received by the Trustee from Fund A
Participants shall be held by the Trustee in confidence and shall not
be divulged or released to any person, including the Committee or
officers or employees of the Company or Affiliated Corporations. If
the Trustee shall not receive timely instruction from a Fund A
Participant as to the manner in which to respond to such a tender
offer, the Trustee shall not tender or exchange any shares of Company
Stock with respect to which such Fund A Participant has the right to
direction, and the Trustee shall have no discretion in such matter.
Fractional shares of Company Stock attributable to Fund A
Participants' accounts shall be tendered or exchanged by the Trustee
in the same proportion as shares of Company Stock attributable to
Fund A Participants' accounts in the Plan are tendered or exchanged,
and the Trustee shall have no discretion in such matter. In
determining such proportion, the Trustee shall under all circumstances
include in its calculation the direction of Fund A Participants on all
shares of Company Stock attributable to Fund A Participants' Plan
accounts. The Trustee shall be authorized to coordinate the tendering
of Company Stock pursuant to this Section 5.6(B) with the tendering
provisions of the ESOP Trust Agreement so as to fully effectuate and
carry out the purposes and intent thereof.
The independent record keeper shall solicit confidentially
from each Fund A Participant the directions described in this
Section 5.6(B) as to whether shares are to be tendered. The
independent record keeper, if different from the Trustee, shall
instruct the Trustee as to the amount of shares to be tendered, in
accordance with the above provisions.
5.7 POWERS OF TRUSTEE: When so directed in accordance with the
provisions of Section 5.3, or in the discretion of the Trustee if it
is managing the Master Trust Fund under such provisions, the Trustee
shall have, subject to the provisions of Sections 5.1 and 5.2, the
power:
(a) To manage, sell, contract to sell, grant options
to purchase, convey, exchange, transfer, abandon,
improve, repair, insure, lease for any term (even though
commencing in the future or extending beyond the term of
the Trust), and otherwise deal with all property, real or
personal, in such
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manner, for such considerations and on such terms and
conditions as the Trustee decides;
(b) To participate in any plan of reorganization,
consolidation, merger, combination, liquidation or other
similar plan relating to any property held in the Master
Trust Fund, and to consent to or oppose any such plan or
any action thereunder, or any contract, lease, mortgage,
purchase, sale or other action by any person or
corporation;
(c) To deposit any property with any protective,
reorganization or similar committee; and to pay and agree
to pay part of the expenses and compensation of any such
committee and any assessments levied with respect to any
property so deposited;
(d) To exercise conversion and subscription rights
pertaining to any property held in the Master Trust Fund;
(e) To extend the time of payment of any obligation
held in the Master Trust Fund;
(f) To enter into stand-by agreements for future
investment, either with or without a stand-by fee;
(g) To hold in cash or cash balances, without
liability for interest thereon, any moneys received by
the Trustee which are awaiting investment and such
additional funds as the Trustee may deem reasonable or
necessary to meet anticipated distributions or other
payments or disbursements with respect to any
Participating Plan;
(h) To invest in any type of deposit of the Trustee
(or of a bank related to the Trustee within the meaning
of Code Section 414(b)) at a reasonable rate of interest
or in a common trust fund, as described in Code Section
584, or in a collective investment fund, the provisions
of which govern the investment of such assets and which
the Plan incorporates by this reference, which the
Trustee (or its affiliate as defined in Code Section
1504) maintains exclusively for the collective investment
of money contributed by the bank (or the affiliate) in
its capacity as trustee and which conforms to the rules
of the Comptroller of the Currency;
(i) For the purposes of the Trust and with the prior
approval of the Committee, to borrow money from others,
to issue its promissory note or notes therefor, and to
secure the repayment thereof by pledging any property in
its possession; provided, however, that the amount or
amounts of such loans shall not exceed in the aggregate
10% of the market value of the Master Trust Fund as of
the date of the borrowing, and further provided that no
such loan or advance shall be made by the Trustee
hereunder other than
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temporary advances to the Master Trust Fund, on a cash or
overdraft basis, on which no interest is payable;
(j) If an Investment Manager directing investment
under Section 5.3 is a bank, as defined in the Investment
Advisers Act of 1940, to transfer to such Investment
Manager all or any specified assets in that part of the
Master Trust Fund which is subject to such Investment
Manager's direction, for investment by such Investment
Manager through the medium of any common, collective,
commingled or group trust fund maintained by it which
consists solely of assets of trusts qualified under Code
Section 401(a) and which is exempt from tax under Code
Section 501(a), whereupon the instrument establishing
such common, collective, commingled or group trust fund,
as amended from time to time, shall constitute a part of
each Participating Plan the assets of which are included
in such part of the trust fund as long as any portion of
such assets shall be invested through the medium of such
common, collective, commingled or group trust fund; and
(k) Notwithstanding any provision of this Article V
to the contrary, the Committee may authorize the Trustee
to exercise in its sole discretion the powers relating to
the lending of securities (and such other powers as may
be incidental thereto) with respect to securities or
other property held in the Master Trust Fund and
designated to be subject to the discretion of the Trustee
or an Investment Manager as otherwise provided hereunder
("Subject Account"). If the Subject Account is otherwise
subject to the discretion of an Investment Manager, such
Investment Manager shall retain investment authority over
such account other than the exercise or direction of the
powers relating to the lending of securities vested in
the Trustee, and, subject to the requirements of ERISA,
shall not be responsible for any act or omission of the
Trustee.
(l) The Trustee shall have the power in its
discretion:
(i) To cause any investment to be
registered and held in its own name, in the name
of a nominee, in the name of a nominee of any
system for the centralized handling of securities,
or in book-entry or bearer form (provided,
however, that the Trustee's books and records
shall at all times show that all such investments
are a part of the Master Trust Fund);
(ii) To collect and receive any and all
money and other property due to the Master Trust
Fund and to give full discharge therefor;
(iii) To settle, compromise or submit to
arbitration any claims, debts or damages due or
owing to or from the Master Trust; to commence or
defend suits or legal proceedings to protect any
interest of the Master Trust; and to represent the
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Master Trust in all suits or legal proceedings in any court
or before any other body or tribunal;
(iv) To organize under the laws of any
state a corporation for the purpose of acquiring
and holding title to any property which it is
authorized to acquire under this Agreement and to
exercise with respect thereto any or all of the
powers set forth in this Agreement;
(v) To manage, operate, repair, improve,
develop, preserve, mortgage or lease for any
period any real property or any oil, mineral or
gas properties, royalties, interests or rights
held by it directly or through any corporation,
either alone or by joining with others, using
other Trust assets for any of such purposes; to
modify, extend, renew, waive or otherwise adjust
any or all of the provisions of any such mortgage
or lease; and to make provision for amortization
of the investment in or depreciation of the value
of such property;
(vi) Generally to do all acts, whether or
not expressly authorized, which the Trustee may
deem necessary or desirable for the protection of
the Master Trust Fund; and
(vii) To exercise all the rights, powers,
options and privileges now or hereafter granted
to, provided for, or vested in, trustees under the
Texas Trust Code, except such as conflict with the
terms of this Agreement or applicable law. As far
as possible, no subsequent legislation or
regulation shall be in limitation of the rights,
powers or privileges granted the Trustee hereunder
or in the Texas Trust Code as it exists at the
time of the execution hereof.
5.8 PAYMENTS AND DISTRIBUTIONS FROM MASTER TRUST FUND: The
Trustee shall make such payments and distributions from the Master
Trust Fund at such time or times and to such person or persons,
including a paying agent or agents designated by the Committee or by a
Plan Administrator as paying agent, as the Committee shall direct in
writing (or as a Plan Administrator of a Participating Plan shall
direct, with respect to the equitable share of such Plan in the Master
Trust Fund), provided, however, (i) that disbursements for ordinary
expenses incurred in the administration of the Master Trust Fund and
disbursements to Participants need not be authorized by the Committee
and (ii) that no payment or distribution in respect of a Participating
Plan shall exceed the equitable share in the Master Trust Fund of such
Participating Plan on the date such payment or distribution is made.
Any cash or property so paid or delivered to any such paying agent
shall be held in trust by such payee until disbursed in accordance
with the Participating Plan with respect to which the payment or
distribution is made. Upon written direction by the Committee, the
Trustee shall transfer and deliver such part of the equitable share of
a Participating Plan or Plans in the Master Trust Fund as may be
specified in such direction to any other trust established for the
purpose of funding benefits
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under such Participating Plan or Plans or under any other plan,
qualifying under Code Section 401 established for the benefit of
participants in such Participating Plan or Plans or their
beneficiaries by the Company, any Affiliated Corporation or any
successor or transferee of the Company or such Affiliated Corporation;
provided such transfer shall be in conformity with the requirements of
Federal law. Any written direction of the Committee or of a Plan
Administrator shall constitute a certification that the distribution
or payment so directed is one which the Committee or Plan
Administrator, as the case may be, is authorized to direct and the
Trustee shall not be responsible for the adequacy of the equitable
share of any Participating Plan to meet and discharge such
distribution or payment.
The Trustee may make any distribution or payment required to
be made by it hereunder by mailing its check for the specified amount,
or delivering the specified property, to the person to whom such
distribution or payment is to be made, at such address as may have
been last furnished to the Trustee, or, if no such address shall have
been so furnished, to such person in care of the Company or the
Committee or the appropriate Plan Administrator, or (if so directed by
the Committee or the appropriate Plan Administrator) by crediting the
account of such person or by transferring funds to such person's
account by bank wire or transfer. If a payment or distribution from
the Trust is not claimed, the Trustee shall promptly notify the
Committee thereof and thereafter handle such payment in accordance
with the subsequent direction of the Committee.
5.9 TRUSTEE'S DEALINGS WITH THIRD PARTIES: Any corporation,
transfer agent or other third party dealing with the Trustee shall not
make, nor be required by any person to make, any inquiry whether the
Trustee has authority to take or omit any action under this Trust
Agreement or whether the Committee or a Plan Administrator has
instructed the Trustee to take or omit any such action, but shall be
fully protected in relying upon the certificate of the Trustee that it
has authority to take or omit such proposed action. The seal of the
Trustee affixed to any instrument executed by it shall constitute the
Trustee's certificate that it is authorized as Trustee hereunder to
execute such instrument and proceed as may be provided for therein.
No third party shall be required to follow the application by the
Trustee of any money or property which may be paid or transferred to
it.
5.10 ANCILLARY TRUSTEE: If at any time the Master Trust
Fund shall consist in whole or in part of assets located in a
jurisdiction in which the Trustee is not authorized to act, the
Trustee may appoint an individual or corporation in such jurisdiction
as ancillary trustee and may confer upon such ancillary trustee, power
to act solely with reference to such assets, and such ancillary
trustee shall remit all net income or proceeds from the sale of such
assets to the Trustee. The Trustee may pay such ancillary trustee
reasonable compensation and may absolve it from any requirement that
it furnish bond or other security unless otherwise required by law.
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<PAGE>
ARTICLE VI
FOR THE PROTECTION OF THE TRUSTEE
6.1 COMPOSITION OF COMMITTEE AND PLAN ADMINISTRATORS: The Plan
and each Participating Plan, if any, shall be administered by the
applicable Plan Administrator, and the Trustee shall not be
responsible in any respect for such administration. The members of
the Committee and each Plan Administrator shall serve pursuant to the
provisions of the Plan, and the Company shall certify to the Trustee
the names of the members of the Committee and each Plan Administrator
acting from time to time and furnish to the Trustee specimens of the
signatures of such persons. The Company shall indemnify and hold
harmless each member of the Committee, or, in the case of a
Participating Plan, any Plan Administrator, from any and all claims,
losses, damages, expenses (including counsel fees approved by the
Committee), and liabilities (including any amounts paid in settlement
with the Committee's approval but excluding any excise tax assessed
against any member or members of the Committee pursuant to the
provisions of Code Section 4975) arising from any act or omission of
such member in connection with his duties and responsibilities under
this Trust Agreement, except when the same is judicially determined to
be due to the gross negligence and willful misconduct of such member.
The foregoing right of indemnification shall be in addition to any
rights to which any member of the Committee, or, in the case of a
Participating Plan, any Plan Administrator, may otherwise be entitled
as a matter of law. When any member of the Committee, or, in the case
of a Participating Plan, any Plan Administrator, shall cease to act,
the Company shall promptly give written notice to that effect to the
Trustee, but until such notice is received by the Trustee it shall be
fully protected in continuing to rely upon the authority of such
persons. If the full number of members of the Committee, as provided
under the Plan, or the full number of members of a Plan Administrator
provided for in a Participating Plan shall not at any time have been
designated, the remaining member or members acting at such time shall
be deemed to have all of the powers and duties of the Committee or
such Plan Administrator; or, if at any time there is no member of the
Committee or of a Plan Administrator, the Board of Directors of the
Company or of such Affiliated Corporation shall be deemed to be the
Committee or such Plan Administrator, as applicable.
6.2 EVIDENCE OF ACTION BY COMPANY OR COMMITTEE: The Committee
and each Plan Administrator, respectively, shall certify to the
Trustee the name or names of any person or persons authorized to act
for the Committee or for such Plan Administrator. Until the Committee
or the appropriate Plan Administrator notifies the Trustee that any
such person is no longer authorized to act for the Committee or for
such Plan Administrator, the Trustee may continue to rely on the
authority of such person. The Trustee may rely upon any certificate,
notice or direction purporting to have been signed on behalf of the
Committee or on behalf of a Plan Administrator which the Trustee
believes to have been signed by the Committee or by a Plan
Administrator or the person or persons authorized to act for the
Committee or for a Plan Administrator.
Any action required by any provision of this Agreement to be
taken by the Board of Directors of the Company or of an Affiliated
Corporation shall be evidenced by a resolution of its Board of
Directors, certified to the Trustee over the signature of its
Secretary or Assistant Secretary, and the Trustee may rely upon, and
shall be fully protected in acting in accordance
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with, such resolution so certified to it. Unless other evidence with
respect thereto has been expressly prescribed in this Agreement, any
other action of the Company or of an Affiliated Corporation under any
provision of this Agreement, including any approval of, or exceptions
to the Trustee's accounts, shall be evidenced by a certificate signed
by an officer of the Company or of an Affiliated Corporation, as the
case may be, and the Trustee shall be fully protected in relying upon
such certificate.
Any action by the Trustee pursuant to any of the provisions
of this Agreement shall be sufficiently evidenced by a certification
of one of its Vice Presidents, Assistant Vice Presidents or other
appropriate Trust Officers, and the Company, each Affiliated
Corporation which has adopted this Master Trust, each Plan
Administrator, the Committee and all other persons in interest may
rely upon, and shall be fully protected in acting in accordance with,
such certification.
6.3 COMMUNICATIONS: Communications to the Trustee shall be
addressed to it at 600 Travis, 5th Floor, Houston, Texas 77002.
Communications to the Committee, each Plan Administrator, the Company
or any Affiliated Corporation shall be addressed to it at 5 Post Oak
Park, 4400 Post Oak Parkway, 27th Floor, Houston, Texas 77027, with a
copy to the Compensation and Benefits Committee, attention: Secretary,
P.O. Box 61867, Houston, Texas 77208, unless the Trustee, the
Committee, the appropriate Plan Administrator, the Company or any
Affiliated Corporation, respectively, shall request that
communications be sent to another address. No communication shall be
binding upon the Master Trust Fund or the Trustee, or upon the
Committee, any Plan Administrator, the Company or any Affiliated
Corporation until it is received by the Trustee, the Committee, the
appropriate Plan Administrator, the Company or the appropriate
Affiliated Corporation, as the case may be.
6.4 ADVICE OF COUNSEL OR PLAN ADMINISTRATOR: The Trustee may
consult with any legal counsel, including counsel to the Company, the
Committee or a Plan Administrator, with respect to the construction of
this Trust Agreement, its duties hereunder, or any act which it
proposes to take or omit.
6.5 MISCELLANEOUS: The Trustee shall discharge its duties
hereunder with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. The Trustee shall
not be liable for any loss sustained by the Master Trust Fund by
reason of the purchase, retention, sale or exchange of any investment
in good faith and in accordance with the provisions of this Trust
Agreement and of any applicable Federal law.
The Trustee's duties and obligations shall be limited to
those expressly imposed upon it by this Master Trust, notwithstanding
any reference to the Participating Plans.
The Company, any Affiliated Corporation, the Committee or
any Plan Administrator, or all of them, at any time may employ as
agent (to perform any act, keep any records or accounts, or make any
computations required of the Company, an Affiliated Corporation, the
Committee or any Plan Administrator by this Trust Agreement or any
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Participating Plan) the corporation serving as Trustee hereunder.
Nothing done by said corporation as such agent shall affect its
responsibility or liability as Trustee hereunder.
6.6 FIDUCIARY RESPONSIBILITIES:
A. The Trustee, the Investment Managers, if any, the members of
the Committee and each Plan Administrator shall discharge their duties
with respect to the Master Trust solely in the interest of the
participants in the respective Participating Plans and their
beneficiaries and with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims.
B. No "fiduciary" (as such term is defined in Section 3(21) of
ERISA, or any successor statutory provision) under this Trust
Agreement shall be liable for an act or omission of another person in
carrying out any fiduciary responsibility where such fiduciary
responsibility is allocated to such other person by this Trust
Agreement or pursuant to a procedure established in this Trust
Agreement except to the extent that:
(i) such fiduciary participated knowingly in, or
knowingly undertook to conceal, an act or omission of
such other person, knowing such act or omission to be a
breach of fiduciary responsibility;
(ii) such fiduciary, by his failure to comply
with Section 404(a)(1) of ERISA (or any successor
statutory provision) in the administration of his
specific responsibilities which give rise to his status
as a fiduciary, has enabled such other person to commit a
breach of fiduciary responsibility;
(iii) such fiduciary has knowledge of a breach of
fiduciary responsibility by such other person, unless he
makes reasonable efforts under the circumstances to
remedy the breach; or
(iv) such fiduciary is a "named fiduciary" (as
such term is defined in Section 402(a)(2) of ERISA, or
any successor statutory provision) and has violated his
duties under Section 404(a)(1) of ERISA (or any successor
statutory provision):
(a) with respect to the allocation of
fiduciary responsibilities among named fiduciaries
or the designation of persons other than named
fiduciaries to carry out fiduciary
responsibilities under this Trust Agreement;
(b) with respect to the establishment
or implementation of procedures for allocating
fiduciary responsibilities among named fiduciaries
or for designating persons other than named
fiduciaries to carry out fiduciary
responsibilities under this Trust Agreement; or
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(c) in continuing the allocation of
fiduciary responsibilities among named fiduciaries
or the designation of persons other than named
fiduciaries to carry out fiduciary
responsibilities under this Trust Agreement.
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<PAGE>
ARTICLE VII
TAXES, EXPENSES AND COMPENSATION OF TRUSTEE
7.1 TAXES AND EXPENSES: Brokerage fees, commissions, stock
transfer taxes and other charges and expenses incurred in connection
with the purchase and sale of securities for the Master Trust Fund or
distribution thereof shall be paid by the Trustee from the Master
Trust Fund. All taxes imposed or levied with respect to the Master
Trust Fund or any part thereof, under existing or future laws, shall
be paid from the Master Trust Fund. The Trustee shall pay from the
Master Trust Fund, to the extent not paid by the Company and/or the
Affiliated Corporations which have adopted this Master Trust, its
reasonable expenses of management and administration of the Master
Trust, including reasonable compensation of counsel and any agents
engaged by the Trustee to assist it in such management and
administration, and when so directed by the Committee (or, in the case
of the expenses of any Participating Plan, the appropriate Plan
Administrator) shall pay from the Master Trust Fund the fees of any
Investment Manager and any specified expenses of administration of any
Participating Plan including, but not limited to, audit fees,
investment consulting fees, and recordkeeping expenses.
Any amount paid from the Master Trust Fund which is
specifically allocable to a particular Participating Plan or Plans
shall be charged against the equitable share of such Participating
Plan or Plans; any amount paid from the Master Trust Fund which is
allocable to all of the Participating Plans shall be allocated to such
Participating Plans in an equitable manner.
7.2 COMPENSATION OF THE TRUSTEE: The Trustee shall receive for
its services as Trustee hereunder such reasonable compensation which
may be agreed upon from time to time by the Company and the Trustee.
All amounts due the Trustee as compensation for its services shall be
paid by the Company, or prorated among the Company and the Affiliated
Corporations which have adopted this Master Trust in such a manner as
they deem equitable, or disbursed by the Trustee out of the Master
Trust Fund, and, until paid, shall constitute a charge upon the Master
Trust Fund.
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<PAGE>
ARTICLE VIII
SETTLEMENT OF ACCOUNTS;
DETERMINATION OF INTERESTS UNDER MASTER TRUST
8.1 SETTLEMENT OF ACCOUNTS OF TRUSTEE: The Trustee shall keep
accurate and detailed accounts of all of its receipts, investments and
disbursements under this Agreement on a modified cash basis,
accounting separately for each Investment Fund and for each insurance
or annuity contract purchased pursuant to the provisions of
Section 5.4 and which is not allocable to any Investment Fund. The
financial statements, books and records of the Trustee with respect to
the Master Trust shall be open to inspection during all business hours
of the Trustee by the Company or the Committee or their
representatives, including, without limitation, independent certified
public accountants engaged by the Company or the Committee, on behalf
of all participants in the Participating Plans, to permit compliance
with the reporting and disclosure requirements of ERISA. However,
such financial statements, books and records may not be audited more
frequently than twice in each fiscal year. If an examination of the
financial statements of the Participating Plans requires a review of
the underlying transactions affecting such financial statements, such
independent certified public accountants shall rely on the report of
the independent certified public accountants engaged by the Trustee to
review its procedures and controls, to the extent such reliance is
permitted by generally accepted auditing standards.
Within 90 days after the close of each calendar year, or any
termination of the duties of the Trustee, the Trustee shall prepare,
sign and mail in duplicate to the Company and the Committee an account
of its acts and transactions as Trustee hereunder. Such account shall
include a statement of the equitable share in the Master Trust Fund
and in its component Investment Funds of each Participating Plan (and
where appropriate of each Affiliated Corporation which has adopted a
Participating Plan) as of the last day of such year or other period
and a statement of the portion of the Master Trust Fund under
management by any Investment Manager as of the same date. If the
Company finds the account to be correct, the Company shall sign the
instrument of settlement annexed to one counterpart of the account and
return such counterpart to the Trustee, whereupon the account shall
become an account stated. If within 90 days after receipt of the
account or any amended account the Company has not signed and returned
a counterpart to the Trustee, nor filed with the Trustee notice of any
objection to any act or transaction of the Trustee, the account or
amended account shall become an account stated. If any objection has
been filed, and if the Company is satisfied that it should be
withdrawn or if the account is adjusted to its satisfaction, the
Company shall in writing filed with the Trustee signify its approval
of the account and it shall become an account stated. In each case in
which an account becomes an account stated, the account shall be an
account stated between the Trustee and the Company and any Affiliated
Corporation which had adopted a Participating Plan.
When an account becomes an account stated, such account
shall be finally settled, and the Trustee shall be completely
discharged and released, as if such account had been settled and
allowed by a judgment or decree of a court of competent jurisdiction
in an action or proceeding in which the Trustee, the Company and any
Affiliated Corporation which has adopted a Participating Plan were
parties.
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The account of the Trustee's acts and transactions delivered
to the Committee shall be settled, and shall become an account stated,
in the same manner as the account delivered to the Company hereunder.
When an account becomes an account stated as between the Trustee and
the Committee, the account shall be finally settled and the Trustee
shall be completely discharged and released, as if such account had
been settled and allowed by a judgment or decree of a court of
competent jurisdiction in an action or proceeding in which the Trustee
and the Committee were parties.
The Trustee, the Committee or the Company shall have the
right to apply at any time to a court of competent jurisdiction for
judicial settlement of any account of the Trustee not previously
settled as hereinabove provided. In any such action or proceeding it
shall be necessary to join as parties only the Trustee, the Committee
and the Company (although the Trustee may also join such other parties
as it may deem appropriate), and any judgment or decree entered
therein shall be conclusive.
8.2 DETERMINATION OF RIGHTS AND BENEFITS OF PERSONS CLAIMING AN
INTEREST IN THE MASTER TRUST FUND; ENFORCEMENT OF MASTER TRUST
FUND: The Committee shall have authority to determine the existence,
non-existence, nature and amount of the rights and interests of all
persons under the Participating Plan and in or to the Master Trust
Fund, and the Trustee shall have no power, authority, or duty in
respect of such matters, or to question or examine any determination
made by the Committee, or any direction given by the Committee to the
Trustee. The Company, other Employers and the Committee shall have
authority, either jointly or severally, to enforce this Trust
Agreement on behalf of any and all persons having or claiming any
interest in the Master Trust Fund or under this Trust Agreement or the
Participating Plans. The assets of the ESOP Trust shall not
constitute a portion of the Master Trust Fund, and the Trustee, in its
capacity as trustee of the Master Trust Fund, shall have no
responsibility with respect to the ESOP Trust, except as otherwise
specifically agreed by the Trustee.
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<PAGE>
ARTICLE IX
RESIGNATION, REMOVAL AND SUBSTITUTION OF THE TRUSTEE
9.1 RESIGNATION OF TRUSTEE: The Trustee may resign its duties
hereunder by filing with the Committee its written resignation. No
such resignation shall take effect until 60 days from the date thereof
unless shorter notice is acceptable to the Committee.
9.2 REMOVAL OF TRUSTEE: The Trustee may be removed by the Board
of Directors of the Company at any time upon not less than 60 days'
notice to the Trustee, but such notice may be waived by the Trustee.
Such removal shall be effected by delivering to the Trustee a written
notice of its removal executed by the Company, and by giving notice to
the Trustee of the appointment of a successor Trustee in the manner
hereinafter set forth.
9.3 APPOINTMENT OF SUCCESSOR TRUSTEE: The appointment of a
successor Trustee hereunder shall be accomplished by and shall take
effect upon the delivery to the resigning or removed Trustee, as the
case may be, of (a) an instrument in writing appointing such successor
Trustee, executed by the Company, together with a certified copy of
the resolution of the Board of Directors of the Company to such effect
and (b) an acceptance in writing of the office of successor Trustee
hereunder executed by the successor so appointed, both of which
documents shall be acknowledged in like manner as this Trust
Agreement. The Company shall send notice of such appointment to each
Affiliated Corporation which has a Participating Plan, and to each
member of the Committee then in office and to each Plan Administrator.
Any successor Trustee hereunder may be either a corporation authorized
and empowered to exercise trust powers or one or more individuals.
All of the provisions set forth herein with respect to the Trustee
shall relate to each successor Trustee so appointed with the same
force and effect as if such successor Trustee had been originally
named herein as the Trustee hereunder. If within 60 days after notice
of resignation shall have been given under the provisions of this
Article IX a successor Trustee shall not have been appointed, the
resigning Trustee or any member of the Committee may apply to any
court of competent jurisdiction for the appointment of a successor
Trustee.
9.4 TRANSFER OF MASTER TRUST FUND TO SUCCESSOR: Upon the
appointment of a successor Trustee, the resigning or removed Trustee
shall transfer and deliver the Master Trust Fund and the records
relating thereto to such successor Trustee, after reserving such
reasonable amount as it shall deem necessary to provide for its
expenses in the settlement of its accounts, the amount of any
compensation due it and any sums chargeable against the Master Trust
Fund for which it may be liable, but if the sums so reserved are not
sufficient for such purposes, the resigning or removed Trustee shall
be entitled to reimbursement for any deficiency from the successor
Trustee and from the Company and each Affiliated Corporation which has
a Participating Plan, who shall be jointly and severally liable
therefor.
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ARTICLE X
DURATION AND TERMINATION OF MASTER TRUST; AMENDMENT
10.1 DURATION AND TERMINATION: This Trust Agreement shall
continue for such time as may be necessary to accomplish the purpose
for which it was created but may be terminated at any time by the
Company by action of its Board of Directors. Notice of such
termination shall be given to the Trustee by an instrument in writing
executed by the Company and acknowledged in the same form as this
Agreement, together with a certified copy of the resolution of the
Board of Directors of the Company authorizing such termination. The
Company shall notify the Committee and each Plan Administrator of such
termination.
10.2 DISTRIBUTION UPON TERMINATION: If this Trust Agreement is
terminated, the Trustee upon the written direction of the Committee
shall liquidate the Master Trust Fund to the extent required for
distribution and, after its final account has been settled as provided
in Article VIII, shall distribute the net balance thereof to such
person or persons, at such time or times and in such proportions and
manner as may be directed by the Committee or, with respect to the
equitable share of any Participating Plan, by the appropriate Plan
Administrator, or in the absence of such direction, as may be directed
by a judgment or decree of a court of competent jurisdiction. Upon
making such distributions, the Trustee shall be relieved from all
further responsibility. The powers of the Trustee hereunder shall
continue so long as any assets of the Master Trust Fund remain in its
hands. Notwithstanding the foregoing provisions of this Section 10.2,
the Company may promptly advise the appropriate District Director of
Internal Revenue of the termination of the Master Trust and the
Trustee may delay the final distribution to Participants in the
terminated Participating Plans until said District Director shall
advise in writing that such termination does not adversely affect the
previously qualified status of the terminated Participating Plan or
Plans or the exemption from tax of the Master Trust under Code
Section 401(a) or 501(a).
10.3 LOSS OF QUALIFICATION OF A PARTICIPATING PLAN; CERTAIN
WITHDRAWALS: The equitable share of any Participating Plan shall be
immediately segregated and withdrawn from the Master Trust Fund if the
Plan ceases to be qualified under Code Section 401(a) and the Company
shall promptly notify the Trustee of any determination by the Internal
Revenue Service that any Participating Plan has ceased to be so
qualified. Each Affiliated Corporation which has adopted the Master
Trust shall have the right to withdraw from this Master Trust upon six
months' written notice to the Trustee and the Committee, which written
notice may be waived by the Trustee and the Committee. In the event
that any Affiliated Corporation which has adopted the Master Trust
shall cease to be an Affiliated Corporation of the Company, such
corporation shall withdraw from this Master Trust as soon as
arrangements may be reasonably made therefor, but in any event such
withdrawal shall be made not more than six months after the date such
corporation ceases to be an Affiliated Corporation. Upon such
withdrawal, the Committee shall certify to the Trustee the interest in
the Master Trust Fund of the participants of such withdrawing
corporation and the Trustee shall thereupon separate such interest
from the Master Trust Fund as provided below in this Section. The
Committee may at any time direct the Trustee to segregate and withdraw
the equitable share of any Participating Plan or that portion of such
equitable share as may be certified to the Trustee by the Committee as
allocable to any specified group or groups of employees or
beneficiaries. Whenever
-35-
segregation is required, the Trustee shall withdraw from the Master
Trust Fund such assets as it shall in its absolute discretion deem to
be equal in value to the equitable share to be segregated. Such
withdrawal from the Master Trust Fund shall be in cash or in any
property held in such Fund, or in a combination of both, in the
absolute discretion of the Trustee. The Trustee shall thereafter hold
the assets so withdrawn as a separate trust fund in accordance with
the provisions either of this Agreement (which shall be construed in
respect of such assets as if the employer maintaining such
Participating Plan (determined without regard to whether any
subsidiaries or affiliates of such employer have joined in such
Participating Plan) had been named as the Company hereunder and as if
the Plan Administrator for such Plan had been named as the Plan
Administrator hereunder) or of a separate trust agreement. Such
segregation shall not preclude later readmission to the Master Trust.
10.4 AMENDMENT: By an instrument in writing delivered to the
Trustee executed pursuant to the order of the Company's Board of
Directors and acknowledged in the same form as this Agreement, the
Company shall have the right at any time and from time to time to
amend this Agreement in whole or in part except that the duties and
responsibilities of the Trustee shall not be increased without the
Trustee's written consent; provided, however, that no such amendment
shall authorize or permit, at any time prior to the satisfaction of
all liabilities with respect to employees and their beneficiaries
under any Participating Plan, any part of the equitable share of such
Participating Plan in the Master Trust Fund to be used for, or
diverted to, any purposes other than for the exclusive benefit of such
employees and their beneficiaries. Notwithstanding the foregoing, the
Committee may authorize any amendment or modification to Article V of
this Agreement regarding the selection of investments or Investment
Funds in which the Master Trust Fund may be invested including,
without limitation, the Group Trusts.
Any such amendment shall become effective upon (a) delivery
to the Trustee of the written instrument of amendment executed by the
appropriate officers of the Company, together with a certified copy of
the resolution of the Board of Directors of the Company authorizing
such amendment and (b) endorsement by the Trustee on such instrument
of its receipt thereof, together with its consent thereto if such
consent is required.
10.5 ACCEPTANCE OR REJECTION OF AMENDMENT BY AFFILIATED
CORPORATIONS: Each Affiliated Corporation which has a Participating
Plan shall be presumed to have consented to any amendment hereof made
by the Company unless it shall object thereto in writing within 30
days after receiving written notice of such amendment. Any Affiliated
Corporation not consenting to any amendment may obtain a separation of
its interest in the Master Trust Fund in accordance with the
provisions of Section 10.3 hereof, any time after 30 days after
receipt of written notice of such amendment, to which such Affiliated
Corporation shall not so consent.
-36-
ARTICLE XI
MISCELLANEOUS
11.1 GOVERNING LAW; NO BOND REQUIRED OF TRUSTEE: Subject to the
provisions of ERISA, as they may be amended from time to time, which
may be applicable and provide to the contrary, this Trust Agreement
and the Trust hereby created shall be governed, construed,
administered and regulated in all respects under the laws of the State
of Texas. No bond or other security for the faithful performance of
its duties hereunder shall be required of the Trustee unless otherwise
required by law.
11.2 INTEREST IN MASTER TRUST FUND; ASSIGNMENT: No document
shall be issued evidencing any interest in the Master Trust or in the
Master Trust Fund, and no Participating Plan shall have the power to
assign all or any part of its equitable share of the Master Trust Fund
or of its interest therein.
11.3 INVALID PROVISIONS: If any provision or provisions of this
Trust Agreement shall be held illegal or invalid for any reason, said
illegality or invalidity shall not affect the remaining provisions of
this Trust Agreement, but shall be fully severable and the Trust
Agreement shall be construed and enforced as if said illegal or
invalid provisions had never been inserted herein.
11.4 PROHIBITION OF DIVERSION: Except as provided in Article VII
hereof, it shall be impossible under this Trust Agreement for any part
of the corpus or income of the Master Trust Fund to be used for, or
diverted to, purposes other than for the exclusive benefit of
employees of the Company and Affiliated Corporations which have a
Participating Plan and the beneficiaries of such employees. It shall
also be impossible under this Trust Agreement for any part of the
Master Trust Fund to revert directly or indirectly to the Company or
any Affiliated Corporation which has a Participating Plan, except to
the extent such reversions are specifically authorized under
Section 403(c)(2) of ERISA.
11.5 HEADINGS FOR CONVENIENCE ONLY: The headings and subheadings
in this Trust Agreement are inserted for convenience of reference only
and are not to be used in construing this instrument or any provision
thereof.
11.6 SUCCESSORS AND ASSIGNS: This Trust Agreement shall bind and
inure to the benefit of the successors and assigns of the Company and
the Trustee, respectively.
-37-
IN WITNESS WHEREOF, the Company and Trustee have caused
these presents to be executed by their duly authorized officers, in a
number of copies all of which shall constitute one and the same
instrument which may be sufficiently evidenced by any executed copy
hereof, this 7th day of April, 1994, but effective as of January 1,
1994.
HOUSTON INDUSTRIES INCORPORATED
By Don D. Sykora
President and Chief Operating Officer
ATTEST:
Rufus S. Scott
Assistant Corporate Secretary
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, Trustee
By Jane E. Whitte
Vice President & Trust Officer
ATTEST:
Tom Abercrombie
-38-
<PAGE>
EXHIBIT A
Participating Plans in the
Houston Industries Incorporated
Master Savings Trust, under a Trust Agreement
with Texas Commerce Bank National Association,
Dated as of January 1, 1994
NAME OF PLAN PLAN NUMBER
1. Houston Industries Incorporated 015
Savings Plan
A-1
<PAGE>
EXHIBIT B
To TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Trustee:
The undersigned have duly adopted and hereby signify their
intention to join in and become a party to the Houston Industries
Incorporated Master Savings Trust, dated as of January 1, 1994,
between you and Houston Industries Incorporated so that the defined
contribution plans maintained for employees of the undersigned may
participate in the Master Trust established under such Trust
Agreement.
IN WITNESS WHEREOF, the undersigned have caused these
presents to be executed by their duly authorized officers and their
seals to be hereto affixed this _____ day of
_________________________, 199___, but effective as of
__________________, 199___.
[AFFILIATED CORPORATION]
By
ATTEST:
B-1
<PAGE>
CONSENT BY COMPENSATION AND BENEFITS COMMITTEE AND TRUSTEE
The undersigned, being respectively the Compensation and
Benefits Committee and the Trustee described in the above-mentioned
Trust Agreement, hereby consent to the above-mentioned Affiliated
Corporations joining in and becoming a party to such Trust Agreement.
The Compensation and Benefits Committee hereby certifies to the
Trustee that a copy of this instrument has been received by each
member of the Compensation and Benefits Committee referred to in such
Trust Agreement.
COMPENSATION AND BENEFITS COMMITTEE
OF HOUSTON INDUSTRIES INCORPORATED
By
Chairman
ATTEST:
Secretary
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, Trustee
By
ATTEST:
-1-
EXHIBIT 11
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(Thousands of Dollars, except per share amounts)
Three Months Ended
March 31,
1994 1993
Primary Earnings Per Share:
(1) Weighted average shares of
common stock outstanding . . . . . . . . . 130,706,753 129,600,283
(2) Effect of issuance of shares from assumed
exercise of stock options
(treasury stock method) . . . . . . . . . (23,017) 5,593
(3) Weighted average shares . . . . . . . . . . 130,683,736 129,605,876
(4) Net income . . . . . . . . . . . . . . . . $ 30,175 $ 27,055
(5) Primary earnings per share
(line 4 divided by line 3) . . . . . . . . $ .23 $ .21
Fully Diluted Earnings Per Share:
(6) Weighted average shares per
computation (line 3) . . . . . . . . . . . 130,683,736 129,605,876
(7) Shares applicable to options
included (line 2) . . . . . . . . . . . . 23,017 (5,593)
(8) Dilutive effect of stock options based on the
average price for the quarter or quarter-end
price, whichever is higher, of $40.50 and
$46.88 for 1994 and 1993, respectively
(treasury stock method) . . . . . . . . . (23,017) 5,593
(9) Weighted average shares . . . . . . . . . . 130,683,736 129,605,876
(10) Net income . . . . . . . . . . . . . . . . $ 30,175 $ 27,055
(11) Fully diluted earnings per
share (line 10 divided by line 9) . . . . $ .23 $ .21
Notes:
These calculations are submitted in accordance with Regulation S-K
item 601(b) (11) although it is not required for financial
presentation disclosure per footnote 2 to paragraph 14 of Accounting
Principles Board (APB) Opinion No. 15 because it does not meet the 3%
dilutive test.
The calculations for the three months ended March 31, 1994 are
submitted in accordance with Regulation S-K item 601 (b) (11) although
they are contrary to paragraphs 30 and 40 of APB No. 15 because they
produce anti-dilutive results.
EXHIBIT 12
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
Three Twelve
Months Ended Months Ended
March 31, 1994 March 31, 1994
Fixed Charges as Defined:
(1) Interest on Long-Term Debt . $ 87,013 $ 370,025
(2) Other Interest . . . . . . . 5,726 14,302
(3) Preferred Dividends Factor
of Subsidiary . . . . . . 13,071 52,752
(4) Interest Component of Rentals
Charged to Operating Expense 1,074 4,383
(5) Total Fixed Charges . . . . $ 106,884 $ 441,462
Earnings as Defined:
(6) Income Before Cumulative Effect
of Change in Accounting for
Postemployment Benefits . $ 38,375 $ 427,388
(7) Income Taxes . . . . . . . . 22,289 243,945
(8) Fixed Charges (line 5) . . . 106,884 441,462
(9) Earnings Before Income Taxes
and Fixed Charges . . . . $ 167,548 $1,112,795
Preferred Dividends Factor of
Subsidiary:
(10) Preferred Stock Dividends of
Subsidiary . . . . . . . . $ 8,273 $ 33,600
(11) Ratio of Pre-Tax Income to
Net Income (line 6 plus
line 7 divided by line 6) 1.58 1.57
(12) Preferred Dividends Factor of
Subsidiary (line 10 times
line 11) . . . . . . . . . $ 13,071 $ 52,752
Ratio of Earnings to Fixed Charges
(line 9 divided by line 5) . . . 1.57 2.52
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 and HL&P's Statements
of 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.
EXHIBIT 99(b)
FUEL
RECOVERY OF FUEL COSTS. For information relating to the cost of
fuel over the last three years, see "Operating Statistics of HL&P"
below and "Results of Operations - HL&P - Fuel and Purchased Power
Expense" in Item 7 of this Report. Utility Commission rules provide
for the recovery of certain fuel and purchased power costs through an
energy component of electric rates (fixed fuel factor). The fixed
fuel factor is established during either a utility's general rate
proceeding or an interim fuel proceeding and is to be generally
effective for a minimum of six months, unless a substantial change in
a utility's cost of fuel occurs. In that event, a utility may be
authorized to revise the fixed fuel factor in its rates appropriately.
In any event, a fuel reconciliation is required every three years.
In October 1991, the Utility Commission approved HL&P's fixed
fuel factor as contemplated in the settlement agreement reached in
February 1991 by HL&P and most other parties to Docket No. 9850. See
Note 10(c) to the Company's Consolidated and HL&P's Financial
Statements in Item 8 of this Report. In November 1993, the Utility
Commission authorized HL&P to implement a higher fuel factor under
Docket No. 12370. The Company can request a revision to its fuel
factor in April and October each year.
Reconciliation of fuel costs after March 1990 is required in
1994, and under Utility Commission rules, HL&P has anticipated that a
filing would be required in May 1994. However, the Utility Commission
staff has requested that such filing be delayed to the fourth quarter
of 1994. If that request is granted by the Utility Commission, HL&P
anticipates that fuel costs through some time in 1994 will be
submitted for reconciliation at that time. No hearing would be
anticipated in that reconciliation proceeding before 1995, and the
schedule for reconciliation of those costs could be affected by the
institution of a rate proceeding by the Utility Commission and/or a
prudence inquiry concerning the outage at the South Texas Project.
For a discussion of that outage and the possibility that a rate
proceeding may be instituted, see Notes 9(f), 10(f) and 10(g),
respectively, to the Company's Consolidated and HL&P's Financial
Statements in Item 8 of this Report, which notes are incorporated
herein by reference.
EXHIBIT 99(c)
ITEM 3. LEGAL PROCEEDINGS.
For a description of certain legal and regulatory proceedings
affecting the Company and its subsidiaries, see Notes 9 through 12 to
the Company's Consolidated and HL&P's Financial Statements in Item 8
of this Report, which notes are incorporated herein by reference.
In August 1993, HL&P entered into a Consent Agreement with the
EPA that resolved three Administrative Orders issued by the EPA in
1991 and 1992 regarding alleged violations of certain provisions of
the Clean Water Act at Limestone during the period 1989 through 1992.
Pursuant to the Consent Agreement, HL&P, while neither admitting nor
denying the allegations contained in the complaint, agreed to pay the
EPA $87,500. On August 29, 1991, the EPA issued an Administrative
Order related to alleged noncompliance at W. A. Parish. HL&P has
taken action to address the issues cited by the EPA and believes them
to be substantially resolved at this time.
From time to time, HL&P sells equipment and material it no longer
requires for its business. In the past, some purchasers may have
improperly handled the material, principally through improper disposal
of oils containing PCBs used in older transformers. Claims have been
asserted against HL&P for clean-up of environmental contamination as
well as for personal injury and property damages resulting from the
purchasers' alleged improper activities. Although HL&P has disputed
its responsibility for the actions of such purchasers, HL&P has, in
some cases, participated in or contributed to the remediation of those
sites. Such undertakings in the past have not required material
expenditures by HL&P. In 1990, HL&P, together with other companies,
participated in the clean-up of one such site. Three suits have been
brought against HL&P and a number of other parties for personal injury
and property damages in connection with that site and its cleanup. In
two of the cases, Dumes, et al. vs. Houston Lighting & Power Company,
et al., pending in the United States District Court for the Southern
District of Texas, Corpus Christi Division, and Trevino, et al. vs.
Houston Lighting & Power Company, et al., pending before the 117th
District Court of Nueces County, Texas, landowners near the site are
seeking damages primarily for lead contamination to their property. A
third lawsuit, Holland vs. Central Power and Light Company, et al.,
involving an allegation of exposure to PCBs disposed of at the site,
was dismissed pursuant to a settlement agreement entered into by the
parties in July 1993. The terms of the settlement were not material.
In all these cases, HL&P has disputed its responsibility for the
actions of the disposal site operator and whether injuries or damages
occurred. In addition, Gulf States has filed suit in the United
States District Court for the Southern District of Texas, Houston
Division, against HL&P and two other utilities concerning another site
in Houston, Texas, which allegedly has been contaminated by PCBs and
which Gulf States has undertaken to remediate pursuant to an EPA
order. Gulf States seeks contribution from HL&P and the other
utilities for Gulf States' remediation costs. HL&P does not currently
believe that it has any responsibility for that site, and HL&P has not
been determined by the EPA to be a responsible party for that site.
Discovery is underway in all these pending cases and, although their
ultimate outcomes cannot be predicted at this time, HL&P and the
Company believe, based on information currently available, that none
of these cases will result in a material adverse effect on the
Company's or HL&P's financial condition or results of operations.
For information with respect to the EPA's identification of HL&P
as a "potentially responsible party" for remediation of a CERCLA site
adjacent to one of HL&P's transmission lines in Harris County, see
"Liquidity and Capital Resources - HL&P - Environmental Expenditures"
in Item 7 of this Report, which information is incorporated herein by
reference.
HL&P and the other owners of the South Texas Project have filed
suit against Westinghouse in the District Court for Matagorda County,
Texas (Cause No. 90-S-0684-C), alleging breach of warranty and
misrepresentation in connection with the steam generators supplied by
Westinghouse for the South Texas Project. In recent years, other
utilities have encountered stress corrosion cracking in steam
generator tubes in Westinghouse units similar to those supplied for
the South Texas Project. Failure of such tubes can result in a
reduction of plant efficiency, and, in some cases, utilities have
replaced their steam generators. During an inspection concluded in the
fall of 1993, evidence was found of stress corrosion cracking
consistent with that encountered with Westinghouse steam generators at
other facilities, and a small number of tubes were found to require
plugging. To date, stress corrosion cracking has not had a
significant impact on operation of either unit; however, the owners
of the South Texas Project have approved remedial operating plans and
have undertaken expenditures to minimize and delay further corrosion.
The litigation, which is in discovery, seeks appropriate damages and
other relief from Westinghouse and is currently scheduled for trial in
the fall of 1994. No prediction can be made as to the ultimate
outcome of that litigation.
HOUSTON INDUSTRIES INCORPORATED
SAVINGS PLAN
(As Amended and Restated Effective January 1, 1994)
First Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having established the Houston Industries Incorporated
Savings Plan, as amended and restated effective January 1, 1994 (the
"Plan"), and having reserved the right to amend the Plan under
Section 10.3 thereof, does hereby amend the Plan as follows, effective
April 6, 1994:
1. Paragraph (f) of Section 4.18 is hereby amended to read
as follows:
"An Employee's rollover account shall be
subject to the same rules as the Employee's Pre-Tax
Contribution Account for all purposes of the
Plan, including, but not by way of limitation,
rules regarding investments, withdrawals,
distributions and loans under the Plan."
2. The second full paragraph of Section 8.1 is hereby
amended to read as follows:
"The Participant shall have the right to
direct the Committee to instruct the Trustee to
invest his Pre-Tax Contributions and After-Tax
Contributions, and the earnings and accretions
thereon, in any combination of ten percent (10%)
increments between the Investment Funds."
3. The second sentence of the third full paragraph of
Section 8.1 of the Plan is hereby amended to read as follows:
"The Participant, effective on any succeeding
monthly Valuation Date, by prior written notice to
the Committee given in such manner and at such
time as may be prescribed from time to time by the
Committee, may (i) change his instructions with
respect to the investment of his future Pre-Tax
and After-Tax Contributions in the Trust Fund
and/or (ii) change his instructions with respect
to the investment of the current values in his
Pre-Tax Contribution Account and After-Tax
Contribution Account in such manner as he may
determine between the investment accounts."
4. The first sentence of Section 10.3 is hereby amended by
adding the following language to the end thereof:
"and the Committee shall have the right to
amend or modify this Plan and the Trust Agreement
to change the Investment Funds at any time and
from time to any extent that it may deem
advisable."
IN WITNESS WHEREOF, Houston Industries Incorporated has
caused these presents to be executed by its duly authorized officers
in a number of copies, all of which shall constitute one and the same
instrument, which may be sufficiently evidenced by any executed copy
hereof, this 7th day of April, 1994, but effective April 6, 1994.
HOUSTON INDUSTRIES INCORPORATED
By: D. D. Sykora
D. D. Sykora,
President and Chief Operating Officer
ATTEST:
Rufus S. Scott
Assistant Corporate Secretary
EXHIBIT 12
HOUSTON LIGHTING & POWER COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(Thousands of Dollars)
Three Twelve
Months Ended Months Ended
March 31, 1994 March 31,1994
Fixed Charges as Defined:
(1) Interest on Long-Term Debt $ 61,842 $ 268,287
(2) Other Interest . . . . . . 2,896 10,557
(3) Amortization of (Premium)
Discount . . . . . . . . . 2,121 7,760
(4) Interest Component of Rentals
Charged to Operating Expense 1,074 4,383
(5) Total Fixed Charges . . $ 67,933 $ 290,987
Earnings as Defined:
(6) Net Income . . . . . . . . $ 49,959 $ 493,462
(7) Cumulative Effect of Change in
Accounting for Postemployment
Benefits . . . . . . . . . 8,200 8,200
(8) Income Before Cumulative
Effect of Change in
Accounting for
Postemployment Benefits . 58,159 501,662
Federal Income Taxes:
(9) Current . . . . . . . . . 21,530 123,191
(10) Deferred (Net) . . . . . . 915 125,035
(11) Cumulative Effect of Change in
Accounting for Postemployment
Benefits . . . . . . . . . 4,415 4,415
(12) Total Federal Income Taxes
Before Cumulative Effect of
Change in Accounting for
Postemployment Benefits . 26,860 252,641
(13) Fixed Charges (line 5) . . 67,933 290,987
(14) Earnings Before Income Taxes
and Fixed Charges (line 8
plus line 12 plus line 13) $ 152,952 $ 1,045,290
Ratio of Earnings to Fixed Charges
(line 14 divided by line 5) . . 2.25 3.59
Preferred Dividends Requirements:
(15) Preferred Dividends . . . $ 8,273 $ 33,600
(16) Less Tax Deduction for
Preferred Dividends . . . 14 54
(17) Total . . . . . . . . . 8,259 33,546
(18) Ratio of Pre-Tax Income to Net
Income (line 8 plus line 12
divided by line 8) . . . . 1.46 1.50
(19) Line 17 times line 18 . . 12,058 50,319
(20) Add Back Tax Deduction
(line 16) . . . . . . . . 14 54
(21) Preferred Dividends Factor $ 12,072 $ 50,373
(22) Fixed Charges (line 5) . . $ 67,933 $ 290,987
(23) Preferred Dividends Factor
(line 21) . . . . . . . . 12,072 50,373
(24) Total . . . . . . . . . $ 80,005 $ 341,360
Ratio of Earnings to Fixed Charges and
Preferred Dividends
(line 14 divided by line 24) . . 1.91 3.06
