<PAGE> 1
HI QUARTERLY
Houston Industries Incorporated 1996 Third Quarter Report
SPECIAL SHAREHOLDERS MEETING SET FOR DECEMBER 17
Houston Industries (HI) will hold a special shareholders meeting at 2 p.m.,
Central Standard Time, December 17 in the auditorium of Houston Industries
Plaza to vote on the company's proposed acquisition of NorAm Energy Corp.
(NorAm). NorAm shareholders are scheduled to meet earlier the same day.
In August, the boards of directors of both HI and NorAm voted unanimously to
merge the two companies. The agreement calls for HI to merge into HL&P, which
will be renamed Houston Industries. NorAm will become subsidiary of Houston
Industries. Proxy statements were mailed beginning November 4 to holders of
record on October 18.
"It's very important for shareholders who can't attend the meeting to return
their proxy cards as soon as possible," stressed Steve Naeve, HI senior vice
president and chief financial officer. "Unlike some other routine shareholder
issues where a simple majority vote is required, two-thirds of all outstanding
share must be cast in favor of the merger for it to be approved. If you don't
vote, in essence, that counts as a vote against the merger."
Meanwhile, progress has been made toward obtaining the various regulatory
approvals needed to close the transaction. At the state level, the utility
regulatory commissions in Oklahoma and Arkansas have approved the merger.
Approvals are also needed in three other states where NorAm has regulated
natural gas distribution operations: Louisiana, Minnesota and Mississippi. The
companies have also filed for approval with four municipalities, including the
city of Houston, where NorAm has franchise agreements which require municipal
consent. Two municipalities have approved the merger. The other two have not
acted. Documents have also been filed with the Securities and Exchange
Commission, the Federal Trade Commission, the Justice Department and the Federal
Energy Regulatory Commission.
For replacement of lost proxy cards or additional information about the
merger, call the company's proxy solicitor, Morrow & Co., at their toll-free
number 1-800-662-5200 or Houston Industries Investor Services at 1-800-231-6406
or 713-207-3060.
BRIDGING THE GAP
[A photograph of a crane installing a new railroad bridge is omitted.] In a
move designed to make HL&P's electric rates more competitive, the Company is
constructing a nine-mile, $24 million railroad spur that will allow competing
rail transportation companies to deliver coal to the W.A. Parish power plant.
The spur is being constructed adjacent to the Burlington Northern Santa Fe line
which is currently the only line serving the W.S Parish power plant. The photo
shows a construction crane installing one of four spans for the new railroad
bridge which crosses the Brazos River near the city of Thompsons. HL&P currently
ships 10.5 million tons of coal to W.A Parish every year at an approximate
transportation cost of $190 million. HL&P's existing transportation contracts
expire at the end of 1996 and first quarter 2000. The rail spur is expected to
be completed in the first quarter of 1997. While fuel and related transportation
costs are passed directly through to customers and do not affect earnings, the
company is always looking for ways to make its electric rates more competitive.
HL&P expects to save $50 to $70 million per year in transportation costs as a
result of this project.
<PAGE> 2
EARNINGS FROM CONTINUING OPERATIONS
SHOW MODEST IMPROVEMENT
Houston Industries Incorporated (HI) reported consolidated earnings from
continuing operations of $240 million or $.98 per share for the third quarter of
1996, compared to $236 million or $.95 per share for the third quarter of 1995.
The third quarter of 1996 included no significant nonrecurring gains or charges,
but the comparable period of 1995 included an after-tax gain of approximately
$618 million or $2.49 per share related to the gain on the sale of KBLCOM.
Reported earnings for the third quarter of last year were $854 million or $3.44
per share.
Consolidated earnings of $369 million or $1.49 per share for the first nine
months of 1996 and $372 million or $1.50 per share for the twelve months ended
September 30, 1996 reflect non-recurring charges of $67 million and $85
million, respectively. These charges were taken in connection with the
settlement of litigation claims discussed below and the potential loss
associated with HI Energy's investment in two tire-to-energy plants in
Illinois. Earnings for the comparable periods of 1995 were $1.1 billion or $4.45
per share and $1.1 billion or $4.50 per share, respectively, including a $709
million or $2.86 per share gain on the sale of HI's cable television subsidiary
and charges related to Houston Lighting & Power Company's (HL&P) rate case
settlements.
After adjusting for one-time gains and charges, year-to-date earnings would
have been $436 million or $1.76 per share this year compared to $399 million or
$1.61 per share last year, and earnings for the twelve months ended September
30, would have been $458 million or $1.85 per share in 1996 compared with $450
million or $1.82 per share in 1995. The increase in earnings for these
periods, after adjusting for one-time items, is due primarily to strong sales
at HL&P HI's principal subsidiary, and dividend income from the Time Warner
securities which HI received as part of the sale of its cable television
subsidiary.
HL&P reported net income after preferred dividends of $240 million for the
third quarter of 1996 compared with $241 million for the same period last year.
Weather had a slightly favorable impact for the quarter when compared to a
normal year. However, base revenues were reduced by about $38 million when
compared to the third quarter of 1995 which was extremely hot. Continued
economic growth in the service area offset this effect, and total kilowatt hour
sales for the calendar quarter grew by about 2 percent.
HL&P's earnings for the nine and twelve months ended September 30, 1996 were
$374 million and $408 million, respectively, compared to $417 million and $435
million for the same periods of 1995. The decrease in HL&P's earnings for the
nine-and twelve-month periods resulted from a $62 million after-tax charge
taken in the first quarter of 1996 in connection with settlements of litigation
claims relating to the South Texas Project (STP).
HL&P's year-to-date and twelve-months-ended earnings also reflect pre-tax
write downs of its investment in STP of $38 million and $59 million,
respectively, compared with $29 million for both periods of last year. In
addition, HL&P began amortizing its investment in certain lignite reserves in
1996 amounting to $16 million for both the year to date and twelve months ended
September 30, 1996. The write downs are allowed under the terms of HL&P's 1995
rate settlement.
[GRAPH - HI Third Quarter Earnings from Continuing Operations (in millions)]
1995 - $236 Million 1996 - $240 Million
CORRECTION
The last edition of HI Quarterly contained errors in the charts comparing
electric rates in the 10 most populous cities in the United States. The
industrial rate comparison was correct. Houston has the lowest average
industrial rate of the 10 most populous cities in the country. However, the
order of the cities on the industrial rate comparison was inadvertently
repeated on the residential and system-average charts at a late stage in the
approval process. Unfortunately we did not discover the error until after the
publication had already been mailed.
While Houston has some of the lowest electric rates of large U.S. cities,
they are not the lowest in all categories. For residential and system-average
rates, Houston's rates are second-lowest of the 10 most populous U.S. cities.
San Antonio has the lowest electric rates in these two categories. We regret
the error. Corrected versions of the rate charts that were published in the
Second Quarter 1996 Report are available by calling toll-free 1-800-231-6406 or
(713) 207-3122.
<PAGE> 3
HOUSTON INDUSTRIES FINANCIAL AND OPERATING HIGHLIGHTS
Quarter ended
September 30, Change
1996 1995
-------------------------- ------
HI
Total assets (000s) $12,135,842 $11,971,228 +1.4%
Book value/share $16.78 $16.98 -1.2%
HL&P
Customers 1,528,259 1,497,302 +2.1%
Kilowatt-hour sales (000s)
Residential 6,800,370 6,650,310 +2.3%
Commercial 4,281,798 4,173,138 +2.6%
Firm Industrial 6,576,544 6,215,676 +5.8%
DIRECT
INVESTING-
SO EASY IT'S
AUTOMATIC
Houston Industries now offers the easiest way ever to invest - Automatic
Investing. This new service offers a convenient, safe and manageable way to buy
Houston Industries stock. You tell us when and how much you want to invest,
and we'll automatically deduct that amount from your checking or savings
account monthly or quarterly.
If you select the monthly investment option, Automatic Investing will begin
approximately 30 days after we receive your authorization form. If you decide
to invest quarterly, investments will be made on your behalf in March, June,
September and December. In both cases, funds are transferred two business days
prior to the investment date which is generally the 10th of the month. The
minimum investment is $50 per transaction, and the maximum is $120,000 per
year. To change your investment amount or banking information or to cancel
Automatic Investing, just notify us in writing or by fax two weeks prior to the
change.
To sign up, call Investor Services at 1-800-231-6406 or in Houston, (713)
207-3060. We will send you an Automatic Investing - Cash Draft Authorization
form. Just fill out the form and return it along with a voided check or deposit
slip. It's that simple.
<PAGE> 4
HIPOINTS
JORDAN RECEIVES WETLANDS CONSERVATION AWARD
Houston Industries Chairman and CEO Don Jordan was honored by the
Houston Chapter of Ducks Unlimited with the Wetlands Conservation Award at its
annual dinner in October. The award was given for HI's participation in a
wetland development project at the South Texas Project. The effort is the
first-ever joint venture between industry and Ducks Unlimited under the Texas
Prairie Wetlands Project which is supported at the state level by the Texas
Parks & Wildlife Department, U.S. Fish & Wildlife Service, and the U.S.D.A.
Natural Resources Conservation Sevice. The objective of the project is to
assist the North American Waterfowl Management Plan to reach its goal of 100
million waterfowl in the fall flight. A 110 acre tract at the nuclear power
plant will be flooded to provide shallow water habitat for both migrant and
resident species of waterfowl and shorebirds. HL&P personnel will monitor and
manage the site as part of an overall conservation plan at STP.
PLANS FOR SOUTH TEXAS PROJECT OPERATING COMPANY PROCEEDING
A steering committee, comprised of South Texas Project (STP) Executive
Vice President Bill Cottle and senior managers from HL&P and the other three
co-owners, has been formed to establish an independent operating company at STP
in early 1997. The steering committee developed objectives and principles that
formed the basis of draft agreements between the owners and the new company.
Functional teams are resolving human resources, accounting, financial,
technical, legal and regulatory issues. On August 23, a request was filed with
the Nuclear Regulatory Commission to add the operating company to the plant's
operating license. HL&P has served as STP project manager throughout the
plant's construction and eight years of operation. Earlier this year, the four
co-owners agreed to establish a separate operating company to run the 2,500
megawatt nuclear plant which is located near Bay City, Texas.
STOCK REPURCHASE PROGRAM SUSPENDED
The stock repurchase program approved by the Houston Industries Board
of Directors was suspended on October 30, as required by Securities and
Exchange Commission rules, in connection with the special shareholders meeting
set for December 17. Earlier this year, the board authorized stock repurchases
totaling $450 million. Since the repurchase program began in mid-June, the
company has repurchased approximately 15.6 million shares at a total cost of
$352 million.
NEW SUBSIDIARY FORMED
A new Houston Industries subsidiary, HL&P Energy Services Company
(HLPES), has been formed to provide retail energy services which go beyond the
traditional business of providing electric service. HL&P Energy Services
developed from one of the two unregulated strategic business units formed in
February of this year as part of a major corporate restructuring.
Since its formation, HLPES has signed in excess of $4 million in
contracts to perform a variety of services related to electric distribution
systems, power quality, lighting and performance contracting. In addition,
HLPES has launched a home appliance protection program. The new company
supports Houston Industries' strategy for creating a national presence as a
total energy service provider.
HLPES recently signed a major energy technology performance contract
with the University of Houston. Initially, the company will provide energy
efficiency consulting services including a detailed audit and upgrade
recommendations. If the university accepts the recommendations, HLPES will
provide turn-key installation of the upgrades and a guarantee that energy cost
savings will fund the project. In a separate agreement, Sears has selected HL&P
for a regional energy alliance where the company will provide a broad range of
services designed to improve the energy efficiency of Sears' facilities, reduce
operating costs and develop plans for future energy supply options. HLPES will
be involved in fulfillment of the Sears energy alliance.
<PAGE> 5
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Houston Industries Incorporated and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
----------------------- ----------------------- -----------------------
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Electric ..................................... $1,230,298 $1,171,789 $3,142,234 $2,896,180 $3,926,351 $3,664,832
Other ....................................... 15,521 13,149 41,769 33,839 57,806 35,906
---------- ---------- ---------- ---------- ---------- ----------
Total .............................. 1,245,819 1,184,938 3,184,003 2,930,019 3,984,157 3,700,738
---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Electric:
Fuel ............................... 319,548 269,159 817,835 691,226 1,005,757 888,225
Purchased power ..................... 71,762 50,160 224,078 166,570 291,002 270,853
Operation and maintenance .......... 206,747 228,913 637,561 645,092 858,639 863,393
Taxes other than income taxes ....... 63,280 62,227 191,148 197,793 239,245 257,958
Depreciation and amortization ............... 130,909 127,148 389,767 343,630 524,171 443,840
Other ....................................... 18,769 25,428 65,063 64,858 122,634 77,157
---------- ---------- ---------- ---------- ---------- ----------
Total .............................. 811,015 763,035 2,325,452 2,109,169 3,041,448 2,801,426
---------- ---------- ---------- ---------- ---------- ----------
Operating Income ........................... 434,804 421,903 858,551 820,850 942,709 899,312
---------- ---------- ---------- ---------- ---------- ----------
Other Income (Expense):
Litigation settlements ...................... (95,000) (95,000)
Allowance for other funds used during
constuction................................. 911 1,676 3,093 6,319 4,533 7,855
Time Warner dividend income ................. 10,403 9,730 31,208 9,730 41,610 9,730
Interest Income ............................. 142 3,102 2,436 5,764 6,446 10,210
Other - net ................................. 8,419 1,074 5,463 (10,501) (3,413) (11,670)
---------- ---------- ---------- ---------- ---------- ----------
Total .............................. 19,875 15,582 (52,800) 11,312 (45,824) 16,125
---------- ---------- ---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt ................... 68,610 75,178 208,861 204,436 283,917 270,561
Other interest .............................. 11,048 2,777 22,096 21,454 22,227 28,020
Allowance for borrowed funds used
during construction ....................... (583) (943) (1,939) (3,881) (2,749) (6,002)
Preferred dividends of subsidiary ........... 5,372 6,772 17,318 23,207 24,066 31,809
---------- ---------- ---------- ---------- ---------- ----------
Total .............................. 84,447 83,784 246,336 245,216 327,461 324,388
---------- ---------- ---------- ---------- ---------- ----------
Income from Continuing Operations Before
Income Taxes ................................ 370,232 353,701 559,415 586,946 569,424 591,049
Income Taxes ...................................... 130,208 117,840 190,797 193,976 196,376 192,240
---------- ---------- ---------- ---------- ---------- ----------
Income from Continuing Operations ................ 240,024 235,861 368,618 392,970 373,048 398,809
Discontinued Operations (Net of Income Taxes):
Gain (Loss) on Sale of Cable Television
Subsidiary ............................... 618,088 708,695 (571) 708,695
Income from Discontinued Cable Television
Operations ................................ 4,831
---------- ---------- ---------- ---------- ---------- ----------
Net Income ...................................... $ 240,024 $ 853,949 $ 368,618 $1,101,665 $ 372,477 $1,112,335
========== ========== ========== ========== ========== ==========
Earnings Per Common Share ........................ $ 0.98 $ 3.44 $ 1.49 $ 4.45 $ 1.50 $ 4.50
Dividends Declared Per Common Share ............. $ 0.375 $ 0.375 $ 1.125 $ 1.125 $ 1.50 $ 1.50
Weighted Average Common Shares Outstanding (000) . 245,889 247,894 247,664 247,546 247,794 247,364
</TABLE>
Reference is made to the Notes to the Consolidated Financial Statements
contained in the Annual Report of Houston Industries Incorporated. The
information furnished is given in response to your request for information
concerning the Company and not in connection with any sale or offer for sale
of, or solicitation of an offer to buy, any securities.
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HOUSTON INDUSTRIES INCORPORATED -----------------
P.O. Box 4567 BULK RATE
Houston, Texas 77210 U.S. POSTAGE PAID
HOUSTON, TX
PERMIT NO. 3108
-----------------
