<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Houston Industries Incorporated
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--Enter Company Name Here--
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
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(1) Amount Previously Paid:
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Notes:
<PAGE>
LOGO
[LOGO OF HOUSTON INDUSTRIES APPEARS HERE]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 9, 1997
AND PROXY STATEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Notice of Annual Meeting
Proxy Statement
Voting of Shares........................................................ 1
Election of Directors................................................... 2
Nominees................................................................ 2
Continuing Directors.................................................... 4
Organization of the Board of Directors.................................. 5
Compensation of Directors............................................... 6
Securities Ownership of Certain Beneficial Owners....................... 7
Securities Ownership of Management...................................... 8
Executive Compensation.................................................. 9
Retirement Plans, Related Benefits and Other Agreements................. 12
Report of the Compensation Committee on Executive Compensation.......... 16
Shareholder Return Performance Graph.................................... 21
Proposal to Amend the Company's 1994 Long-Term Incentive Compensation
Plan................................................................... 22
Ratification of Appointment of Independent Accountants and Auditors..... 28
Other Matters........................................................... 28
Shareholder Proposals for 1998 Annual Meeting of Shareholders........... 28
Director Nominations for 1998 Annual Meeting of Shareholders............ 28
Annual Report to Shareholders........................................... 29
Exhibit A--Amendment to the 1994 Houston Industries Incorporated Long-
Term Incentive Compensation Plan....................................... A-1
Appendix A--1996 Financial Statements
</TABLE>
<PAGE>
LOGO
[LOGO OF HOUSTON INDUSTRIES APPEARS HERE]
1111 Louisiana, Houston, Texas 77002
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 9, 1997
AND PROXY STATEMENT
To the Shareholders:
The Annual Meeting of Shareholders of Houston Industries Incorporated will
be held in the AUDITORIUM OF HOUSTON INDUSTRIES PLAZA, 1111 LOUISIANA,
HOUSTON, TEXAS, at 9:00 a.m., Central Daylight Time, on Friday, May 9, 1997,
for the following purposes:
1. To elect directors to hold office in accordance with the Amended and
Restated Bylaws of the Company;
2. To consider and vote on a proposal to amend the 1994 Houston
Industries Incorporated Long-Term Incentive Compensation Plan to include
provisions relating to performance-based compensation necessary to satisfy
requirements under Section 162(m) of the Internal Revenue Code and increase
the number of shares of Common Stock subject to the Plan by four million;
3. To ratify the appointment of Deloitte & Touche LLP as independent
accountants and auditors for the Company for 1997; and
4. To transact such other business that may properly come before the
meeting, or any adjournments thereof.
Only shareholders of record at the close of business on March 10, 1997 are
entitled to notice of, and to vote at, the meeting.
All shareholders are cordially invited and urged to attend the meeting. EVEN
IF YOU PLAN TO ATTEND THE MEETING, YOU ARE STILL REQUESTED TO SIGN, DATE AND
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED ADDRESSED ENVELOPE. If you
attend, you may vote in person if you wish, even though you have sent in your
proxy.
By order of the Board of Directors,
LOGO
/S/ HUGH RICE KELLY
Hugh Rice Kelly
Corporate Secretary
March 31, 1997
<PAGE>
HOUSTON INDUSTRIES INCORPORATED
1111 Louisiana, Houston, Texas 77002
(713) 207-3000
PROXY STATEMENT
On or about March 31, 1997, Houston Industries Incorporated (Company) began
mailing this proxy statement and the accompanying proxy card to shareholders
entitled to vote at the Company's annual meeting of shareholders to be held on
May 9, 1997 (Annual Meeting). The proxy statement and proxy card are being
furnished in connection with the solicitation of proxies by the Company's
Board of Directors for the Annual Meeting.
The Company bears the expense of this solicitation. The Company has engaged
Morrow & Co. to assist in the solicitation of proxies at a fee of
approximately $9,500, plus expenses. The Company will also reimburse brokerage
firms, nominees, fiduciaries, custodians and other agents for their expenses
in distributing proxy material to the beneficial owners of the Company's
common stock, without par value (Common Stock), in accordance with Securities
and Exchange Commission (SEC) and New York Stock Exchange requirements. In
addition, certain of the Company's directors, officers and employees may
solicit proxies by telephone and personal contact.
VOTING OF SHARES
As of March 10, 1997, the record date fixed by the Board of Directors for
the determination of shareholders entitled to vote at the Annual Meeting, the
Company had outstanding 246,793,389 shares of Common Stock. Common Stock is
the only class of the Company's securities entitled to vote at the Annual
Meeting. Each share of Common Stock is entitled to one vote.
Shares represented by properly executed proxies received prior to the Annual
Meeting will be voted as specified by the shareholders. If no specifications
have been given in a proxy, the shares represented will be voted at the Annual
Meeting or any adjournments thereof FOR Item 1 (election of the nominees for
director), FOR Item 2 (approval of the proposal to amend the Company's 1994
Long-Term Incentive Compensation Plan), FOR Item 3 (ratification of the
appointment of Deloitte & Touche LLP as independent accountants and auditors
of the Company for 1997) and, in the discretion of the persons named in the
proxy, on any other business that may properly come before the meeting.
A proxy may be revoked by a shareholder at any time before it is voted at
the Annual Meeting by (i) delivering written revocation to Mr. Robert E.
Smith, Assistant Corporate Secretary, at the Company's address shown above,
(ii) submitting a subsequent proxy or (iii) voting in person at the meeting.
Under Texas law and the Company's Amended and Restated Bylaws (Bylaws), the
vote required for Item 1 (election of the nominees for director) is a
plurality of the votes cast. The vote required for each of Items 2 and 3
(approval of the proposal to amend the Company's 1994 Long-Term Incentive
Compensation Plan and ratification of independent accountants and auditors) is
the affirmative vote of a majority of the shares of Common Stock voted for or
against the matter (provided in the case of Item 2 that the total votes cast
must also exceed 50% of the shares of Common Stock outstanding and entitled to
vote on the matter). Abstentions and non-votes (shares held by brokers and
other nominees or fiduciaries that are present at the meeting but not voted on
a particular matter) on Items 2 and 3 do not count as voted for or against the
matter and thus do not affect the determination of whether the requisite
majority vote has been obtained.
1
<PAGE>
ELECTION OF DIRECTORS
The Company's Bylaws provide for a Board of Directors divided into three
classes having staggered terms with each class as nearly equal in size as
possible. Pursuant to the Company's Bylaws, the Board of Directors has set its
size at fifteen members as of the date of the Annual Meeting if the closing of
the merger (Merger) with NorAm Energy Corp. (NorAm) pursuant to the Agreement
and Plan of Merger dated as of August 11, 1996, as amended, among the Company,
its subsidiaries Houston Lighting & Power Company (HL&P) and HI Merger, Inc.,
and NorAm occurs prior to the date of the Annual Meeting. If the Merger does
not close prior to the date of the Annual Meeting, the size of the Board will
be set at eleven until such time as the closing occurs, when it will be
automatically increased to fifteen without any further action of the Board of
Directors. The current term of office of the directors in Class I expires at
the Annual Meeting. The terms of office of directors in Class II and Class III
will expire at the annual meetings of shareholders to be held in 1998 and
1999, respectively. At each annual meeting of shareholders, directors are
elected to succeed those whose terms have expired. Each newly elected director
serves for a three-year term.
The Bylaws currently provide that no person is eligible to stand for re-
election to the Board of Directors at the annual meeting of shareholders on or
immediately following the tenth anniversary of such person's initial election
or appointment to the Board of Directors unless such person was serving as a
director of the Company as of April 1, 1992 or is an employee of the Company
or any of its corporate affiliates. The Bylaws also provide that no person is
eligible to serve as a director after the annual meeting of shareholders
occurring on or after the first day of the month immediately following such
person's seventieth birthday. The Bylaws specify that any vacancies created by
such term limitations are to be filled by the shareholders at the appropriate
annual meeting. In any case, each director will serve until his or her
successor is duly elected and qualified unless he or she resigns, becomes
disqualified or disabled or is removed. Messrs. Howard W. Horne and Jack T.
Trotter will retire from the Board at the Annual Meeting, having served as a
directors of the Company since 1978 and 1985, respectively.
NOMINEES
The nominees for Class I directors to serve three-year terms ending at the
annual meeting in 2000 are current directors Messrs. Cruikshank and Hogan, Dr.
Schilt and Ms. Deily. If the closing of the Merger occurs prior to the Annual
Meeting, Mr. T. Milton Honea (who, together with Messrs. Robert C. Hanna, O.
Holcombe Crosswell and Joseph M. Grant, are directors of NorAm that have been
elected by the Company's shareholders as directors effective as of the
effective time of the Merger) will also be a nominee for a three-year term
ending at the annual meeting in 2000. If the closing of the Merger occurs
after the Annual Meeting, Mr. Honea's election as a Class I director with a
term expiring at the annual meeting in 2000 will be effective upon such
closing. Unless authority to vote is withheld, the persons named in the
accompanying proxy will vote shares represented by properly executed proxies
for the election of the foregoing nominees as directors. If any nominee should
become unavailable to serve on the Board of Directors, the persons named in
the proxy may act with discretionary authority to vote the proxy for such
other person, if any, as may be designated by the Board of Directors.
2
<PAGE>
The following sets forth certain information with respect to the business
experience of each nominee during the past five years and certain other
directorships held by each nominee. Unless otherwise indicated, each person
has had the same principal occupation for at least five years.
CLASS I DIRECTORS--TERM EXPIRING 2000
ROBERT J. CRUIKSHANK, age 66, has been a director since 1993. Mr. Cruikshank
is primarily engaged in managing his personal investments in Houston, Texas.
Prior to his retirement in 1993, he was a Senior Partner in the accounting
firm of Deloitte & Touche. Mr. Cruikshank serves as a director of MAXXAM Inc.,
Kaiser Aluminum Corporation, Compass Bank--Houston, Texas Biotechnology
Corporation and American Residential Services.
LINNET F. DEILY, age 51, has been a director since 1993. Ms. Deily currently
serves as Executive Vice President for Charles Schwab & Co., Inc. She
previously served as Chairman, Chief Executive Officer and President of First
Interstate Bank of Texas, N.A. until April 1996, having been Chairman since
1992, Chief Executive Officer since 1991 and President of First Interstate
Bank of Texas since 1988.(1)
LEE W. HOGAN, age 52, has been a director since 1995. Mr. Hogan is Executive
Vice President of the Company, having served in that capacity since January
1997. Previously, he served as Senior Vice President of the Company, having
served in that capacity since February 1996, and as Vice President of the
Company and as President and Chief Operating Officer of Houston Industries
Energy, Inc. (HI Energy), a subsidiary of the Company that engages primarily
in the generation and distribution of electricity in foreign markets, having
served in those capacities since 1993. From 1990 to 1993 he served as Group
Vice President--External Affairs for HL&P. In January 1997, Mr. Hogan was
appointed President and Chief Executive Officer of the HI Retail Energy Group,
a newly created division of the Company.
T. MILTON HONEA, age 63, has been Chief Executive Officer of NorAm since
December 1992. He was Vice Chairman of the Board of NorAm from July through
December 1992 and Executive Vice President of NorAm from October 1991 until
July 1992.
ALEXANDER F. SCHILT, PH.D., age 56, has been a director since 1992. Dr.
Schilt is the President of the InterAmerican University Council for Economic
and Social Development. He is currently on leave from the University of
Houston where he served as Chancellor through August 1995. Prior to 1990, he
was President of Eastern Washington University in Cheney and Spokane,
Washington.
- --------
(1) Wells Fargo Bank, as successor in interest to First Interstate Bank of
Texas, N.A., and certain of its affiliates participate in various credit
facilities with the Company, certain of its subsidiaries and other
entities in which the Company has an ownership interest. Under these
agreements, Wells Fargo and certain of its affiliates have maximum
aggregate loans and loan commitments of approximately $56 million as of
December 31, 1996.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES FOR DIRECTOR.
3
<PAGE>
CONTINUING DIRECTORS
The following sets forth certain information with respect to the members of
Class II and Class III of the Company's Board of Directors whose current terms
will continue after the Annual Meeting and the directors (Messrs. Hanna,
Crosswell and Grant) who will be added to Classes II and III effective upon
the closing of the Merger (regardless of whether it occurs before or after the
Annual Meeting). Information is provided concerning the business experience of
each continuing director during the past five years and certain other
directorships held by each continuing director. Unless otherwise indicated,
each person has had the same principal occupation for at least five years.
CLASS II DIRECTORS--TERM EXPIRING 1998
MILTON CARROLL, age 46, has been a director since 1992. Mr. Carroll is
Chairman, President and Chief Executive Officer of Instrument Products Inc., a
manufacturer of oil field equipment, in Houston, Texas. He is a director of
PanEnergy Corp., Seagull Energy Corporation, the Federal Reserve Bank of
Dallas and Blue Cross and Blue Shield of Texas, Inc.
JOHN T. CATER, age 61, has been a director since 1983. Mr. Cater is Chairman
and a director of River Oaks Trust Company in Houston, Texas. He also serves
as President and a director of Compass Bank. Until his retirement in 1990, Mr.
Cater served as President, Chief Operating Officer and a director of MCorp, a
Texas bank holding company. He served as a director of MCorp until July 1994.
ROBERT C. HANNA, age 67, was President and Chief Executive Officer of
Imperial Holly Corporation and Chairman of Holly Sugar Corporation prior to
his retirement in September 1993 and was a director of Imperial Holly
Corporation until July 1996. He currently serves as Chairman of the George
Foundation.
R. STEVE LETBETTER, age 48, has been a director since 1995. Mr. Letbetter is
President and Chief Operating Officer of the Company, having served in that
capacity since January 1997 and President and Chief Operating Officer of HL&P,
having served in that capacity since 1993. He has served in various positions
as an officer of HL&P since 1978 and as an officer of the Company since 1993,
most recently as a Senior Vice President of the Company from 1996 to January
1997.
BERTRAM WOLFE, Ph.D., age 69, has been a director since 1993. Prior to his
retirement in 1992, Dr. Wolfe was Vice President and General Manager of
General Electric Company's nuclear energy business in San Jose, California.
From 1992 to 1995, he was on the nuclear advisory committee of Pennsylvania
Power & Light and was a member of the international advisory committee of
Concord Industries. Dr. Wolfe serves on the boards of directors of URENCO Inc.
and URENCO Investments, Inc.
CLASS III DIRECTORS--TERM EXPIRING 1999
JAMES A. BAKER, III, age 66, has been a director since 1996. Mr. Baker is
currently a senior partner in the law firm of Baker & Botts, L.L.P. in
Houston, Texas, Senior Counselor to The Carlyle Group, a merchant banking firm
in Washington, D. C. and a director of Electronic Data Systems (EDS). He
served as the U.S. Secretary of State from January 1989 through August 1992
and as White House Chief of Staff and Senior Counselor to President Bush from
August 1992 to January 1993.(1)
- --------
(1) Baker & Botts, L.L.P. provided legal services to the Company and its
subsidiaries during 1996, for which it received approximately $10.2
million in legal fees, and it is also expected to provide legal services
during 1997.
4
<PAGE>
RICHARD E. BALZHISER, PH.D., age 64, has been a director since 1996. Dr.
Balzhiser is President Emeritus of the Electric Power Research Institute
(EPRI) in Palo Alto, California, a collaborative research and development
organization funded by member electric utilities. Dr. Balzhiser joined EPRI in
1973 as Director of the Fossil Fuel Advanced Systems Division. He became Vice
President of Research and Development in 1979 and Executive Vice President in
1987 and served as President and Chief Executive Officer from 1988 through
August 1996.(2)
O. HOLCOMBE CROSSWELL, age 55, is President of Griggs Corporation, a real
estate and investment company in Houston, Texas.
JOSEPH M. GRANT, age 57, is the Senior Vice President and Chief Financial
Officer of EDS and has been with EDS since December 1990. He is on the Board
of Directors of EDS, American Eagle Group, Incorporated and Heritage Media
Corporation.
DON D. JORDAN, age 64, has been a director of the Company since 1977 and of
HL&P since 1974. Mr. Jordan is Chairman and Chief Executive Officer of the
Company and Chairman and Chief Executive Officer of HL&P. He also serves as an
advisory director of Texas Commerce Bank National Association and a director
of BJ Services Company, Inc.
ORGANIZATION OF THE BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Board of
Directors. Several committees established by the Board of Directors oversee
specific matters affecting the Company, including an Executive and Nominating
Committee, an Audit Committee, a Finance Committee, a Compensation Committee,
a Nuclear Committee and other committees.
THE EXECUTIVE AND NOMINATING COMMITTEE, currently composed of Messrs. Cater,
Cruikshank, Horne, Jordan and Trotter, reviews management recommendations for
organizational changes, provides consultation regarding duties of executive
officers and recommends potential candidates for election to the Board of
Directors. See "Director Nominations for 1998 Annual Meeting of Shareholders."
THE AUDIT COMMITTEE is composed entirely of non-employee directors,
currently Messrs. Carroll and Cruikshank and Dr. Schilt. The Audit Committee
reviews the Company's accounting and financial practices and advises the Board
of Directors of any needed changes in such practices, recommends to the Board
of Directors the firm of independent public accountants to be engaged to
examine the financial statements of the Company and its subsidiaries, reviews
and approves the plan and scope of the independent public accountants' audit
and non-audit services and related fees, reviews the Company's internal
accounting controls, and has general responsibility for related matters.
THE FINANCE COMMITTEE, currently composed of Messrs. Cater, Hogan, Horne,
Jordan and Trotter and Ms. Deily, reviews management forecasts of the
Company's financial needs and policies, acts on management recommendations
concerning the Company's capital structure, amounts and sources of permanent
financing, lines of credit, loan agreements and dividend policies and approves
terms relevant to specific debt and equity offerings of the Company.
- --------
(2) During 1996, the Company and HL&P paid a total of approximately $12.6
million in membership dues and related fees to EPRI. HL&P expects to pay
approximately $9.2 million in dues to EPRI during 1997.
5
<PAGE>
THE COMPENSATION COMMITTEE is composed entirely of non-employee directors,
currently Messrs. Cater, Cruikshank and Horne. Mr. Carroll also served on the
Compensation Committee during 1996. The Compensation Committee makes
recommendations to the Board of Directors concerning compensation and benefits
for officers of the Company and reviews human resource programs regarding
manpower forecasts and training. The Compensation Committee also monitors and,
in certain cases, administers employee benefit plans.
THE NUCLEAR COMMITTEE is currently composed entirely of non-employee
directors, Drs. Balzhiser, Schilt and Wolfe. The Nuclear Committee reviews the
activities of the Company and HL&P in all areas of nuclear development and
operations, and reports to and makes recommendations to the Board of Directors
on such matters as nuclear regulatory reports and licensing requirements,
management evaluations of nuclear engineering, construction and operations
progress and performance and monitoring of budgetary requirements.
The Board of Directors of the Company held fourteen meetings during 1996.
During 1996, the Executive and Nominating Committee met two times, the Audit
Committee met three times, the Finance Committee met three times, the
Compensation Committee met five times and the Nuclear Committee met six times.
Other committees met an aggregate of five times. Each director attended at
least 75% of the aggregate number of meetings of the Board of Directors and of
committees on which he or she served.
COMPENSATION OF DIRECTORS
Each non-employee director receives an annual retainer fee of $20,000, a fee
of $1,000 for each board and committee meeting attended and 500 shares of
Common Stock annually pursuant to the terms of the Company's Stock Plan for
Outside Directors. Directors may defer all or part of their annual retainer
fees and meeting fees under the Company's deferred compensation plan. The
deferred compensation plan currently provides for accrual of interest on
deferred director compensation at a rate equal to the average annual yield on
Moody's Long-Term Corporate Bond Index plus two percentage points.
Non-employee directors participate in a director benefits plan pursuant to
which a director who serves at least one full year will receive an annual
benefit in cash equal to the annual retainer payable in the year the director
terminates service. Benefits under this plan will be payable to a director,
commencing the January following the later of the director's termination of
service or attainment of age 65, for a period equal to the number of full
years of service of the director.
Non-employee directors may also participate in the Company's executive life
insurance plan described under "Retirement Plans, Related Benefits and Other
Agreements." This plan provides split-dollar life insurance with a death
benefit equal to six times the director's annual retainer with coverage
continuing after termination of service as a director. The plan also permits
the Company to provide for a tax reimbursement payment to make the directors
whole for any imputed income recognized with respect to the term portion of
the annual insurance premiums. Upon death, the Company will receive the
balance of the insurance proceeds payable in excess of the specified death
benefit which, by design, is expected to be at least sufficient to cover the
Company's cumulative outlays to pay premiums and the after-tax cost to the
Company of the tax reimbursement payments. Mr. Trotter, who does not
participate in this plan, has a separate agreement with the Company providing
for payment in the event of his death of a lump sum equal to eight times his
final annual retainer. Because this amount is subject to taxation at
distribution, it approximates on an after-tax basis the amount of the death
benefit that would have been payable had he participated in the executive life
insurance plan.
6
<PAGE>
Mr. Carroll entered into an agreement with the Company in January 1997 under
which Mr. Carroll performs consulting services in connection with deregulation
issues. He is compensated by the Company for these services at a rate of
$20,000 per month. The agreement has a term of one year, subject to earlier
termination by either party. Under a separate, now-terminated consulting
agreement, Mr. Carroll was paid $60,000 in 1996 by HI Energy for services in
connection with certain international activities.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth certain information regarding each person
(including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934) who is known by the Company (based on
February 1997 Schedule 13G filings made with the SEC) to beneficially own more
than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ------------------------------------ ---------- -------
<S> <C> <C>
The Northern Trust Corporation............................ 33,642,811(1) 14.35%
50 South LaSalle Street
Chicago, Illinois 60675
</TABLE>
- --------
(1) Northern Trust Corporation as parent holding company, and its subsidiaries
The Northern Trust Company, Northern Trust Bank of Florida N.A. and
Northern Trust Bank of Arizona (together, Northern Trust), have reported
that Northern Trust has sole voting power for 399,172 shares, shared
voting power for 33,225,189 shares, sole dispositive power for 350,268
shares and shared dispositive power for 61,654 shares. The Company
understands that the shares reported include 33,211,443 shares held by The
Northern Trust Company in its capacity as trustee under the Company's
savings plan.
7
<PAGE>
SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth information as of March 1, 1997, with respect
to the beneficial ownership of the Company's Common Stock by each current
director and nominee whose election will be effective upon the closing of the
Merger, the chief executive officer and the other four most highly compensated
executive officers of the Company and, as a group, by such persons and other
executive officers. No person or member of the group listed owns any equity
securities of HL&P or any other subsidiary of the Company. Unless otherwise
indicated, each person or member of the group listed has sole voting and sole
investment power with respect to the shares of Common Stock listed. No
ownership shown in the table represents 1% or more of the outstanding shares
of Common Stock.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK
NAME BENEFICIALLY OWNED
- ---- ------------------
<S> <C>
James A. Baker, III...................................... 1,500
Richard E. Balzhiser..................................... 600
Milton Carroll........................................... 2,900
John T. Cater............................................ 2,500(1)
William T. Cottle........................................ 19,445(2)(3)
O. Holcombe Crosswell.................................... 0
Robert J. Cruikshank..................................... 2,500
Linnet F. Deily.......................................... 2,500(4)
Joseph M. Grant.......................................... 0
Robert C. Hanna.......................................... 0
Lee W. Hogan............................................. 31,719(2)(3)(5)
T. Milton Honea.......................................... 0
Howard W. Horne.......................................... 13,588(5)
Don D. Jordan............................................ 279,905(2)(3)(6)
Hugh Rice Kelly.......................................... 73,992(2)(3)(5)
R. Steve Letbetter....................................... 66,911(2)(3)(5)
Alexander F. Schilt...................................... 1,300
Jack T. Trotter.......................................... 2,500
Bertram Wolfe............................................ 720
All of the above and other executive officers as a group
(28 persons)............................................ 703,512(2)(3)(5)
</TABLE>
- --------
(1) Mr. Cater disclaims beneficial ownership of 2,000 of these shares, which
are owned by his adult children.
(2) Includes shares held under the Company's savings plan, as to which the
participant has sole voting power (subject to such power being exercised
by the plan's trustee in the same proportion as directed shares in the
savings plan are voted in the event the participant does not exercise
voting power). The shares held under the plan are reported as of December
31, 1996.
(3) The ownership shown in the table includes shares which may be acquired
within 60 days on exercise of outstanding stock options granted under the
Company's long-term incentive compensation plan by each of the persons and
group, as follows: Mr. Cottle--9,187 shares; Mr. Hogan--7,668 shares; Mr.
Jordan--113,574 shares; Mr. Kelly--22,842 shares; Mr. Letbetter--24,047
shares; and the group--236,831 shares.
(4) Voting power and investment power with respect to the shares listed for
Ms. Deily are shared with her spouse.
(5) Includes shares held under the Company's dividend reinvestment and stock
purchase plan as of December 31, 1996.
(6) Voting power and investment power with respect to 1,152 of the shares
listed are shared with Mr. Jordan's spouse.
8
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, for the years ended December 31, 1994, 1995 and
1996, the annual, long-term and certain other compensation of the chief
executive officer and each of the other four most highly compensated executive
officers of the Company who served as executive officers during 1996 (Named
Officers).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ---------- ---------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY(1) BONUS(1) COMPENSATION OPTIONS(#) PAYOUTS(2) COMPENSATION(3)
------------------ ---- -------- ---------- ------------ ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Don D. Jordan.......... 1996 $962,292 $1,050,000 $ 13,300 27,985 $767,440 $819,105
Chairman and Chief 1995 884,500 907,226 3,969 36,316 407,437 734,023
Executive Officer of 1994 859,500 734,873 114,648 27,726 550,567 717,261
the Company and HL&P
R. Steve Letbetter..... 1996 416,000 330,750 228 7,815 138,831 45,151
President and Chief 1995 363,500 285,750 190 9,746 84,201 47,242
Operating Officer of 1994 321,000 246,525 31,133 6,366 117,607 43,818
the Company and HL&P
Hugh Rice Kelly........ 1996 344,833 209,400 705 5,563 176,311 37,495
Executive Vice 1995 334,000 195,773 637 7,414 100,925 44,245
President, General 1994 323,500 190,820 42,147 5,470 145,107 50,546
Counsel and Corporate
Secretary of the
Company and HL&P
Lee W. Hogan........... 1996 310,000 401,722 1,260 0 42,360 20,913
Executive Vice 1995 262,500 123,750 965 0 52,142 18,711
President of the 1994 239,400 311,250 21,104 0 102,074 14,434
Company
William T. Cottle...... 1996 269,000 164,400 450 4,299 121,217 18,547
Executive Vice 1995 254,500 157,200 401 5,566 0 16,711
President and 1994 241,000 129,675 337 4,044 0 13,126
General Manager--
Nuclear of HL&P
</TABLE>
- --------
(1) The amounts shown include salary and bonus earned as well as earned but
deferred by the Named Officers.
(2) The amounts shown for 1996 represent the dollar value of shares of the
Company's Common Stock paid out in 1996 under the Company's long-term
incentive compensation plan based on the achievement of certain
performance goals for the 1993-1995 performance cycle, plus dividend
equivalent accruals during the performance period.
(3) The amounts shown for 1996 include (i) Company contributions to the
Company's savings plan and accruals under its savings restoration plan on
behalf of the Named Officers, as follows: Mr. Jordan, $19,416; Mr.
Letbetter, $29,474; Mr. Kelly, $14,289; Mr. Hogan, $17,178; and Mr.
Cottle, $17,900; (ii) the term portion of the premiums paid by the Company
under split-dollar life insurance policies purchased in 1994 in connection
with the Company's executive life insurance plan, as follows: Mr. Jordan,
$19,100; Mr. Letbetter, $327; Mr. Kelly, $1,012; Mr. Hogan, $1,809; and
Mr. Cottle, $647; and (iii) the portion of accrued interest on amounts of
compensation deferred under the Company's deferred compensation plan and
executive incentive compensation plan that exceeds 120% of the applicable
federal long-term rate provided under Section 1274(d) of the Internal
Revenue Code, as follows: Mr. Jordan, $780,589; Mr. Letbetter, $15,350;
Mr. Kelly, $22,194; Mr. Hogan, $1,926; and Mr. Cottle, none.
9
<PAGE>
STOCK OPTION GRANTS
The following table contains information concerning grants of stock options
during 1996 under the Company's long-term incentive compensation plan to the
Named Officers. Mr. Hogan participated in a different incentive compensation
plan which does not provide for option grants.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
GRANT
INDIVIDUAL GRANTS DATE VALUE
------------------------------------------- ----------
NUMBER OF % OF TOTAL EXERCISE
SECURITIES OPTIONS OR BASE
UNDERLYING GRANTED TO PRICE GRANT DATE
OPTIONS EMPLOYEES IN PER EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR SHARE DATE VALUE(2)
- ---- ---------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Don D. Jordan............ 27,985 27.49% $24.375 1/01/06 $67,724
R. Steve Letbetter....... 7,815 7.68% 24.375 1/01/06 18,912
Hugh Rice Kelly.......... 5,563 5.46% 24.375 1/01/06 13,462
William T. Cottle........ 4,299 4.22% 24.375 1/01/06 10,404
</TABLE>
- --------
(1) The nonstatutory options for shares of Common Stock included in the table
were granted on January 2, 1996, have a ten-year term and generally become
exercisable annually in one-third increments commencing one year after
date of grant, so long as employment with the Company or its subsidiaries
continues. A change in control of the Company would result in all options
becoming immediately exercisable. For the purposes of the long-term
incentive compensation plan, a "change in control" generally is deemed to
have occurred if (i) any person or group becomes the direct or indirect
beneficial owner of 30% or more of the Company's outstanding voting
securities; (ii) the majority of the Board changes as a result of, or in
connection with, certain transactions; (iii) as a result of the Company
merging or consolidating with another corporation, less than 70% of the
surviving corporation's outstanding voting securities is owned by the
former shareholders of the Company (excluding any party to such a
transaction or any affiliates of any such party); (iv) a tender offer or
exchange offer is made and consummated for the ownership of 30% or more of
the Company's outstanding voting securities; or (v) the Company transfers
all or substantially all of its assets to another corporation that is not
wholly-owned by the Company.
(2) The values are based on the Black-Scholes option pricing model adjusted
for the payment of dividends. The calculations were based on the following
assumptions: volatility of 15.713% (based on daily closing prices of
Common Stock for the one-year period prior to grant date); risk-free
interest rate of 5.65% (interest rate on a U.S. Treasury security with a
maturity date corresponding to that of the option term); option price of
$24.375 (fair market value of the underlying stock on the date of grant);
current dividend rate of $1.50 per share per year; and option term equal
to the full ten-year period until the stated expiration date. No reduction
has been made in the valuations on account of non-transferability of the
options or vesting or forfeiture provisions. Valuations would change if
different assumptions were made. Option values are dependent on general
market conditions and the performance of Common Stock. There can be no
assurance that the values in this table will be realized.
10
<PAGE>
STOCK OPTION VALUES
The following table sets forth information on the unexercised options to
purchase Common Stock held by the Named Officers as of December 31, 1996. No
options were exercised by the Named Officers during 1996.
1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS THE-MONEY OPTIONS AT
AT DECEMBER 31, 1996 DECEMBER 31, 1996(1)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
Don D. Jordan............... 82,900/61,437 $77,289/$114,998
R. Steve Letbetter.......... 16,070/16,435 18,670/ 30,866
Hugh Rice Kelly............. 16,694/12,329 15,743/ 23,475
Lee W. Hogan................ 7,668/ 0 2,897/ 0
William T. Cottle........... 4,552/ 9,357 8,816/ 17,623
</TABLE>
- --------
(1) Based on the average of the high and low sales prices of the Common Stock
on the New York Stock Exchange Composite Tape, as reported in The Wall
Street Journal for December 31, 1996.
LONG-TERM INCENTIVE COMPENSATION
The following table sets forth, for the Named Officers other than Mr. Hogan,
information concerning awards made during 1996 for the 1996-1998 performance
cycle under the Company's long-term incentive compensation plan. The amounts
shown represent potential payouts of awards of shares of Common Stock based on
the achievement of performance goals over a three year performance cycle. The
performance goals include a Company consolidated goal and subsidiary or
business unit goals, weighted 25% on consolidated performance and 75% on
subsidiary or business unit performance. The Company consolidated goal is
achieving a certain level of total shareholder return in relation to a group
of other companies. The subsidiary or business unit goals are achieving
certain cash flow performance in relation to a group of other companies and
improving competitive position through a combination of cost reduction and
revenue growth. An additional goal applicable to Messrs. Jordan and Kelly is
based on the success of HI Energy in closing certain transactions and its
achievement of specified internal rates of return. If a change in control of
the Company occurs before the end of a performance cycle, the payout of awards
for performance shares will occur without regard to achievement of the
performance goals. See Note 1 to the Option Grants in 1996 table for
information regarding the definition of a change in control under the
Company's long-term incentive compensation plan. There were no awards during
1996 for Mr. Hogan under the incentive compensation plan established for HI
Energy for the 1995-1999 performance cycle.
LONG-TERM INCENTIVE PLAN AWARDS IN 1996
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-BASED
PERFORMANCE PLANS(1)
OR OTHER ---------------------------
PERIOD MAXIMUM
NUMBER UNTIL THRESHOLD TARGET NUMBER
OF MATURATION NUMBER OF NUMBER OF
NAME SHARES OR PAYOUT SHARES OF SHARES SHARES
- ---- ------ ----------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Don D. Jordan.................... 27,359 12/31/98 13,680 27,359 41,039
R. Steve Letbetter............... 8,187 12/31/98 4,094 8,187 12,281
Hugh Rice Kelly.................. 5,827 12/31/98 2,914 5,827 8,741
William T. Cottle................ 4,504 12/31/98 2,252 4,504 6,756
</TABLE>
- --------
(1) The table does not reflect dividend equivalent accruals during the
performance period.
11
<PAGE>
RETIREMENT PLANS, RELATED BENEFITS AND OTHER AGREEMENTS
The following table shows the estimated annual benefit payable under the
Company's retirement plan, benefit restoration plan and, in certain cases,
supplemental agreements, to officers in various compensation classifications
upon retirement at age 65 after the indicated periods of service, determined
on a single-life annuity basis. The benefits listed in the table are not
subject to any deduction for Social Security or other offsetting amounts.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
FINAL
AVERAGE
ANNUAL ESTIMATED ANNUAL PENSION BASED ON SERVICE(1)
COMPENSATION ------------------------------------------------------------------
AT AGE 65 15 20 25 30 =35
- ------------ -- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 400,000 $114,580 $152,773 $190,967 $ 229,160 $ 267,353
$ 500,000 $143,680 $191,573 $239,467 $ 287,360 $ 335,253
$ 600,000 $172,780 $230,373 $287,967 $ 345,560 $ 403,153
$ 700,000 $201,880 $269,173 $336,467 $ 403,760 $ 471,053
$ 800,000 $230,980 $307,973 $384,967 $ 461,960 $ 538,953
$ 900,000 $260,080 $346,773 $433,467 $ 520,160 $ 606,853
$1,000,000 $289,180 $385,573 $481,967 $ 578,360 $ 674,753
$1,200,000 $347,380 $463,173 $578,967 $ 694,760 $ 810,553
$1,400,000 $405,580 $540,773 $675,967 $ 811,160 $ 946,353
$1,600,000 $463,780 $618,373 $772,967 $ 927,560 $1,082,153
$1,800,000 $521,980 $695,973 $869,967 $1,043,960 $1,217,953
$2,000,000 $580,180 $773,573 $966,967 $1,160,360 $1,353,753
</TABLE>
- --------
(1) The qualified pension plan limits compensation in accordance with Section
401(a)(17) of the Internal Revenue Code and also limits benefits in
accordance with Section 415 of the Internal Revenue Code. Pension benefits
based on compensation above the qualified plan limit or in excess of the
limit on annual benefits are provided through the benefit restoration
plan.
For the purpose of the pension table above, final average annual
compensation means the average of covered compensation for 36 consecutive
months out of the 120 consecutive months immediately preceding retirement in
which the participant's covered compensation was the highest. Covered
compensation includes only the amounts shown in the "Salary" and "Bonus"
columns of the Summary Compensation Table. At December 31, 1996, the credited
years of service for the following persons are: 35 years for Mr. Jordan; 23
years for Mr. Letbetter; 22 years for Mr. Kelly, 10 of which result from a
supplemental agreement; 6 years for Mr. Hogan; and 4 years for Mr. Cottle.
The Company maintains an executive benefits plan that provides certain
salary continuation, disability and death benefits to certain key officers of
the Company and certain of its subsidiaries. The Named Officers participate in
this plan pursuant to individual agreements that generally provide for (i) a
salary continuation benefit of 100% of the officer's current salary for twelve
months after death during active employment and then 50% of salary for nine
years or until the deceased officer would have attained age 65, if later, and
(ii) if the officer retires after attainment of age 65, an annual post-
retirement death benefit of 50% of the officer's preretirement annual salary
payable for six years. This benefit plan is no longer being offered to new
officers.
The Company has an executive life insurance plan providing split-dollar life
insurance in the form of a death benefit for officers and members of the Board
of Directors. The death benefit coverage varies but in each case is based on
coverage (either single life or second to die) that is available for the same
amount of premium that could purchase coverage equal to four times current
salary for
12
<PAGE>
Messrs. Letbetter and Hogan; two times current salary for Messrs. Kelly and
Cottle; thirty million dollars for Mr. Jordan; and six times the annual
retainer for the Company's non-employee directors (except in the case of Mr.
Trotter who has a separate agreement providing for similar coverage, as
described under "Compensation of Directors"). The plan also provides that the
Company may make payments to the covered individuals to compensate for tax
consequences of imputed income that they must recognize for federal income tax
purposes based on the term portion of the annual premiums. If a covered
executive retires at age 65 or at an earlier age under circumstances approved
by the Board of Directors, rights under the plan vest so that coverage is
continued based on the same death benefit in effect at the time of retirement.
Upon death, the Company will receive the balance of the insurance proceeds
payable in excess of the specified death benefit which is expected to be at
least sufficient to cover the Company's cumulative outlays to pay premiums and
the after-tax cost to the Company of the tax reimbursement payments. There is
no arrangement or understanding under which any covered individuals will
receive or be allocated any interest in any cash surrender value under the
policy.
The Company, HL&P and HI Energy have entered into a trust agreement with an
independent trustee establishing a "rabbi trust" for the purpose of funding
benefits payable to participants (which include each of the Named Officers)
under the Company's deferred compensation plans, executive incentive
compensation plans, benefits restoration plan and savings restoration plan
(Designated Plans). The trust is a grantor trust, irrevocable except in the
event of an unfavorable ruling by the Internal Revenue Service as to the tax
status of the trust or certain changes in tax law. It is currently funded with
a nominal amount of cash. The Company, HL&P and HI Energy are required to make
future contributions to the grantor trust when required by the provisions of
the Designated Plans or when required by the Company's benefits committee. The
benefits committee consists of officers of the Company designated by the Board
of Directors and has general responsibility for funding decisions and
selection of investment managers for the Company's retirement plan and other
administrative matters in connection with other employee benefit plans of the
Company. If there is a change in control (defined in a manner generally the
same as the comparable definition in the Company's long-term incentive
compensation plan), the Company, HL&P and HI Energy are required to fully fund
the grantor trust, within 15 days following the change in control, with an
amount equal to the entire benefit to which each participant would be entitled
under the Designated Plans as of the date of the change in control (calculated
on the basis of the present value of the projected future benefits payable
under the Designated Plans). The assets of the grantor trust are required to
be held separate and apart from the other funds of the Company and its
subsidiaries, but remain subject to claims of general creditors under
applicable state and federal law.
In accordance with the indemnification provisions of the Company's Bylaws
and Texas law, the Company paid approximately $9,600 in 1996 to cover legal
fees and expenses incurred on behalf of the Company's directors in connection
with the defense of a shareholder derivative suit and class action filed in
April 1994 by two former employees of HL&P.
In February 1997, the Company entered into an amended and restated
employment agreement (Agreement) with Mr. Jordan extending his employment for
two years beyond his normal retirement date (June 1, 1997). The restated
agreement replaces an original agreement entered in 1994 which provided for
benefits in the event of termination of employment following a change of
control and for extension of Mr. Jordan's employment until he reaches age 67
if he remained employed by the Company at age 65. The agreement, as restated,
provides for the employment of Mr. Jordan at his present position with the
Company during the two and one-half year period commencing January 8, 1997 and
ending June 1, 1999 (Employment Period). During the Employment Period, Mr.
Jordan will receive benefits including (i) base salary in an amount not less
than his salary in effect on January 8, 1997, (ii) annual bonus awards based
on amounts payable under the Company's executive incentive compensation plan
and long-term incentive compensation plan, and (iii) participation in other
13
<PAGE>
employee benefit plans and programs on generally the same basis as other peer
executives, except that Mr. Jordan will not receive any long-term incentive
compensation plan award for performance cycles commencing in 1998 and 1999 but
will instead receive an award of 300,000 restricted shares of Common Stock.
The award of restricted shares of Common Stock is implemented through
bookkeeping entry until applicable vesting conditions are satisfied, at which
time shares of Common Stock will be delivered out of shares held in the
Company's treasury, together with accumulated dividends.
Mr. Jordan's right to 150,000 of the restricted shares of Common Stock
(Vested Shares) will vest on June 1, 1999 if he has remained in the continuous
employment of the Company during the Employment Period. If, during the
Employment Period, the Company terminates Mr. Jordan's employment for Cause
(as defined in the Agreement) or he voluntarily terminates employment without
Good Reason (as defined in the Agreement), Mr. Jordan will forfeit all rights
to the Vested Shares as of the date of termination. If, during the Employment
Period, the Company terminates Mr. Jordan's employment without Cause, he
terminates employment for Good Reason, or Mr. Jordan's employment terminates
by reason of death, Disability (as defined in the Agreement) or retirement
with consent of the Company, his right to the Vested Shares will vest as of
the date of termination.
Mr. Jordan's right to an additional 150,000 of the restricted shares of
Common Stock (Performance Shares) is generally subject to vesting provisions
based on achievement of certain performance goals (the same performance goals
that are applicable to Mr. Jordan's performance-based restricted stock award
under the long-term incentive compensation plan for the 1997 performance
cycle); provided that (1) if, during the Employment Period, the Company
terminates Mr. Jordan's employment without Cause or he terminates employment
for Good Reason, Mr. Jordan's right to the Performance Shares will vest as of
the date of termination, (2) if, during the Employment Period, the Company
terminates Mr. Jordan's employment for Cause or he voluntarily terminates
employment without Good Reason, Mr. Jordan will forfeit all right to the
Performance Shares as of the date of termination, and (3) if, prior to the end
of the Employment Period and during calendar year 1997, Mr. Jordan terminates
employment by reason of death, Disability or retirement with the consent of
the Company, he will forfeit all right to the Performance Shares as of the
date of termination. If Mr. Jordan terminates employment prior to the end of
the Employment Period and during calendar year 1998 or 1999, he will have a
vested right to a portion of the Performance Shares, based on the Compensation
Committee's determination of the extent to which the performance goals for the
1997 performance cycle are, based on information then available, expected to
be achieved and prorated based on time elapsed in the performance cycle. Upon
Mr. Jordan's completion of the Employment Period without termination of
employment, he will have a vested right to all or a portion of the Performance
Shares, based on the Compensation Committee's determination of the extent to
which the performance goals for the 1997 performance cycle are, based on
information then available, expected to be achieved.
The restated agreement provides that Mr. Jordan has the right to receive
payments of salary and bonus previously deferred under the Company's deferred
compensation plan in fifteen annual installments and that the Company may not
exercise any right it otherwise has to make payment in a lump sum. In
addition, the agreement provides for an extension of the commencement date of
the deferred payments under the deferred compensation plan from June 1, 1999
until June 1, 2000 in consideration of Mr. Jordan's agreement to make himself
available for up to 40 hours per month as a consultant from June 2, 1999 until
June 1, 2000.
Upon the Company's termination of Mr. Jordan's employment without Cause or
his termination of employment for Good Reason following a Change of Control
(as defined below), the Company will pay Mr. Jordan a cash payment equal to
2.99 times Mr. Jordan's base amount (generally, his average taxable
compensation received from the Company for the five calendar years prior to
the Change of
14
<PAGE>
Control) under Internal Revenue Code Section 280G, in addition to fulfillment
of certain other obligations generally applicable upon termination of
employment, and any unvested portion of the 300,000 restricted shares of
Common Stock will vest. To the extent that payments made to Mr. Jordan upon a
Change of Control would result in the application of an excise tax (and
related loss of deduction to the Company) under the Internal Revenue Code,
such payments shall be reduced as necessary to avoid this result. In the event
that an overpayment is made, such payment will be recharacterized as a loan
that Mr. Jordan is obligated to repay with interest in order to avoid the
excise tax and lost deduction. Generally, a Change of Control will be deemed
to occur under the Agreement if (i) an individual, entity or group acquires
beneficial ownership of 30% or more of the Company's Common Stock, (ii) the
individuals constituting the Board of Directors of the Company on January 1,
1997, including their designated successors (Incumbent Board) cease to
constitute a majority of the Board, or (iii) a merger or other business
combination to which the Company is a party is consummated unless (1) the
Company's stockholders prior to the business combination own more than 70% of
the resulting parent entity, (2) there is not a 30% stockholder of the
resulting parent entity except to the extent such ownership existed prior to
the business combination and (3) a majority of the board of the resulting
parent entity after the transaction were members of the Incumbent Board at the
time of the initial agreement or board action providing for the business
combination.
HL&P and Mr. Cottle entered into an employment agreement in 1993 that
continues indefinitely, subject to termination by either party on 30 days'
notice (Employment Period). The agreement generally provides for employment of
Mr. Cottle as a group vice president--nuclear or in such other executive
capacities as may be determined from time to time, a minimum annual base
salary ($235,000), bonuses and participation in those employee benefit plans
and programs available to similarly situated employees during the Employment
Period. In addition, if the Employment Period terminates after April 5, 2003,
Mr. Cottle will be eligible for supplemental pension, disability or death
benefits determined as if his employment had commenced ten years prior to the
initial date of the Employment Period.
The Company and Mr. Hogan entered into an agreement in 1996 which provides
that, upon the earliest of his normal retirement, disability or death, Mr.
Hogan will be eligible for supplemental pension benefits determined as if his
employment had commenced fifteen years prior to his first day of actual
employment with the Company.
Certain of the Company's executive officers, including Messrs. Letbetter,
Kelly, Hogan and Cottle, were parties to severance agreements with the Company
that expired in December 1996. The expired agreements provided, in general,
for the payment of certain benefits if within three years following a change
in control of the Company, the officer's employment is terminated for reasons
other than for cause or disability or by the officer following certain changes
in job responsibilities, job location or compensation and benefits. The
benefits that would have been triggered by a covered termination under the
expired agreements included a payment of 2.99 times average annual gross
compensation included in gross income for the previous five years and
continuation of certain medical benefits. The Company is currently considering
authorizing new severance agreements for certain of the Company's executive
officers, including Messrs. Letbetter, Kelly, Hogan and Cottle.
15
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee (Committee) is composed entirely of directors who
are not officers or employees of the Company and who are not eligible to
participate in any of the compensation programs that the Committee
administers. The Committee reviews and makes recommendations to the Board
concerning all executive officer salary arrangements, other non-incentive
based compensation for executives and the design of the Company's incentive
compensation plans for executives. The Committee also oversees and administers
the Company's incentive compensation programs including the determination of
the annual and long-term incentive awards to the Company's executive officers.
COMPENSATION POLICY
The Company's executive compensation policy is to have compensation programs
that
. strengthen the relationship between pay and performance;
. attract, retain and encourage the development of highly qualified and
experienced executives;
. promote overall corporate performance; and
. provide compensation that is competitive externally and equitable
internally.
The Company retains independent consulting firms to provide, at least
biennially, data on the executive compensation practices of a peer group of
companies considered comparable to the Company in terms of size, performance,
position and compensation philosophy (Reference Group). Data concerning the
Reference Group is used primarily for establishing ranges for base salary and
target and opportunity levels for annual and long-term incentive awards. (The
Reference Group is not identical to the group of companies identified in the
Standard & Poor's group index of electric utility companies (S&P Electric
Companies Index) used in the creation of the Performance Graph included in
this proxy statement because the Committee believes that the Company's most
direct competitors for executive talent are not in all cases the same as the
companies included in the index chosen for comparing shareholder returns.)
The Committee also obtains peer group data regarding the performance of
groups of companies in the utility industry, the nonregulated power industry
and other industries. This industry-specific data is used primarily in the
formulation of performance measurements related to the Company's individual
subsidiaries or business units.
In addition to considering comparative data for the Reference Group and
other peer groups, the Committee makes its own subjective determination of
executive officer performance. In making such determinations, the Committee
also takes into account the chief executive officer's evaluations of other
executive officers' performance.
The Committee periodically evaluates the Company's executive compensation
programs in light of the provisions of the Internal Revenue Code relating to
the disallowance of deductions for compensation in excess of $1 million for
certain executive officers unless certain requirements are met. The Committee
does not anticipate any payment of compensation in 1997 or 1998 in excess of
that which is deductible under those rules, taking into account expected
deferrals of compensation by affected executive officers. Except for the long-
term performance incentive awards established for the Company's nonregulated
power business, the performance goals for awards under the Company's long-term
incentive awards program qualify for an exception to the deductibility limit
for certain shareholder-approved, performance-based compensation. In order for
this exception to the deductibility limit to continue to be applicable, a
description of the performance goals for long-term
16
<PAGE>
incentive awards under this program and certain limitations on awards to any
individual employee must be approved by the Company's shareholders no later
than the Company's 1997 Annual Meeting of Shareholders. Accordingly, at the
recommendation of the Committee, the Board of Directors has adopted, subject
to shareholder approval, amendments to the 1994 Long-Term Incentive
Compensation Plan intended to achieve this result. The Committee may consider
in the future whether or not to submit for shareholder approval the
performance goals applicable to the annual incentive awards or the long-term
incentive awards established for the Company's nonregulated power business, or
make any adjustments to the performance goals for those incentive awards that
would be necessary in order to qualify for the performance-based exception of
the tax provisions. The Company reserves the right to structure compensation
in a manner not eligible for exclusion from the deductibility limit.
The Committee will continue to evaluate the effect of the tax provisions and
the exception to the deductibility limit for certain shareholder-approved,
performance-based compensation.
COMPONENTS OF COMPENSATION
The key elements of the Company's executive compensation program are base
salary, annual incentive awards and long-term incentive awards. The Committee
evaluates each element of compensation separately and in relation to the other
elements of an executive's total compensation package, taking into
consideration relevant comparative data for compensation at the 50th
percentile and 75th percentile for companies in the Reference Group. Compared
to companies in the Reference Group, total targeted compensation may vary from
below the 50th percentile to above the 75th percentile depending on an
executive officer's tenure, experience, leadership and level of
responsibility. Because a significant portion of an executive officer's
compensation includes at-risk components based on business performance, if the
performance exceeds that of the relevant peer group, compensation should be
above the targeted levels; likewise, if performance falls below that of the
peer group, compensation should be below the targeted level.
BASE SALARIES
The Committee's annual recommendations to the Board concerning each
executive officer's base salary are based on the Committee's analysis of
salary levels for comparable executive officer positions at companies in the
Reference Group, its subjective evaluation and, except in the case of Mr.
Jordan, management's evaluation of each executive officer's individual
performance and level of responsibility.
ANNUAL INCENTIVE COMPENSATION
The annual incentive awards program provides executive officers with annual
bonuses based on the achievement of Committee-approved performance goals.
Those annually determined performance goals generally are based upon financial
objectives of the Company and its subsidiaries or business units and are
designed to encourage improved operating results and foster achievement of
particular strategic objectives. The performance goals for 1996 included, for
the electric utility operations, achieving certain levels of cash flow and
certain ratings in a customer value index; and for the nonregulated power
business, conducting new business in accordance with a specified business
plan, income versus expense goals and/or closing transactions for particular
projects or acquiring properties in the nonregulated power business that
result in achievement of specified internal rates of return. Certain executive
officers also had individual goals related to improvements in productivity and
the quality of work within particular departments and included for 1996 such
matters as controlling various categories of costs and expenses, promoting
safety and reliability and otherwise optimizing department operations. For
1996, annual bonuses for executive officers were based on the achievement of
relevant subsidiary or business unit goals, except that for certain
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executive officers, from 25% to 100% of the bonus was based on individual
goals. Annual bonus payments are made in cash, except in the case of one
executive officer whose participation is through a separate plan established
for the nonregulated power business, to whom award payments may be made in
cash or shares of Common Stock.
Annual incentive awards for executive officers in 1996 had target award
levels that ranged from 30% to 70% of base salary depending on the executive
officer's level of responsibility. A threshold level of performance results in
an award that is 50% of target, and a maximum level of performance results in
an award that is 50% over the target level, except in the case of the
nonregulated power business where a maximum level of performance results in an
award that is 100% over the target level. However, an executive officer's
subsidiary or business unit goals must be met at least at an aggregate
threshold level in order for that officer to receive an annual incentive
award. The aggregate amount of the awards paid out with respect to any year
(excluding those for the nonregulated power business) cannot exceed 2.5% of
the Company's net income for that year. For 1996, the composite goals for the
Company's executive officers were achieved at levels that resulted in bonuses
ranging from 17% to 50% over target.
LONG-TERM INCENTIVE COMPENSATION
The long-term incentive awards program provides stock-based incentive
compensation for executive officers in the form of grants of performance
shares, stock options, stock appreciation rights and, in some instances, share
equivalent or contingent share units. In addition, the Committee has adopted a
stock ownership guideline applicable to all of the Company's officers that
establishes a goal of ownership of the Company's Common Stock representing a
value of at least two times the officer's base salary.
Annual grants of performance shares are based on long-term performance goals
that include both Company consolidated and subsidiary or business unit goals,
weighted 25% and 75% of the total, respectively. Those goals are generally
based on financial objectives measurable over a three-year performance cycle.
For the performance cycle that ended in 1995, under which payments were made
in 1996, the Company's consolidated goal was to achieve a specified level of
total shareholder return as compared to a group of approximately 75 other
electric utilities and utility holding companies. The same Company
consolidated goal applies to the new performance cycle that commenced in 1996,
except that the peer group of companies against which the Company's
performance is to be measured for the new performance cycle consists of the
group of companies included in the S&P Electric Companies Index.
The subsidiary or business unit goals for the performance cycle that ended
in 1995 were based on the following financial objectives: for the electric
utility operations, maintaining certain base electric rates and achieving
certain cash flow performance in relation to a group of 20 other electric
utility companies; and for the cable television operations (sold in 1995),
achieving certain increases in operating profit. For the performance cycle
that commenced in 1996, the subsidiary or business unit goals are, for the
electric utility operations, to improve electric utility cash flow performance
and improve competitive position through cost reduction and revenue growth
and, for the nonregulated power business, to achieve specified internal rates
of return based on particular projects.
The target number of performance shares granted is based on a percentage of
base salary divided by the average market price of Common Stock over a
prescribed period prior to the beginning of the performance cycle. In
determining the size of the grant, the Committee reviews comparative data for
the companies in the Reference Group, considers the level of responsibility of
each of the Company's executive officers and the recommendations of the chief
executive officer with respect to other executive officers, and then makes a
subjective determination that targets the award within a range of 30% to 70%
of base salary.
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<PAGE>
Achievement of the performance goals at the target level results in a payout
level of 100% of the performance shares for both the performance cycle that
paid out in 1996 and the performance cycle that commenced in 1996. For both of
these performance cycles, attainment of the threshold level of performance
results in payouts of 50% of the target number of shares and the attainment of
the maximum level results in payouts of up to 50% over the target number of
shares.
For the performance cycle concluding in 1995 that paid out in 1996, the
composite goals for the Company's executive officers were achieved at levels
that resulted in payouts ranging from 9% to 25% over target.
Annual grants of stock options are made at an option price not less than the
fair market value of the Common Stock on the date of grant. This design is
intended to focus executive officers on the creation of shareholder value over
the long-term and encourage equity ownership in the Company.
In determining the size of stock option grants to executive officers, the
Committee reviews comparative data for the companies in the Reference Group.
Because the policies of Reference Group companies with respect to stock
options vary widely, the Committee's objective of delivering a competitive
award opportunity based on the dollar value of the award granted necessarily
involves a subjective determination by the Committee. In making its
determination, however, the Committee considers the recommendations of the
chief executive officer with respect to the awards for other executive
officers. For 1996 grants, the percentages of grant date option value to base
salary ranged from 30% to 75% depending on the executive officer's position.
The Committee also grants long-term awards under a long-term incentive plan
established for the Company's nonregulated power business. One executive
officer of the Company participated in this plan during 1996 in lieu of
receipt of performance shares and stock options as described above. Awards
under this plan may be allocated initially in the form of cash or contingent
share units which are valued based on the market price of the Company's Common
Stock. Those awards have a four-year performance cycle and are based on
performance in relation to Committee-approved performance goals. For the cycle
that commenced in 1996, those goals are based on closing transactions for
particular projects or acquiring properties in the nonregulated power business
that result in achievement of specified internal rates of return.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Committee applies the executive compensation policies and programs
described above in determining Mr. Jordan's total compensation. At its June 4,
1996 meeting to consider executive salaries effective June 1, 1996, the
Committee reviewed Mr. Jordan's base salary, comparing it to the base salary
of chief executive officers in the Reference Group of companies, and
determined that his relative position should be the upper end of the range
near the 75th percentile for those companies. The Committee recommended to the
Board that Mr. Jordan's base salary be increased to $1,000,000, a 10%
increase. In evaluating Mr. Jordan's total compensation, the Committee
considered his contributions to the overall success of the Company through his
individual performance and his experience level with the Company as well as
his significant leadership in the electric utility industry as a whole,
through his service as a director of the Edison Electric Institute and the
Electric Reliability Council of Texas, as chairman of the United States Energy
Association and vice chairman of the World Energy Council. In the case of Mr.
Jordan's total compensation paid in 1996, the at-risk portion represented by
the annual incentive awards and long-term award payouts was 64%. Mr. Jordan's
target annual incentive award for 1996 was 70% of his base salary, with the
subsidiary or business unit goals for the electric utility operations and the
nonregulated power business operations (80% and 20%, respectively) comprising
75% of the award and a consolidated goal comprising the remaining 25% of the
award. The 1996 annual incentive award payment (reflected in the Summary
Compensation Table in this proxy statement) was based on achievement of his
composite goal at
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<PAGE>
50% over the target level. In the case of long-term incentive awards, the
target number of performance shares was valued at 65% of his base salary for
the performance cycle that paid out in 1996 and 70% for the performance cycle
that commenced in 1996. Mr. Jordan's performance share awards for the cycle
that paid out in 1996 were based 25% on achievement of the Company's
consolidated goal and 75% on achievement of the subsidiary or business unit
goals for the electric utility operations and the since-sold cable television
operations (70% and 30%, respectively). For the cycle that commenced in 1996,
the relative weighting between the Company consolidated goal and subsidiary or
business unit goals was the same, but the subsidiary goals cover the electric
utility operations and the nonregulated power business (80% and 20%,
respectively). Long-term incentive awards paid out in 1996 are reported in the
Summary Compensation Table in this proxy statement and represent a composite
achievement of 14% over the target level of performance. Long-term incentive
awards for the cycle begun in 1996 are reflected in the table for Long-Term
Incentive Plan Awards in 1996 in this proxy statement. As shown in the table
for Options Grants in 1996 in this proxy statement, in 1996 Mr. Jordan was
granted options to purchase 27,985 shares of the Company's Common Stock at an
exercise price of $24.375 per share. This represents a grant date option value
of approximately 75% of Mr. Jordan's 1995 year-end base salary.
John T. Cater
Robert J. Cruikshank
Howard W. Horne
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SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on the Common Stock with the
cumulative total return of the Standard & Poor's (S&P) 500 Index, the S&P
Electric Companies Index and the Dow Jones Utilities Average for the period
commencing January 1, 1992 and ending December 31, 1996.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG HOUSTON INDUSTRIES INCORPORATED, S&P 500 INDEX,
THE S&P ELECTRIC COMPANIES INDEX AND THE DOW JONES UTILITIES AVERAGE
FOR FISCAL YEAR ENDED DECEMBER 31(1)(2)(3)
LOGO
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
DECEMBER 31,
- -------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Houston Industries Incorporated................ $100 $111 $123 $100 $146 $146
- -------------------------------------------------------------------------------
S&P 500 Index.................................. $100 $108 $118 $120 $165 $203
- -------------------------------------------------------------------------------
S&P Electric Companies Index................... $100 $106 $119 $104 $136 $136
- -------------------------------------------------------------------------------
Dow Jones Utilities Average.................... $100 $104 $114 $ 97 $128 $139
</TABLE>
(1) Assumes that the value of the investment in Common Stock and each index
was $100 on December 31, 1991 and that all dividends were reinvested.
(2) Historical stock price performance is not necessarily indicative of future
price performance.
(3) The line of business index selected has been changed from the Dow Jones
Utilities Average to reflect the selection of the group of companies
included in the S&P Electric Companies Index as the peer group of
companies against which the Company's performance is now measured under
the long-term incentive compensation plan.
21
<PAGE>
PROPOSAL TO AMEND THE COMPANY'S 1994
LONG-TERM INCENTIVE COMPENSATION PLAN
In 1993, the Company's Board of Directors adopted and the stockholders
approved the 1994 Houston Industries Incorporated Long-Term Incentive
Compensation Plan (Plan). Officers and key employees (collectively, key
employees) of the Company and its subsidiaries are eligible to participate in
the Plan. The maximum number of shares of Common Stock as to which awards can
be granted (after adjustment for a two-for-one stock split in 1995) is four
million shares.
The Board of Directors believes that the Plan has been important in securing
for the Company and its stockholders the benefits arising from ownership of
Common Stock by key employees. The objectives of the Plan are to attract and
retain key employees of the Company and its subsidiaries, to award the
outstanding performance of such key employees, to encourage the sense of
proprietorship of such key employees and to stimulate the active interest of
such persons in the development and financial success of the Company and its
subsidiaries. These objectives are to be accomplished by making awards under
the Plan and thereby providing participants with a proprietary interest in the
growth and performance of the Company and its subsidiaries.
DESCRIPTION OF PLAN AMENDMENT
For purposes of satisfying the requirements under Section 162(m) of the
Internal Revenue Code of 1986, as amended (Code) and to increase the number of
shares of Common Stock subject to the Plan, on March 5, 1997, the Board of
Directors adopted, subject to and effective upon shareholder approval, an
amendment to the Plan (Plan Amendment). The following description of the Plan
Amendment is qualified in its entirety by reference to the full text thereof,
a copy of which is attached as Exhibit A to this Proxy Statement. The Plan
Amendment: (1) provides that no participant may be granted, during any
calendar year, (a) options (including stock appreciation rights) covering, in
the aggregate, more than 50,000 shares of Common Stock authorized under the
Plan or (b) restricted stock awards (including opportunity shares) covering,
in the aggregate, more than 50,000 shares of Common Stock authorized under the
Plan; (2) sets forth the general financial and strategic goals utilized as
performance-based objectives under the Plan; (3) makes certain other minor
technical changes to satisfy the requirements of Code Section 162(m); and (4)
increases the number of shares of Common Stock available for awards under the
Plan by four million shares.
DISCUSSION OF THE CHANGES
The maximum grant provision in the Plan Amendment is intended to comply with
Section 162(m) of the Code. Section 162(m) of the Code (adopted in 1993)
disallows deductions for compensation in excess of $1 million for certain
executive officers of publicly held corporations, unless such compensation
meets the requirements of Section 162(m) as "performance-based compensation."
In December 1995, the Internal Revenue Service finalized the regulations under
Code Section 162(m). In order to meet the requirements of Section 162(m), the
Company's shareholders must approve the material terms under which the
compensation is payable not later than the 1997 Annual Meeting of
Shareholders. If the Plan Amendment is approved by the shareholders, the
Company will be entitled to deduct for tax purposes compensation paid under
the Plan to its Chief Executive Officer and other participating officers
notwithstanding the $1 million limitation under Code Section 162(m). This
proposal solicits the approval of the Company's shareholders for the purpose
of qualifying awards under the Plan as performance-based compensation under
Code Section 162(m) (and, consequently, as allowable deductions in computing
the Company's federal income tax).
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<PAGE>
In order to comply with Code Section 162(m), the following must be approved
by the shareholders: (i) the class of employees eligible to receive
compensation, (ii) general performance criteria on which performance
objectives are based (except in regard to the award of stock options and stock
appreciation rights under which the amount of compensation the participant
could receive is based solely on an increase in the value of the Common Stock
after the date of grant or award), and (iii) the formula used to calculate the
maximum amount of compensation to be paid to a participant if the performance
objectives are attained (i.e., the maximum number of shares that can be
awarded to any participant during any calendar year plus the maximum tax
payment that may be made to a participant during any calendar year). Based on
the provisions of the Plan and assuming that shareholders approve the proposed
Plan Amendment, the Company expects that all restricted stock, stock options
and related stock appreciation rights under the Plan will qualify as
performance-based compensation under Code Section 162(m).
The Compensation Committee of the Board of Directors has adopted certain
performance criteria on the basis of which restricted stock awards are granted
or vested. The Compensation Committee will establish performance objectives
for the period of service to which the performance objectives relate prior to
the earlier to occur of (i) 90 days after the commencement of the period of
service or (ii) the elapse of 25% of the period of service, and in any event,
while the outcome is substantially uncertain. Under the Plan Amendment, the
criteria by which the Company's performance will be measured for the purpose
of awarding restricted stock and opportunity shares after May 9, 1997 will be
based upon targets established by the Committee with respect to one or more of
the following financial factors: earnings per share growth, total return
ranking among the group of companies included in the S&P Electric Companies
Index, and cash return on capitalization ranking among the group of companies
included in the S&P Electric Companies Index. Performance objectives will be
based on one or more of these criteria and may be relative to a peer group or
be based on increases or changes relative to stated values. Performance-based
compensation is to be paid under the Plan and may be paid to any individual
eligible to participate in the Plan. The Plan provides that all officers and
key employees of the Company and subsidiary corporations are eligible to
participate.
The Plan Amendment, if approved by the Company's shareholders, will also
increase the aggregate authorized shares of Common Stock issuable under the
Plan by four million shares. As of March 21, 1997, 574 shares of Common Stock
have been issued under the Plan and 795,648 shares were subject to issuance
upon exercise of outstanding options or the vesting of performance-based
restricted stock awards and 3,203,778 shares were subject to issuance pursuant
to future grants. Options covering 125,830 shares have been previously granted
under the Plan to Mr. Jordan, 33,865 shares to Mr. Letbetter, 24,739 shares to
Mr. Kelly, 0 shares to Mr. Hogan, 18,849 shares to Mr. Cottle, 275,556 shares
to all executive officers as a group and 191,809 shares to all employees other
than executive officers. Performance-based restricted stock awards covering a
maximum of 88,763 shares have been previously granted under the Plan to Mr.
Jordan, 27,314 shares to Mr. Letbetter, 18,259 shares to Mr. Kelly, 0 shares
to Mr. Hogan, 14,228 shares to Mr. Cottle, 217,475 shares to all executive
officers as a group and 149,094 shares to all employees other than executive
officers. The closing market price of Common Stock on March 24, 1997 as
reported in The Wall Street Journal was $21.25 per share. After giving effect
to the proposed four million share increase, the number of shares of Common
Stock subject to issuance pursuant to future grants will be 7,203,778. The
Company expects that after the closing of the Merger there will be a larger
number of participants in the Plan (initially approximately 90) and that
awards to the larger group may result in utilization of shares at a higher
rate.
23
<PAGE>
SUMMARY OF THE PLAN
The Plan is administered solely by the Compensation Committee of the
Company's Board of Directors. The Compensation Committee selects the
participants and determines the type or types of awards and the number of
shares to be optioned or granted to each participant under the Plan.
Participants who may be granted awards under the Plan include all officers and
key employees of the Company and its subsidiary corporations. All or part of
an award may be subject to conditions established by the Committee, which may
include continuous service with the Company and its subsidiaries, achievement
of specific business objectives and other comparable measurements of
performance.
The types of awards that may be made under the Plan are as follows:
STOCK AWARDS. The Plan provides for granting restricted stock awards and for
making additional awards of opportunity shares in connection with such
restricted stock awards. All stock awards are subject to the achievement of
performance-related target objectives (Performance Objectives) by the Company
and its subsidiaries. The degree to which the Company and its subsidiaries
achieve Performance Objectives will serve as the basis for the Compensation
Committee's determination of the portion of shares covered by a restricted
stock award which will become vested by reason of the lapse of restrictions
and the amount of additional opportunity shares, if any, relating to such
restricted stock award which will be awarded. It is anticipated that these
restrictions will lapse and that opportunity shares will be granted as
follows: (1) a threshold (minimum) level of achievement will result in 50% of
the restricted shares being vested but no opportunity shares will vest; (2) a
target level of achievement will result in 100% of the restricted shares being
vested but no opportunity shares will vest; and (3) a maximum level of
achievement will result in both 100% of the restricted shares and 100% of the
opportunity shares being vested. A minimum, or threshold, level of achievement
must be accomplished before any vesting of restricted shares will occur. For
achievement between any two levels, restricted shares or opportunity shares,
as applicable, will vest on a pro rata basis.
The Compensation Committee will establish Performance Objectives for a
specified period of not less than one year nor more than six years
(Performance Cycle). Under the Plan Amendment, the criteria by which the
Company's performance will be measured for the purpose of awarding restricted
stock and opportunity shares after May 9, 1997 shall be based upon targets
established by the Committee with respect to one or more of the following
financial factors: earnings per share growth, total return ranking among the
group of companies included in the S&P Electric Companies Index, and cash
return on capitalization ranking among the group of companies included in the
S&P Electric Companies Index. Restricted stock awards and the allocation of
opportunity shares which may be awarded in connection with such restricted
stock awards will be made not later than 90 days after the beginning of a
Performance Cycle, but may, in the Compensation Committee's discretion, be
made from time to time during a Performance Cycle to an officer or key
employee hired or promoted after the commencement of the Performance Cycle. No
key employee may receive a restricted stock award (including an award of
opportunity shares) during any calendar year for a number of shares in excess
of 50,000 shares.
The grant of a restricted stock award may be implemented by (1) credit to a
bookkeeping account maintained by the Company evidencing the accrual to a key
employee of unsecured and unfunded rights to shares of Common Stock or (2)
delivery of certificates for shares of Common Stock to the key employee, who
must execute appropriate stock powers in blank and return the certificates and
stock powers to the Company to be held in escrow for future delivery in
accordance with the terms of the restricted stock award.
No key employee granted a restricted stock award implemented by credit to a
Company bookkeeping account shall have any rights as a shareholder by virtue
of such grant until shares are
24
<PAGE>
actually issued or delivered to such key employee. The grant of such stock
award may provide that the key employee shall be entitled to receive an amount
equivalent to any dividend payable with respect to the number of shares which,
as of the record date for which dividends are payable, have been credited but
not delivered to such key employee. As provided in the grant, such dividend
equivalents may be (1) paid at such time or times as dividends are paid on
shares of Common Stock during the period when such shares are as yet
undelivered, (2) paid at the time the shares to which the dividend equivalents
apply are delivered or (3) reflected by the credit of additional full or
fractional shares in an amount equal to the amount of such dividend
equivalents divided by the fair market value of a full share of Common Stock
on the date of payment of the dividend on which the dividend equivalent is
based. Any arrangement for the payment or credit of dividend equivalents will
terminate if and to the extent that the right to receive shares of Common
Stock pursuant to the terms of the restricted stock award terminates or
lapses.
A key employee granted a restricted stock award that is implemented by
issuance of a stock certificate will have, at the time of such grant, all of
the benefits of ownership in respect of such shares, including the right to
receive dividends thereon and to vote such shares, subject to the restrictions
set forth in the Plan and in the instrument evidencing the grant of such
restricted stock award. Such shares, however, will be held in escrow and,
until the restrictions set forth in the Plan have lapsed, (1) may not be sold
or otherwise disposed of, and (2) are required to be returned to the Company
to the extent that the Compensation Committee determines that the Company did
not achieve the Performance Objectives established for the Performance Cycle
with respect to which the shares were awarded, or if the employment of the key
employee to whom the restricted stock award has been granted is terminated for
any reason other than a reason which causes such restrictions to lapse (as
hereinafter described). Additional restrictions may be imposed by the
Compensation Committee on individual restricted stock awards, which
restrictions will lapse as to all or a portion of the shares covered by a
restricted stock award (and additional opportunity shares may be awarded), as
more fully described in the Plan, (1) if the Compensation Committee determines
that the Performance Objectives established for the Performance Cycle with
respect to which the shares were awarded have been achieved or (2) upon the
key employee's death, long-term disability or retirement on or after age 60 or
if such key employee's employment is terminated by the Company without cause.
In addition, upon a change in control of the Company (as defined in the Plan),
the Company shall pay cash to each key employee to whom a restricted stock
award has been made (and with respect to which the restrictions have not
previously lapsed) in an amount equal to the number of shares granted pursuant
to such restricted stock awards and all related opportunity shares times the
fair market value of the Common Stock on the date of the change in control.
RELATED TAX PAYMENTS. Each key employee who has received shares pursuant to
a restricted stock award with respect to which all of the restrictions set
forth in the Plan have lapsed or pursuant to an award of opportunity shares
related to such restricted stock award may also receive from the Company a
cash payment in an amount, if any, determined by the Compensation Committee,
not to exceed that amount sufficient to pay such key employee's tax liability
(assuming the highest rates of tax applicable to any individual taxpayer in
the year in which such payment is made) with respect to (1) such shares and
(2) such cash payment.
STOCK OPTIONS AND SARS. In addition to stock awards, the Plan provides for
granting (1) incentive stock options, (2) nonstatutory stock options and (3)
stock appreciation rights (SARs).
Incentive and nonstatutory stock options may be granted to a key employee
either alone or with an attached SAR. The number of shares, the exercise
price, the terms and conditions of exercise, whether the option will qualify
as an incentive stock option under the Code or a nonqualified stock option,
and other terms of grant will be fixed by the Compensation Committee and set
forth in an option agreement; provided, that no key employee may receive a
stock option grant during any
25
<PAGE>
calender year for a number of shares in excess of 50,000 shares. The price
payable upon exercise of an option may not be less than the fair market value
per share of the Common Stock at the time of the grant, and may be paid either
in cash or, with the consent of the Compensation Committee, with shares of
Common Stock or a combination thereof.
An option designed as an incentive stock option is intended to qualify as
such under Section 422 of the Code. Thus, the aggregate fair market value,
determined at the time of the grant, of the shares with respect to which
incentive stock options are exercisable for the first time by an individual
during any calendar year may not exceed $100,000. Nonstatutory stock options
are not subject to this limitation.
No stock option may be exercised until at least one year after the date of
the grant, except that this restriction shall cease to apply upon and
simultaneously with a change in control of the Company (as defined in the
Plan). No option may be outstanding for more than ten years after its grant.
If an SAR is granted together with a stock option, such a right will entitle
the holder to receive upon exercise of the SAR cash or, at the election of the
Compensation Committee, shares of Common Stock or a combination thereof in an
amount equal to the difference between the option exercise price and the
market value (on the date of grant) of the shares of Common Stock subject to
such option. The exercise of an SAR shall be in lieu of the exercise of the
related stock option. SARs generally may be exercised only at such times and
to the extent the options to which they relate are exercisable.
Stock options and SARs are nontransferable other than by will or the laws of
descent and distribution. The legal representatives of a deceased key employee
may exercise a stock option or the attached SAR, to the extent it is
exercisable on the date of death, within three years after the death of the
key employee. A stock option and any attached SAR may be exercised, to the
extent it is exercisable on the date of the event, within 90 days, in the case
of an incentive stock option, and three years in the case of a nonstatutory
stock option, following early retirement, disability or termination of
employment of the key employee; provided, however, that a stock option and any
attached SAR will terminate on the date of discharge of such key employee if
the Compensation Committee determines in its discretion that it is not in the
best interests of the Company that the right of such discharged key employee
to exercise the stock option or attached SAR continue. All stock options and
any attached SARs become fully exercisable and may be exercised within 90
days, in the case of an incentive stock option, and three years, in the case
of a nonstatutory stock option, following retirement on or after age 65.
The number and kind of shares covered by the Plan and by outstanding options
under the Plan are subject to adjustment in the event of any reorganization,
recapitalization, reclassification or other changes in the capital stock or
increase or decrease in the number of outstanding shares of Common Stock.
AMENDMENT AND TERMINATION. The Plan may be amended, modified, suspended or
terminated by the Board of Directors. No amendment shall be effective prior to
approval of the shareholders to the extent such approval is then required
pursuant to Rule 16b-3 under the Securities Exchange Act of 1934 in order to
preserve the applicability of any exemption provided by such rule to any stock
incentive then outstanding (unless the holder consents) or to the extent
shareholder approval is otherwise required by applicable legal requirements.
The Board of Directors may terminate the Plan as of any date specified in a
resolution adopted by the Board for that purpose. If not earlier terminated,
the Plan shall terminate on February 2, 2003. No stock incentives may be
granted after the Plan has terminated.
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FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTIONS AND SARS. Some of the
options issuable under the Plan may constitute incentive stock options within
the meaning of Section 422 of the Code, while other options granted under the
Plan may be non-qualified stock options. The Code provides for tax treatment
of stock options qualifying as incentive stock options which may be more
favorable to employees than the tax treatment accorded non-qualified stock
options. Generally, upon the exercise of an incentive stock option, the
optionee will recognize no income for U.S. federal income tax purposes. The
difference between the exercise price of the incentive stock option and the
fair market value of the stock at the time of exercise is an item of tax
preference that may require payment of an alternative minimum tax. On the sale
of shares acquired by exercise of an incentive stock option (assuming that the
sale does not occur within two years of the date of grant of the option or
within one year from the date of exercise), any gain will be taxed to the
optionee as long-term capital gain. In contrast, upon the exercise of a non-
qualified option, the optionee recognizes taxable income (subject to
withholding) in an amount equal to the difference between the then-fair market
value of the shares on the date of exercise and the exercise price. Upon any
sale of such shares by the optionee, any difference between the sale price and
the fair market value of the shares on the date of exercise of the non-
qualified option will be treated generally as capital gain or loss. No
deduction is available to the Company upon the grant or exercise of an
incentive stock option (although a deduction may be available if the employee
sells the shares so purchased before the applicable holding period expires),
whereas upon exercise of a non-qualified stock option, the Company is entitled
to a deduction in an amount equal to the income recognized by the employee.
Except with respect to death or disability of an optionee, an optionee has 90
days after termination of employment in which to exercise an incentive stock
option and retain favorable tax treatment at exercise. An option exercised
more than 90 days after an optionee's termination of employment other than
upon death or disability of an optionee cannot qualify for the tax treatment
accorded incentive stock options. Such option would be treated as a non-
qualified stock option instead. The amount of any cash or the fair market
value of any stock received by the holder upon the exercise of SARs under the
Plan will be subject to ordinary income tax in the year of receipt, and the
Company will be entitled to a deduction for such amount.
A participant's tax basis in shares purchased under the Plan is equal to the
sum of the price paid for the shares, if any, and the amount of ordinary
income recognized by the participant on the transfer of the shares. The
participant's holding period for the shares begins immediately after the
transfer of the shares. If a participant sells shares, any difference between
the amount realized in the sale and the participant's tax basis in the shares
is taxed as long- or short-term capital gain or loss (provided the shares are
held as a capital asset on the date of sale), depending on the participant's
holding period for the shares.
Based on the provisions of the Plan, the Company expects that options and
SARs under the Plan will comply with the requirements of Section 162(m) of the
Code.
REQUISITE VOTE
The vote required for approval of the Plan Amendment is the affirmative vote
of a majority of the shares of Common Stock voted for or against the matter.
In addition, approval of the Plan Amendment requires that the total votes cast
on the matter exceed 50% of the shares of Common Stock outstanding and
entitled to vote. If the requisite vote is not obtained, the amendment will
not become effective.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PLAN AMENDMENT.
27
<PAGE>
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS AND AUDITORS
The Board of Directors, upon the recommendation of the Audit Committee, has
appointed Deloitte & Touche LLP as independent accountants and auditors to
conduct the annual audit of the Company's accounts for the year 1997. Deloitte
& Touche LLP (and their predecessors) have served as independent accountants
and auditors for the Company and HL&P since 1932. Approval of Item 3 requires
the affirmative vote of a majority of shares of Common Stock voted for or
against the matter. If ratification of the appointment is not approved, the
Board will reconsider the appointment.
Representatives of Deloitte & Touche LLP will be present at the Annual
Meeting and will have an opportunity to make a statement if they desire. They
will be available to respond to appropriate questions from shareholders at the
Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT ACCOUNTANTS AND AUDITORS.
OTHER MATTERS
The Board of Directors does not intend to bring any other matters before the
Annual Meeting and has not been informed that any other matters are to be
properly presented to the Annual Meeting by others. In the event that other
matters properly come before the Annual Meeting or any adjournments thereof,
it is intended that the persons named in the accompanying proxy will vote
pursuant to the proxy in accordance with their best judgment on such matters.
SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING OF SHAREHOLDERS
Any shareholder who intends to present a proposal at the 1998 annual meeting
of shareholders must file such proposal with the Company by December 1, 1997
for possible inclusion in the Company's proxy statement and form of proxy
relating to that meeting.
DIRECTOR NOMINATIONS FOR 1998 ANNUAL MEETING OF SHAREHOLDERS
The Company's Bylaws provide for shareholder nominations for the election of
directors, subject to certain procedural requirements. The requirements
include, among other things, the timely delivery to the Company's Corporate
Secretary of (i) notice of the nomination; (ii) evidence of the shareholder's
status as such and the number of shares beneficially owned; and (iii) a list
of the persons (if any) with whom the shareholder is acting in concert and the
number of shares such persons beneficially own. The Bylaws also provide that,
to be timely in connection with an annual meeting of shareholders, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Company not less than 90 days nor more than
180 days prior to the date on which the immediately preceding year's annual
meeting of shareholders was held. For the 1998 annual meeting, therefore,
nominations must be received no later than February 9, 1998 nor earlier than
November 10, 1997. The Bylaws further provide that a shareholder wishing to
make a nomination must submit information concerning the nominee such as would
be required by a proxy statement. The Bylaws provide that failure to follow
the required procedures renders the person ineligible for nomination at the
meeting at which such person is proposed to be nominated. Compliance with the
procedures does not require the Company to include the proposed nominee in the
Company's proxy solicitation material. A copy of the Bylaws setting forth the
requirements for the nomination of director candidates by shareholders may be
obtained by writing Mr. Hugh Rice Kelly, Corporate Secretary, at the Company's
address shown above.
28
<PAGE>
ANNUAL REPORT TO SHAREHOLDERS
The Summary Annual Report to Shareholders, together with the enclosed
Appendix A--1996 Financial Statements, which contains the Company's
consolidated financial statements for the year ended December 31, 1996,
accompany the proxy material being mailed to all shareholders. The Summary
Annual Report is not a part of the proxy solicitation material.
By Order of the Board of Directors,
LOGO
/S/ DON D. JORDAN
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
March 31, 1997
29
<PAGE>
EXHIBIT A
1994 HOUSTON INDUSTRIES INCORPORATED
LONG-TERM INCENTIVE COMPENSATION PLAN
PROPOSED AMENDMENT
1. Section 2.1(c) of the Plan is hereby amended in its entirety to read as
follows:
"(c) "Committee' means the Compensation Committee or such other committee
appointed by the Board to administer this Plan pursuant to Article XI."
2. The first two sentences of Section 3.2 of the Plan are hereby amended to
read as follows:
"The aggregate number of shares of Common Stock which may be issued under
this Plan shall not exceed Eight Million (8,000,000) shares, subject to
adjustment as hereinafter provided. All or any part of such Eight Million
shares may be issued pursuant to Stock Awards."
3. Section 3.2 of the Plan is hereby further amended by adding the following
paragraph to the end thereof:
"Notwithstanding anything herein to the contrary, no Key Employee may be
granted, during any calendar year, (i) Options (including Stock
Appreciation Rights) covering, in the aggregate, more than 50,000 shares of
Common Stock authorized under the Plan or (ii) Restricted Stock Awards
(including "opportunity shares') covering, in the aggregate, more than
50,000 shares of Common Stock authorized under the Plan, in each case
subject to adjustment in the same manner provided in Section 13.3."
4. The last sentence of Section 5.1(a) of the Plan is hereby amended to read
as follows:
"Restricted Stock Awards and the allocation of "opportunity shares'
related to such Restricted Stock Awards shall be made not later than 90
days following the commencement of a Performance Cycle; provided, however,
the Committee shall retain discretion to name as a Key Employee to whom a
Stock Incentive shall be granted an Employee hired or promoted after the
commencement of the Performance Cycle."
5. Section 5.2 of the Plan is hereby amended in its entirety to read as
follows:
"5.2 Performance Objectives: Each Restricted Stock Award shall be subject
to the achievement of Performance Objectives by the Company during the
Performance Cycle with respect to which the Restricted Stock Award is made.
The Committee shall specify in writing the Performance Objectives which are
to apply for that Performance Cycle prior to the earlier of (i) 90 days
after the commencement of the Performance Cycle or (ii) the elapse of 25%
of the Performance Cycle, and in any event, while the outcome is
substantially uncertain. Performance Objectives may vary among Key
Employees and from Performance Cycle to Performance Cycle; provided,
however, that the Performance Objectives established in connection with a
Restricted Stock Award made after May 9, 1997, shall be based upon targets
established by the Committee with respect to one or more of the following
financial factors: earnings per share growth, total return ranking among
the group of companies included in the S&P Electric Companies Index, and
cash return on capitalization ranking among the group of companies included
in the S&P Electric Companies Index. The degree to which the Company
achieves such Performance Objectives shall serve as the basis for the
Committee's determination of the portion of a Key Employee's Restricted
Stock Award which shall become vested by reason of the lapse of the
restrictions set forth in Article VI and the number of "opportunity
shares,' if any, which shall be awarded.
A-1
<PAGE>
The Committee will certify in writing, prior to payment of the Stock
Awards, that the applicable Performance Objectives and any other material
terms were satisfied. The Committee in its sole discretion may decrease a
Stock Award, but in no event shall the Committee have discretion to
increase a Stock Award in a manner such that the Award would fail to meet
the exception for qualified performance-based compensation under Code
Section 162(m). In interpreting Plan provisions applicable to Performance
Objectives and Stock Awards, it is the intent of the Plan to conform with
the standards of Code Section 162(m) applicable to qualified performance-
based compensation, and the Committee in establishing such goals and
interpreting the Plan shall be guided by such provisions."
6. The first sentence of Section 11.1 of the Plan is hereby amended to read
as follows and the second sentence of such Section is deleted:
"This Plan shall be administered solely by the Compensation Committee of
the Board of Directors or such other committee of the Board as the Board
shall designate to administer the Plan."
A-2
<PAGE>
LOGO
[LOGO OF HOUSTON INDUSTRIES APPEARS HERE]
<PAGE>
HOUSTON INDUSTRIES INCORPORATED
PROXY - COMMON STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints D. D. Jordan, R. Steve Letbetter and Lee W.
Hogan, and each of them as proxies, with full power of substitution, to vote as
designated on the reverse side, all shares of common stock held by the
undersigned at the annual meeting of shareholders of Houston Industries
Incorporated to be held May 9, 1997, at 9 AM (CDT) in the Auditorium of Houston
Industries Plaza, 1111 Louisiana Street, Houston, Texas, or any adjournments
thereof, and with discretionary authority to vote on all other matters that may
properly come before the meeting.
IF YOU WISH TO VOTE IN ACCORDANCE WITH
THE RECOMMENDATIONS OF THE BOARD OF
DIRECTORS, YOU MAY JUST SIGN AND DATE
BELOW AND MAIL IN THE POSTAGE-PAID
ENVELOPE PROVIDED. SPECIFIC CHOICES
MAY BE MADE ON THE REVERSE SIDE. IN
THE ABSENCE OF INSTRUCTIONS TO THE
CONTRARY, THE SHARES REPRESENTED WILL
BE VOTED IN ACCORDANCE WITH THE
BOARD'S RECOMMENDATION.
DATE: __________________________, 1997
SIGNATURE: ___________________________
NOTE: PLEASE SIGN EXACTLY AS NAME(S)
APPEARS HEREON. JOINT OWNERS SHOULD
EACH SIGN. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR
GUARDIAN, PLEASE GIVE FULL TITLE.
DO YOU PLAN TO ATTEND THE ANNUAL
MEETING? __________
<PAGE>
HOUSTON INDUSTRIES INCORPORATED
PROXY (CONTINUED)
1997 ANNUAL MEETING OF SHAREHOLDERS
The nominees for Class I directors are Robert J. Cruikshank, Linnet F. Deily,
Lee W. Hogan, T. Milton Honea and Alexander F. Schilt. Their terms will expire
in 2000. Your Board of Directors recommends that you vote FOR all nominees for
director, FOR amendment of the 1994 Long-Term Incentive Compensation Plan and
FOR the appointment of Deloitte & Touche as independent accountants and auditors
for 1997. To withhold authority to vote for any individual nominee, please write
that nominee's name in the space provided below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
WITH- FOR ALL
FOR HOLD EXCEPT FOR AGAINST ABSTAIN
1. Election of nominees [ ] [ ] [ ] 2. Amendment of 1994 Long-Term [ ] [ ] [ ]
for director in Incentive Compensation Plan
Class I
Exceptions: ______________________________ 3. Appoint Deloitte & Touche
__________________________________________ as independent accountants
__________________________________________ and auditors for 1997
</TABLE>
DETACH AND MAIL CARD
