<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
______________________________
Commission file number 1-7629
HOUSTON INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Texas 74-1885573
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
</TABLE>
(713) 207-3000
(Registrant's telephone number, including area code)
______________________________
Commission file number 1-3187
HOUSTON LIGHTING & POWER COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Texas 74-0694415
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
</TABLE>
(713) 207-1111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No .
--- ---
As of October 31, 1996, Houston Industries Incorporated had 234,408,647 shares
of common stock outstanding, including 13,463,173 ESOP shares not deemed
outstanding for financial statement purposes and excluding 15,643,527 shares
held as treasury stock. As of October 31, 1996, all 1,100 shares of Houston
Lighting & Power Company's common stock were held, directly or indirectly, by
Houston Industries Incorporated.
<PAGE> 2
HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
This combined Form 10-Q is separately filed by Houston Industries Incorporated
and Houston Lighting & Power Company. Information contained herein relating to
Houston Lighting & Power Company is filed by Houston Industries Incorporated
and separately by Houston Lighting & Power Company on its own behalf. Houston
Lighting & Power Company makes no representation as to information relating to
Houston Industries Incorporated (except as it may relate to Houston Lighting &
Power Company) or to any other affiliate or subsidiary of Houston Industries
Incorporated.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
- ------ --------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Houston Industries Incorporated and Subsidiaries
Statements of Consolidated Income
Three Months and Nine Months Ended
September 30, 1996 and 1995 3
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 5
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 1996 and 1995 7
Statements of Consolidated Retained Earnings
Three Months and Nine Months Ended
September 30, 1996 and 1995 8
Notes to Consolidated Financial Statements 14
Houston Lighting & Power Company
Statements of Income
Three Months and Nine Months Ended
September 30, 1996 and 1995 9
Balance Sheets
September 30, 1996 and December 31, 1995 10
Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 12
Statements of Retained Earnings
Three Months and Nine Months Ended
September 30, 1996 and 1995 13
Notes to Financial Statements 14
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17
Part II. Other Information
- ------- -----------------
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 26
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Electric utility . . . . . . . . . . . . . . . . . . $1,230,298 $1,171,789 $3,142,234 $2,896,180
Other . . . . . . . . . . . . . . . . . . . . . . . . 15,521 13,149 41,769 33,839
---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . 1,245,819 1,184,938 3,184,003 2,930,019
---------- ---------- ---------- ----------
EXPENSES:
Electric utility:
Fuel . . . . . . . . . . . . . . . . . . . . . . . 319,548 269,159 817,835 691,226
Purchased power . . . . . . . . . . . . . . . . . . 71,762 50,160 224,078 166,570
Operation and maintenance . . . . . . . . . . . . . 206,747 228,913 637,561 645,092
Taxes other than income taxes . . . . . . . . . . . 63,280 62,227 191,148 197,793
Depreciation and amortization . . . . . . . . . . . . 130,909 127,148 389,767 343,630
Other operating expenses . . . . . . . . . . . . . . 18,769 25,428 65,063 64,858
---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . 811,015 763,035 2,325,452 2,109,169
---------- ---------- ---------- ----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . 434,804 421,903 858,551 820,850
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Litigation settlements . . . . . . . . . . . . . . . (95,000)
Time Warner dividend income . . . . . . . . . . . . . 10,403 9,730 31,208 9,730
Allowance for other funds used
during construction . . . . . . . . . . . . . . . . 911 1,676 3,093 6,319
Other - net . . . . . . . . . . . . . . . . . . . . . 8,561 4,176 7,899 (4,737)
---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . 19,875 15,582 (52,800) 11,312
INTEREST AND OTHER CHARGES:
Interest on long-term debt . . . . . . . . . . . . . 68,610 75,178 208,861 204,436
Other interest . . . . . . . . . . . . . . . . . . . 11,048 2,777 22,096 21,454
Allowance for borrowed funds used
during construction . . . . . . . . . . . . . . . . (583) (943) ( 1,939) (3,881)
Preferred dividends of subsidiary . . . . . . . . . . 5,372 6,772 17,318 23,207
---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . 84,447 83,784 246,336 245,216
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 370,232 353,701 559,415 586,946
INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . 130,208 117,840 190,797 193,976
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . 240,024 235,861 368,618 392,970
DISCONTINUED OPERATIONS (NET OF INCOME
TAXES):
Gain on sale of cable television
subsidiary . . . . . . . . . . . . . . . . . . . . 618,088 708,695
---------- ---------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . $ 240,024 $ 853,949 $ 368,618 $1,101,665
========== ========== ========== ==========
</TABLE>
(continued)
-3-
<PAGE> 4
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1996 1995 1996 1995
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS . . . . . . . . . . . . . . . $ 0.98 $ 0.95 $ 1.49 $ 1.59
DISCONTINUED OPERATIONS - Gain on sale
of cable television subsidiary . . . . . . . . . 2.49 2.86
--------- --------- --------- --------
EARNINGS PER COMMON SHARE . . . . . . . . . . . . . $ 0.98 $ 3.44 $ 1.49 $ 4.45
========= ========= ========= ========
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . $ 0.375 $ 0.375 $ 1.125 $ 1.125
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000) . . . . . . . . . . . . . . . 245,889 247,894 247,664 247,546
</TABLE>
See Notes to Consolidated Financial Statements.
-4-
<PAGE> 5
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Plant in service . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,349,687 $ 12,089,490
Construction work in progress . . . . . . . . . . . . . . . . . . . . 239,034 320,040
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,351 217,604
Plant held for future use . . . . . . . . . . . . . . . . . . . . . . 48,631 48,631
Other property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,121 105,624
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,998,824 12,781,389
Less accumulated depreciation and amortization . . . . . . . . . . . . . 4,237,624 3,916,540
------------- -------------
Property, plant and equipment - net . . . . . . . . . . . . . . . 8,761,200 8,864,849
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 7,698 11,779
Special deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 433
Accounts receivable - net . . . . . . . . . . . . . . . . . . . . . . . . 33,675 39,635
Accrued unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . 45,373 59,017
Time Warner dividends receivable . . . . . . . . . . . . . . . . . . . . 10,313 10,313
Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,592 59,699
Materials and supplies, at average cost . . . . . . . . . . . . . . . . . 134,053 138,007
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,651 18,562
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 303,371 337,445
------------- -------------
OTHER ASSETS:
Investment in Time Warner securities . . . . . . . . . . . . . . . . . . 1,028,500 1,027,875
Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . . 593,797 613,134
Equity investments in and advances to foreign and
non-regulated affiliates - net . . . . . . . . . . . . . . . . . . . . 487,995 41,395
Deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382,243 311,758
Regulatory asset - net . . . . . . . . . . . . . . . . . . . . . . . . . 220,700 228,587
Recoverable project costs - net . . . . . . . . . . . . . . . . . . . . . 202,010 232,775
Unamortized debt expense and premium on
reacquired debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,026 161,788
------------- -------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . 3,071,271 2,617,312
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,135,842 $ 11,819,606
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
-5-
<PAGE> 6
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
CAPITALIZATION:
Common Stock Equity:
Common stock, no par value . . . . . . . . . . . . . . . . . . . . . . $ 2,446,003 $ 2,441,790
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . (205,901)
Unearned ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . (255,627) (268,405)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 2,046,237 1,953,672
Unrealized loss on investment in Time Warner
common securities . . . . . . . . . . . . . . . . . . . . . . . . . (3,087) (3,494)
------------- ------------
Total common stock equity . . . . . . . . . . . . . . . . . . . 4,027,625 4,123,563
------------- ------------
Preference Stock, no par value, authorized
10,000,000 shares; none outstanding
Cumulative Preferred Stock of Subsidiary, no par
value:
Not subject to mandatory redemption . . . . . . . . . . . . . . . . 351,345 351,345
Subject to mandatory redemption . . . . . . . . . . . . . . . . . . 51,055
------------- -------------
Total cumulative preferred stock . . . . . . . . . . . . . . . . 351,345 402,400
------------- -------------
Long-Term Debt:
Debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,051 348,913
Long-term debt of subsidiaries:
First mortgage bonds . . . . . . . . . . . . . . . . . . . . . . . 2,704,848 2,979,293
Pollution control revenue bonds . . . . . . . . . . . . . . . . . . 5,000 4,426
Other . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,756 5,790
------------- -------------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . 3,061,655 3,338,422
------------- -------------
Total capitalization . . . . . . . . . . . . . . . . . . . . 7,440,625 7,864,385
------------- -------------
CURRENT LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697,831 6,300
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,862 136,008
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,031 174,925
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,020 79,380
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,057 98,502
Accrued liabilities to municipalities . . . . . . . . . . . . . . . . . . 30,279 20,773
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,258 61,582
Current portion of long-term debt and preferred stock . . . . . . . . . . 419,460 379,451
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,409 58,664
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 1,834,207 1,015,585
------------- -------------
DEFERRED CREDITS:
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . 2,062,338 2,067,246
Unamortized investment tax credit . . . . . . . . . . . . . . . . . . . . 377,561 392,153
Fuel-related credits . . . . . . . . . . . . . . . . . . . . . . . . . . 86,655 122,063
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334,456 358,174
------------- -------------
Total deferred credits . . . . . . . . . . . . . . . . . . . . . 2,861,010 2,939,636
------------- -------------
COMMITMENTS AND CONTINGENCIES
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,135,842 $ 11,819,606
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
-6-
<PAGE> 7
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1996 1995
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . $ 368,618 $ 392,970
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 389,767 343,630
Amortization of nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . 24,261 21,892
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,127) 53,855
Investment tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,592) (14,573)
Allowance for other funds used during construction . . . . . . . . . . . . . (3,093) (6,319)
Fuel cost (refund) and over/(under) recovery - net . . . . . . . . . . . . . (119,442) (133,484)
Net cash provided by discontinued cable television
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,391
Changes in other assets and liabilities:
Accounts receivable and accrued unbilled revenues . . . . . . . . . . . . 19,604 (96,091)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,061 11,248
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,328 (17,347)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,146) (43,774)
Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . 105,746 75,645
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . (73) 10,569
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,774 31,058
---------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . 778,686 645,670
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital and nuclear fuel expenditures (including
allowance for borrowed funds used during construction) . . . . . . . . . . . (226,783) (206,474)
Non-regulated electric power project expenditures . . . . . . . . . . . . . . . (446,600) (12,388)
Corporate headquarters expenditures (including
capitalized interest) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,185) (78,828)
Settlement of subsidiary debt in connection with sale
of cable television subsidiary . . . . . . . . . . . . . . . . . . . . . . . 621,954
Net cash used in discontinued cable television operations . . . . . . . . . . . (47,601)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,799) (9,807)
---------- ----------
Net cash provided by(used in)investing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 711,367) 266,856
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (205,901)
Proceeds from sale of first mortgage bonds . . . . . . . . . . . . . . . . . . . 142,988
Payment of matured bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . (150,000)
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . (51,400) (91,400)
Payment of common stock dividends . . . . . . . . . . . . . . . . . . . . . . . (279,498) (278,611)
Increase/(decrease)in notes payable - net . . . . . . . . . . . . . . . . . . . 691,531 (423,291)
Extinguishment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . (85,263) (174,140)
Net cash used in discontinued cable television operations . . . . . . . . . . . (40,798)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,131 6,810
---------- ----------
Net cash used in financing activities . . . . . . . . . . . . . . . . (71,400) (858,442)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . (4,081) 54,084
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 11,779 10,443
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $ 7,698 $ 64,527
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ------------------------------------------------
Cash Payments:
Interest (net of amounts capitalized) . . . . . . . . . . . . . . . . . $ 221,641 $ 261,292
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,867 61,691
</TABLE>
See Notes to Consolidated Financial Statements.
-7-
<PAGE> 8
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at Beginning of Period . . . . . . . . $1,896,173 $1,283,326 $1,953,672 $1,221,221
Net Income for the Period . . . . . . . . . . . 240,024 853,949 368,618 1,101,665
---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . 2,136,197 2,137,275 2,322,290 2,322,886
Common Stock Dividends . . . . . . . . . . . . (89,960) (93,030) (276,053) (278,641)
---------- ---------- ---------- ----------
Balance at End of Period . . . . . . . . . . . $2,046,237 $2,044,245 $2,046,237 $2,044,245
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-8-
<PAGE> 9
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . $ 1,230,298 $ 1,171,789 $ 3,142,234 $ 2,896,180
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . . . . 319,548 269,159 817,835 691,226
Purchased power . . . . . . . . . . . . 71,762 50,160 224,078 166,570
Operation . . . . . . . . . . . . . . . 153,433 169,248 453,944 464,174
Maintenance . . . . . . . . . . . . . . 53,314 59,665 183,617 180,918
Depreciation and amortization . . . . . 130,099 126,849 387,910 342,723
Income taxes . . . . . . . . . . . . . . 134,462 126,223 248,767 222,533
Other taxes . . . . . . . . . . . . . . 63,280 62,227 191,148 197,793
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . 925,898 863,531 2,507,299 2,265,937
----------- ----------- ----------- -----------
OPERATING INCOME . . . . . . . . . . . . . 304,400 308,258 634,935 630,243
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Litigation settlements (net of tax) . . (61,750)
Allowance for other funds used
during construction . . . . . . . . . 911 1,676 3,093 6,319
Other - net . . . . . . . . . . . . . . (2,787) 1,807 (8,797) (8,701)
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . (1,876) 3,483 (67,454) (2,382)
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES . . . . . . 302,524 311,741 567,481 627,861
----------- ----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt . . . . . . . 54,704 62,038 167,162 184,955
Other interest . . . . . . . . . . . . . 3,042 2,715 10,811 6,639
Allowance for borrowed funds used
during construction . . . . . . . . . (583) (943) (1,939) (3,881)
----------- ----------- ----------- ------------
Total . . . . . . . . . . . . . . . 57,163 63,810 176,034 187,713
----------- ----------- ----------- ------------
NET INCOME . . . . . . . . . . . . . . . . 245,361 247,931 391,447 440,148
DIVIDENDS ON PREFERRED STOCK . . . . . . . 5,372 6,772 17,318 23,207
----------- ----------- ----------- ------------
INCOME AFTER PREFERRED DIVIDENDS . . . . . $ 239,989 $ 241,159 $ 374,129 $ 416,941
=========== =========== =========== ============
</TABLE>
See Notes to Financial Statements.
-9-
<PAGE> 10
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- --------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant in service . . . . . . . . . . . . . . . . . . . . . . . . $ 12,349,687 $ 12,089,490
Construction work in progress . . . . . . . . . . . . . . . . . . . . . . 239,034 320,040
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,351 217,604
Plant held for future use . . . . . . . . . . . . . . . . . . . . . . . . 48,631 48,631
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,866,703 12,675,765
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,231,116 3,906,139
------------- -------------
Property, plant and equipment - net . . . . . . . . . . . . . . . . 8,635,587 8,769,626
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 73,389 75,851
Special deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 433
Accounts receivable:
Affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . 2,053 2,845
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,064 23,858
Accrued unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . 45,373 59,017
Inventory:
Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,592 59,699
Materials and supplies, at average cost . . . . . . . . . . . . . . . 133,599 137,584
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,480 11,876
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 335,566 371,163
------------- -------------
OTHER ASSETS:
Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . . 593,797 613,134
Deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344,675 290,012
Unamortized debt expense and premium on
reacquired debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,612 159,962
Regulatory asset - net . . . . . . . . . . . . . . . . . . . . . . . . . 220,700 228,587
Recoverable project costs - net . . . . . . . . . . . . . . . . . . . . . 202,010 232,775
------------- -------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,515,794 1,524,470
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,486,947 $ 10,665,259
============= =============
</TABLE>
See Notes to Financial Statements.
-10-
<PAGE> 11
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
CAPITALIZATION:
Common Stock Equity:
Common stock, class A; no par value . . . . . . . . . . . . . . $ 1,524,949 $ 1,524,949
Common stock, class B; no par value . . . . . . . . . . . . . . 150,978 150,978
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 2,277,465 2,150,086
------------- -------------
Total common stock equity . . . . . . . . . . . . . . . . 3,953,392 3,826,013
------------- -------------
Cumulative Preferred Stock:
Not subject to mandatory redemption . . . . . . . . . . . . . . 351,345 351,345
Subject to mandatory redemption . . . . . . . . . . . . . . . . 51,055
------------- -------------
Total cumulative preferred stock . . . . . . . . . . . . . 351,345 402,400
------------- -------------
Long-Term Debt:
First mortgage bonds . . . . . . . . . . . . . . . . . . . . . . 2,704,848 2,979,293
Pollution control revenue bonds . . . . . . . . . . . . . . . . 5,000 4,426
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,756 5,790
------------- -------------
Total long-term debt . . . . . . . . . . . . . . . . . . . 2,712,604 2,989,509
------------- -------------
Total capitalization . . . . . . . . . . . . . . . . . . . 7,017,341 7,217,922
------------- -------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 103,545 119,032
Accounts payable to affiliated companies . . . . . . . . . . . . . 5,594 6,982
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . 266,169 192,673
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . 65,692 70,823
Accrued liabilities to municipalities . . . . . . . . . . . . . . . 30,279 20,773
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . 58,258 61,582
Current portion of long-term debt and preferred stock . . . . . . . 219,460 179,451
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,505 54,149
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . 795,502 705,465
------------- -------------
DEFERRED CREDITS:
Accumulated deferred federal income taxes . . . . . . . . . . . . . 1,958,891 1,947,488
Unamortized investment tax credit . . . . . . . . . . . . . . . . . 377,561 392,153
Fuel-related credits . . . . . . . . . . . . . . . . . . . . . . . 86,655 122,063
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,997 280,168
------------- -------------
Total deferred credits . . . . . . . . . . . . . . . . . . 2,674,104 2,741,872
------------- -------------
COMMITMENTS AND CONTINGENCIES
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,486,947 $ 10,665,259
============= =============
</TABLE>
See Notes to Financial Statements.
-11-
<PAGE> 12
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 391,447 $ 440,148
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 387,910 342,723
Amortization of nuclear fuel . . . . . . . . . . . . . . . . . . . . . 24,261 21,892
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 11,403 50,187
Investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . (14,592) (14,573)
Allowance for other funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,093) (6,319)
Fuel cost (refund) and over/(under) recovery - net . . . . . . . . . . (119,442) (133,484)
Changes in other assets and liabilities:
Accounts receivable - net . . . . . . . . . . . . . . . . . . . . . 25,230 (74,652)
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . 3,985 4,298
Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,107 7,281
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (16,875) (53,241)
Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . 68,365 85,696
Other current liabilities . . . . . . . . . . . . . . . . . . . . . (26) 12,869
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,885 36,884
------------ -----------
Net cash provided by operating activities . . . . . . . . . . . 776,565 719,709
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction) . . . . . . . . . . . . . . . . . . . . . . (226,783) (291,474)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,688) (6,906)
------------ -----------
Net cash used in investing activities . . . . . . . . . . . . . (233,471) (298,380)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from first mortgage bonds . . . . . . . . . . . . . . . . . . . 142,988
Payment of matured bonds . . . . . . . . . . . . . . . . . . . . . . . . (150,000)
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . (265,504) (271,979)
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . (51,400) (91,400)
Extinguishment of long-term debt . . . . . . . . . . . . . . . . . . . . (85,263) (174,140)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,611 6,327
------------ -----------
Net cash used in financing activities . . . . . . . . . . . . . (545,556) (388,204)
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . (2,462) 33,125
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . 75,851 235,867
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . $ 73,389 $ 268,992
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) . . . . . . . . . . . . . . . . $ 172,362 $ 184,485
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,060 67,743
</TABLE>
See Notes to Financial Statements.
-12-
<PAGE> 13
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at Beginning of
Period . . . . . . . . . . . . . . . $ 2,119,726 $ 2,164,391 $ 2,150,086 $ 2,153,109
Net Income for the Period . . . . . . . . 245,361 247,931 391,447 440,148
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . . . 2,365,087 2,412,322 2,541,533 2,593,257
----------- ----------- ----------- -----------
Deductions - Cash Dividends:
Preferred . . . . . . . . . . . . . 5,372 6,772 17,318 23,207
Common . . . . . . . . . . . . . . . 82,250 82,250 246,750 246,750
----------- ----------- ----------- -----------
Total . . . . . . . . . . . . . 87,622 89,022 264,068 269,957
----------- ----------- ----------- -----------
Balance at End of Period . . . . . . . . $ 2,277,465 $ 2,323,300 $ 2,277,465 $ 2,323,300
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
-13-
<PAGE> 14
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim financial statements and notes (Interim Financial
Statements) contained in this Form 10-Q for the period ended September
30, 1996 (Form 10-Q) are unaudited and condensed. Certain notes and
other information contained in the Combined Annual Report on Form 10-K
(File Nos. 1-7629 and 1-3187) for the year ended December 31, 1995
(Form 10-K) of Houston Industries Incorporated (Company) and Houston
Lighting & Power Company (HL&P) have been omitted in accordance with
Rule 10-01 of Regulation S-X under the Securities Exchange Act of
1934. The information presented in the Interim Financial Statements
should be read in combination with the information presented in the
Form 10-K and the Combined Quarterly Reports on Form 10-Q of the
Company and HL&P for the quarters ended March 31, 1996 (First Quarter
10-Q) and June 30, 1996 (Second Quarter 10-Q).
On August 11, 1996, the Company, HL&P and a newly formed Delaware
subsidiary of the Company (HI Merger, Inc.) entered into an Agreement
and Plan of Merger (Merger Agreement) with NorAm Energy Corp.
(NorAm). Subject to the satisfaction or waiver of the conditions
precedent in the Merger Agreement, including receipt of all required
regulatory and shareholder approvals, the Company will merge with and
into HL&P, which will be renamed "Houston Industries Incorporated"
(Houston). NorAm will merge with and into HI Merger, Inc. and will
become a wholly owned subsidiary of Houston. Consideration for the
purchase of NorAm shares will be a combination of cash and shares of
Houston common stock. The transaction is valued at $3.9 billion,
consisting of $2.5 billion for NorAm's common stock and equivalents
and $1.4 billion of NorAm debt. For information regarding the merger,
reference is made to the Combined Report on Form 8-K of the Company
and HL&P dated August 11, 1996, which report is incorporated herein by
reference, and the joint registration statement on Form S-4 (including
unaudited pro forma financial statements giving effect to the
mergers) filed by the Company and HL&P with the Securities and
Exchange Commission (Reg. No. 333-11329).
The Merger Agreement provides for alternative merger structures should
existing administrative positions or legislative changes adversely
affect the structure described above or permit structures not
currently authorized by the Public Utility Holding Company Act of
1935, as amended. One of the alternative structures contemplates a
non-holding company structure in which all domestic utility operations
would be conducted within one publicly-held company.
(2) CERTAIN CONTINGENCIES
The following notes to the financial statements in the Form 10-K (as
updated by the notes contained in this Form 10-Q and the notes from
the First Quarter 10-Q and the Second Quarter 10-Q described below)
are incorporated herein by reference: Note 1(b) (System of Accounts
and Effects of Regulation), Note 1(n) (Use of Estimates), Note 2
(Jointly-Owned Nuclear Plant), Note 3 (Rate Matters), Note 4
(Investments in Foreign and Non-Regulated Entities) and Note 11
(Commitments and Contingencies).
For information regarding a $62 million (after-tax) charge to earnings
recorded in the first quarter of 1996 in connection with the
settlement of litigation relating to the South Texas Project Electric
Generating Station (South Texas Project), see Notes 3 and 7(a) to the
First Quarter 10-Q and Note 3 to the Second Quarter 10-Q, which notes
are incorporated herein by reference.
-14-
<PAGE> 15
For information regarding the appeal of Docket No. 6668 (an inquiry
into the prudence of the planning and construction of the South Texas
Project), see Note 3(b) to the Form 10-K, which note is incorporated
herein by reference. For information regarding Docket No. 8425
(HL&P's 1988 rate case), see Note 5 to the Second Quarter 10-Q, which
note is incorporated herein by reference.
(3) DEPRECIATION
The Company and HL&P compute depreciation using the straight-line
method. The Company's depreciation expense for the third quarter and
first nine months of 1996 was $91 million and $269 million,
respectively, compared to $85 million and $258 million for the same
periods in 1995. HL&P's depreciation expense for the third quarter
and first nine months of 1996 was $90 million and $267 million,
respectively, compared to $85 million and $257 million for the same
periods in 1995.
(4) HI ENERGY
Certain investments of Houston Industries Energy, Inc., a wholly-owned
subsidiary of the Company (HI Energy), are recorded under the equity
method of accounting. The Company records HI Energy's proportionate
share (based on stock ownership) of the operating results of these
entities as "Other - Net" on the Company's Statements of Consolidated
Income. For additional information regarding these investments, see
Note 4 to the Second Quarter 10-Q, which note is incorporated herein
by reference.
(5) CAPITAL STOCK
Company. At September 30, 1996 and December 31, 1995, the Company had
400,000,000 authorized shares of common stock, of which 240,022,296
and 248,316,710 shares, respectively, were outstanding. Earnings per
common share for the Company are computed by dividing net income by
the weighted average number of shares outstanding during the
respective period. Outstanding common shares exclude (i) shares
pledged to secure a loan to the Company's Employee Stock Ownership
Plan (13,463,173 and 14,355,758 at September 30, 1996 and December 31,
1995, respectively) and (ii) shares repurchased by the Company under
its common stock repurchase program and held as treasury shares
(9,262,978 at September 30, 1996 and none at December 31, 1995).
In September 1996, the Company announced that its board of directors
had expanded from $150 million to $450 million its previous
authorization to repurchase common stock. Subject to market
conditions, applicable legal requirements, available cash and other
factors, the additional purchases will be made in the open market or
in privately negotiated transactions over a period of time to be
determined by management.
At the close of business on October 30, 1996, the Company announced
that it had temporarily suspended all repurchases of common stock
under its repurchase program, pending the Company's special
shareholders meeting (currently scheduled for December 17, 1996). It
is anticipated that repurchases of common stock would also be
suspended during at least (i) the 45-day period prior to the closing
of the mergers contemplated by the Merger Agreement and (ii) two
business days prior to the period during which record holders of NorAm
common stock are able to make an election between the cash or common
stock consideration being offered in the merger. Future repurchases
of common stock, which may not be preceded by public announcement, are
subject to the discretion of management, market conditions, applicable
legal requirements, available cash and other factors. As of the date
of the suspension of the buyback program, the Company had repurchased
a total of 15,643,527 shares of common stock for an aggregate purchase
price of $352,322,274.
The Company and HL&P have registered 315 million shares of Houston
common stock and associated preference stock purchase rights for
issuance upon consumation of the transactions contemplated under the
Merger Agreement.
HL&P. All issued and outstanding shares of Class A voting common
stock of HL&P are held by the Company, and all issued and outstanding
shares of Class B non-voting
-15-
<PAGE> 16
common stock of HL&P are held by Houston Industries (Delaware)
Incorporated (HI Delaware), a wholly owned subsidiary of the Company.
Earnings per share data for HL&P are not computed because all of its
common stock is held by the Company and HI Delaware.
On September 30, 1996 and December 31, 1995, HL&P had 10,000,000
authorized shares of preferred stock, of which 3,804,397 and 4,318,397
shares, respectively, were outstanding.
For information regarding HL&P's redemption of 514,000 shares of its
$9.375 cumulative preferred stock in April 1996, see Note 6 to the
Second Quarter 10-Q, which note is incorporated herein by reference.
(6) LONG-TERM DEBT
For information regarding payment of matured HL&P bonds in January and
April 1996 and the extinguishment of certain long-term debt in May
1996, see Note 7 to the Second Quarter 10-Q, which note is
incorporated herein by reference.
(7) SUBSEQUENT EVENT
On November 7, 1996, HL&P called for redemption in the fourth quarter
of 1996 all issued and outstanding shares of its variable term
cumulative preferred stock, Series A, B, C and D, at the aggregate
fixed liquidation value of $220 million plus accrued dividends.
(8) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative of
results expected for the year due to the seasonal nature of HL&P's
business. In the opinion of management, the interim information
reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a full presentation of the results for the
interim periods. Certain amounts from the previous year have been
reclassified to conform to the 1996 presentation of financial
statements. Such reclassifications do not affect earnings.
-16-
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in combination with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of the Form 10-K, the financial statements and notes
contained in Item 8 of the Form 10-K, the First Quarter 10-Q, the Second
Quarter 10-Q and the Interim Financial Statements.
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Such statements are expectations as to future economic
performance and are not statements of fact. Actual results may differ
materially from those projected in these statements. Important factors that
could cause future results to differ include the effects of competition in the
power industry, legislative and regulatory changes affecting electric
utilities, fluctuations in the weather and changes in the economy as well as
other factors discussed in this and the Company's and HL&P's other filings with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
COMPANY
A summary of selected financial data for the Company and its
subsidiaries is set forth below:
<TABLE>
<CAPTION>
Three Months Ended
September 30, Percent
1996 1995 Change
----------- ----------- ------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . $1,245,819 $1,184,938 5
Operating Expenses . . . . . . . . . . . . . . . . 811,015 763,035 6
Operating Income . . . . . . . . . . . . . . . . . 434,804 421,903 3
Other Income (Expense) . . . . . . . . . . . . . . 19,875 15,582 28
Interest and Other Charges . . . . . . . . . . . . 84,447 83,784 1
Income Taxes . . . . . . . . . . . . . . . . . . . 130,208 117,840 10
Income from Continuing Operations . . . . . . . . 240,024 235,861 2
Gain from Discontinued Operations . . . . . . . . 618,088 ---
Net Income . . . . . . . . . . . . . . . . . . . 240,024 853,949 (72)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Percent
1996 1995 Change
----------- ----------- ------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . $3,184,003 $2,930,019 9
Operating Expenses . . . . . . . . . . . . . . . . 2,325,452 2,109,169 10
Operating Income . . . . . . . . . . . . . . . . . 858,551 820,850 5
Other Income (Expense) . . . . . . . . . . . . . . (52,800) 11,312 ---
Interest and Other Charges . . . . . . . . . . . . 246,336 245,216 ---
Income Taxes . . . . . . . . . . . . . . . . . . . 190,797 193,976 (2)
Income from Continuing Operations . . . . . . . . 368,618 392,970 (6)
Gain from Discontinued Operations . . . . . . . . 708,695 ---
Net Income . . . . . . . . . . . . . . . . . . . 368,618 1,101,665 (67)
</TABLE>
The Company had consolidated earnings per share of $.98 for the third
quarter of 1996 compared to consolidated earnings per share of $3.44 for the
third quarter of 1995. The decline in 1996 third quarter earnings was the
result of a one-time $618 million, or $2.49 per share, gain in the third
quarter of 1995 from the sale of the Company's cable television subsidiary.
Excluding this one-time gain, consolidated earnings from continuing operations
for the third quarter of 1995 were $236 million, or $.95 per share, compared to
$240 million, or $.98 per share, in the third quarter of 1996.
- 17 -
<PAGE> 18
The Company's consolidated earnings for the nine months ended
September 30, 1996 were $369 million, or $1.49 per share, compared to $1.1
billion, or $4.45 per share, for the comparable period in 1995. The decline in
1996 nine months earnings reflects the impact of (i) a $62 million, or $.25 per
share, after-tax charge in the first quarter of 1996 relating to the settlement
of South Texas Project litigation claims and (ii) a $709 million, or $2.86 per
share, gain recorded in 1995 upon the sale of the Company's cable television
subsidiary. Excluding the effects of these items, a $5 million, or $.02 per
share, after-tax charge to earnings in the first quarter of 1996 with respect
to HI Energy operations and a $6 million, or $.02 per share, after-tax charge
to earnings in the second quarter of 1995 related to HL&P's rate case
settlement, the Company's consolidated income from continuing operations for
the first nine months of 1996 would have been $1.76 per share, and its
consolidated income from continuing operations for the first nine months of
1995 would have been $1.61 per share. This increase in earnings for these
periods, after adjusting for one-time items, is due primarily to increased
sales at HL&P and dividend income from Time Warner Inc. (Time Warner)
securities acquired by the Company as part of the sale of its cable
television subsidiary.
For information regarding the proposed acquisition of NorAm, see Note
1 to the Interim Financial Statements and "--Liquidity and Capital Resources"
below.
HL&P
A summary of selected financial data for HL&P is set forth below:
<TABLE>
<CAPTION>
Three Months Ended
September 30, Percent
1996 1995 Change
------------ ---------- ------
(Thousands of Dollars)
<S> <C> <C> <C>
Base Revenues (1) . . . . . . . . . . . . . . $ 855,003 $ 869,949 (2)
Reconcilable Fuel Revenues (2) . . . . . . . 375,295 301,840 24
Operating Expenses (3) . . . . . . . . . . . . 925,898 863,531 7
Operating Income (3) . . . . . . . . . . . . . 304,400 308,258 (1)
Other Income (Expense) . . . . . . . . . . . . (1,876) 3,483 --
Interest Charges . . . . . . . . . . . . . . . 57,163 63,810 (10)
Income After Preferred Dividends . . . . . . . 239,989 241,159 --
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Percent
1996 1995 Change
--------- ---------- ------
(Thousands of Dollars)
<S> <C> <C> <C>
Base Revenues (1) . . . . . . . . . . . . . $2,149,649 $2,099,961 2
Reconcilable Fuel Revenues (2) . . . . . . . 992,585 796,219 25
Operating Expenses (3) . . . . . . . . . . . 2,507,299 2,265,937 11
Operating Income (3) . . . . . . . . . . . . 634,935 630,243 1
Other Income (Expense) . . . . . . . . . . . (67,454) (2,382) --
Interest Charges . . . . . . . . . . . . . . 176,034 187,713 (6)
Income After Preferred Dividends . . . . . . 374,129 416,941 (10)
</TABLE>
____________
(1) Includes miscellaneous revenues, certain non-reconcilable fuel
revenues and certain purchased power related revenues.
(2) Includes revenues collected through a fixed fuel factor net of
adjustment for over/under recovery. See "Operating Revenues
and Sales" below.
(3) Includes income taxes.
In the third quarter of 1996, HL&P's income after preferred dividends
was $240 million compared to $241 million in the third quarter of 1995.
Income after preferred dividends for the first nine months of 1996 was $374
million compared to $417 million for the same period in 1995. The $43 million
decrease in 1996 was primarily due to a $62 million after-tax charge in the
first quarter of 1996 relating to the settlement of South Texas Project
litigation claims. Excluding the $62 million charge, HL&P's income for the
first nine months of 1996 would have been $436 million compared to $417
million. This increase primarily reflects increased kilowatt-hour (KWH) sales,
as described below.
- 18 -
<PAGE> 19
OPERATING REVENUES AND SALES
HL&P's third quarter 1996 base revenues decreased 2 percent from 1995
third quarter base revenues primarily due to the effects of mild weather in
August and September of 1996. During this period, industrial KWH sales
increased 6 percent over the third quarter of 1995, while residential KWH sales
decreased 2 percent due to the weather factors described above. Residential
and commercial KWH sales for the first nine months of 1996 increased 5 percent
and 3 percent, respectively, compared to the same period in 1995 due to the
positive effects of weather, customer growth and increased electricity usage
per customer.
Reconcilable fuel revenues are revenues that are collected through a
fixed fuel factor. These revenues are adjusted monthly to equal certain
related fuel and purchased power expenses; therefore, such revenues and
expenses have no effect on earnings unless such fuel costs are determined not
to be recoverable. For information regarding the recovery of fuel costs, see
"Business of HL&P -- Fuel -- Recovery of Fuel Costs" in Item 1 of the Form
10-K.
FUEL AND PURCHASED POWER EXPENSES
HL&P's fuel expense for the third quarter and first nine months of
1996 increased $50 million and $127 million, respectively, compared to the same
periods in 1995. The average cost of fuel for the third quarter and first
nine months of 1996 was $1.81 and $1.85 per million British Thermal Unit
(MMBtu), respectively, compared to $1.52 and $1.59 per MMBtu for the comparable
1995 periods. The fuel cost increase relates primarily to an increase in the
unit cost of gas (the average cost was $2.38 and $2.29 per MMBtu for the third
quarter and nine months ended 1996, respectively, compared to $1.58 and $1.65
for the comparative periods in 1995).
In October 1996, HL&P filed with the Public Utility Commission of
Texas for an approximately $70 million temporary fuel surcharge to reduce its
cumulative fuel under-recovery balance through August 31, 1996. HL&P proposes
to implement the temporary fuel surcharge, which will have no effect on
earnings, over a six-month period beginning in January 1997.
Purchased power expense increased $22 million and $58 million,
respectively, for the third quarter and first nine months of 1996 compared to
the same periods in 1995. These increases were due mainly to higher prices per
KWH and an increase in electricity purchases by HL&P (reflecting, in part,
higher electric sales) for the first nine months of 1996. The increase in
purchased power expense for the first nine months of 1996 was partially offset
by a decrease in firm capacity costs resulting from the renegotiation of a
purchased power contract in April 1995.
OTHER OPERATING EXPENSES
Operation expense for the third quarter and the first nine months of
1996 decreased $16 million and $10 million, respectively, compared to the same
periods in 1995, primarily due to decreased pension accruals resulting from a
change in actuarial assumptions and a decrease in employee benefits costs. The
decrease in operation expense for the first nine months of 1996 was partially
offset by an increase in municipal franchise payments, which were lower during
the first nine months of 1995 because of the effects of a $112 million refund
of reconcilable fuel revenues in April 1995.
Maintenance expense for the third quarter of 1996 decreased $6 million
compared to the third quarter of 1995 primarily due to the timing of
maintenance work performed. Maintenance expense for the first nine months of
1996 increased $3 million compared to the same period in 1995 primarily as the
result of scheduled outages at the W. A. Parish and P. H. Robinson generation
stations.
Depreciation and amortization expense increased $3 million and $45
million during the third quarter and first nine months of 1996, respectively,
compared to the same periods in 1995. These increases reflect HL&P's decision
to write down a portion of its investment in the South Texas Project ($12.5
million for the third quarter of 1996 and $37.5 million for the first nine
months of 1996 compared to $21.4 million and $28.5 million, respectively, for
the same period in 1995) as permitted under the settlement of HL&P's 1995 rate
case (Docket No. 12065). In addition, HL&P began amortization in January 1996
of its investment in certain lignite reserves at a rate of approximately $22
million a year (amounting to $5.5 million in the third quarter of 1996 and
$16.4 million for the first nine months of 1996). The increase in depreciation
and amortization expense also included amortization of HL&P's 1995 early
retirement program and increased plant depreciation.
- 19 -
<PAGE> 20
For information regarding the settlement of HL&P's most recent rate
case and its ongoing effects on HL&P's results of operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Certain Factors Affecting Future Earnings of the Company and HL&P - Rate
Matters and Other Contingencies" in Item 7 of the Form 10-K and Note 3(a) to
the financial statements in the Form 10-K.
Taxes other than income taxes decreased $7 million for the first nine
months of 1996 compared to the same period in 1995 primarily due to lower
accruals of estimated property tax assessments.
LIQUIDITY AND CAPITAL RESOURCES
COMPANY
GENERAL
The Company's net cash provided by operating activities for the first
nine months of 1996 totaled $779 million. Net cash used in the Company's
investing activities for the first nine months of 1996 totaled $711 million,
primarily due to the Company's equity investments in foreign utilities as well
as electric capital and nuclear fuel expenditures. The Company's financing
activities for the first nine months of 1996 resulted in a net cash outflow of
$71 million. The Company's primary financing activities were the payment of
matured HL&P bonds, the payment of dividends on the Company's common stock, the
redemption of HL&P preferred stock, the purchase of common stock under the
Company's repurchase program and the extinguishment of long-term debt funded by
an increase in commercial paper.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
As of September 30, 1996, the Company had approximately $697 million
of commercial paper outstanding, which is supported by bank credit facilities
of $1.5 billion (exclusive of bank credit facilities of subsidiaries). Prior
to the end of the quarter, the Company increased its aggregate borrowing
capacity under existing facilities from $750 million to $1.5 billion primarily
to support purchases of common stock under the Company's repurchase program, as
described below, and to fund in the fourth quarter of 1996 the retirement of
$200 million of the Company's debentures.
During the third quarter of 1996, the Company purchased 8,067,078
shares of its common stock for an aggregate purchase price (including
commissions) of $179 million. During the first nine months of 1996, the
Company purchased a total of 9,262,978 shares of common stock for an aggregate
purchase price (including commissions) of $206 million. The purchases were
financed with short-term borrowings. For additional information on the
Company's common stock repurchase program (including purchases of common stock
subsequent to September 30, 1996, and the temporary suspension of the
repurchase program), see Note 5 to the Interim Financial Statements.
In the fourth quarter of 1996, $200 million of the Company's
outstanding debentures will mature. Based on current market conditions, the
Company intends to repay the debentures using short-term borrowings under its
existing credit facilities. The $200 million in debentures is recorded as
current portion of long-term debt and preferred stock on the Company's
Consolidated Balance Sheet. After giving effect to the retirement, a total of
$350 million in debentures will remain outstanding.
On August 11, 1996, the Company, HL&P and HI Merger, Inc., a newly
formed Delaware subsidiary of the Company, entered into an Agreement and Plan
of Merger with NorAm. Subject to the satisfaction or waiver of the conditions
precedent in the Merger Agreement, including receipt of all required regulatory
and shareholder approvals, the Company will merge with and into HL&P, which
will be renamed "Houston Industries Incorporated" (Houston). NorAm will merge
with and into HI Merger, Inc. and will become a wholly owned subsidiary of
Houston. Consideration for the purchase of the NorAm shares will be a
combination of cash and shares of Houston common stock. The transaction is
valued at $3.9 billion, consisting of $2.5 billion for NorAm's common stock and
equivalents and $1.4 billion of NorAm debt. For additional information
regarding the merger, see Note 1 to the Interim Financial Statements.
The Company currently contemplates that the cash portion of the
consideration for the NorAm merger (approximately $1.25 billion) will be
funded through bank borrowings under new bank credit
- 20 -
<PAGE> 21
facilities (Bank Facilities) to be arranged by Houston or by a newly formed
finance subsidiary of Houston (Borrower) with a group of commercial banks. As
of the date hereof, the structure, terms and provisions of the Bank Facilities
are being negotiated with prospective lenders and have not yet been finalized.
Thus, depending on the outcome of such negotiations, the structure, terms and
provisions of the Bank Facilities as described below may change.
The Bank Facilities are expected to bear interest at a rate based upon
either the London Interbank Offered Rate plus a margin, a base rate plus a
margin or at a rate determined through a bidding process.
The borrowings may be secured by liens on or first priority security
interests in assets, which may include (i) the shares of common stock of NorAm
held by Houston or its affiliates, (ii) the shares of common and preferred
stock of Time Warner currently owned by the Company, (iii) the capital stock
of subsidiaries of the Borrower, to the extent permitted by legal and
contractual limitations and (iv) intercompany notes evidencing any loans
made by the Borrower to Houston or its direct or indirect subsidiaries.
The obligations under the Bank Facilities are not expected to be secured by the
utility properties of HL&P or NorAm.
In connection with the Bank Facilities, Houston may issue preference
stock to, or enter into support arrangements for the benefit of, the Borrower
(with calculations, definitions and payment mechanics to be agreed upon).
Houston may also agree to certain covenants, including certain limitations on
the payment of dividends on or the repurchase of Houston's common stock. The
net proceeds of any disposition of the Time Warner stock may be used to prepay
borrowings under the Bank Facilities, subject to a corresponding release by the
banks of their security interest in the Time Warner stock to the extent of any
such prepayment.
The Bank Facilities will also contain customary covenants and default
provisions applicable to the Borrower and its subsidiaries, including the
ability of the Borrower and its subsidiaries to, among other things, incur
additional indebtedness (other than certain permitted indebtedness), create
liens and make investments or loans.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratios of earnings to fixed charges for the nine and
twelve months ended September 30, 1996 were 3.17 and 2.65, respectively. The
Company believes that the ratio for the nine-month period is not necessarily
indicative of the ratio for a twelve-month period due to the seasonal nature of
HL&P's business.
LIQUIDITY AND CAPITAL RESOURCES
HL&P
GENERAL
HL&P's net cash provided by operating activities for the first nine
months of 1996 totaled $777 million. Net cash used in HL&P's investing
activities for the first nine months of 1996 totaled $233 million. HL&P's
capital and nuclear fuel expenditures (excluding allowance for funds used
during construction) for the first nine months of 1996 totaled $225 million out
of the $387 million annual budget. HL&P's financing activities for the first
nine months of 1996 resulted in a net cash outflow of approximately $546
million attributable to the payment of dividends, the extinguishment of
long-term debt, the repayment of matured long-term debt and the redemption of
preferred stock.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
As of September 30, 1996, HL&P had no commercial paper outstanding.
HL&P's commercial paper borrowings are supported by a bank credit facility of
$400 million.
On November 7, 1996, HL&P called for redemption in the fourth quarter
of 1996 all four series of its variable term preferred stock having an
aggregate liquidation price of $220 million. HL&P intends to (i) repay at
maturity $40 million aggregate principal amount of its 5 1/4% series first
mortgage bonds and $150 million of its 7 5/8% series first mortgage bonds in
the first quarter of 1997 and (ii) make a $25.7 million sinking fund payment
applicable to its $9.375 series preferred stock in April 1997. During the
fourth quarter of 1996, HL&P intends to increase its borrowing capacity under
- 21 -
<PAGE> 22
its bank facility to, among other things, anticipate these obligations.
RATIOS OF EARNINGS TO FIXED CHARGES
HL&P's ratios of earnings to fixed charges for the nine and twelve
months ended September 30, 1996 were 4.27 and 3.69, respectively. HL&P's
ratios of earnings to fixed charges and preferred dividends for the nine and
twelve months ended September 30, 1996 were 3.73 and 3.21, respectively. HL&P
believes that the ratios for the nine-month period are not necessarily
indicative of the ratios for a twelve-month period due to the seasonal nature
of HL&P's business.
- 22 -
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company and its
subsidiaries, including HL&P and HI Energy, reference is made to the
information set forth in Item 3 of the Form 10-K and Notes 2(b), 3 and
4(c) to the financial statements in the Form 10-K, which information,
as qualified and updated by the description of developments in
regulatory and litigation matters contained in Note 7(a) to the
financial statements in the First Quarter 10-Q and Note 3 of the Notes
to the Second Quarter 10-Q is incorporated herein by reference.
On October 17, 1996, the Court of Appeals for the First District of
Texas affirmed a district court ruling that certified a lawsuit filed
by the Cities of Wharton, Galveston and Pasadena on behalf of certain
incorporated municipalities as a class action. The lawsuit seeks
payment of additional unpaid franchise fees allegedly owed by HL&P
to various municipalities pursuant to municipal franchise agreements.
For additional information regarding the lawsuit, reference is made to
Item 1, Part II of the Second Quarter 10-Q, which information is
incorporated herein by reference. The plaintiffs have not specified
damages in their pleadings; however, the plaintiffs' testimony alleges
that their damages could be as high as $220 million. Although the
Company and HL&P believe that the plaintiffs' claims are without merit
and intend to vigorously contest the lawsuit, no assurance can be
given at this time as to the ultimate outcome of this matter.
On August 14, 1996, an action styled Shaw v. NorAm Energy Corp., et
al. was filed in the District Court of Harris County, Texas by a
purported NorAm stockholder against NorAm, certain of its officers and
directors and the Company to enjoin the merger or to rescind the
merger and/or to recover damages in the event that the NorAm merger is
consummated. The complaint alleges, among other things, that the
merger consideration is inadequate, that NorAm's Board of Directors
breached its fiduciary duties and that the Company aided and abetted
such breaches of fiduciary duties. In addition, the plaintiff seeks
certification as a class action. The Company believes that the claims
are without merit and intends to vigorously defend against the
lawsuit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. (Exhibits designated by an asterisk (*) are incorporated
herein by reference to a separate filing as indicated.)
Houston Industries Incorporated:
*Exhibit 2(a) - Agreement and Plan of Merger among the
Company, HL&P, HI Merger, Inc. and NorAm
dated August 11, 1996 (incorporated by
reference to Exhibit 2 to the Company and
HL&P's Report on Form 8-K dated August 11,
1996).
*Exhibit 2(b) - Amendment to Agreement and Plan of Merger
among the Company, HL&P, HI Merger, Inc. and
NorAm dated August 11, 1996 (incorporated by
reference to Exhibit 2(c) to the Company's
Registration Statement on Form S-4 (Reg. No.
333-11329)).
- 23 -
<PAGE> 24
*Exhibit 10(a) - Form of Severance Agreements dated December
22, 1994, between the Company and the
following directors of HL&P: Jack D.
Greenwade, Lee W. Hogan, Stephen W. Naeve,
Stephen C. Schaeffer and Robert L. Waldrop
(incorporated by reference to Exhibit 10(u)
to Company's Annual Report on Form 10-K for
the year ended December 31, 1995, File No.
1-7629).
*Exhibit 10(b) - Supplemental Pension Agreement dated July 17,
1996, between the Company and Lee W. Hogan
(incorporated by reference to Exhibit 10(aa)
to the Company's Registration Statement on
Form S-4 (Reg. No. 333-11329).
Exhibit 11 - Computation of Earnings per Common Share and
Common Equivalent Share.
Exhibit 12 - Computation of Ratios of Earnings to Fixed
Charges.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a) - Notes 1(b), 2, 3, 4 and 11 to the Financial
Statements included on pages 57, 59 through
64 and 73 through 74 of the Form 10-K.
Exhibit 99(b) - Notes 3 and 7(a) to the Financial Statements
included on pages 13, 14 and 15 of the First
Quarter Form 10-Q.
Exhibit 99(c) - Notes 3, 4, 5, 6 and 7 to the Financial
Statements included on pages 14 through 16
of the Second Quarter Form 10-Q.
Houston Lighting & Power Company:
*Exhibit 3(a) - Articles of Amendment to the Articles of
Incorporation of HL&P dated August 9, 1996
(incorporated by reference to Exhibit 3(b) to
HL&P's Registration Statement on Form S-4
(Reg. No. 333-11329)).
*Exhibit 3(b) - Form of Articles of Amendment to the Articles
of Incorporation of HL&P (incorporated by
reference to Exhibit 3(c) to HL&P's
Registration Statement on Form S-4 (Reg. No.
333-11329)).
Exhibit 10 - Employment Agreement dated September 16, 1996
between HL&P and Charles R. Crisp.
Exhibit 12 - Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Fixed
Charges and Preferred Dividends.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a) - Notes 1(b), 2, 3, 4 and 11 to the Financial
Statements included on pages 57, 59 through
64 and 73 through 74 of the Form 10-K.
Exhibit 99(b) - Notes 3 and 7(a) to the Financial Statements
included on pages 13, 14 and 15 of the First
Quarter Form 10-Q.
- 24 -
<PAGE> 25
Exhibit 99(c) - Notes 3, 5, 6 and 7 to the Financial
Statements included on pages 14, 15 and 16 of
the Second Quarter Form 10-Q.
(b) Reports on Form 8-K.
Report on Form 8-K of the Company and HL&P dated August 11, 1996.
- 25 -
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSTON INDUSTRIES INCORPORATED
(Registrant)
/s/ Mary P. Ricciardello
-------------------------------------
Mary P. Ricciardello
Vice President and Comptroller
(Principal Accounting Officer)
Date: November 13, 1996
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSTON LIGHTING & POWER COMPANY
(Registrant)
/s/ Mary P. Ricciardello
------------------------------------
Mary P. Ricciardello
Vice President and Comptroller
(Principal Accounting Officer)
Date: November 13, 1996
<PAGE> 28
INDEX TO EXHIBITS
Houston Industries Incorporated:
*Exhibit 2(a) - Agreement and Plan of Merger among the
Company, HL&P, HI Merger, Inc. and NorAm
dated August 11, 1996 (incorporated by
reference to Exhibit 2 to the Company and
HL&P's Report on Form 8-K dated August 11,
1996).
*Exhibit 2(b) - Amendment to Agreement and Plan of Merger
among the Company, HL&P, HI Merger, Inc. and
NorAm dated August 11, 1996 (incorporated by
reference to Exhibit 2(c) to the Company's
Registration Statement on Form S-4 (Reg. No.
333-11329)).
*Exhibit 10(a) - Form of Severance Agreements dated December
22, 1994, between the Company and the
following directors of HL&P: Jack D.
Greenwade, Lee W. Hogan, Stephen W. Naeve,
Stephen C. Schaeffer and Robert L. Waldrop
(incorporated by reference to Exhibit 10(u)
to Company's Annual Report on Form 10-K for
the year ended December 31, 1995, File No.
1-7629).
*Exhibit 10(b) - Supplemental Pension Agreement dated July 17,
1996, between the Company and Lee W. Hogan
(incorporated by reference to Exhibit 10(aa)
to the Company's Registration Statement on
Form S-4 (Reg. No. 333-11329).
Exhibit 11 - Computation of Earnings per Common Share and
Common Equivalent Share.
Exhibit 12 - Computation of Ratios of Earnings to Fixed
Charges.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a) - Notes 1(b), 2, 3, 4 and 11 to the Financial
Statements included on pages 57, 59 through
64 and 73 through 74 of the Form 10-K.
Exhibit 99(b) - Notes 3 and 7(a) to the Financial Statements
included on pages 13, 14 and 15 of the First
Quarter Form 10-Q.
Exhibit 99(c) - Notes 3, 4, 5, 6 and 7 to the Financial
Statements included on pages 14 through 16
of the Second Quarter Form 10-Q.
Houston Lighting & Power Company:
*Exhibit 3(a) - Articles of Amendment to the Articles of
Incorporation of HL&P dated August 9, 1996
(incorporated by reference to Exhibit 3(b) to
HL&P's Registration Statement on Form S-4
(Reg. No. 333-11329)).
*Exhibit 3(b) - Form of Articles of Amendment to the Articles
of Incorporation of HL&P (incorporated by
reference to Exhibit 3(c) to HL&P's
Registration Statement on Form S-4 (Reg. No.
333-11329)).
Exhibit 10 - Employment Agreement dated September 16, 1996
between HL&P and Charles R. Crisp.
Exhibit 12 - Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Fixed
Charges and Preferred Dividends.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a) - Notes 1(b), 2, 3, 4 and 11 to the Financial
Statements included on pages 57, 59 through
64 and 73 through 74 of the Form 10-K.
Exhibit 99(b) - Notes 3 and 7(a) to the Financial Statements
included on pages 13, 14 and 15 of the First
Quarter Form 10-Q.
Exhibit 99(c) - Notes 3, 5, 6 and 7 to the Financial
Statements included on pages 14, 15 and 16 of
the Second Quarter Form 10-Q.
<PAGE> 1
Exhibit 11
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Primary Earnings Per Share:
(1) Weighted average shares of
common stock outstanding . . . . 245,888,549 247,894,174 247,663,731 247,545,698
(2) Effect of issuance of shares
from assumed exercise of
stock options
(treasury stock method) . . . . . 18,884 11,142 24,186 (10,400)
-------------- -------------- -------------- --------------
(3) Weighted average shares . . . . . 245,907,433 247,905,316 247,687,917 247,535,298
============== ============== ============== ==============
(4) Net income . . . . . . . . . . . $ 240,024 $ 853,949 $ 368,618 $ 1,101,665
(5) Primary earnings per share
(line 4/line 3) . . . . . . . . . $ 0.98 $ 3.44 $ 1.49 $ 4.45
Fully Diluted Earnings Per Share:
(6) Weighted average shares per
computation on line 3 above . . . 245,907,433 247,905,316 247,687,917 247,535,298
(7) Shares applicable to options
included on line 2 above . . . . (18,884) (11,142) (24,186) 10,400
(8) Dilutive effect of stock
options based on the average
price for the period or quarter-
end price, whichever is higher,
of $22.63 and $22.06 for the
third quarter of 1996 and 1995,
respectively, and $22.88 and
$22.06 for the first nine months
of 1996 and 1995, respectively
(treasury stock method) . . . . . 18,884 17,220 24,186 17,220
-------------- -------------- -------------- --------------
(9) Weighted average shares . . . . . 245,907,433 247,911,394 247,687,917 247,562,918
============== ============== ============== ==============
(10) Net income . . . . . . . . . . . $ 240,024 $ 853,949 $ 368,618 $ 1,101,665
(11) Fully diluted earnings per
share (line 10/line 9) . . . . . $ 0.98 $ 3.44 $ 1.49 $ 4.45
</TABLE>
Notes:
These calculations are submitted in accordance with Regulation S-K item 601(b)
(11) although it is not required for financial presentation disclosure per
footnote 2 to paragraph 14 of Accounting Principles Board (APB) Opinion No. 15
because it does not meet the 3% dilutive test.
<PAGE> 1
Exhibit 12
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Nine Twelve
Months Ended Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Fixed Charges as Defined:
(1) Interest on Long-Term Debt . . . . . . . . . . . $ 208,861 $ 283,917
(2) Other Interest . . . . . . . . . . . . . . . . . 22,096 22,227
(3) Preferred Dividends Factor
of Subsidiary . . . . . . . . . . . . . . . 26,323 36,821
(4) Interest Component of Rentals
Charged to Operating Expense . . . . . . . . 779 1,196
------------------ ------------------
(5) Total Fixed Charges . . . . . . . . . . . . . . $ 258,059 $ 344,161
================== ==================
Earnings as Defined:
(6) Income from Continuing Operations
Before Cumulative Effect of
Change in Accounting . . . . . . . . . . . . $ 368,618 $ 373,048
(7) Income Taxes for Continuing
Operations Before Cumulative
Effect of Change in Accounting . . . . . . . 190,797 196,376
(8) Total Fixed Charges (line 5) . . . . . . . . . . 258,059 344,161
------------------ ------------------
(9) Income from Continuing Operations
Before Cumulative Effect of
Change in Accounting, Income
Taxes and Fixed Charges . . . . . . . . . . $ 817,474 $ 913,585
================== ==================
Preferred Dividends Factor of
Subsidiary:
(10) Preferred Stock Dividends of
Subsidiary . . . . . . . . . . . . . . . . . $ 17,318 $ 24,066
(11) Ratio of Pre-Tax Income from
Continuing Operations to Income
from Continuing Operations
(line 6 plus line 7 divided
by line 6) . . . . . . . . . . . . . . . . . 1.52 1.53
------------------ ------------------
(12) Preferred Dividends Factor of
Subsidiary (line 10 times
line 11) . . . . . . . . . . . . . . . . . . $ 26,323 $ 36,821
================== ==================
Ratio of Earnings to Fixed Charges
(line 9 divided by line 5) . . . . . . . . . . . . . . 3.17 2.65
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Company's and HL&P's financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000202131
<NAME> HOUSTON INDUSTRIES INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 8,635,587
<OTHER-PROPERTY-AND-INVEST> 1,642,108
<TOTAL-CURRENT-ASSETS> 303,371
<TOTAL-DEFERRED-CHARGES> 1,554,776
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 12,135,842
<COMMON> 1,981,388
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 2,046,237
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4,027,625
0
351,345
<LONG-TERM-DEBT-NET> 3,059,620
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 1,128
<COMMERCIAL-PAPER-OBLIGATIONS> 696,703
<LONG-TERM-DEBT-CURRENT-PORT> 390,130
25,700
<CAPITAL-LEASE-OBLIGATIONS> 2,035
<LEASES-CURRENT> 3,630
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,577,926
<TOT-CAPITALIZATION-AND-LIAB> 12,135,842
<GROSS-OPERATING-REVENUE> 3,184,003
<INCOME-TAX-EXPENSE> 190,797
<OTHER-OPERATING-EXPENSES> 2,325,452
<TOTAL-OPERATING-EXPENSES> 2,325,452
<OPERATING-INCOME-LOSS> 858,551
<OTHER-INCOME-NET> (52,800)
<INCOME-BEFORE-INTEREST-EXPEN> 805,751
<TOTAL-INTEREST-EXPENSE> 229,018
<NET-INCOME> 385,936
17,318
<EARNINGS-AVAILABLE-FOR-COMM> 368,618
<COMMON-STOCK-DIVIDENDS> 276,053
<TOTAL-INTEREST-ON-BONDS> 167,122<F1>
<CASH-FLOW-OPERATIONS> 778,686
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.49
<FN>
<F1>Total annual interest charges on all bonds for year-to-date 9/30/96.
</FN>
</TABLE>
<PAGE> 1
Exhibit 99(a)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its wholly owned and
majority-owned subsidiaries. Certain investments in joint ventures or
other entities in which the Company or its subsidiaries have a 50
percent or less interest are recorded using the equity method or the
cost method. For additional information regarding investments and
advances, see Notes 1(j) and 4.
All significant intercompany transactions and balances are eliminated
in consolidation.
(B) SYSTEM OF ACCOUNTS AND EFFECTS OF REGULATION. HL&P, the principal
subsidiary of the Company, maintains its accounting records in
accordance with the FERC Uniform System of Accounts. HL&P's
accounting practices are subject to regulation by the Utility
Commission, which has adopted the FERC Uniform System of Accounts.
As a result of its regulated status, HL&P follows the accounting
policies set forth in SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," which allows a utility with cost-based
rates to defer certain costs in concert with rate recovery that would
otherwise be expensed. In accordance with this statement, HL&P has
deferred certain costs pursuant to rate actions of the Utility
Commission and is recovering or expects to recover such costs in
electric rates charged to customers. The regulatory assets are
included in other assets on the Company's Consolidated and HL&P's
Balance Sheets. The regulatory liabilities are included in deferred
credits on the Company's Consolidated and HL&P's Balance Sheets. The
following is a list of significant regulatory assets and liabilities
reflected on the Company's Consolidated and HL&P's Balance Sheets:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
(Millions of Dollars)
<S> <C>
Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . . $613
Malakoff investment . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Regulatory tax asset - net . . . . . . . . . . . . . . . . . . . . . . . 229
Unamortized loss on reacquired debt . . . . . . . . . . . . . . . . . . 121
Deferred debits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Unamortized investment tax credit. . . . . . . . . . . . . . . . . . . . (392)
Accumulated deferred income taxes - regulatory tax asset . . . . . . . . (80)
</TABLE>
If as a result of changes in regulation or competition, HL&P's ability
to recover these assets and/or liabilities would not be assured, then
pursuant to SFAS No. 71 and to the extent that such regulatory assets
or liabilities ultimately were determined not to be recoverable, HL&P
would be required to write off or write down such assets or
liabilities.
(C) ELECTRIC PLANT. HL&P capitalizes at cost all additions to electric
plant, betterments to existing property and replacements of units of
property. Cost includes the original cost of contracted services,
direct labor and material, indirect charges for engineering
supervision and similar overhead items and AFUDC. Customer payments
for construction reduce additions to electric
57
<PAGE> 2
preferred stock. The Company has recorded its investment in these
securities at a combined fair value of approximately $1 billion on the
Company's Consolidated Balance Sheet. Investment in the Time Warner
common stock is considered an "available-for-sale" equity security
under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Consequently, the Company excludes unrealized net
changes in the fair value of Time Warner common stock (exclusive of
dividends and write downs) from earnings and, until realized, reports
such changes as a net amount in the shareholders' equity section of the
balance sheet. Investment in the Time Warner convertible preferred
stock (which is not subject to the requirements of SFAS No. 115, since
it is a non-publicly traded equity security) is accounted for under the
cost method.
The securities held in the Company's nuclear decommissioning trust are
classified as "available-for-sale" and, in accordance with SFAS No.
115, are reported at fair value which at December 31, 1995
approximates cost ($44.5 million as of December 31, 1995) on the
Company's Consolidated and HL&P's Balance Sheets under deferred debits
and deferred credits. Any unrealized gains or losses are accounted
for in accordance with SFAS No. 71 as a regulatory asset/liability and
reported on the Company's Consolidated and HL&P's Balance Sheets as a
deferred debit.
(K) FUEL STOCK. Gas inventory (at average cost) was $12.1 million at
December 31, 1995. Coal, lignite, and oil inventory balances
recorded at last-in, first-out, were $22.2 million, $12.1 million, and
$13.3 million, respectively.
(L) RECLASSIFICATION. Certain amounts from the previous years have been
reclassified to conform to the 1995 presentation of financial
statements. Such reclassifications do not affect earnings.
(M) NATURE OF OPERATIONS. The Company is a holding company operating
principally in the electric utility business. HL&P is engaged in the
generation, transmission, distribution and sale of electric energy.
HL&P's service area covers a 5,000 square mile area in the Texas Gulf
Coast, including Houston. Another subsidiary of the Company, HI
Energy, participates in domestic and foreign power generation projects
and invests in the privatization of foreign electric utilities. The
business and operations of HL&P account for substantially all of the
Company's income from continuing operations and common stock equity.
(N) USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(2) JOINTLY-OWNED NUCLEAR PLANT
(A) HL&P INVESTMENT. HL&P is the project manager (and one of four
co-owners) of the South Texas Project, which consists of two 1,250
megawatt nuclear generating units. HL&P has a 30.8 percent interest
in the project and bears a corresponding share of capital and
operating costs associated with the project. As of December 31, 1995,
HL&P's investment in the South Texas Project and in nuclear fuel,
including AFUDC, was $2.0 billion (net of $439 million plant
accumulated depreciation) and $75.1 million (net of $142 million
nuclear fuel amortization), respectively.
(B) REGULATORY PROCEEDINGS AND LITIGATION. Between June 1993 and February
1995, the South Texas Project was listed on the United States Nuclear
Regulatory Commission's (NRC) "watch list" of plants with weaknesses
that warrant increased NRC regulatory attention. In February 1995,
the NRC removed the South Texas Project from its "watch list."
59
<PAGE> 3
In February 1994, the City of Austin (Austin), one of the four
co-owners of the South Texas Project, filed suit against HL&P
(Austin Litigation). Trial of that suit, which began in March 1996
is pending in the 11th District Court of Harris County, Texas.
Austin alleges that the outages at the South Texas Project from
early 1993 to early 1994 were due to HL&P's failure to perform
obligations it owed to Austin under the Participation Agreement
among the four co-owners of the South Texas Project (Participation
Agreement). Austin also asserts that HL&P breached certain
undertakings voluntarily assumed by HL&P on behalf of the co-
owners under the terms of the NRC Operating Licenses and Technical
Specifications relating to the South Texas Project.
Under amended pleadings in the Austin Litigation, Austin claims it
suffered damages of at least $120 million due to increased operating
and maintenance costs, the cost of replacement power and lost profits
on wholesale transactions that did not occur. Although HL&P and the
Company do not believe there is merit to Austin's claims, no assurance
can be given as to the ultimate outcome of this matter.
In May 1994, the City of San Antonio (San Antonio), another co-owner
of the South Texas Project, intervened in the litigation filed by
Austin against HL&P and asserted claims similar to those asserted by
Austin. Although San Antonio has not specified the damages sought in
its complaint, expert reports filed in the litigation have indicated
that San Antonio's claims may be in excess of $228 million. On
February 29,1996, San Antonio announced that it was taking a nonsuit
on its claims in the Austin Litigation in order to pursue settlement
discussions with HL&P concerning those claims, as well as separate
claims for unspecified damages previously asserted by San Antonio
against HL&P with respect to the construction of the South Texas
Project, which construction claims are the subject of a request for
arbitration under the Participation Agreement. In order to preserve
its litigation claims pending the outcome of settlement negotiations,
San Antonio refiled its lawsuit in the 152nd District Court of Harris
County, Texas. While neither the Company nor HL&P believes there is
merit to San Antonio's claims either in the pending litigation or in
the arbitration proceeding, there can be no assurance as to the
ultimate outcome of those matters, nor can there be an assurance as to
the ultimate outcome of the settlement discussions. If a settlement
is reached, it is possible, among other things, that such resolution
could require in the near term a charge to earnings from continuing
operations, but it is not anticipated that any such resolution would
be material to the Company's or HL&P's financial position, liquidity
or ability to meet their respective cash requirements stemming from
operating, capital expenditures and financing activities.
(C) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability insurance
coverage as required by law and periodically review available limits
and coverage for additional protection. The owners of the South Texas
Project currently maintain $2.75 billion in property damage insurance
coverage which is above the legally required minimum, but is less than
the total amount of insurance currently available for such losses.
This coverage consists of $500 million in primary property damage
insurance and excess property insurance in the amount of $2.25
billion. Under the excess property insurance (which became effective
in November 1995), HL&P and the other owners of the South Texas
Project are subject to assessments, the maximum aggregate assessment
under current policies being $25.8 million during any one policy year.
The application of the proceeds of such property insurance is subject
to the priorities established by the NRC regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was $8.92 billion as of December 1995. Owners are required
under the Act to insure their liability for nuclear incidents and
protective evacuations by maintaining the maximum amount of financial
protection available from private sources and by maintaining secondary
financial protection through an industry retrospective rating plan.
The
60
<PAGE> 4
assessment of deferred premiums provided by the plan for each nuclear
incident is up to $75.5 million per reactor subject to indexing for
inflation, a possible 5 percent surcharge (but no more than $10 million
per reactor per incident in any one year) and a 3 percent state premium
tax. HL&P and the other owners of the South Texas Project currently
maintain the required nuclear liability insurance and participate in
the industry retrospective rating plan.
There can be no assurance that all potential losses or liabilities
will be insurable, or that the amount of insurance will be sufficient
to cover them. Any substantial losses not covered by insurance would
have a material effect on HL&P's and the Company's financial condition
and results of operations.
(D) NUCLEAR DECOMMISSIONING. In accordance with the Rate Case Settlement,
HL&P contributes $14.8 million per year to a trust established to fund
HL&P's share of the decommissioning costs for the South Texas Project.
For a discussion of securities held in the Company's nuclear
decommissioning trust, see Note 1(j). In May 1994, an outside
consultant estimated HL&P's portion of decommissioning costs to be
approximately $318 million (1994 dollars). The consultant's
calculation of decommissioning costs for financial planning purposes
used the DECON methodology (prompt removal/dismantling), one of the
three alternatives acceptable to the NRC, and assumed deactivation of
Unit Nos. 1 and 2 upon the expiration of their 40-year operating
licenses. While the current and projected funding levels presently
exceed minimum NRC requirements, no assurance can be given that the
amounts held in trust will be adequate to cover the actual
decommissioning costs of the South Texas Project. Such costs may vary
because of changes in the assumed date of decommissioning, changes in
regulatory and accounting requirements, changes in technology and
changes in costs of labor, materials and equipment.
(3) RATE MATTERS
The Utility Commission has original (or in some cases appellate)
jurisdiction over HL&P's electric rates and services. In Texas,
Utility Commission orders may be appealed to a District Court in
Travis County, and from that Court's decision an appeal may be taken
to the Court of Appeals for the 3rd District at Austin (Austin Court
of Appeals). Discretionary review by the Supreme Court of Texas may
be sought from decisions of the Austin Court of Appeals. In the event
that the courts ultimately reverse actions of the Utility Commission,
such matters are remanded to the Utility Commission for action in
light of the courts' orders. On remand, the Utility Commission's
action could range from granting rate relief substantially equal to
the rates previously approved to reducing the revenues to which HL&P
was entitled during the time the applicable rates were in effect,
which could require a refund to customers of amounts collected
pursuant to such rates.
(A) 1995 RATE CASE. In August 1995, the Utility Commission unanimously
approved the Rate Case Settlement, which resolved HL&P's 1995 rate
case (Docket No. 12065) as well as a separate proceeding (Docket No.
13126) regarding the prudence of operation of the South Texas Project.
Subject to certain changes in existing regulation or legislation, the
Rate Case Settlement precludes HL&P from seeking rate increases until
after December 31, 1997. HL&P began recording the effects of the Rate
Case Settlement in the first quarter of 1995. The Rate Case Settlement
reduced HL&P's earnings for 1995 by approximately $100 million.
61
<PAGE> 5
The after-tax effects in 1995 of the Rate Case Settlement are as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
-----------------
(Millions of Dollars)
<S> <C>
Reduction in base revenues . . . . . . . . . . . . . . . . . . . $ 52
South Texas Project write-down . . . . . . . . . . . . . . . . . 33
One-time write-off of mine-related costs . . . . . . . . . . . . 6
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . 9
----
Total Rate Case Settlement effect on net income . . . . $100
====
</TABLE>
The Rate Case Settlement gives HL&P the option to write down up to $50
million ($33 million after-tax) per year of its investment in the
South Texas Project through December 31, 1999. The parties to the
Rate Case Settlement agreed that any such write-down will be treated
as a reasonable and necessary expense during routine reviews of HL&P's
earnings and any rate review proceeding initiated against HL&P. In
accordance with the Rate Case Settlement, HL&P recorded a $50 million
pre-tax write-down in 1995 of its investment in the South Texas
Project which is included in the Company's Statements of Consolidated
Income and HL&P's Statements of Income in depreciation and
amortization expense. In 1995, HL&P also began accruing its share of
decommissioning expense for the South Texas Project at an annual rate
of $14.8 million (a $9 million per year increase over 1994).
As required by the Rate Case Settlement, HL&P will begin in 1996 to
amortize its $153 million investment in certain lignite reserves
associated with the canceled Malakoff project. These amortizations
will equal approximately $22 million per year. As a result of this
additional amortization, HL&P's remaining investment in Malakoff
($233 million at December 31, 1995) will be fully amortized no later
than December 31, 2002. During the second quarter of 1995, HL&P
recorded a one-time pre-tax charge of $9 million incurred in
connection with certain Malakoff mine-related costs that were not
previously recorded and were not recoverable under the terms of the
Rate Case Settlement. Issues concerning the prudence of expenditures
related to Malakoff were deferred until a subsequent rate case.
In Docket No. 8425, the Utility Commission allowed recovery of certain
costs associated with Malakoff by allowing HL&P to amortize these
costs over ten years. Such recoverable costs are not included in rate
base and, as a result, no return on investment is being earned during
the recovery period. The $28 million unamortized balance of these
costs at December 31, 1995 is included in the $233 million discussed
above and is to be amortized over the following 54 months.
In anticipation of the Rate Case Settlement, the Company and HL&P
recorded in the fourth quarter of 1994 a one-time, pre-tax charge of
approximately $70 million to reconcilable fuel revenues, an amount
which HL&P agreed as a part of the Rate Case Settlement was not
recoverable from ratepayers.
(B) RATE CASE APPEALS. Pursuant to the Rate Case Settlement, HL&P and the
other parties to that settlement have dismissed their pending appeals
of previous Utility Commission orders. As a result of that action or
subsequent judicial action, the Utility Commission's orders have
become final in Docket No. 9850 (involving HL&P's 1991 rate case) and
in Docket Nos. 8230 and 9010 (involving deferred accounting). Two
appeals of other orders, by parties who did not join in the Rate Case
Settlement, remain pending: review of Docket No. 8425 (HL&P's 1988
rate case), and review of Docket No. 6668 (the Utility Commission's
inquiry into the prudence of the planning and construction of the
South Texas Project). The appeal from the order in Docket No. 8425
concerns (i) the treatment as "plant held for future use" of certain
costs associated with the Malakoff
62
<PAGE> 6
generating station and (ii) the treatment by HL&P of certain tax
savings associated with federal income tax deductions for expenses not
included in cost of service for ratemaking purposes. The appeal is
currently pending before the Texas Supreme Court.
Review of the Utility Commission's order in Docket No. 6668 is pending
before a Travis County district court. In that order the Utility
Commission determined that $375.5 million of HL&P's $2.8 billion
investment in the South Texas Project had been imprudently incurred.
That ruling was incorporated into HL&P's 1988 and 1991 rate cases.
Unless the order is modified or reversed on appeal, the amount found
imprudent by the Utility Commission will be sustained.
(4) INVESTMENTS IN FOREIGN AND NON-REGULATED ENTITIES
(A) GENERAL. HI Energy sustained net losses of $33 million, $6 million
and $2 million in 1995, 1994 and 1993, respectively. Development
costs for 1995 were approximately $14 million. The majority of costs
in 1994 and 1993 were related to project development activities.
(B) FOREIGN INVESTMENTS. Houston Argentina S.A. (Houston Argentina),
a subsidiary of HI Energy, owns a 32.5 percent interest in
Compania de Inversiones en Electricidad S.A. (COINELEC), an Argentine
holding company which acquired a 51 percent interest in Empresa
Distribuidora de La Plata S.A. (EDELAP), an electric utility company
operating in La Plata, Argentina and surrounding regions. Houston
Argentina's share of the purchase price was approximately $37.4
million. Such investment was in the form of (i) a capital
contribution of $27.6 million to COINELEC and (ii) a loan to COINELEC
in the aggregate principal amount of $9.8 million. HI Energy has also
entered into support agreements with two financial institutions
pursuant to which HI Energy has agreed to make additional cash
contributions or subordinated loans to COINELEC or pay COINELEC's
lenders up to a maximum aggregate of $6.6 million in the event of a
default by COINELEC of its commitments to such financial institutions.
Subsequent to the acquisition, the generating assets of EDELAP were
transferred to Central Dique S.A., an Argentine Corporation, 51
percent of the stock of which is owned by COINELEC. HI Energy's
portion of EDELAP and Central Dique S.A. earnings was approximately $1
million in both 1995 and 1994.
In January 1995, HI Energy acquired for $15.7 million a 90 percent
ownership interest in an electric utility operating company located in
a rural province in the north central part of Argentina. The utility
system serves approximately 116,000 customers in an area of 136,000
square kilometers. HI Energy's share of net losses from this
investment for 1995 was $3.6 million substantially all of which was
due to non-recurring severance costs.
In 1995, HI Energy invested approximately $7 million in a cogeneration
project being developed in San Nicolas, Argentina and approximately $5
million in a coke calcining project being developed in the state of
Andhra Pradesh, India. These projects had no earnings impact in 1995.
HI Energy estimates that its commitment in 1996 for the Argentine
cogeneration project will be approximately $31 million and that its
share of the 1996 commitment for the coke calcining project will be
approximately $3 million. HI Energy has entered into a support
agreement in favor of the International Finance Corporation (IFC)
under the terms of which HI Energy has agreed to provide one of its
subsidiaries (HIE Rain), which is an investor in the coke calcining
project, with sufficient funds to meet certain funding obligations of
HIE Rain under agreements with the IFC. The maximum aggregate funding
commitment of HI Energy under this support agreement is approximately
$18 million, of which approximately $16 million is to support
contingent obligations of HIE Rain and the balance of which is
additional equity to be contributed to the coke calcining project.
63
<PAGE> 7
(C) ILLINOIS WASTE TIRE-TO-ENERGY PROJECTS. HI Energy is a subordinated
lender to two waste tire-to-energy projects being developed by Ford
Heights and Fulton, respectively, located in the state of Illinois. HI
Energy also owns a $400,000 equity interest (20 percent) in Ford
Heights. Both projects were being developed in reliance on the terms of
the Illinois Retail Rate Law, enacted in 1987, to encourage development
of energy production facilities for the disposal of solid waste by
providing an operating subsidy to qualifying projects. In March 1996,
the Governor of Illinois signed into law legislation which purports to
repeal the subsidy provided to most of such energy production
facilities, including the two waste tire-to-energy projects in which HI
Energy has invested. A lawsuit has been filed on behalf of the Ford
Heights and Fulton projects challenging, among other things, the
constitutionality of the repeal and its retroactive application to the
two waste tire-to-energy projects. On March 26, 1996, the Ford Heights
project filed a voluntary petition seeking protection under the federal
bankruptcy laws. The ability of the two waste tire-to-energy projects
to meet their debt obligations is dependent upon the projects
continuing to receive the operating subsidy under the Retail Rate Law.
The terms of the public bonds issued by the Ford Heights and Fulton
projects are non-recourse to the Company and HI Energy.
In response to the actions taken by the state of Illinois, the Company
has established a valuation allowance of $28 million ($18 million
after-tax), which amount reflects the combined amounts lent on a
subordinated basis to the Ford Heights and Fulton projects. In
addition to amounts funded through March 26, 1996, HI Energy also is
party to two separate Note Purchase Agreements committing it, under
certain circumstances, to acquire up to (i) $3 million in aggregate
principal amount of additional subordinated notes from the Ford Heights
project and (ii) $17 million in aggregate principal amount of
additional subordinated notes from the Fulton project. The Company has
entered into a support agreement under which it has agreed to provide
additional funds to HI Energy to enable it to honor its obligations
under the two Note Purchase Agreements. The Company is unable to
predict the ultimate effect of these developments on HI Energy's
remaining funding commitments under these Note Purchase Agreements;
however, in the Company's opinion it is unlikely that the majority of
the additional unfunded subordinated debt provided for in the Fulton
Note Purchase Agreement would be required to be funded unless
construction activities with respect to the Fulton project are
recommenced at some future date. If HI Energy becomes obligated to
advance additional funds under the Note Purchase Agreements, the
Company could be required to increase the amount of the valuation
allowance, which would result in additional charges to earnings.
(5) COMMON STOCK
(A) STOCK DISTRIBUTION. The Company effected a two-for-one stock split in
the form of a common stock distribution on December 9, 1995. All
prior periods have been restated for consistency to reflect the stock
distribution in terms of number of common shares outstanding and the
per share amounts for earnings, dividends and market price. The
nominal consideration established by the Board of Directors for the
common stock distributed ($.01 per share) is reflected as a deduction
from retained earnings in the Company's Statements of Consolidated
Retained Earnings.
(B) DIVIDENDS. The timing of the Company's Board of Directors'
declaration of dividends changed resulting in five quarterly dividend
declarations in 1993. All dividends declared in 1993 have been
included in 1993 common stock dividends on the Company's Statements of
Consolidated Retained Earnings. The Company paid four regular
quarterly dividends in 1993 aggregating $1.50 per share, after
restatement for the two-for-one stock split, on its common stock
shares.
(C) LONG-TERM INCENTIVE COMPENSATION PLANS. The Company has Long-Term
Incentive Compensation Plans (LICP) providing for the issuance of
stock incentives (including performance-based restricted shares and
stock options) to key employees of the Company, including officers.
As of December 31, 1995, 29 current and former employees participated
in the plans. A maximum of five million shares of common stock may be
issued under the LICP. Beginning one
64
<PAGE> 8
Following are the Company's tax effects of temporary differences
attributable to continuing operations resulting in deferred tax assets
and liabilities:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1994
-------------- -------------
(Thousands of Dollars)
<S> <C> <C>
Deferred Tax Assets:
Alternative minimum tax . . . . . . . . . . . . . . . . . . . . . . . $ 46,516 $ 66,707
IRS audit assessment . . . . . . . . . . . . . . . . . . . . . . . . . 74,966 74,966
Disallowed plant cost - net . . . . . . . . . . . . . . . . . . . . . 22,687 23,496
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,628 83,740
---------- ----------
Total deferred tax assets - net . . . . . . . . . . . . . . . . . 240,797 248,909
---------- ----------
Deferred Tax Liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,391,573 1,336,035
Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . 200,028 207,746
Regulatory assets - net . . . . . . . . . . . . . . . . . . . . . . . 228,587 235,463
Capitalized taxes, employee benefits and removal costs . . . . . . . . 110,065 111,660
Gain on sale of cable television subsidiary . . . . . . . . . . . . . 227,515
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,275 121,235
---------- ----------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . 2,308,043 2,012,139
---------- ----------
Accumulated deferred income taxes - net . . . . . . . . . . $2,067,246 $1,763,230
========== ==========
</TABLE>
See Note 13 for income taxes related to discontinued operations.
(11) COMMITMENTS AND CONTINGENCIES
(a) HL&P COMMITMENTS. HL&P has various commitments for capital
expenditures, fuel, purchased power, cooling water and operating
leases. Commitments in connection with HL&P's capital program are
generally revocable by HL&P subject to reimbursement to manufacturers
for expenditures incurred or other cancellation penalties. HL&P's
other commitments have various quantity requirements and durations.
However, if these requirements could not be met, various alternatives
are available to mitigate the cost associated with the contracts'
commitments.
(b) FUEL AND PURCHASED POWER. HL&P is a party to several long-term coal,
lignite and natural gas contracts which have various quantity
requirements and durations. Minimum payment obligations for coal and
transportation agreements are approximately $175 million in 1996, $178
million in 1997 and $184 million in 1998. Additionally, minimum
payment obligations for lignite mining and lease agreements are
approximately $5 million for 1996, $8 million for 1997 and $9 million
for 1998. Collectively, the fixed price gas supply contracts, which
expire in 1997, could amount to 11 percent of HL&P's annual natural
gas requirements for 1996 and 7 percent for 1997. Minimum payment
obligations for both natural gas purchase and storage contracts are
approximately $57 million in 1996, $38 million in 1997 and $9 million
in 1998.
HL&P also has commitments to purchase firm capacity from cogenerators
of approximately $22 million in each of the years 1996 through 1998.
Utility Commission rules currently allow recovery of these costs
through HL&P's base rates for electric service and additionally
authorize HL&P to charge or credit customers through a purchased power
cost recovery factor for any variation in actual purchased power costs
from the cost utilized to determine its base rates. In the event that
the Utility Commission, at some future date, does not allow recovery
through rates of any amount of purchased power payments, the two
principal firm capacity contracts contain provisions allowing HL&P to
suspend or reduce payments and seek repayment for amounts disallowed.
73
<PAGE> 9
(c) OTHER. HL&P's service area is heavily dependent on oil, gas, refined
products, petrochemicals and related businesses. Significant adverse
events affecting these industries would negatively affect the
revenues of the Company and HL&P. For information regarding
contingencies relating to the South Texas Project, see Note 2 above.
The Company and HL&P are involved in legal, tax and regulatory
proceedings before various courts, regulatory commissions and
governmental agencies regarding matters arising in the ordinary course
of business, some of which involve substantial amounts.
(12) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1995 1994
---------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------- ----------- -------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments . . . . . . . $ 11,779 $ 11,779 $ 10,443 $ 10,443
Investment in Time Warner securities . . . . 1,027,875 1,027,875
Financial liabilities:
Short-term notes payable . . . . . . . . . . 6,300 6,300 423,291 423,291
Cumulative preferred stock of
subsidiary (subject to mandatory
redemption) . . . . . . . . . . . . . . . . 76,755 79,250 167,610 173,355
Debentures . . . . . . . . . . . . . . . . . 348,914 396,903 548,729 549,532
Long-term debt of subsidiaries:
Electric:
First mortgage bonds . . . . . . . . . 2,979,293 3,247,139 3,020,400 2,980,028
Pollution control revenue bonds . . . 4,426 5,000 155,247 163,736
Other notes payable 981 981 1,129 1,129
Discontinued operations:
Senior bank debt . . . . . . . . . . . 364,000 364,000
Senior and senior subordinated
notes . . . . . . . . . . . . . . . 140,580 154,654
</TABLE>
The fair values of cash and short-term investments, investment in equity
securities, short-term and other notes payable and bank debt are estimated to
be equivalent to the carrying amounts.
The fair values of the Company's debentures, HL&P's cumulative preferred
stock subject to mandatory redemption, HL&P's first mortgage bonds, pollution
control revenue bonds issued on behalf of HL&P and senior subordinated notes
are estimated using rates currently available for securities with similar
terms and remaining maturities.
(13) CABLE TELEVISION--DISCONTINUED OPERATIONS
In July 1995, the Company completed the sale of KBLCOM, its cable television
subsidiary, to Time Warner. The Company's 1995 earnings include a one-time,
after-tax gain on the sale of $708 million. Effective January 1, 1995, the
operations of KBLCOM were accounted for as discontinued and prior periods
were restated for consistency in reflecting KBLCOM as a discontinued
operation.
74
<PAGE> 1
EXHIBIT 99(b)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim financial statements and notes (Interim Financial
Statements) contained in this Form 10-Q for the period ended
March 31, 1996 (Form 10-Q) are unaudited and condensed. Certain
notes and other information contained in the Combined Annual
Report on Form 10-K (File Nos. 1-7629 and 1-3187) for the year
ended December 31, 1995 (Form 10-K), of Houston Industries
Incorporated (Company) and Houston Lighting & Power Company
(HL&P) have been omitted in accordance with Rule 10-01 of
Regulation S-X under the Securities Exchange Act of 1934. The
information presented in the Interim Financial Statements should
be read in combination with the information presented in the
Form 10-K, including the financial statements and notes
contained therein. For information regarding the Company's
discontinued cable television operations, see Note 13 to the
financial statements contained in the Form 10-K.
(2) CERTAIN CONTINGENCIES
The following notes to the financial statements of the Form 10-K
(as updated by the notes contained in this Form 10-Q) are
incorporated herein by reference: Note 1(b) (System of Accounts
and Effects of Regulation), Note 2 (Jointly-Owned Nuclear
Plant), Note 3 (Rate Matters), Note 4 (Investments in Foreign
and Non-Regulated Entities) and Note 11 (Commitments and
Contingencies).
(3) JOINTLY-OWNED NUCLEAR PLANT
HL&P is the project manager (and one of four co-owners) of the
South Texas Project Electric Generating Station (South Texas
Project), which consists of two 1,250 megawatt nuclear
generating units. HL&P has a 30.8 percent interest in the
project.
On April 30, 1996, HL&P and the City of Austin (Austin), one of
the four co-owners of the South Texas Project, agreed to settle
a lawsuit in which Austin had alleged that outages occurring at
the South Texas Project between early 1993 and early 1994 were
due to HL&P's failure to perform certain obligations it owed
Austin under a Participation Agreement relating to the project.
For information regarding this settlement and a $13 million
(after-tax) charge to first quarter earnings resulting from the
settlement, see Note 7(a) to the Interim Financial Statements.
For information concerning a similar lawsuit filed against HL&P
by the City of San Antonio (San Antonio), another co-owner of
the South Texas Project, and San Antonio's pending arbitration
claims against HL&P with respect to the construction of the
South Texas Project, see Note 2(b) to the financial statements
contained in the Form 10-K. HL&P and San Antonio (acting
through the City Public Service Board of San Antonio (CPS)) have
agreed on the principles under which they would settle all
claims with respect to the South Texas Project. For information
regarding the proposed settlement and a $49 million (after-tax)
charge to first quarter earnings relating thereto, see Note 7(a)
to the Interim Financial Statements.
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<PAGE> 2
(4) RATE CASE PROCEEDINGS
For information concerning the settlement of HL&P's most recent
rate case (Docket No. 12065) and the continuing impact of that
settlement on HL&P's results of operations, see Note 3(a) to the
financial statements contained in the Form 10-K. The two Public
Utility Commission of Texas (Utility Commission) orders
concerning HL&P that are still subject to appellate review are:
Docket No. 8425 (HL&P's 1988 rate case) and Docket No. 6668 (an
inquiry into the prudence of the planning and construction of
the South Texas Project). For information regarding these
appeals, see Note 3(b) to the financial statements contained in
the Form 10-K.
(5) CAPITAL STOCK
Company. At March 31, 1996 and December 31, 1995, the Company
had 400,000,000 authorized shares of common stock, of which
248,556,370 and 248,316,710 shares, respectively, were
outstanding as of such dates. Outstanding shares exclude the
unallocated shares of the Company's Employee Stock Ownership
Plan, which as of March 31, 1996 and December 31, 1995 totaled
14,186,577 and 14,355,758, respectively. Earnings per common
share for the Company are computed by dividing net income by the
weighted average number of shares outstanding during the
respective period.
HL&P. All issued and outstanding shares of Class A voting
common stock of HL&P are held by the Company, and all issued and
outstanding shares of Class B non-voting common stock of HL&P
are held by Houston Industries (Delaware) Incorporated (HI
Delaware), a wholly owned subsidiary of the Company. Earnings
per share data for HL&P are not computed because all of its
common stock is held by the Company and HI Delaware.
On March 31, 1996 and December 31, 1995, HL&P had 10,000,000
authorized shares of preferred stock, of which 4,318,397 shares
were outstanding.
(6) LONG-TERM DEBT
HL&P. In January 1996, HL&P repaid upon maturity $100 million
principal amount of its Collateralized Medium-Term Notes Series
B and $10 million principal amount of its Collateralized
Medium-Term Notes Series A plus accrued interest on the two
issues.
In March 1996, HL&P deposited approximately $86 million in a
trust and irrevocably directed the trustee to redeem on May 8,
1996 all issued and outstanding principal amounts of HL&P's
7 1/4% first mortgage bonds due February 1, 2001 (at a redemption
price of 100.42% plus accrued interest) and 6 3/4% first
mortgage bonds due April 1, 1998 (at a redemption price of
100.15% plus accrued interest).
(7) SUBSEQUENT EVENTS
(a) South Texas Project Litigation. On April 30, 1996,
Houston Lighting & Power Company entered into a settlement
with Austin regarding City of Austin v. Houston Lighting &
Power Company, Cause No. 94-07946, in the 11th Judicial
District Court, Harris County, Texas. In that suit, filed
by Austin in May 1994, Austin asserted that HL&P had
mismanaged its responsibilities as Project Manager of the
South Texas Project. Austin contended that, because of
HL&P's mismanagement and negligence, the outage at the
South Texas Project during 1993-94 had caused Austin
damages of approximately $120 million.
Trial of Austin's suit began in March 1996, and the
settlement was reached in April 1996. Under the
settlement, HL&P agreed to pay Austin $20 million in cash
to resolve all pending disputes between HL&P and Austin,
and Austin agreed to
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<PAGE> 3
support the formation of a new operating company to
assume HL&P's role as project manager for the South Texas
Project. The Company and HL&P have recorded the $20
million ($13 million net of tax) payment to Austin on the
Company's Statements of Consolidated Income and HL&P's
Statements of Income as litigation settlements expense.
HL&P and CPS have agreed on the principles under which they
would settle all claims with respect to the South Texas
Project. Under the proposed settlement, HL&P and CPS would
enter into definitive agreements providing, among other
things, for (i) a cash payment by HL&P to CPS of $75
million ($25 million of which has already been paid), (ii)
an agreement to support formation of a new operating
company to replace HL&P as project manager of the South
Texas Project and (iii) the execution of a 10-year joint
operations agreement under which HL&P and CPS will share
savings resulting from the joint dispatching of their
respective generating assets in order to take advantage of
each system's lower cost resources. Under the terms of the
joint operations agreement, CPS will be guaranteed minimum
annual savings of $10 million with a minimum cumulative
savings of $150 million over the ten year term of the
agreement. Based on current forecasts and other assumptions
regarding the combined operation of the two generating
systems, HL&P anticipates that the savings resulting from
joint operations will equal or exceed the minimum savings
guaranteed under the joint operations agreement.
Although no assurance can be given as to the ultimate
resolution of negotiations, the proposed settlement will
resolve all claims, litigation and matters in arbitration
between the two parties with respect to the South Texas
Project. The proposed settlement has been reviewed by San
Antonio's city council but is still subject to approval by
CPS. In anticipation of the settlement, the Company and
HL&P have recorded a $49 million expense (net of tax) on
the Company's Statement of Consolidated Income and HL&P's
Statements of Income (reflected as litigation settlement
expense). The unpaid portion of the cash payment
contemplated by the settlement is shown in other deferred
credits on the Company's Consolidated and HL&P's Balance
Sheets.
(b) HI Energy. In May 1996, a subsidiary of Houston
Industries Energy, Inc. (HI Energy) purchased for
approximately $55 million an additional 39 percent of the
capital stock of Empresa Distribuidora la Plata (EDELAP),
an electric utility company operating in La Plata,
Argentina and surrounding regions. HI Energy also
indirectly owns 16.6 percent of the capital stock of
EDELAP, which shares were acquired in December 1992 for
$37 million. For additional information regarding HI
Energy's investments in foreign and non-regulated
entities, see Note 4 to the financial statements contained
in the Form 10-K. Beginning in the second quarter of
1996, EDELAP will be reflected in the Company's financial
statements on a consolidated basis.
(c) Redemption of HL&P Preferred Stock. In March 1996, HL&P
provided notice to the holders of its $9.375 preferred
stock that it would redeem 514,000 shares of such stock at
a cost of approximately $53 million ($102.34375 per share
including accrued dividends). On April 1, 1996, HL&P
redeemed 257,000 of such shares pursuant to a sinking fund
requirement and 257,000 shares pursuant to optional
redemption provisions. HL&P will record the redemptions
in the second quarter of 1996.
(8) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative of
results expected for the year due to the seasonal nature of
HL&P's business. In the opinion of management, the interim
information reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a full presentation of the
results for the interim periods. Certain amounts from the
previous year have been reclassified to conform to the 1996
presentation of financial statements. Such reclassifications do
not affect earnings.
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<PAGE> 1
EXHIBIT 99(c)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim financial statements and notes (Interim Financial
Statements) contained in this Form 10-Q for the period ended June 30,
1996 (Form 10-Q) are unaudited and condensed. Certain notes and other
information contained in the Combined Annual Report on Form 10-K (File
Nos. 1-7629 and 1-3187) for the year ended December 31, 1995 (Form
10-K), of Houston Industries Incorporated (Company) and Houston
Lighting & Power Company (HL&P) have been omitted in accordance with
Rule 10-01 of Regulation S-X under the Securities Exchange Act of
1934.
The information presented in the Interim Financial Statements should
be read in combination with the information presented in the Form 10-K
and the Combined Quarterly Report on Form 10-Q of the Company and HL&P
for the quarter ended March 31, 1996 (First Quarter 10-Q).
(2) CERTAIN CONTINGENCIES
The following notes to the financial statements in the Form 10-K (as
updated by the notes contained in this Form 10-Q and the First Quarter
10-Q ) are incorporated herein by reference: Note 1(b) (System of
Accounts and Effects of Regulation), Note 2 (Jointly-Owned Nuclear
Plant), Note 3 (Rate Matters), Note 4 (Investments in Foreign and
Non-Regulated Entities) and Note 11 (Commitments and Contingencies).
(3) JOINTLY-OWNED NUCLEAR PLANT
In July 1996, HL&P and City Public Service Board of San Antonio (CPS)
entered into a settlement agreement providing, among other things,
for (i) the dismissal with prejudice of all pending arbitration claims
and lawsuits between HL&P and CPS relating to the South Texas Project
Electric Generating Station (South Texas Project), (ii) a cash payment
by HL&P to CPS of $75 million (accrued in the quarter ended March 31,
1996), (iii) an agreement to support formation of a new operating
company to replace HL&P as project manager for the South Texas Project
and (iv) the execution of a 10-year joint operations agreement under
which HL&P and CPS will share savings resulting from the joint
dispatching of their respective generating assets in order to take
advantage of each system's lower cost resources.
Under the terms of the joint operations agreement entered into between
CPS and HL&P, HL&P will guarantee CPS minimum annual savings of $10
million and a minimum cumulative savings of $150 million over the
ten-year term of the agreement. Based on current forecasts and other
assumptions regarding the combined operation of the two generating
systems, HL&P anticipates that the savings resulting from joint
operations will equal or exceed the minimum savings guaranteed under
the joint operations agreement.
For information regarding the settlement in April 1996 of a similar
lawsuit filed by the City of Austin (Austin) against HL&P and a $13
million (after-tax) charge to earnings recorded in the first quarter
of 1996 in connection with this settlement, see Notes 3 and 7(a) to
the First Quarter 10-Q, which notes are incorporated herein by
reference.
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<PAGE> 2
As a result of the settlements of the CPS and Austin litigation, all
litigation and arbitration claims formerly pending between HL&P and
the other co-owners of the South Texas Project have been settled and
dismissed with prejudice.
(4) HI ENERGY
Acquisition of Interest in Brazilian Electric Utility. In May 1996, a
subsidiary of Houston Industries Energy, Inc. (HI Energy) acquired
11.35 percent of the common shares of Light - Servicos de Eletricidade
S.A. (Light), a publicly-held Brazilian corporation, for $392 million.
Light is the operator under a 30-year concession agreement of an
approximately 3,888 megawatt electric power generation, transmission
and distribution system serving 28 municipalities in the state of Rio
de Janeiro, Brazil. HI Energy acquired the shares as a bidder in the
government-sponsored auction of 60 percent of Light's outstanding
shares.
Subsequent to the auction, the winning bidders, including a subsidiary
of HI Energy, formed a consortium whose aggregate ownership interest
of 50.44 percent represents a controlling interest in Light. The
consortium, organized pursuant to a shareholders agreement dated as of
May 27, 1996, is comprised of the direct share ownership interests
held in Light by subsidiaries or affiliates of The AES Corporation
(11.35 percent), Electricite de France (11.35 percent), HI Energy
(11.35 percent), Companhia Sidercgica Nacional (7.25 percent), and
Banco Nacional de Desenvolvimento Economico E Social (BNDES) (9.14
percent). Pursuant to the shareholders agreement, principal
responsibilities for the various aspects of Light's business will be
allocated among the parties. The HI Energy subsidiary will have the
principal responsibility for all matters relating to Light's financial
affairs.
The Company has accounted for this transaction under purchase
accounting and has recorded its investment and its interest in Light's
operations since June 1, 1996, using the equity method. The effect of
Light's income on the Company's net income is immaterial for the
second quarter of 1996 and the six months ended June 30, 1996.
Class B Shares of Edelap. On May 2, 1996, Houston Argentina S.A.
(Houston Argentina), a subsidiary of HI Energy, purchased for
approximately $55 million the Class B Shares of Empresa Distribuidora
de la Plata S.A. (Edelap), an electric utility company operating in
La Plata, Argentina, and surrounding regions. The Class B Shares of
Edelap were sold by the Argentine government in a public auction. On
May 28, 1996, Houston Argentina sold a portion of its Class B Shares
to a third party for approximately $10 million. The remaining Class B
Shares held by Houston Argentina constitute 32 percent of the capital
stock of Edelap. Houston Argentina also owns indirectly through a
holding company an additional 16.6 percent of the capital stock of
Edelap, which shares were acquired in 1992 for $37 million. The
Company has recorded its investment in Edelap using the equity method.
(5) RATE CASE PROCEEDINGS
In June 1996, the Supreme Court of Texas unanimously upheld the
decision of the Public Utility Commission of Texas (Utility
Commission) in Docket No. 8425 (HL&P's 1988 rate case) to include in
HL&P's rate base $93 million in construction costs relating to the
Malakoff project (a canceled lignite generation project). The Supreme
Court also affirmed the Utility Commission's decision granting
deferred accounting treatment for Unit No. 2 of the South Texas
Project and the calculation of HL&P's federal income tax expenses
without taking into account deductions for expenses paid by the
Company's shareholders. As a result of this decision, HL&P's 1988
rate case has now become final.
For information regarding the appeal of Docket No. 6668 (an inquiry
into the prudence of the planning and construction of the South Texas
Project), see Note 3(b) to the Form 10-K.
-15-
<PAGE> 3
(6) CAPITAL STOCK
Company. At June 30, 1996 and December 31, 1995, the Company had
400,000,000 authorized shares of common stock, of which 247,690,618
and 248,316,710 shares, respectively, were outstanding as of such
dates. Outstanding shares exclude (i) the unallocated shares of the
Company's Employee Stock Ownership Plan (which as of June 30, 1996 and
December 31, 1995 totaled 13,861,929 and 14,355,758, respectively) and
(ii) 1,195,900 shares purchased by the Company as of June 30, 1996,
under the common stock repurchase program described below. Earnings
per common share for the Company are computed by dividing net income
by the weighted average number of shares outstanding during the
respective period.
In June 1996, the Company announced that its Board of Directors had
authorized the purchase of up to $150 million of the Company's common
stock. It is anticipated that any purchases of common stock under the
program would be effected over the next 12 months, subject to market
conditions, available cash and alternative investment opportunities.
The Company began repurchasing shares in mid-June 1996.
HL&P. All issued and outstanding shares of Class A voting common
stock of HL&P are held by the Company, and all issued and outstanding
shares of Class B non-voting common stock of HL&P are held by Houston
Industries (Delaware) Incorporated (HI Delaware), a wholly owned
subsidiary of the Company. Earnings per share data for HL&P are not
computed because all of its common stock is held by the Company and HI
Delaware.
On June 30, 1996 and December 31, 1995, HL&P had 10,000,000 authorized
shares of preferred stock, of which 3,804,397 and 4,318,397 shares,
respectively, were outstanding.
In April 1996, HL&P redeemed 514,000 shares of its $9.375 cumulative
preferred stock at a cost of approximately $53 million ($102.34375 per
share, including accrued dividends). The redemption included 257,000
shares in satisfaction of mandatory sinking fund requirements and an
additional 257,000 shares as an optional redemption.
(7) LONG-TERM DEBT
In January 1996, HL&P repaid upon maturity $100 million principal
amount of its Collateralized Medium-Term Notes Series B and $10
million principal amount of its Collateralized Medium-Term Notes
Series A, plus accrued interest on the two issues.
In April 1996, HL&P repaid upon maturity $40 million principal amount
of its 5 1/4% first mortgage bonds.
In May 1996, HL&P redeemed all outstanding principal amounts of its 7
1/4% first mortgage bonds ($50,000,000) due February 1, 2001, at a
redemption price of 100.42% (plus accrued interest) and 6 3/4% first
mortgage bonds ($35,000,000) due April 1, 1998, at a redemption price
of 100.15% (plus accrued interest).
(8) SUBSEQUENT EVENT
On August 11, 1996, the Company, HL&P and a newly formed Delaware
subsidiary of the Company (HI Merger, Inc.) entered into an Agreement
and Plan of Merger with NorAm Energy Corp. (NorAm). Under the merger
agreement and assuming all necessary regulatory and shareholder
approvals, the Company would merge with and into HL&P and the currently
outstanding stock of the Company would become the common stock of HL&P,
which would be renamed "Houston Industries Incorporated" (HII). NorAm
would merge with and into HI Merger, Inc. and would become a wholly
owned subsidiary of HII. Consideration for the purchase of NorAm shares
will be a combination of cash and shares of HII common stock. The
transaction is valued at $3.8 billion, consisting of $2.4 billion for
NorAm's common stock and equivalents and $1.4 billion of NorAm debt.
For information regarding the Agreement and Plan of Merger, see the
Company and HL&P's current report on Form 8-K dated August 11, 1996,
which report is incorporated herein by reference.
(9) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative of
results expected for the year due to the seasonal nature of HL&P's
business. In the opinion of management, the interim information
reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a full presentation of the results for the
interim periods. Certain amounts from the previous year have been
reclassified to conform to the 1996 presentation of financial
statements. Such reclassifications do not affect earnings.
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<PAGE> 1
Exhibit 10
August 9, 1996
Mr. Charles R. Crisp
124 Melrose Drive
Montgomery, Texas 77356
Dear Charlie:
It has been a pleasure to meet and become better acquainted with you
during our several meetings. We are confident that you are an extraordinary
executive who will become a tremendous asset to our executive management team.
On my behalf and that of Houston Industries, it is my pleasure to make the
following offer of employment to you. The following briefly summarizes the
terms of our offer:
1. Title. You will join our Houston Lighting and Power Company
subsidiary as head of our generating assets Strategic Business Unit currently
referred to as "Genco." Your title will be Executive Vice President and
General Manager of this business unit. You will report to me in my present
capacity as President and Chief Operating Officer of HL&P.
2. Duties and Responsibilities. You will be responsible for managing
all of HL&P's generating and related assets. Your focus will be domestic
physical assets with an objective of rationalizing assets and positioning this
business unit to be successful in an evolving deregulated environment. You
also will be responsible at this time for the wholesale marketing of
electricity. Currently your primary customer is HL&P's transmission and
distribution Strategic Business Unit known as "Wiresco."
3. Organizational Structure. The Company is currently in a
transitional stage from its historical regulated utility perspective moving
toward becoming market-focused and capable of superior performance in a
deregulated environment. This transition may result in changes in your initial
duties, responsibilities, and title.
4. Compensation.
a) Base Salary. Your starting base salary will be $325,000 per annum
with appropriate adjustments in the future.
<PAGE> 2
Mr. Charles R. Crisp
August 9, 1996
Page 2
b) Short-Term Incentive Compensation. HL&P's existing short-term
Executive Incentive Compensation Plan (EICP) calls for incentive compensation
to be paid in cash annually at a rate between zero and 60% of base compensation
at your level. The plan year runs from January through December. For plan
year 1996, we have agreed that your qualifying bonus will be determined
according to goals to be decided between us, prorated according to your term of
service during 1996.
c) Long-Term Incentive Compensation (LICP). You are eligible for
stock grants under the LICP, for amounts ranging from zero to 60% of base
salary, which are determined as to amount on three-year cycles.
d) Stock Options. Stock options for 40% of base salary are also
issued under the LICP, with values dependent on increases in stock value as in
other stock option plans.
e) Sign-On Bonus. You will receive a $300,000 bonus payable to you as
soon as possible upon your joining the company. As we discussed, this bonus
will offset any bonus forgone by leaving your present employer. This bonus
will be structured as an interest-free loan, one-half of which will be forgiven
six months after your initial employment date, the other half after twelve
months. The loan will be forgiven on these dates under all circumstances other
than your voluntary termination from the company.
f) Benefits. You will be entitled to such other benefits as are
currently offered to newly hired or promoted senior executives. This includes
life, disability, hospitalization, dental, automobile, and vacation. You will
qualify for 4 weeks of vacation, commencing in January of 1997, with one week
of vacation agreed during 1996.
g) Anticipated Start Date: September 1996 or other mutually agreeable
date.
The foregoing covers the principal features of our employment offer.
The attachment to this letter sets the matters forth in more detail. As to the
incentive compensation and benefit plans, my description of their terms is
included for discussion purposes and is not intended to alter the written
plans, whose terms and conditions govern. Similarly, your service and tenure,
as with all senior HII executives, is subject to the discretion of the Board of
Directors.
This is an exciting but challenging time for Houston Industries. We
are committed to maintain HL&P as a major force in energy generation and
marketing, and your decision to join our senior management team will
substantially enhance our ability to fulfill that commitment. I look forward
to your positive response to this offer of employment and ask that you sign in
the space provided below. Of course, this offer is subject to routine
pre-employment physical examination and other inprocessing requirements as are
required of all Company employees.
<PAGE> 3
Mr. Charles R. Crisp
August 9, 1996
Page 3
We look forward to working with you.
Sincerely,
/s/ R. Steve Letbetter
ACCEPTED AND AGREED to
this 16th day of September, 1996
By /s/ Charles R. Crisp
Charles R. Crisp
<PAGE> 4
ADDENDUM TO LETTER TO CHARLES CRISP DATED AUGUST 9, 1996
1. EMPLOYMENT. The Company will employ Charles R. Crisp
from and after the effective date of this Agreement as Executive Vice President
and General Manager of the energy production Strategic Business Unit and in
such other executive capacities as may be determined from time to time by the
Company. As used in this Agreement, "employment with the Company" shall mean
employment with Houston Lighting & Power Company or with Houston Industries
Incorporated or with any wholly-owned subsidiary of either of said companies.
Employment shall be subject to completion of routine employment physical
examination and other inprocessing requirements as are required of all Company
employees.
2. EXTENT OF SERVICES. Mr. Crisp will devote his
services full time to the business of the Company and to perform to the best of
his ability and with reasonable diligence the duties and responsibilities
assigned to him by appropriate management of the Company.
3. TERM. The term of this Agreement shall commence in
September 1996 and shall continue indefinitely thereafter, subject to
termination by the Company or by Mr. Crisp at any time, with or without cause,
on thirty days notice to the other.
4. COMPENSATION. As compensation for the services to be
rendered by Mr. Crisp under this Agreement, the Company agrees to pay Mr. Crisp
an initial annual salary of $325,000, payable in accordance with the general
practices of the Company. The provisions of this paragraph 4 shall not operate
as a limitation upon, or as a direction against, the exercise by the Board of
Directors of the Company of its power and discretion to make salary increases
or decreases, or to grant or withhold bonuses or other additional direct or
indirect compensation or benefits to or on behalf of Mr. Crisp if, in the
judgment of the Board of Directors, such action is in the best interest of the
Company.
5. EMPLOYEE BENEFITS. Throughout the term of Mr.
Crisp's employment with the Company, he shall be eligible to participate on the
same basis as other eligible employees in the Retirement Plan, the Savings Plan
and any other qualified plan of the Company, and he shall be eligible to
participate in any long-term disability, life insurance, medical, dental and
vision
<PAGE> 5
plans, and any other employee benefit plan maintained by the Company for its
employees. For purposes of participation in these employee benefit plans, Mr.
Crisp's service with the Company shall commence in September 1996.
Mr. Crisp shall be eligible for four weeks of vacation and 120
days sick pay per year. Additional annual vacation and sick pay entitlement
will be in accordance with the Company's vacation and sick pay policies for
employees generally. Mr. Crisp shall be furnished an automobile and home
security system in accordance with the Company's policy covering officers of
equal position or rank, and Mr. Crisp shall be furnished a luncheon club
membership to be used for business purposes of the Company.
6. EXECUTIVE BENEFITS. Mr. Crisp shall be eligible to
participate in the Company's Executive Incentive Compensation Plan and
Long-Term Incentive Compensation Plan. Participation in the Executive
Incentive Compensation Plan shall commence as provided in the employment
letter agreement dated August 9, 1996, and the Long-Term Incentive Compensation
Plan shall commence in the 1997 calendar year. Mr. Crisp shall also be
eligible to participate in the Company's Deferred Compensation Plan, Benefit
and Savings Restoration Plans, Executive Life Insurance Plan and shall be
eligible to participate on the same basis as other executive vice presidents of
the Company in any other executive compensation plan or program of the Company
which may from time to time cover such officers of the Company, with the
exception of the formerly applicable salary continuation and death benefit plan
known as the "Executive Benefits Plan," which is no longer being offered.
7. EMPLOYMENT BONUS. The Company shall pay Mr. Crisp
$300,000 in lieu of forgone benefits with his prior employer as provided in the
employment letter agreement dated August 9, 1996.
8. WITHHOLDING OF TAXES. The Company shall deduct from
any payments hereunder any taxes required to be withheld by the federal or any
state or local government.
9. PROHIBITION AGAINST ASSIGNMENT. Mr. Crisp agrees on
behalf of himself and his executors and administrators, heirs, legatees,
distributees, and any other person or persons
-6-
<PAGE> 6
claiming any benefits under him by virtue of this Agreement, that this
Agreement and the rights, interests and benefits hereunder shall not be
assigned, transferred, pledged or hypothecated in any way. Any attempted
assignment, transfer, pledge or hypothecation or other disposition of this
Agreement or of such rights, interests and benefits, or the levy of any
attachment or similar process thereupon, shall be null and void and without
effect.
10. CONTROLLING LAW. This Agreement shall be interpreted
and construed in accordance with the laws of the State of Texas.
11. BINDING EFFECT. This Agreement shall be binding upon
and shall inure to the benefit of any successor of this Company and any such
successor shall be deemed substituted for the Company under the terms of this
Agreement. As used in this Agreement, the term "successor" shall include any
person, firm, corporation or other business entity which at any time, whether
by merger, purchase or otherwise, acquires all or substantially all of the
assets or business of the Company or gains control of the Company.
12. ENTIRE AGREEMENT. This Agreement consists of (1) the
employment letter agreement dated August 9, 1996, and (2) this Addendum, which
together constitute the entire agreement of the parties with respect to the
subject matter hereof, and may be modified only by a written instrument
executed by both parties.
-7-
<PAGE> 1
Exhibit 12
HOUSTON LIGHTING & POWER COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Nine Twelve
Months Ended Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Fixed Charges as Defined:
(1) Interest on Long-Term Debt . . . . . . . . . . . . $ 167,162 $ 226,590
(2) Other Interest . . . . . . . . . . . . . . . . . . 10,811 12,289
(3) Amortization of (Premium)
Discount . . . . . . . . . . . . . . . . . . . 6,789 9,077
(4) Interest Component of Rentals
Charged to Operating Expense . . . . . . . . . . . 779 1,196
------------------ ------------------
(5) Total Fixed Charges . . . . . . . . . . . $ 185,541 $ 249,152
================== ==================
Earnings as Defined:
(6) Net Income . . . . . . . . . . . . . . . . . . . . $ 391,447 $ 432,231
------------------ ------------------
Federal Income Taxes:
(7) Current . . . . . . . . . . . . . . . . . . . . . 210,181 214,869
(8) Deferred (Net) . . . . . . . . . . . . . . . . . . 4,698 23,071
------------------ ------------------
(9) Total Federal Income Taxes . . . . . . . . . . . . 214,879 237,940
------------------ ------------------
(10) Total Fixed Charges (line 5) . . . . . . . . . . . 185,541 249,152
------------------ ------------------
(11) Earnings Before Income Taxes and
Fixed Charges (line 6 plus
line 9 plus line 10) . . . . . . . . . . . . . $ 791,867 $ 919,323
================== ==================
Ratio of Earnings to Fixed Charges
(line 11 divided by line 5) . . . . . . . . . . . . . . 4.27 3.69
Preferred Dividends Requirements:
(12) Preferred Dividends . . . . . . . . . . . . . . . $ 17,318 $ 24,066
(13) Less Tax Deduction for
Preferred Dividends . . . . . . . . . . . . . 41 54
------------------ ------------------
(14) Total . . . . . . . . . . . . . . . . . . 17,277 24,012
(15) Ratio of Pre-Tax Income to Net
Income (line 6 plus line 9
divided by line 6) . . . . . . . . . . . . . . 1.55 1.55
------------------ ------------------
(16) Line 14 times line 15 . . . . . . . . . . . . . . 26,779 37,219
(17) Add Back Tax Deduction
(line 13) . . . . . . . . . . . . . . . . . . 41 54
------------------ ------------------
(18) Preferred Dividends Factor . . . . . . . . . . . . $ 26,820 $ 37,273
================== ==================
(19) Total Fixed Charges (line 5) . . . . . . . . . . . $ 185,541 $ 249,152
(20) Preferred Dividends Factor
(line 18) . . . . . . . . . . . . . . . . . . 26,820 37,273
------------------ ------------------
(21) Total . . . . . . . . . . . . . . . . . . $ 212,361 $ 286,425
================== ==================
Ratio of Earnings to Fixed Charges and
Preferred Dividends Requirements
(line 11 divided by line 21) . . . . . . . . . . . . . . 3.73 3.21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from HL&P's
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000048732
<NAME> HOUSTON LIGHTING & POWER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 8,635,587
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 335,566
<TOTAL-DEFERRED-CHARGES> 1,515,794
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 10,486,947
<COMMON> 1,675,927
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 2,277,465
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,953,392
0
351,345
<LONG-TERM-DEBT-NET> 2,710,569
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 190,130
25,700
<CAPITAL-LEASE-OBLIGATIONS> 2,035
<LEASES-CURRENT> 3,630
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,250,146
<TOT-CAPITALIZATION-AND-LIAB> 10,486,947
<GROSS-OPERATING-REVENUE> 3,142,234
<INCOME-TAX-EXPENSE> 248,767
<OTHER-OPERATING-EXPENSES> 2,258,532
<TOTAL-OPERATING-EXPENSES> 2,507,299
<OPERATING-INCOME-LOSS> 634,935
<OTHER-INCOME-NET> (67,454)
<INCOME-BEFORE-INTEREST-EXPEN> 567,481
<TOTAL-INTEREST-EXPENSE> 176,034
<NET-INCOME> 391,447
17,318
<EARNINGS-AVAILABLE-FOR-COMM> 374,129
<COMMON-STOCK-DIVIDENDS> 246,750
<TOTAL-INTEREST-ON-BONDS> 167,122<F1>
<CASH-FLOW-OPERATIONS> 776,565
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Total annual interest charges on all bonds for year-to-date 9/30/96.
</FN>
</TABLE>
<PAGE> 1
Exhibit 99(a)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its wholly owned and
majority-owned subsidiaries. Certain investments in joint ventures or
other entities in which the Company or its subsidiaries have a 50
percent or less interest are recorded using the equity method or the
cost method. For additional information regarding investments and
advances, see Notes 1(j) and 4.
All significant intercompany transactions and balances are eliminated
in consolidation.
(B) SYSTEM OF ACCOUNTS AND EFFECTS OF REGULATION. HL&P, the principal
subsidiary of the Company, maintains its accounting records in
accordance with the FERC Uniform System of Accounts. HL&P's
accounting practices are subject to regulation by the Utility
Commission, which has adopted the FERC Uniform System of Accounts.
As a result of its regulated status, HL&P follows the accounting
policies set forth in SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," which allows a utility with cost-based
rates to defer certain costs in concert with rate recovery that would
otherwise be expensed. In accordance with this statement, HL&P has
deferred certain costs pursuant to rate actions of the Utility
Commission and is recovering or expects to recover such costs in
electric rates charged to customers. The regulatory assets are
included in other assets on the Company's Consolidated and HL&P's
Balance Sheets. The regulatory liabilities are included in deferred
credits on the Company's Consolidated and HL&P's Balance Sheets. The
following is a list of significant regulatory assets and liabilities
reflected on the Company's Consolidated and HL&P's Balance Sheets:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
(Millions of Dollars)
<S> <C>
Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . . $613
Malakoff investment . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Regulatory tax asset - net . . . . . . . . . . . . . . . . . . . . . . . 229
Unamortized loss on reacquired debt . . . . . . . . . . . . . . . . . . 121
Deferred debits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Unamortized investment tax credit. . . . . . . . . . . . . . . . . . . . (392)
Accumulated deferred income taxes - regulatory tax asset . . . . . . . . (80)
</TABLE>
If as a result of changes in regulation or competition, HL&P's ability
to recover these assets and/or liabilities would not be assured, then
pursuant to SFAS No. 71 and to the extent that such regulatory assets
or liabilities ultimately were determined not to be recoverable, HL&P
would be required to write off or write down such assets or
liabilities.
(C) ELECTRIC PLANT. HL&P capitalizes at cost all additions to electric
plant, betterments to existing property and replacements of units of
property. Cost includes the original cost of contracted services,
direct labor and material, indirect charges for engineering
supervision and similar overhead items and AFUDC. Customer payments
for construction reduce additions to electric
57
<PAGE> 2
preferred stock. The Company has recorded its investment in these
securities at a combined fair value of approximately $1 billion on the
Company's Consolidated Balance Sheet. Investment in the Time Warner
common stock is considered an "available-for-sale" equity security
under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Consequently, the Company excludes unrealized net
changes in the fair value of Time Warner common stock (exclusive of
dividends and write downs) from earnings and, until realized, reports
such changes as a net amount in the shareholders' equity section of the
balance sheet. Investment in the Time Warner convertible preferred
stock (which is not subject to the requirements of SFAS No. 115, since
it is a non-publicly traded equity security) is accounted for under the
cost method.
The securities held in the Company's nuclear decommissioning trust are
classified as "available-for-sale" and, in accordance with SFAS No.
115, are reported at fair value which at December 31, 1995
approximates cost ($44.5 million as of December 31, 1995) on the
Company's Consolidated and HL&P's Balance Sheets under deferred debits
and deferred credits. Any unrealized gains or losses are accounted
for in accordance with SFAS No. 71 as a regulatory asset/liability and
reported on the Company's Consolidated and HL&P's Balance Sheets as a
deferred debit.
(K) FUEL STOCK. Gas inventory (at average cost) was $12.1 million at
December 31, 1995. Coal, lignite, and oil inventory balances
recorded at last-in, first-out, were $22.2 million, $12.1 million, and
$13.3 million, respectively.
(L) RECLASSIFICATION. Certain amounts from the previous years have been
reclassified to conform to the 1995 presentation of financial
statements. Such reclassifications do not affect earnings.
(M) NATURE OF OPERATIONS. The Company is a holding company operating
principally in the electric utility business. HL&P is engaged in the
generation, transmission, distribution and sale of electric energy.
HL&P's service area covers a 5,000 square mile area in the Texas Gulf
Coast, including Houston. Another subsidiary of the Company, HI
Energy, participates in domestic and foreign power generation projects
and invests in the privatization of foreign electric utilities. The
business and operations of HL&P account for substantially all of the
Company's income from continuing operations and common stock equity.
(N) USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(2) JOINTLY-OWNED NUCLEAR PLANT
(A) HL&P INVESTMENT. HL&P is the project manager (and one of four
co-owners) of the South Texas Project, which consists of two 1,250
megawatt nuclear generating units. HL&P has a 30.8 percent interest
in the project and bears a corresponding share of capital and
operating costs associated with the project. As of December 31, 1995,
HL&P's investment in the South Texas Project and in nuclear fuel,
including AFUDC, was $2.0 billion (net of $439 million plant
accumulated depreciation) and $75.1 million (net of $142 million
nuclear fuel amortization), respectively.
(B) REGULATORY PROCEEDINGS AND LITIGATION. Between June 1993 and February
1995, the South Texas Project was listed on the United States Nuclear
Regulatory Commission's (NRC) "watch list" of plants with weaknesses
that warrant increased NRC regulatory attention. In February 1995,
the NRC removed the South Texas Project from its "watch list."
59
<PAGE> 3
In February 1994, the City of Austin (Austin), one of the four
co-owners of the South Texas Project, filed suit against HL&P
(Austin Litigation). Trial of that suit, which began in March 1996
is pending in the 11th District Court of Harris County, Texas.
Austin alleges that the outages at the South Texas Project from
early 1993 to early 1994 were due to HL&P's failure to perform
obligations it owed to Austin under the Participation Agreement
among the four co-owners of the South Texas Project (Participation
Agreement). Austin also asserts that HL&P breached certain
undertakings voluntarily assumed by HL&P on behalf of the co-
owners under the terms of the NRC Operating Licenses and Technical
Specifications relating to the South Texas Project.
Under amended pleadings in the Austin Litigation, Austin claims it
suffered damages of at least $120 million due to increased operating
and maintenance costs, the cost of replacement power and lost profits
on wholesale transactions that did not occur. Although HL&P and the
Company do not believe there is merit to Austin's claims, no assurance
can be given as to the ultimate outcome of this matter.
In May 1994, the City of San Antonio (San Antonio), another co-owner
of the South Texas Project, intervened in the litigation filed by
Austin against HL&P and asserted claims similar to those asserted by
Austin. Although San Antonio has not specified the damages sought in
its complaint, expert reports filed in the litigation have indicated
that San Antonio's claims may be in excess of $228 million. On
February 29,1996, San Antonio announced that it was taking a nonsuit
on its claims in the Austin Litigation in order to pursue settlement
discussions with HL&P concerning those claims, as well as separate
claims for unspecified damages previously asserted by San Antonio
against HL&P with respect to the construction of the South Texas
Project, which construction claims are the subject of a request for
arbitration under the Participation Agreement. In order to preserve
its litigation claims pending the outcome of settlement negotiations,
San Antonio refiled its lawsuit in the 152nd District Court of Harris
County, Texas. While neither the Company nor HL&P believes there is
merit to San Antonio's claims either in the pending litigation or in
the arbitration proceeding, there can be no assurance as to the
ultimate outcome of those matters, nor can there be an assurance as to
the ultimate outcome of the settlement discussions. If a settlement
is reached, it is possible, among other things, that such resolution
could require in the near term a charge to earnings from continuing
operations, but it is not anticipated that any such resolution would
be material to the Company's or HL&P's financial position, liquidity
or ability to meet their respective cash requirements stemming from
operating, capital expenditures and financing activities.
(C) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas
Project maintain nuclear property and nuclear liability insurance
coverage as required by law and periodically review available limits
and coverage for additional protection. The owners of the South Texas
Project currently maintain $2.75 billion in property damage insurance
coverage which is above the legally required minimum, but is less than
the total amount of insurance currently available for such losses.
This coverage consists of $500 million in primary property damage
insurance and excess property insurance in the amount of $2.25
billion. Under the excess property insurance (which became effective
in November 1995), HL&P and the other owners of the South Texas
Project are subject to assessments, the maximum aggregate assessment
under current policies being $25.8 million during any one policy year.
The application of the proceeds of such property insurance is subject
to the priorities established by the NRC regulations relating to the
safety of licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public for owners of nuclear power plants, such as the South Texas
Project, was $8.92 billion as of December 1995. Owners are required
under the Act to insure their liability for nuclear incidents and
protective evacuations by maintaining the maximum amount of financial
protection available from private sources and by maintaining secondary
financial protection through an industry retrospective rating plan.
The
60
<PAGE> 4
assessment of deferred premiums provided by the plan for each nuclear
incident is up to $75.5 million per reactor subject to indexing for
inflation, a possible 5 percent surcharge (but no more than $10 million
per reactor per incident in any one year) and a 3 percent state premium
tax. HL&P and the other owners of the South Texas Project currently
maintain the required nuclear liability insurance and participate in
the industry retrospective rating plan.
There can be no assurance that all potential losses or liabilities
will be insurable, or that the amount of insurance will be sufficient
to cover them. Any substantial losses not covered by insurance would
have a material effect on HL&P's and the Company's financial condition
and results of operations.
(D) NUCLEAR DECOMMISSIONING. In accordance with the Rate Case Settlement,
HL&P contributes $14.8 million per year to a trust established to fund
HL&P's share of the decommissioning costs for the South Texas Project.
For a discussion of securities held in the Company's nuclear
decommissioning trust, see Note 1(j). In May 1994, an outside
consultant estimated HL&P's portion of decommissioning costs to be
approximately $318 million (1994 dollars). The consultant's
calculation of decommissioning costs for financial planning purposes
used the DECON methodology (prompt removal/dismantling), one of the
three alternatives acceptable to the NRC, and assumed deactivation of
Unit Nos. 1 and 2 upon the expiration of their 40-year operating
licenses. While the current and projected funding levels presently
exceed minimum NRC requirements, no assurance can be given that the
amounts held in trust will be adequate to cover the actual
decommissioning costs of the South Texas Project. Such costs may vary
because of changes in the assumed date of decommissioning, changes in
regulatory and accounting requirements, changes in technology and
changes in costs of labor, materials and equipment.
(3) RATE MATTERS
The Utility Commission has original (or in some cases appellate)
jurisdiction over HL&P's electric rates and services. In Texas,
Utility Commission orders may be appealed to a District Court in
Travis County, and from that Court's decision an appeal may be taken
to the Court of Appeals for the 3rd District at Austin (Austin Court
of Appeals). Discretionary review by the Supreme Court of Texas may
be sought from decisions of the Austin Court of Appeals. In the event
that the courts ultimately reverse actions of the Utility Commission,
such matters are remanded to the Utility Commission for action in
light of the courts' orders. On remand, the Utility Commission's
action could range from granting rate relief substantially equal to
the rates previously approved to reducing the revenues to which HL&P
was entitled during the time the applicable rates were in effect,
which could require a refund to customers of amounts collected
pursuant to such rates.
(A) 1995 RATE CASE. In August 1995, the Utility Commission unanimously
approved the Rate Case Settlement, which resolved HL&P's 1995 rate
case (Docket No. 12065) as well as a separate proceeding (Docket No.
13126) regarding the prudence of operation of the South Texas Project.
Subject to certain changes in existing regulation or legislation, the
Rate Case Settlement precludes HL&P from seeking rate increases until
after December 31, 1997. HL&P began recording the effects of the Rate
Case Settlement in the first quarter of 1995. The Rate Case Settlement
reduced HL&P's earnings for 1995 by approximately $100 million.
61
<PAGE> 5
The after-tax effects in 1995 of the Rate Case Settlement are as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
-----------------
(Millions of Dollars)
<S> <C>
Reduction in base revenues . . . . . . . . . . . . . . . . . . . $ 52
South Texas Project write-down . . . . . . . . . . . . . . . . . 33
One-time write-off of mine-related costs . . . . . . . . . . . . 6
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . 9
----
Total Rate Case Settlement effect on net income . . . . $100
====
</TABLE>
The Rate Case Settlement gives HL&P the option to write down up to $50
million ($33 million after-tax) per year of its investment in the
South Texas Project through December 31, 1999. The parties to the
Rate Case Settlement agreed that any such write-down will be treated
as a reasonable and necessary expense during routine reviews of HL&P's
earnings and any rate review proceeding initiated against HL&P. In
accordance with the Rate Case Settlement, HL&P recorded a $50 million
pre-tax write-down in 1995 of its investment in the South Texas
Project which is included in the Company's Statements of Consolidated
Income and HL&P's Statements of Income in depreciation and
amortization expense. In 1995, HL&P also began accruing its share of
decommissioning expense for the South Texas Project at an annual rate
of $14.8 million (a $9 million per year increase over 1994).
As required by the Rate Case Settlement, HL&P will begin in 1996 to
amortize its $153 million investment in certain lignite reserves
associated with the canceled Malakoff project. These amortizations
will equal approximately $22 million per year. As a result of this
additional amortization, HL&P's remaining investment in Malakoff
($233 million at December 31, 1995) will be fully amortized no later
than December 31, 2002. During the second quarter of 1995, HL&P
recorded a one-time pre-tax charge of $9 million incurred in
connection with certain Malakoff mine-related costs that were not
previously recorded and were not recoverable under the terms of the
Rate Case Settlement. Issues concerning the prudence of expenditures
related to Malakoff were deferred until a subsequent rate case.
In Docket No. 8425, the Utility Commission allowed recovery of certain
costs associated with Malakoff by allowing HL&P to amortize these
costs over ten years. Such recoverable costs are not included in rate
base and, as a result, no return on investment is being earned during
the recovery period. The $28 million unamortized balance of these
costs at December 31, 1995 is included in the $233 million discussed
above and is to be amortized over the following 54 months.
In anticipation of the Rate Case Settlement, the Company and HL&P
recorded in the fourth quarter of 1994 a one-time, pre-tax charge of
approximately $70 million to reconcilable fuel revenues, an amount
which HL&P agreed as a part of the Rate Case Settlement was not
recoverable from ratepayers.
(B) RATE CASE APPEALS. Pursuant to the Rate Case Settlement, HL&P and the
other parties to that settlement have dismissed their pending appeals
of previous Utility Commission orders. As a result of that action or
subsequent judicial action, the Utility Commission's orders have
become final in Docket No. 9850 (involving HL&P's 1991 rate case) and
in Docket Nos. 8230 and 9010 (involving deferred accounting). Two
appeals of other orders, by parties who did not join in the Rate Case
Settlement, remain pending: review of Docket No. 8425 (HL&P's 1988
rate case), and review of Docket No. 6668 (the Utility Commission's
inquiry into the prudence of the planning and construction of the
South Texas Project). The appeal from the order in Docket No. 8425
concerns (i) the treatment as "plant held for future use" of certain
costs associated with the Malakoff
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<PAGE> 6
generating station and (ii) the treatment by HL&P of certain tax
savings associated with federal income tax deductions for expenses not
included in cost of service for ratemaking purposes. The appeal is
currently pending before the Texas Supreme Court.
Review of the Utility Commission's order in Docket No. 6668 is pending
before a Travis County district court. In that order the Utility
Commission determined that $375.5 million of HL&P's $2.8 billion
investment in the South Texas Project had been imprudently incurred.
That ruling was incorporated into HL&P's 1988 and 1991 rate cases.
Unless the order is modified or reversed on appeal, the amount found
imprudent by the Utility Commission will be sustained.
(4) INVESTMENTS IN FOREIGN AND NON-REGULATED ENTITIES
(A) GENERAL. HI Energy sustained net losses of $33 million, $6 million
and $2 million in 1995, 1994 and 1993, respectively. Development
costs for 1995 were approximately $14 million. The majority of costs
in 1994 and 1993 were related to project development activities.
(B) FOREIGN INVESTMENTS. Houston Argentina S.A. (Houston Argentina),
a subsidiary of HI Energy, owns a 32.5 percent interest in
Compania de Inversiones en Electricidad S.A. (COINELEC), an Argentine
holding company which acquired a 51 percent interest in Empresa
Distribuidora de La Plata S.A. (EDELAP), an electric utility company
operating in La Plata, Argentina and surrounding regions. Houston
Argentina's share of the purchase price was approximately $37.4
million. Such investment was in the form of (i) a capital
contribution of $27.6 million to COINELEC and (ii) a loan to COINELEC
in the aggregate principal amount of $9.8 million. HI Energy has also
entered into support agreements with two financial institutions
pursuant to which HI Energy has agreed to make additional cash
contributions or subordinated loans to COINELEC or pay COINELEC's
lenders up to a maximum aggregate of $6.6 million in the event of a
default by COINELEC of its commitments to such financial institutions.
Subsequent to the acquisition, the generating assets of EDELAP were
transferred to Central Dique S.A., an Argentine Corporation, 51
percent of the stock of which is owned by COINELEC. HI Energy's
portion of EDELAP and Central Dique S.A. earnings was approximately $1
million in both 1995 and 1994.
In January 1995, HI Energy acquired for $15.7 million a 90 percent
ownership interest in an electric utility operating company located in
a rural province in the north central part of Argentina. The utility
system serves approximately 116,000 customers in an area of 136,000
square kilometers. HI Energy's share of net losses from this
investment for 1995 was $3.6 million substantially all of which was
due to non-recurring severance costs.
In 1995, HI Energy invested approximately $7 million in a cogeneration
project being developed in San Nicolas, Argentina and approximately $5
million in a coke calcining project being developed in the state of
Andhra Pradesh, India. These projects had no earnings impact in 1995.
HI Energy estimates that its commitment in 1996 for the Argentine
cogeneration project will be approximately $31 million and that its
share of the 1996 commitment for the coke calcining project will be
approximately $3 million. HI Energy has entered into a support
agreement in favor of the International Finance Corporation (IFC)
under the terms of which HI Energy has agreed to provide one of its
subsidiaries (HIE Rain), which is an investor in the coke calcining
project, with sufficient funds to meet certain funding obligations of
HIE Rain under agreements with the IFC. The maximum aggregate funding
commitment of HI Energy under this support agreement is approximately
$18 million, of which approximately $16 million is to support
contingent obligations of HIE Rain and the balance of which is
additional equity to be contributed to the coke calcining project.
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<PAGE> 7
(C) ILLINOIS WASTE TIRE-TO-ENERGY PROJECTS. HI Energy is a subordinated
lender to two waste tire-to-energy projects being developed by Ford
Heights and Fulton, respectively, located in the state of Illinois. HI
Energy also owns a $400,000 equity interest (20 percent) in Ford
Heights. Both projects were being developed in reliance on the terms of
the Illinois Retail Rate Law, enacted in 1987, to encourage development
of energy production facilities for the disposal of solid waste by
providing an operating subsidy to qualifying projects. In March 1996,
the Governor of Illinois signed into law legislation which purports to
repeal the subsidy provided to most of such energy production
facilities, including the two waste tire-to-energy projects in which HI
Energy has invested. A lawsuit has been filed on behalf of the Ford
Heights and Fulton projects challenging, among other things, the
constitutionality of the repeal and its retroactive application to the
two waste tire-to-energy projects. On March 26, 1996, the Ford Heights
project filed a voluntary petition seeking protection under the federal
bankruptcy laws. The ability of the two waste tire-to-energy projects
to meet their debt obligations is dependent upon the projects
continuing to receive the operating subsidy under the Retail Rate Law.
The terms of the public bonds issued by the Ford Heights and Fulton
projects are non-recourse to the Company and HI Energy.
In response to the actions taken by the state of Illinois, the Company
has established a valuation allowance of $28 million ($18 million
after-tax), which amount reflects the combined amounts lent on a
subordinated basis to the Ford Heights and Fulton projects. In
addition to amounts funded through March 26, 1996, HI Energy also is
party to two separate Note Purchase Agreements committing it, under
certain circumstances, to acquire up to (i) $3 million in aggregate
principal amount of additional subordinated notes from the Ford Heights
project and (ii) $17 million in aggregate principal amount of
additional subordinated notes from the Fulton project. The Company has
entered into a support agreement under which it has agreed to provide
additional funds to HI Energy to enable it to honor its obligations
under the two Note Purchase Agreements. The Company is unable to
predict the ultimate effect of these developments on HI Energy's
remaining funding commitments under these Note Purchase Agreements;
however, in the Company's opinion it is unlikely that the majority of
the additional unfunded subordinated debt provided for in the Fulton
Note Purchase Agreement would be required to be funded unless
construction activities with respect to the Fulton project are
recommenced at some future date. If HI Energy becomes obligated to
advance additional funds under the Note Purchase Agreements, the
Company could be required to increase the amount of the valuation
allowance, which would result in additional charges to earnings.
(5) COMMON STOCK
(A) STOCK DISTRIBUTION. The Company effected a two-for-one stock split in
the form of a common stock distribution on December 9, 1995. All
prior periods have been restated for consistency to reflect the stock
distribution in terms of number of common shares outstanding and the
per share amounts for earnings, dividends and market price. The
nominal consideration established by the Board of Directors for the
common stock distributed ($.01 per share) is reflected as a deduction
from retained earnings in the Company's Statements of Consolidated
Retained Earnings.
(B) DIVIDENDS. The timing of the Company's Board of Directors'
declaration of dividends changed resulting in five quarterly dividend
declarations in 1993. All dividends declared in 1993 have been
included in 1993 common stock dividends on the Company's Statements of
Consolidated Retained Earnings. The Company paid four regular
quarterly dividends in 1993 aggregating $1.50 per share, after
restatement for the two-for-one stock split, on its common stock
shares.
(C) LONG-TERM INCENTIVE COMPENSATION PLANS. The Company has Long-Term
Incentive Compensation Plans (LICP) providing for the issuance of
stock incentives (including performance-based restricted shares and
stock options) to key employees of the Company, including officers.
As of December 31, 1995, 29 current and former employees participated
in the plans. A maximum of five million shares of common stock may be
issued under the LICP. Beginning one
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<PAGE> 8
Following are the Company's tax effects of temporary differences
attributable to continuing operations resulting in deferred tax assets
and liabilities:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1994
-------------- -------------
(Thousands of Dollars)
<S> <C> <C>
Deferred Tax Assets:
Alternative minimum tax . . . . . . . . . . . . . . . . . . . . . . . $ 46,516 $ 66,707
IRS audit assessment . . . . . . . . . . . . . . . . . . . . . . . . . 74,966 74,966
Disallowed plant cost - net . . . . . . . . . . . . . . . . . . . . . 22,687 23,496
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,628 83,740
---------- ----------
Total deferred tax assets - net . . . . . . . . . . . . . . . . . 240,797 248,909
---------- ----------
Deferred Tax Liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,391,573 1,336,035
Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . 200,028 207,746
Regulatory assets - net . . . . . . . . . . . . . . . . . . . . . . . 228,587 235,463
Capitalized taxes, employee benefits and removal costs . . . . . . . . 110,065 111,660
Gain on sale of cable television subsidiary . . . . . . . . . . . . . 227,515
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,275 121,235
---------- ----------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . 2,308,043 2,012,139
---------- ----------
Accumulated deferred income taxes - net . . . . . . . . . . $2,067,246 $1,763,230
========== ==========
</TABLE>
See Note 13 for income taxes related to discontinued operations.
(11) COMMITMENTS AND CONTINGENCIES
(a) HL&P COMMITMENTS. HL&P has various commitments for capital
expenditures, fuel, purchased power, cooling water and operating
leases. Commitments in connection with HL&P's capital program are
generally revocable by HL&P subject to reimbursement to manufacturers
for expenditures incurred or other cancellation penalties. HL&P's
other commitments have various quantity requirements and durations.
However, if these requirements could not be met, various alternatives
are available to mitigate the cost associated with the contracts'
commitments.
(b) FUEL AND PURCHASED POWER. HL&P is a party to several long-term coal,
lignite and natural gas contracts which have various quantity
requirements and durations. Minimum payment obligations for coal and
transportation agreements are approximately $175 million in 1996, $178
million in 1997 and $184 million in 1998. Additionally, minimum
payment obligations for lignite mining and lease agreements are
approximately $5 million for 1996, $8 million for 1997 and $9 million
for 1998. Collectively, the fixed price gas supply contracts, which
expire in 1997, could amount to 11 percent of HL&P's annual natural
gas requirements for 1996 and 7 percent for 1997. Minimum payment
obligations for both natural gas purchase and storage contracts are
approximately $57 million in 1996, $38 million in 1997 and $9 million
in 1998.
HL&P also has commitments to purchase firm capacity from cogenerators
of approximately $22 million in each of the years 1996 through 1998.
Utility Commission rules currently allow recovery of these costs
through HL&P's base rates for electric service and additionally
authorize HL&P to charge or credit customers through a purchased power
cost recovery factor for any variation in actual purchased power costs
from the cost utilized to determine its base rates. In the event that
the Utility Commission, at some future date, does not allow recovery
through rates of any amount of purchased power payments, the two
principal firm capacity contracts contain provisions allowing HL&P to
suspend or reduce payments and seek repayment for amounts disallowed.
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<PAGE> 9
(c) OTHER. HL&P's service area is heavily dependent on oil, gas, refined
products, petrochemicals and related businesses. Significant adverse
events affecting these industries would negatively affect the
revenues of the Company and HL&P. For information regarding
contingencies relating to the South Texas Project, see Note 2 above.
The Company and HL&P are involved in legal, tax and regulatory
proceedings before various courts, regulatory commissions and
governmental agencies regarding matters arising in the ordinary course
of business, some of which involve substantial amounts.
(12) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1995 1994
---------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------- ----------- -------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments . . . . . . . $ 11,779 $ 11,779 $ 10,443 $ 10,443
Investment in Time Warner securities . . . . 1,027,875 1,027,875
Financial liabilities:
Short-term notes payable . . . . . . . . . . 6,300 6,300 423,291 423,291
Cumulative preferred stock of
subsidiary (subject to mandatory
redemption) . . . . . . . . . . . . . . . . 76,755 79,250 167,610 173,355
Debentures . . . . . . . . . . . . . . . . . 348,914 396,903 548,729 549,532
Long-term debt of subsidiaries:
Electric:
First mortgage bonds . . . . . . . . . 2,979,293 3,247,139 3,020,400 2,980,028
Pollution control revenue bonds . . . 4,426 5,000 155,247 163,736
Other notes payable 981 981 1,129 1,129
Discontinued operations:
Senior bank debt . . . . . . . . . . . 364,000 364,000
Senior and senior subordinated
notes . . . . . . . . . . . . . . . 140,580 154,654
</TABLE>
The fair values of cash and short-term investments, investment in equity
securities, short-term and other notes payable and bank debt are estimated to
be equivalent to the carrying amounts.
The fair values of the Company's debentures, HL&P's cumulative preferred
stock subject to mandatory redemption, HL&P's first mortgage bonds, pollution
control revenue bonds issued on behalf of HL&P and senior subordinated notes
are estimated using rates currently available for securities with similar
terms and remaining maturities.
(13) CABLE TELEVISION--DISCONTINUED OPERATIONS
In July 1995, the Company completed the sale of KBLCOM, its cable television
subsidiary, to Time Warner. The Company's 1995 earnings include a one-time,
after-tax gain on the sale of $708 million. Effective January 1, 1995, the
operations of KBLCOM were accounted for as discontinued and prior periods
were restated for consistency in reflecting KBLCOM as a discontinued
operation.
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<PAGE> 1
EXHIBIT 99(b)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim financial statements and notes (Interim Financial
Statements) contained in this Form 10-Q for the period ended
March 31, 1996 (Form 10-Q) are unaudited and condensed. Certain
notes and other information contained in the Combined Annual
Report on Form 10-K (File Nos. 1-7629 and 1-3187) for the year
ended December 31, 1995 (Form 10-K), of Houston Industries
Incorporated (Company) and Houston Lighting & Power Company
(HL&P) have been omitted in accordance with Rule 10-01 of
Regulation S-X under the Securities Exchange Act of 1934. The
information presented in the Interim Financial Statements should
be read in combination with the information presented in the
Form 10-K, including the financial statements and notes
contained therein. For information regarding the Company's
discontinued cable television operations, see Note 13 to the
financial statements contained in the Form 10-K.
(2) CERTAIN CONTINGENCIES
The following notes to the financial statements of the Form 10-K
(as updated by the notes contained in this Form 10-Q) are
incorporated herein by reference: Note 1(b) (System of Accounts
and Effects of Regulation), Note 2 (Jointly-Owned Nuclear
Plant), Note 3 (Rate Matters), Note 4 (Investments in Foreign
and Non-Regulated Entities) and Note 11 (Commitments and
Contingencies).
(3) JOINTLY-OWNED NUCLEAR PLANT
HL&P is the project manager (and one of four co-owners) of the
South Texas Project Electric Generating Station (South Texas
Project), which consists of two 1,250 megawatt nuclear
generating units. HL&P has a 30.8 percent interest in the
project.
On April 30, 1996, HL&P and the City of Austin (Austin), one of
the four co-owners of the South Texas Project, agreed to settle
a lawsuit in which Austin had alleged that outages occurring at
the South Texas Project between early 1993 and early 1994 were
due to HL&P's failure to perform certain obligations it owed
Austin under a Participation Agreement relating to the project.
For information regarding this settlement and a $13 million
(after-tax) charge to first quarter earnings resulting from the
settlement, see Note 7(a) to the Interim Financial Statements.
For information concerning a similar lawsuit filed against HL&P
by the City of San Antonio (San Antonio), another co-owner of
the South Texas Project, and San Antonio's pending arbitration
claims against HL&P with respect to the construction of the
South Texas Project, see Note 2(b) to the financial statements
contained in the Form 10-K. HL&P and San Antonio (acting
through the City Public Service Board of San Antonio (CPS)) have
agreed on the principles under which they would settle all
claims with respect to the South Texas Project. For information
regarding the proposed settlement and a $49 million (after-tax)
charge to first quarter earnings relating thereto, see Note 7(a)
to the Interim Financial Statements.
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<PAGE> 2
(4) RATE CASE PROCEEDINGS
For information concerning the settlement of HL&P's most recent
rate case (Docket No. 12065) and the continuing impact of that
settlement on HL&P's results of operations, see Note 3(a) to the
financial statements contained in the Form 10-K. The two Public
Utility Commission of Texas (Utility Commission) orders
concerning HL&P that are still subject to appellate review are:
Docket No. 8425 (HL&P's 1988 rate case) and Docket No. 6668 (an
inquiry into the prudence of the planning and construction of
the South Texas Project). For information regarding these
appeals, see Note 3(b) to the financial statements contained in
the Form 10-K.
(5) CAPITAL STOCK
Company. At March 31, 1996 and December 31, 1995, the Company
had 400,000,000 authorized shares of common stock, of which
248,556,370 and 248,316,710 shares, respectively, were
outstanding as of such dates. Outstanding shares exclude the
unallocated shares of the Company's Employee Stock Ownership
Plan, which as of March 31, 1996 and December 31, 1995 totaled
14,186,577 and 14,355,758, respectively. Earnings per common
share for the Company are computed by dividing net income by the
weighted average number of shares outstanding during the
respective period.
HL&P. All issued and outstanding shares of Class A voting
common stock of HL&P are held by the Company, and all issued and
outstanding shares of Class B non-voting common stock of HL&P
are held by Houston Industries (Delaware) Incorporated (HI
Delaware), a wholly owned subsidiary of the Company. Earnings
per share data for HL&P are not computed because all of its
common stock is held by the Company and HI Delaware.
On March 31, 1996 and December 31, 1995, HL&P had 10,000,000
authorized shares of preferred stock, of which 4,318,397 shares
were outstanding.
(6) LONG-TERM DEBT
HL&P. In January 1996, HL&P repaid upon maturity $100 million
principal amount of its Collateralized Medium-Term Notes Series
B and $10 million principal amount of its Collateralized
Medium-Term Notes Series A plus accrued interest on the two
issues.
In March 1996, HL&P deposited approximately $86 million in a
trust and irrevocably directed the trustee to redeem on May 8,
1996 all issued and outstanding principal amounts of HL&P's
7 1/4% first mortgage bonds due February 1, 2001 (at a redemption
price of 100.42% plus accrued interest) and 6 3/4% first
mortgage bonds due April 1, 1998 (at a redemption price of
100.15% plus accrued interest).
(7) SUBSEQUENT EVENTS
(a) South Texas Project Litigation. On April 30, 1996,
Houston Lighting & Power Company entered into a settlement
with Austin regarding City of Austin v. Houston Lighting &
Power Company, Cause No. 94-07946, in the 11th Judicial
District Court, Harris County, Texas. In that suit, filed
by Austin in May 1994, Austin asserted that HL&P had
mismanaged its responsibilities as Project Manager of the
South Texas Project. Austin contended that, because of
HL&P's mismanagement and negligence, the outage at the
South Texas Project during 1993-94 had caused Austin
damages of approximately $120 million.
Trial of Austin's suit began in March 1996, and the
settlement was reached in April 1996. Under the
settlement, HL&P agreed to pay Austin $20 million in cash
to resolve all pending disputes between HL&P and Austin,
and Austin agreed to
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<PAGE> 3
support the formation of a new operating company to
assume HL&P's role as project manager for the South Texas
Project. The Company and HL&P have recorded the $20
million ($13 million net of tax) payment to Austin on the
Company's Statements of Consolidated Income and HL&P's
Statements of Income as litigation settlements expense.
HL&P and CPS have agreed on the principles under which they
would settle all claims with respect to the South Texas
Project. Under the proposed settlement, HL&P and CPS would
enter into definitive agreements providing, among other
things, for (i) a cash payment by HL&P to CPS of $75
million ($25 million of which has already been paid), (ii)
an agreement to support formation of a new operating
company to replace HL&P as project manager of the South
Texas Project and (iii) the execution of a 10-year joint
operations agreement under which HL&P and CPS will share
savings resulting from the joint dispatching of their
respective generating assets in order to take advantage of
each system's lower cost resources. Under the terms of the
joint operations agreement, CPS will be guaranteed minimum
annual savings of $10 million with a minimum cumulative
savings of $150 million over the ten year term of the
agreement. Based on current forecasts and other assumptions
regarding the combined operation of the two generating
systems, HL&P anticipates that the savings resulting from
joint operations will equal or exceed the minimum savings
guaranteed under the joint operations agreement.
Although no assurance can be given as to the ultimate
resolution of negotiations, the proposed settlement will
resolve all claims, litigation and matters in arbitration
between the two parties with respect to the South Texas
Project. The proposed settlement has been reviewed by San
Antonio's city council but is still subject to approval by
CPS. In anticipation of the settlement, the Company and
HL&P have recorded a $49 million expense (net of tax) on
the Company's Statement of Consolidated Income and HL&P's
Statements of Income (reflected as litigation settlement
expense). The unpaid portion of the cash payment
contemplated by the settlement is shown in other deferred
credits on the Company's Consolidated and HL&P's Balance
Sheets.
(b) HI Energy. In May 1996, a subsidiary of Houston
Industries Energy, Inc. (HI Energy) purchased for
approximately $55 million an additional 39 percent of the
capital stock of Empresa Distribuidora la Plata (EDELAP),
an electric utility company operating in La Plata,
Argentina and surrounding regions. HI Energy also
indirectly owns 16.6 percent of the capital stock of
EDELAP, which shares were acquired in December 1992 for
$37 million. For additional information regarding HI
Energy's investments in foreign and non-regulated
entities, see Note 4 to the financial statements contained
in the Form 10-K. Beginning in the second quarter of
1996, EDELAP will be reflected in the Company's financial
statements on a consolidated basis.
(c) Redemption of HL&P Preferred Stock. In March 1996, HL&P
provided notice to the holders of its $9.375 preferred
stock that it would redeem 514,000 shares of such stock at
a cost of approximately $53 million ($102.34375 per share
including accrued dividends). On April 1, 1996, HL&P
redeemed 257,000 of such shares pursuant to a sinking fund
requirement and 257,000 shares pursuant to optional
redemption provisions. HL&P will record the redemptions
in the second quarter of 1996.
(8) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative of
results expected for the year due to the seasonal nature of
HL&P's business. In the opinion of management, the interim
information reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a full presentation of the
results for the interim periods. Certain amounts from the
previous year have been reclassified to conform to the 1996
presentation of financial statements. Such reclassifications do
not affect earnings.
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<PAGE> 1
EXHIBIT 99(c)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim financial statements and notes (Interim Financial
Statements) contained in this Form 10-Q for the period ended June 30,
1996 (Form 10-Q) are unaudited and condensed. Certain notes and other
information contained in the Combined Annual Report on Form 10-K (File
Nos. 1-7629 and 1-3187) for the year ended December 31, 1995 (Form
10-K), of Houston Industries Incorporated (Company) and Houston
Lighting & Power Company (HL&P) have been omitted in accordance with
Rule 10-01 of Regulation S-X under the Securities Exchange Act of
1934.
The information presented in the Interim Financial Statements should
be read in combination with the information presented in the Form 10-K
and the Combined Quarterly Report on Form 10-Q of the Company and HL&P
for the quarter ended March 31, 1996 (First Quarter 10-Q).
(2) CERTAIN CONTINGENCIES
The following notes to the financial statements in the Form 10-K (as
updated by the notes contained in this Form 10-Q and the First Quarter
10-Q ) are incorporated herein by reference: Note 1(b) (System of
Accounts and Effects of Regulation), Note 2 (Jointly-Owned Nuclear
Plant), Note 3 (Rate Matters), Note 4 (Investments in Foreign and
Non-Regulated Entities) and Note 11 (Commitments and Contingencies).
(3) JOINTLY-OWNED NUCLEAR PLANT
In July 1996, HL&P and City Public Service Board of San Antonio (CPS)
entered into a settlement agreement providing, among other things,
for (i) the dismissal with prejudice of all pending arbitration claims
and lawsuits between HL&P and CPS relating to the South Texas Project
Electric Generating Station (South Texas Project), (ii) a cash payment
by HL&P to CPS of $75 million (accrued in the quarter ended March 31,
1996), (iii) an agreement to support formation of a new operating
company to replace HL&P as project manager for the South Texas Project
and (iv) the execution of a 10-year joint operations agreement under
which HL&P and CPS will share savings resulting from the joint
dispatching of their respective generating assets in order to take
advantage of each system's lower cost resources.
Under the terms of the joint operations agreement entered into between
CPS and HL&P, HL&P will guarantee CPS minimum annual savings of $10
million and a minimum cumulative savings of $150 million over the
ten-year term of the agreement. Based on current forecasts and other
assumptions regarding the combined operation of the two generating
systems, HL&P anticipates that the savings resulting from joint
operations will equal or exceed the minimum savings guaranteed under
the joint operations agreement.
For information regarding the settlement in April 1996 of a similar
lawsuit filed by the City of Austin (Austin) against HL&P and a $13
million (after-tax) charge to earnings recorded in the first quarter
of 1996 in connection with this settlement, see Notes 3 and 7(a) to
the First Quarter 10-Q, which notes are incorporated herein by
reference.
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<PAGE> 2
As a result of the settlements of the CPS and Austin litigation, all
litigation and arbitration claims formerly pending between HL&P and
the other co-owners of the South Texas Project have been settled and
dismissed with prejudice.
(4) HI ENERGY
Acquisition of Interest in Brazilian Electric Utility. In May 1996, a
subsidiary of Houston Industries Energy, Inc. (HI Energy) acquired
11.35 percent of the common shares of Light - Servicos de Eletricidade
S.A. (Light), a publicly-held Brazilian corporation, for $392 million.
Light is the operator under a 30-year concession agreement of an
approximately 3,888 megawatt electric power generation, transmission
and distribution system serving 28 municipalities in the state of Rio
de Janeiro, Brazil. HI Energy acquired the shares as a bidder in the
government-sponsored auction of 60 percent of Light's outstanding
shares.
Subsequent to the auction, the winning bidders, including a subsidiary
of HI Energy, formed a consortium whose aggregate ownership interest
of 50.44 percent represents a controlling interest in Light. The
consortium, organized pursuant to a shareholders agreement dated as of
May 27, 1996, is comprised of the direct share ownership interests
held in Light by subsidiaries or affiliates of The AES Corporation
(11.35 percent), Electricite de France (11.35 percent), HI Energy
(11.35 percent), Companhia Sidercgica Nacional (7.25 percent), and
Banco Nacional de Desenvolvimento Economico E Social (BNDES) (9.14
percent). Pursuant to the shareholders agreement, principal
responsibilities for the various aspects of Light's business will be
allocated among the parties. The HI Energy subsidiary will have the
principal responsibility for all matters relating to Light's financial
affairs.
The Company has accounted for this transaction under purchase
accounting and has recorded its investment and its interest in Light's
operations since June 1, 1996, using the equity method. The effect of
Light's income on the Company's net income is immaterial for the
second quarter of 1996 and the six months ended June 30, 1996.
Class B Shares of Edelap. On May 2, 1996, Houston Argentina S.A.
(Houston Argentina), a subsidiary of HI Energy, purchased for
approximately $55 million the Class B Shares of Empresa Distribuidora
de la Plata S.A. (Edelap), an electric utility company operating in
La Plata, Argentina, and surrounding regions. The Class B Shares of
Edelap were sold by the Argentine government in a public auction. On
May 28, 1996, Houston Argentina sold a portion of its Class B Shares
to a third party for approximately $10 million. The remaining Class B
Shares held by Houston Argentina constitute 32 percent of the capital
stock of Edelap. Houston Argentina also owns indirectly through a
holding company an additional 16.6 percent of the capital stock of
Edelap, which shares were acquired in 1992 for $37 million. The
Company has recorded its investment in Edelap using the equity method.
(5) RATE CASE PROCEEDINGS
In June 1996, the Supreme Court of Texas unanimously upheld the
decision of the Public Utility Commission of Texas (Utility
Commission) in Docket No. 8425 (HL&P's 1988 rate case) to include in
HL&P's rate base $93 million in construction costs relating to the
Malakoff project (a canceled lignite generation project). The Supreme
Court also affirmed the Utility Commission's decision granting
deferred accounting treatment for Unit No. 2 of the South Texas
Project and the calculation of HL&P's federal income tax expenses
without taking into account deductions for expenses paid by the
Company's shareholders. As a result of this decision, HL&P's 1988
rate case has now become final.
For information regarding the appeal of Docket No. 6668 (an inquiry
into the prudence of the planning and construction of the South Texas
Project), see Note 3(b) to the Form 10-K.
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(6) CAPITAL STOCK
Company. At June 30, 1996 and December 31, 1995, the Company had
400,000,000 authorized shares of common stock, of which 247,690,618
and 248,316,710 shares, respectively, were outstanding as of such
dates. Outstanding shares exclude (i) the unallocated shares of the
Company's Employee Stock Ownership Plan (which as of June 30, 1996 and
December 31, 1995 totaled 13,861,929 and 14,355,758, respectively) and
(ii) 1,195,900 shares purchased by the Company as of June 30, 1996,
under the common stock repurchase program described below. Earnings
per common share for the Company are computed by dividing net income
by the weighted average number of shares outstanding during the
respective period.
In June 1996, the Company announced that its Board of Directors had
authorized the purchase of up to $150 million of the Company's common
stock. It is anticipated that any purchases of common stock under the
program would be effected over the next 12 months, subject to market
conditions, available cash and alternative investment opportunities.
The Company began repurchasing shares in mid-June 1996.
HL&P. All issued and outstanding shares of Class A voting common
stock of HL&P are held by the Company, and all issued and outstanding
shares of Class B non-voting common stock of HL&P are held by Houston
Industries (Delaware) Incorporated (HI Delaware), a wholly owned
subsidiary of the Company. Earnings per share data for HL&P are not
computed because all of its common stock is held by the Company and HI
Delaware.
On June 30, 1996 and December 31, 1995, HL&P had 10,000,000 authorized
shares of preferred stock, of which 3,804,397 and 4,318,397 shares,
respectively, were outstanding.
In April 1996, HL&P redeemed 514,000 shares of its $9.375 cumulative
preferred stock at a cost of approximately $53 million ($102.34375 per
share, including accrued dividends). The redemption included 257,000
shares in satisfaction of mandatory sinking fund requirements and an
additional 257,000 shares as an optional redemption.
(7) LONG-TERM DEBT
In January 1996, HL&P repaid upon maturity $100 million principal
amount of its Collateralized Medium-Term Notes Series B and $10
million principal amount of its Collateralized Medium-Term Notes
Series A, plus accrued interest on the two issues.
In April 1996, HL&P repaid upon maturity $40 million principal amount
of its 5 1/4% first mortgage bonds.
In May 1996, HL&P redeemed all outstanding principal amounts of its 7
1/4% first mortgage bonds ($50,000,000) due February 1, 2001, at a
redemption price of 100.42% (plus accrued interest) and 6 3/4% first
mortgage bonds ($35,000,000) due April 1, 1998, at a redemption price
of 100.15% (plus accrued interest).
(8) SUBSEQUENT EVENT
On August 11, 1996, the Company, HL&P and a newly formed Delaware
subsidiary of the Company (HI Merger, Inc.) entered into an Agreement
and Plan of Merger with NorAm Energy Corp. (NorAm). Under the merger
agreement and assuming all necessary regulatory and shareholder
approvals, the Company would merge with and into HL&P and the currently
outstanding stock of the Company would become the common stock of HL&P,
which would be renamed "Houston Industries Incorporated" (HII). NorAm
would merge with and into HI Merger, Inc. and would become a wholly
owned subsidiary of HII. Consideration for the purchase of NorAm shares
will be a combination of cash and shares of HII common stock. The
transaction is valued at $3.8 billion, consisting of $2.4 billion for
NorAm's common stock and equivalents and $1.4 billion of NorAm debt.
For information regarding the Agreement and Plan of Merger, see the
Company and HL&P's current report on Form 8-K dated August 11, 1996,
which report is incorporated herein by reference.
(9) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative of
results expected for the year due to the seasonal nature of HL&P's
business. In the opinion of management, the interim information
reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a full presentation of the results for the
interim periods. Certain amounts from the previous year have been
reclassified to conform to the 1996 presentation of financial
statements. Such reclassifications do not affect earnings.
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