<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 MARCH 31, 1997
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 April 30, 1997, Houston Industries Incorporated had 246,793,504 shares of
common stock outstanding, including 12,969,969 ESOP shares not deemed
outstanding for financial statement purposes and excluding 16,042,027 shares
held as treasury stock. As of April 30, 1997, 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 MARCH 31, 1997
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 3
Houston Industries Incorporated and Subsidiaries
Statements of Consolidated Income
Three Months Ended March 31, 1997 and 1996 3
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 4
Statements of Consolidated Cash Flows
Three Months Ended March 31, 1997 and 1996 6
Statements of Consolidated Retained Earnings
Three Months Ended March 31, 1997 and 1996 7
Notes to Consolidated Financial Statements 13
Houston Lighting & Power Company
Statements of Income
Three Months Ended March 31, 1997 and 1996 8
Balance Sheets
March 31, 1997 and December 31, 1996 9
Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996 11
Statements of Retained Earnings
Three Months Ended March 31, 1997 and 1996 12
Notes to Financial Statements 13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17
Part II. Other Information
- ------- -----------------
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote
Of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
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)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
REVENUES:
Electric utility . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 856,534 $ 811,965
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,567 11,542
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 878,101 823,507
---------- ----------
EXPENSES:
Electric utility:
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,330 197,622
Purchased power . . . . . . . . . . . . . . . . . . . . . . . . . 100,992 78,179
Operation and maintenance . . . . . . . . . . . . . . . . . . . . 183,633 193,448
Taxes other than income taxes . . . . . . . . . . . . . . . . . . 62,811 62,565
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 130,990 129,347
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . 24,129 25,207
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 721,885 686,368
---------- ----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,216 137,139
---------- ----------
OTHER INCOME (EXPENSE):
Litigation settlements . . . . . . . . . . . . . . . . . . . . . . . . (95,000)
Allowance for other funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . . (727) 1,131
Time Warner dividend income . . . . . . . . . . . . . . . . . . . . . 10,403 10,403
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,035) (1,407)
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,641 (84,873)
---------- ----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt . . . . . . . . . . . . . . . . . . . . . . 62,801 71,395
Other interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,410 1,574
Distributions on trust securities . . . . . . . . . . . . . . . . . . . 4,519
Allowance for borrowed funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,100) (685)
Preferred dividends of subsidiary . . . . . . . . . . . . . . . . . . 2,125 6,632
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,755 78,916
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . 80,102 (26,650)
INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,482 (9,910)
---------- ----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,620 $ (16,740)
========== ==========
EARNINGS (LOSS) PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . $ .26 $ (.07)
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . . . . . . . . $ .375 $ .375
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (000) . . . . . . . . . . . . 233,689 248,466
</TABLE>
See Notes to Consolidated Financial Statements.
-3-
<PAGE> 4
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Electric plant in service . . . . . . . . . . . . . . . . . . . . . . $ 12,434,432 $ 12,387,375
Construction work in progress . . . . . . . . . . . . . . . . . . . . 232,737 251,497
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241,397 241,001
Plant held for future use . . . . . . . . . . . . . . . . . . . . . . 48,631 48,631
Other property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,721 86,969
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,064,918 13,015,473
Less accumulated depreciation and amortization . . . . . . . . . . . . . 4,362,539 4,259,050
------------- -------------
Property, plant and equipment - net . . . . . . . . . . . . . . . 8,702,379 8,756,423
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 15,351 8,001
Special deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 10
Accounts receivable - net . . . . . . . . . . . . . . . . . . . . . . . . 24,118 36,277
Accrued unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . 81,647 77,853
Time Warner dividends receivable . . . . . . . . . . . . . . . . . . . . 10,313 10,313
Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,209 61,795
Materials and supplies, at average cost . . . . . . . . . . . . . . . . . 127,299 130,380
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,454 19,291
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 325,407 343,920
------------- -------------
OTHER ASSETS:
Investment in Time Warner securities . . . . . . . . . . . . . . . . . . 1,033,250 1,027,500
Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . . 580,906 587,352
Equity investments in and advances to foreign and
non-regulated affiliates - net . . . . . . . . . . . . . . . . . . . . 501,636 501,991
Regulatory tax asset - net . . . . . . . . . . . . . . . . . . . . . . . 359,872 362,310
Deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,929 306,473
Unamortized debt expense and premium on
reacquired debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,360 153,823
Recoverable project costs - net . . . . . . . . . . . . . . . . . . . . . 153,375 163,630
Fuel-related debits . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,025 84,435
------------- -------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . 3,192,353 3,187,514
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,220,139 $ 12,287,857
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
-4-
<PAGE> 5
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
CAPITALIZATION:
Common stock equity:
Common stock, no par value . . . . . . . . . . . . . . . . . . . . . $ 2,449,778 $ 2,446,754
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . (361,196) (361,196)
Unearned ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . (243,796) (251,350)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 1,969,454 1,997,490
Unrealized loss on investment in Time Warner
common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,737)
------------- -------------
Total common stock equity . . . . . . . . . . . . . . . . 3,814,240 3,827,961
------------- -------------
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 . . . . . . . . . . . . . 9,740 135,179
------------- -------------
HL&P obligated mandatorily redeemable trust securities . . . . . . . . . 340,810
------------- -------------
Long-term debt:
Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . 349,144 349,098
Long-term debt of subsidiaries:
First mortgage bonds . . . . . . . . . . . . . . . . . . . . . 2,552,349 2,670,041
Pollution control revenue bonds . . . . . . . . . . . . . . . 123,000 5,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 2,087 1,511
------------- -------------
Total long-term debt . . . . . . . . . . . . . . . . . . . 3,026,580 3,025,650
------------- -------------
Total capitalization . . . . . . . . . . . . . . . . 7,191,370 6,988,790
------------- -------------
CURRENT LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 1,439,622 1,337,872
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 102,094 157,682
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . 85,703 191,011
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . 69,894 67,707
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . 92,548 92,515
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,112 53,633
Current portion of long-term debt and preferred stock . . . . . . . . . 63,054 254,463
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 70,072 89,238
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . 1,974,099 2,244,121
------------- -------------
DEFERRED CREDITS:
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . 2,273,235 2,265,031
Unamortized investment tax credit . . . . . . . . . . . . . . . . . . . 368,870 373,749
Fuel-related credits . . . . . . . . . . . . . . . . . . . . . . . . . 65,913 74,639
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 346,652 341,527
------------- -------------
Total deferred credits . . . . . . . . . . . . . . . . . . 3,054,670 3,054,946
------------- -------------
COMMITMENTS AND CONTINGENCIES
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,220,139 $ 12,287,857
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
-5-
<PAGE> 6
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,620 $ (16,740)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 130,990 129,347
Amortization of nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . 6,657 7,595
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,191 (8,774)
Investment tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,879) (4,864)
Allowance for other funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 727 (1,131)
Fuel surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,239
Fuel cost over/(under) recovery - net . . . . . . . . . . . . . . . . . . . . (39,828) (11,112)
Changes in other assets and liabilities:
Accounts receivable - net . . . . . . . . . . . . . . . . . . . . . . . . 8,365 28,797
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,138 1,485
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,831 10,783
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,588) 10,078
Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . (103,121) (112,616)
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . (21,743) (11,013)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,095 58,103
----------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . 38,694 79,938
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction) . . . . . . . . . . . . . . . . . . . . . . . . . . (44,384) (70,141)
Non-regulated electric power project
expenditures and advances (including capitalized
interest) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,913) (8,809)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,880) (7,392)
---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . . (65,177) (86,342)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of HL&P obligated mandatorily redeemable
trust securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,810
Payment of matured bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . (190,000) (110,000)
Proceeds from issuance of pollution control
revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,795
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . (127,928)
Payment of common stock dividends . . . . . . . . . . . . . . . . . . . . . . . (87,567) (93,209)
Increase in notes payable - net . . . . . . . . . . . . . . . . . . . . . . . . 101,750 286,428
Extinguishment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . (120,360) (85,263)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,333 3,001
---------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . . 33,833 957
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . 7,350 (5,447)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 8,001 11,779
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $ 15,351 $ 6,332
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ------------------------------------------------
Cash Payments:
Interest (net of amounts capitalized) . . . . . . . . . . . . . . . . . . . . $ 80,721 $ 61,385
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,914 18,365
</TABLE>
See Notes to Consolidated Financial Statements.
-6-
<PAGE> 7
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Balance at Beginning of Period . . . . . . . . . . . . . . . . . . . . $ 1,997,490 $ 1,953,672
Net Income (Loss) for the Period . . . . . . . . . . . . . . . . . . . 59,620 (16,740)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,057,110 1,936,932
Common Stock Dividends . . . . . . . . . . . . . . . . . . . . . . . . (87,656) (93,209)
----------- -----------
Balance at End of Period . . . . . . . . . . . . . . . . . . . . . . . $ 1,969,454 $ 1,843,723
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-7-
<PAGE> 8
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 856,534 811,965
--------- ----------
OPERATING EXPENSES:
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,330 197,622
Purchased power . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,992 78,179
Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,383 139,772
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,250 53,676
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 130,251 128,434
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,322 32,063
Other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,811 62,565
--------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 730,339 692,311
--------- ----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,195 119,654
--------- ----------
OTHER INCOME (EXPENSE):
Litigation settlements (net of tax) . . . . . . . . . . . . . . . . . . (61,750)
Allowance for other funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . . (727) 1,131
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,140) (3,360)
--------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,867) (63,979)
--------- ----------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . . 121,328 55,675
--------- ----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt . . . . . . . . . . . . . . . . . . . . . . 52,533 57,504
Other interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,212 2,411
Distributions on trust securities . . . . . . . . . . . . . . . . . . . 4,519
Allowance for borrowed funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,100) (685)
--------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,164 59,230
--------- ----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,164 (3,555)
DIVIDENDS ON PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . 2,125 6,632
--------- ----------
INCOME (LOSS) AFTER PREFERRED DIVIDENDS . . . . . . . . . . . . . . . . . . $ 61,039 $ (10,187)
========= ==========
</TABLE>
See Notes to Financial Statements.
-8-
<PAGE> 9
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ -------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant in service . . . . . . . . . . . . . . . . . . . . . . . . $ 12,434,432 $ 12,387,375
Construction work in progress . . . . . . . . . . . . . . . . . . . . . . 232,737 251,497
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241,397 241,001
Plant held for future use . . . . . . . . . . . . . . . . . . . . . . . . 48,631 48,631
------------ -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,957,197 12,928,504
Less accumulated depreciation and amortization . . . . . . . . . . . . . 4,355,935 4,252,745
------------- -------------
Property, plant and equipment - net . . . . . . . . . . . . . . . . 8,601,262 8,675,759
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 634 643
Special deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 10
Accounts receivable:
Affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . 2,772 1,493
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,395 16,996
Accrued unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . 81,647 77,853
Inventory:
Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,209 61,795
Materials and supplies, at average cost . . . . . . . . . . . . . . . 127,198 130,281
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,672 10,770
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 281,543 299,841
------------- -------------
OTHER ASSETS:
Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . . 580,906 587,352
Regulatory tax asset - net . . . . . . . . . . . . . . . . . . . . . . . 359,872 362,310
Deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264,701 270,381
Unamortized debt expense and premium on
reacquired debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,131 152,524
Recoverable project costs - net . . . . . . . . . . . . . . . . . . . . . 153,375 163,630
Fuel-related debits . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,025 84,435
------------- -------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,607,010 1,620,632
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,489,815 $ 10,596,232
============= =============
</TABLE>
See Notes to Financial Statements.
-9-
<PAGE> 10
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,206,730 2,227,941
------------- -------------
Total common stock equity . . . . . . . . . . . . . . . . . . . . . . . 3,882,657 3,903,868
------------- -------------
Cumulative preferred stock, not subject to
mandatory redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,740 135,179
------------- -------------
HL&P obligated mandatorily redeemable trust securities . . . . . . . . . . . . 340,810
------------- -------------
Long-term debt:
First mortgage bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,552,349 2,670,041
Pollution control revenue bonds . . . . . . . . . . . . . . . . . . . . . 123,000 5,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,087 1,511
------------- -------------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 2,677,436 2,676,552
------------- -------------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . 6,910,643 6,715,599
------------- -------------
CURRENT LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327,722 234,665
Notes payable to affiliated companies . . . . . . . . . . . . . . . . . . . . 19,600
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,978 142,439
Accounts payable to affiliated companies . . . . . . . . . . . . . . . . . . 5,744
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,336 196,444
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,644 60,234
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,112 53,633
Current portion of long-term debt and preferred
stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,054 254,463
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,212 85,274
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 753,058 1,052,496
------------- -------------
DEFERRED CREDITS:
Accumulated deferred federal income taxes . . . . . . . . . . . . . . . . . . 2,131,747 2,124,567
Unamortized investment tax credit . . . . . . . . . . . . . . . . . . . . . . 368,870 373,749
Fuel-related credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,913 74,639
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259,584 255,182
------------- -------------
Total deferred credits . . . . . . . . . . . . . . . . . . . . . . . . 2,826,114 2,828,137
------------- -------------
COMMITMENTS AND CONTINGENCIES
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,489,815 $ 10,596,232
============= =============
</TABLE>
See Notes to Financial Statements.
-10-
<PAGE> 11
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,164 $ (3,555)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 130,251 128,434
Amortization of nuclear fuel . . . . . . . . . . . . . . . . . . . . . 6,657 7,595
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 7,180 (5,309)
Investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . (4,879) (4,864)
Allowance for other funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . . 727 (1,131)
Fuel surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,239
Fuel cost over/(under) recovery - net . . . . . . . . . . . . . . . . . (39,828) (11,112)
Changes in other assets and liabilities:
Accounts receivable - net . . . . . . . . . . . . . . . . . . . . . 2,527 28,738
Material and supplies . . . . . . . . . . . . . . . . . . . . . . . 4,553 2,586
Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,586 (806)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . (55,205) 16,460
Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . . (100,698) (122,376)
Other current liabilities . . . . . . . . . . . . . . . . . . . . . (23,207) (11,425)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,759 54,011
----------- -----------
Net cash provided by operating activities . . . . . . . . . . . 39,826 77,246
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction) . . . . . . . . . . . . . . . . . . . . . . . (44,384) (70,141)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (668) (2,233)
----------- -----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . (45,052) (72,374)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of HL&P obligated mandatorily redeemable
trust securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,810
Payment of matured bonds . . . . . . . . . . . . . . . . . . . . . . . . . (190,000) (110,000)
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . . (127,928)
Proceeds from issuance of pollution control
revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,795
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . (86,750) (89,175)
Increase in notes payable . . . . . . . . . . . . . . . . . . . . . . . . 93,057 203,648
Extinguishment of long-term debt . . . . . . . . . . . . . . . . . . . . . (120,360) (85,263)
Decrease in notes payable to affiliated company . . . . . . . . . . . . . (19,600)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 2,143
---------- -----------
Net cash provided by (used in)
financing activities . . . . . . . . . . . . . . . . . . . . . 5,217 (78,647)
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . (9) (73,775)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . 643 75,851
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . $ 634 $ 2,076
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ------------------------------------------------
Cash Payments:
Interest (net of amounts capitalized) . . . . . . . . . . . . . . . . . $ 62,336 $ 56,393
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,257 22,892
</TABLE>
See Notes to Financial Statements.
-11-
<PAGE> 12
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Balance at Beginning of Period . . . . . . . . . . . . . . . . . . . . $ 2,227,941 $ 2,150,086
Net Income (Loss) for the Period . . . . . . . . . . . . . . . . . . . 63,164 (3,555)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,291,105 2,146,531
----------- -----------
Deduct - Cash Dividends:
Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,125 6,632
Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,250 82,250
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,375 88,882
----------- -----------
Balance at End of Period . . . . . . . . . . . . . . . . . . . . . . . $ 2,206,730 $ 2,057,649
=========== ===========
</TABLE>
See Notes to Financial Statements.
-12-
<PAGE> 13
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, 1997 (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, 1996 (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.
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 1(n) (Nature of Operations),
Note 1(o) (Use of Estimates), Note 1(p) (Long-Lived Assets),
Note 2 (Jointly-Owned Nuclear Plant), Note 3 (Rate Matters),
Note 11 (Commitments and Contingencies) and Note 16 (NorAm
Merger).
(2) NORAM MERGER
In August 1996, the Company, HL&P and a newly formed Delaware
subsidiary of the Company entered into an Agreement and Plan of
Merger (Merger Agreement) with NorAm Energy Corp. (NorAm) under
which the Company will merge into HL&P, and NorAm will merge
into the newly-formed subsidiary. For information regarding the
mergers (Merger), reference is made to the Form 10-K and the
joint registration statement on Form S-4 filed by the Company
and HL&P with the Securities and Exchange Commission (SEC) (Reg.
No. 333-11329). Unless otherwise stated, the information in
this Form 10-Q relates solely to the Company and HL&P without
giving effect to the Merger.
Under the Merger Agreement, each outstanding share of common
stock of NorAm will be converted into the right to receive at the
effective time of The Merger cash and/or common stock of HL&P
(which will be renamed "Houston Industries Incorporated" after
the Merger). Commencing on May 11, 1997, the cash consideration
for each NorAm share ($16.00) will increase by two percent
(simple interest) per quarter until the consummation of the
Merger.
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<PAGE> 14
The closing of the Merger is subject to the satisfaction or
waiver of various conditions in the Merger Agreement, including
the obtaining of all required governmental consents. The Company
and NorAm have received approvals from all state regulatory
commissions and municipalities whose prior approval is required
to close the Merger.
In February 1997, the Federal Energy Regulatory Commission
(FERC) issued an order directing NorAm Energy Services (NES), a
subsidiary of NorAm engaged in the power marketing business, to
set forth its views as to whether prior approval of the Merger
by FERC may be required because of NES' jurisdictional status as
a power marketer. In the alternative, FERC invited NES to
submit an application for approval of the Merger under Section
203 of the Federal Power Act of 1935.
On March 7, 1997, NES filed a response asserting that FERC
lacked jurisdiction over the Merger. On March 27, 1997, without
conceding FERC jurisdiction over the Merger, NES filed an
application with FERC for approval of the Merger. In its merger
policy statement, FERC indicated it intends to act on
applications within 60 to 90 days after the closing of the
applicable comment period where the proposed transaction does
not adversely affect competition, rates or regulations. NES'
application requests that FERC grant approval of the Merger
within 60 days of the closing of the comment period (expected to
occur on May 27, 1997) but, in any event, no later than August
1, 1997.
On April 30, 1997, FERC issued an order asserting jurisdiction
over the Merger and over similar transactions involving other
power marketers. The Company and HL&P understand that NES
intends to file a petition for rehearing of FERC's decision on
or prior to May 30, 1997.
In connection with the Merger, the Company and HL&P have filed
with the SEC an application requesting an exemption from
regulation as a registered public utility holding company under
Section 3(a)(2) of the Public Utility Holding Company Act of
1935 (1935 Act). The SEC is considering the application. If
the requested order is not granted, the Merger Agreement
provides that NorAm and the Company would both be merged into
HL&P, with HL&P being the surviving corporation. The primary
difference resulting from this alternative merger structure is
that NorAm would not be a subsidiary and all regulatory utility
assets would be held within the same corporation. Under such
circumstances, no public utility holding company would exist.
(3) DEPRECIATION
The Company and HL&P calculate depreciation using the
straight-line method. The Company's depreciation expense for
the first quarter of 1997 and 1996 was $90 million and $89
million, respectively. HL&P's depreciation expense for the
first quarter of 1997 and 1996 was $90 million and $88 million,
respectively.
(4) RATE CASE PROCEEDINGS
For information regarding the appeal of Docket No. 6668, an
inquiry into the prudence of the planning and construction of
the South Texas Project Electric Generating Station (South Texas
Project), see Note 3(b) to the financial statements contained in
the Form 10-K.
-14-
<PAGE> 15
(5) CAPITAL STOCK
Company. At March 31, 1997, and December 31, 1996, the Company
had 400,000,000 authorized shares of common stock. As of such
dates, 233,823,535 and 233,325,030 shares of common stock were
outstanding, respectively. Outstanding common shares exclude
(i) shares pledged to secure a loan to the Company's Employee
Stock Ownership Plan (12,969,969 and 13,370,939 at March 31,
1997, and December 31, 1996, respectively) and (ii) shares
repurchased by the Company under its common stock repurchase
program and held as treasury shares (16,042,027 at March 31,
1997 and December 31, 1996).
The Company calculates earnings per common share data by
dividing its net income by the weighted average number of its
common shares outstanding during the relevant period.
The Financial Accounting Standards Board (FASB) recently issued
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share." This new standard requires dual
presentation of basic and diluted earnings per share on the face
of the Statements of Consolidated Income and requires a
reconciliation of the numerators and denominators of basic and
diluted earnings per share calculations. The Company's current
earnings per share calculation conforms to basic earnings per
share. Diluted earnings per share are not expected to be
materially different from basic earnings per share. SFAS No. 128
is effective for financial statements issued for periods ending
after December 15, 1997, earlier adoption is not permitted.
HL&P. The Company owns all issued and outstanding shares of
Class A voting common stock of HL&P. Houston Industries
(Delaware) Incorporated, a wholly-owned subsidiary of the
Company, owns all issued and outstanding shares of Class B
non-voting common stock of HL&P. The financial statements do
not include earnings per share data for HL&P because the common
stock of HL&P is owned by the Company and its affiliates.
On March 31, 1997 and December 31, 1996, HL&P had 10,000,000
authorized shares of preferred stock. As of such dates, 354,397
and 1,604,397 shares of preferred stock were outstanding,
respectively. For information regarding the redemption of
certain series of HL&P's preferred stock in February 1997, see
Note 7 to the Interim Financial Statements.
(6) LONG-TERM DEBT
In January 1997, the Brazos River Authority (BRA) and the
Matagorda County Navigation District Number One (MCND) issued,
on behalf of HL&P, $118 million aggregate principal amount of
pollution control revenue bonds. The BRA and MCND bonds will
mature in 2018 and 2028, respectively. HL&P used the proceeds
from the sale of these securities to redeem all outstanding 7
7/8% BRA Series 1986A pollution control revenue bonds ($50
million) and 7 7/8% MCND Series 1986A pollution control revenue
bonds ($68 million) at a redemption price of 102% of the
aggregate principal amount of each series.
The new bonds initially will bear interest at a floating daily
rate. Subject to certain conditions, HL&P may change the method
of determining the interest rate on the bonds to a daily,
weekly, commercial paper or long-term interest rate. The bonds
are subject to a mandatory tender for purchase upon certain
events, including changes in the method of determining interest
rates on the bonds. When a daily or weekly rate is in effect
for the bonds, holders of the bonds of such issue have the
option to have their bonds purchased at 100% of principal amount
plus accrued interest to the date of purchase. Bonds tendered
prior to maturity may be remarketed. Although it is anticipated
that all bonds tendered will be purchased with proceeds from the
subsequent offer and sale of the
-15-
<PAGE> 16
tendered bonds, HL&P has entered into standby purchase
agreements with commercial banks to provide approximately $120
million for the purchase of tendered bonds in the event that
such proceeds are not available. Facility fees are payable in
connection with these facilities.
In January 1997, HL&P repaid upon maturity $40 million aggregate
principal amount of its 5 1/4% first mortgage bonds. In March
1997, HL&P repaid upon maturity $150 million aggregate principal
amount of its 7 5/8% first mortgage bonds.
(7) HL&P OBLIGATED MANDATORILY REDEEMABLE TRUST SECURITIES
In February 1997, two Delaware statutory business trusts
(Trusts) established by HL&P issued (i) $250 million of
preferred securities and (ii) $100 million of capital
securities, respectively. The preferred securities have a
distribution rate of 8.125%, a stated liquidation amount of $25
per preferred security and must be redeemed by March 2046. The
capital securities have a distribution rate of 8.257%, a stated
liquidation amount of $1,000 per capital security and must be
redeemed by February 2037.
The Trusts sold the preferred and capital securities to the
public and used the proceeds to purchase $350 million aggregate
principal amount of subordinated debentures (Debentures) from
HL&P having interest rates corresponding to the distribution
rates of the securities and maturity dates corresponding to the
mandatory redemption dates of the securities. The Trusts are
accounted for as wholly-owned consolidated subsidiaries of HL&P.
The Debentures are the Trusts' principal assets. Proceeds from
the sale of the Debentures were used by HL&P for general
corporate purposes, including the repayment of short-term debt
and the redemption of three series of HL&P's outstanding
cumulative preferred stock at the following redemption prices,
plus accrued dividends:
<TABLE>
<CAPTION>
Number of Redemption Price
Series Shares Per Share
------- ------ ---------
<S> <C> <C>
$6.72 250,000 $102.51
$7.52 500,000 $102.35
$8.12 500,000 $102.25
</TABLE>
HL&P has fully and unconditionally guaranteed, on a subordinated
basis, distributions and all other payments due on the preferred
and capital securities.
The preferred and capital securities are mandatorily redeemable
upon the repayment of the related Debentures at their stated
maturity or earlier redemption.
Subject to certain limitations, HL&P has the option of deferring
payments of interest on the Debentures held by the Trusts. If
and for as long as payments on the Debentures have been
deferred, or an event of default under the indenture relating
thereto has occurred and is continuing, HL&P may not pay
dividends on its capital stock.
(8) SUBSEQUENT EVENTS
In April 1997, HL&P redeemed all outstanding shares of its
$9.375 cumulative preferred stock in satisfaction of mandatory
sinking fund requirements.
In April 1997, a subsidiary of Houston Industries Energy, Inc.
(HI Energy) borrowed
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<PAGE> 17
$167.5 million under a five-year term loan facility. The
proceeds of the loan, net of a $17.5 million debt reserve
account established for the benefit of the lenders, were used to
refinance a portion of the acquisition costs of Light-Servicos
de Eletricidade S.A. (Light). The loan, which is non-recourse
to the Company and HL&P, restricts payments of dividends if
Light fails to meet certain financial covenants. The loan is
secured by, among other things, a pledge of the shares of Light.
HI Energy acquired an 11.35 percent interest in Light in May
1996 for $392 million.
In February 1996, three Texas cities filed a lawsuit against
HL&P and Houston Industries Finance, Inc., formerly a
wholly-owned subsidiary of the Company, seeking recovery of
unspecified damages relating to the alleged underpayment of
municipal franchise fees. In April 1997, the plaintiffs amended
their pleadings to assert damages alleged to exceed $250
million. The Company and HL&P believe that the lawsuit is
without merit. The Company and HL&P cannot estimate a range of
possible losses, if any, from this lawsuit, nor can any
assurance be given as to its ultimate outcome. For additional
information regarding this lawsuit, reference is made to Note
11(c) to the financial statements included in the Form 10-K,
which Note is incorporated herein by reference.
In May 1997, the Company sold in open market transactions 550,000
shares of Time Warner Inc. (Time Warner) common stock for
approximately $25 million, representing an average sales price of
$45.49 per share, net of fees and other commissions . For
information regarding the Company's investment in Time Warner
securities, see Notes 1(j) and 13 to the financial statements
included in the Form 10-K.
(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 1997
presentation of financial statements. Such reclassifications do
not affect earnings.
-17-
<PAGE> 18
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 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,
legislative and regulatory changes, fluctuations in the weather and changes in
the economy as well as other factors discussed in this and other filings by the
Company and HL&P with the SEC. When used in the Company's and HL&P's documents
or oral presentations, the words "anticipate," "estimate," "expect,"
"objective," "projection," "forecast," "goal" or similar words are intended to
identify forward-looking statements. The sections of Management's Discussion
and Analysis of Financial Condition and Results of Operations captioned "The
Merger," "Recent Developments" and "New Accounting Issues" contain or
incorporate forward-looking statements.
THE MERGER
On December 17, 1996, the shareholders of the Company and NorAm
approved a Merger Agreement providing for the merger of the Company into HL&P
and the merger of NorAm into a subsidiary of the Company (Merger Sub). Upon
consummation of the Merger, HL&P, the surviving corporation of the Company/HL&P
merger, will be renamed "Houston Industries Incorporated" (Houston) and Merger
Sub, the surviving corporation of the NorAm/Merger Sub merger, will be renamed
"NorAm Energy Corp." and will become a wholly-owned subsidiary of Houston.
For additional information regarding the Merger, reference is made to
"Liquidity and Capital Resources--Company--Sources of Capital Resources and
Liquidity" below, Note 2 to the Interim Financial Statements, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Merger" in the Form 10-K and Note 16 to the Financial Statements contained in
the Form 10-K.
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
March 31,
------------------------------- Percent
1997 1996 Change
----------- ---------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 878,101 $ 823,507 7
Operating Expenses . . . . . . . . . . . . . 721,885 686,368 5
Operating Income . . . . . . . . . . . . . . 156,216 137,139 14
Other Income (Expense) . . . . . . . . . . . 8,641 (84,873) --
Interest and Other Charges . . . . . . . . . 84,755 78,916 7
Income Taxes . . . . . . . . . . . . . . . . 20,482 (9,910) --
Net Income (Loss) . . . . . . . . . . . . . 59,620 (16,740) --
</TABLE>
- 18 -
<PAGE> 19
The Company's consolidated earnings for the first quarter of 1997 were
$60 million or $.26 per share compared to a first quarter 1996 consolidated
loss of $17 million or a loss of $.07 per share.
First quarter 1996 earnings included non-recurring charges of $62
million (after-tax) taken in connection with the settlement of litigation
claims relating to the South Texas Project and $5 million associated with an
investment in two tire-to-energy plants in Illinois. Excluding these
non-recurring charges, the Company's 1996 first quarter earnings would have
been $50 million or $.20 per share.
The improvement in first quarter 1997 results of operations reflects a
decrease in HL&P operation and maintenance expenses and improved results of
operations at HI Energy. The Company's 1997 first quarter results of operation
include $10 million in equity earnings from HI Energy's investments in foreign
electric utility systems in Brazil (acquired in May 1996) and Argentina. For
additional information regarding HI Energy's foreign investments, see Note 4 to
the financial statements in the Form 10-K.
HL&P
A summary of selected financial data for HL&P is set forth below:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------- Percent
1997 1996 Change
------------- ------------- ------
(Thousands of Dollars)
<S> <C> <C> <C>
Base Revenues (1) . . . . . . . . . . . . . $ 552,547 $ 552,335 --
Reconcilable Fuel Revenues (2) . . . . . . . 303,987 259,630 17
Operating Expenses (3) . . . . . . . . . . . 730,339 692,311 5
Operating Income (3) . . . . . . . . . . . . 126,195 119,654 5
Other Income (Expense) (3) . . . . . . . . . (4,867) (63,979) --
Interest Charges . . . . . . . . . . . . . . 58,164 59,230 (2)
Income (Loss) After
Preferred Dividends . . . . . . . . . . . 61,039 (10,187) --
-----------------
</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.
HL&P's first quarter 1997 net income after preferred dividends was $61
million compared to a loss of $10 million in the first quarter of 1996.
Excluding the effects of the $62 million after-tax charge described above,
HL&P's first quarter 1996 net income after preferred dividends would have been
$52 million. The improved results of operations at HL&P reflect a $10 million
decrease in operation and maintenance expenses and a $5 million decrease in
preferred dividends.
OPERATING REVENUES AND SALES
Notwithstanding mild weather in the first quarter of 1997, HL&P's base
revenues between the quarterly periods were relatively unchanged. The adverse
effects of weather-related factors were offset by increases in the number of
customers in the first quarter of 1997.
- 19 -
<PAGE> 20
Reconcilable fuel revenue increased 17 percent in the first quarter of
1997 primarily as a result of an increase in natural gas prices. The Public
Utility Commission of Texas (Utility Commission) permits recovery of certain
fuel and purchased power costs through a fixed fuel factor included in electric
rates. The fixed fuel factor is established during either a utility's general
rate proceeding or its fuel factor proceeding and is generally effective for a
minimum of six months. Since reconcilable fuel revenues are adjusted monthly
to equal expenses, these items have no effect on earnings unless fuel costs are
subsequently determined by the Utility Commission not to be recoverable. The
adjusted over/under recovery of fuel costs is recorded on HL&P's Balance Sheets
as fuel-related credits or fuel- related debits. 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.
At March 31, 1997, HL&P's cumulative under-recovery of fuel costs was
$93 million. In January 1997, HL&P implemented a $70 million temporary fuel
surcharge, inclusive of interest through June 30, 1997. The fuel surcharge was
intended to recover HL&P's cumulative fuel under-recovery balance as of August
31, 1996. In April 1997, HL&P filed with the Utility Commission a request to
implement a $62 million temporary fuel surcharge, inclusive of interest, during
the six-month period beginning July 1, 1997. HL&P requested the surcharge in
order to recover its under-recovery of fuel expenses for the period between
September 1996 and February 1997.
FUEL AND PURCHASED POWER EXPENSES
HL&P's 1997 first quarter fuel expenses increased $22 million compared
to the first quarter of 1996. The increase was due to an increase in the unit
cost of natural gas. The average cost of fuel for the first quarter of 1997
was $1.88 per million British Thermal Units (MMBtu) compared to $1.70 per MMBtu
for the same period in 1996, including an average gas cost of $3.09 per MMBtu
and $2.13 per MMBtu, respectively. Purchased power expense increased $23
million for the first quarter of 1997 primarily as a result of increased energy
purchases and higher unit costs.
OTHER OPERATING EXPENSES
HL&P's 1997 first quarter operation and maintenance expenses decreased
$10 million in comparison to the first quarter of 1996. The largest component
of the decrease related to pension benefit costs, which declined during the
first quarter of 1997 as a result of an increase in the estimated return on
assets held in the Company's pension benefit plans. Other factors relating to
the decline in operation and maintenance expenses included a reduction in
severance cost expenses between the two periods. Other operating expenses were
relatively constant between the two periods.
In each of the first quarter of 1997 and 1996, depreciation and
amortization expense included (i) a $13 million write down of HL&P's investment
in the South Texas Project and (ii) a $5 million write down of HL&P's
investment in lignite reserves associated with a canceled generation project.
The settlement of HL&P's most recent rate case (Docket No. 12065) permits HL&P
to write down up to $50 million per year of its investment in the South Texas
Project through December 31, 1999. HL&P must amortize the remaining $98
million of its investment in the lignite reserves no later than 2002. For
additional information regarding these expenses, see Note 3(a) to the Financial
Statements included in the Form 10-K.
RECENT DEVELOPMENTS
In connection with the current session of the Texas legislature,
various proposals have been discussed that would permit Texas retail electric
customers to choose their own electric suppliers beginning in December 2001. The
proposals include provisions relating to full stranded cost recovery, rate
reductions, rate freezes, the unbundling of generation operations, transmission
and distribution operations and customer service operations, and the
securitization of regulatory assets. The Company and HL&P are reviewing the
proposals.
- 20 -
<PAGE> 21
However, at this time, the Company and HL&P cannot predict what, if any, action
the Texas legislature may take on the proposals or the ultimate form in which
such proposals may be adopted, if at all. The 1997 session of the Texas
legislature is scheduled to end on June 2, 1997.
A number of bills have been introduced in the United States Congress
calling for the repeal of the 1935 Act and/or requiring that retail electric
customers be permitted to choose their own electric supplier. Although the
Company and HL&P cannot predict what action Congress may take with respect to
these bills, enactment of any of these bills would likely have a profound
effect on the electric utility industry.
In March 1997, the Utility Commission issued a final order in a rate
proceeding involving a Texas utility that owns a 25.2 percent interest in the
South Texas Project. HL&P owns a 30.8 percent interest in the South Texas
Project. A major provision of the Utility Commission's final order was the
categorization of approximately $859 million of the utility's investment in the
South Texas Project as Excess Cost Over Market (ECOM). The term ECOM refers to
the amount of cost that potentially would become "stranded" if retail
competition were mandated and prices were set by the market rather than being
determined by current regulatory standards of reasonable and necessary cost of
providing service. The final order reduced the utility's return on common
equity for the ECOM portion of its investment in the South Texas Project to 7.96
percent, as compared with the 10.9 percent return on common equity approved for
all other invested capital. At the same time, the final order accelerated the
recovery of the $859 million designated as ECOM to 20 years from the remaining
32-year life of the South Texas Project. The Company and HL&P are unable to
predict at this time whether the policies reflected in this rate order will be
applied to other Texas utilities.
As discussed in Note 1(b) (System of Accounts and Effects of
Regulation) to the financial statements contained in the Form 10-K, HL&P follows
the accounting policies set forth in SFAS No. 71. The accounting staff of the
SEC has raised issues with respect to the continued use of SFAS No. 71 by other
utilities in the context of the enactment of regulations providing for increased
competition and market-based pricing. These issues have been referred to the
Emerging Issues Task Force (EITF) of the FASB for consideration at its May 1997
meeting. The Company and HL&P cannot predict what position the EITF may adopt
regarding these issues or how the EITF's position may be applied in the context
of future legislation affecting HL&P.
For information on other developments, factors, and trends that may
have an impact on the Company's and HL&P's future earnings, reference is made
to Item 7 of the Form 10-K, "Management's Discussion and Analysis of
Financial Condition and Results of Operations --The Merger " and "--Certain
Factors Affecting Future Earnings of the Company and HL&P."
LIQUIDITY AND CAPITAL RESOURCES
COMPANY
GENERAL
During the first quarter of 1997, the Company' s net cash from
operating activities and financing activities was $39 million and $34 million,
respectively. The Company's first quarter investment activities resulted in
expenditures of $65 million, of which $44 million represented HL&P capital
expenditures. The Company's primary financing activities during the first
quarter of 1997 were the payment of dividends on its common stock, the
redemption of preferred stock, the redemption or repayment of long-term debt
and the sale of pollution control revenue bonds and HL&P trust securities.
- 21 -
<PAGE> 22
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
As of March 31, 1997, the Company had approximately $1.1 billion of
commercial paper outstanding, supported by two bank credit facilities
aggregating $1.5 billion. As of this date, HL&P had approximately $328 million
of commercial paper outstanding, supported by a bank credit facility of $400
million. Rates paid by the Company and HL&P on their short-term borrowings
are generally lower than the prime rate.
The cash portion of the Merger consideration (estimated to be
approximately $1.25 billion) is expected to be funded through bank borrowings
under new bank credit facilities (Bank Facilities) to be arranged by a
newly-formed subsidiary of Houston with a group of commercial banks. For
information regarding the proposed credit facility, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources--Company--Sources of Capital
Resources and Liquidity--The Merger" in the Form 10-K. In April 1997, the
Company negotiated an extension of the term of the bank commitments for the
Bank Facilities to October 31, 1997. The Company has paid fees relating to the
commitments of approximately $1.6 million.
In April 1997, a subsidiary of HI Energy borrowed $167.5 million under
a five-year term loan facility. The proceeds of the loan, net of a $17.5
million deposited in a debt reserve account for the benefit of the lenders,
were used to refinance a portion of the acquisition costs of Light. For
additional information, see Note 8 to the Interim Financial Statements.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratios of earnings to fixed charges for the three and
twelve months ended March 31, 1997, were 1.92 and 3.04, respectively. The
Company believes that the ratio for the three-month period is not necessarily
indicative of the ratio for a twelve-month period due to the seasonal nature of
HL&P's business.
HL&P
GENERAL
During the first quarter of 1997, HL&P's net cash from operating
activities and financing activities was $40 million and $5 million,
respectively. HL&P's first quarter investment activities resulted in
expenditures of $45 million, of which $44 million represented capital
expenditures. The 1997 annual budget for capital and nuclear expenditures is
$239 million. HL&P's primary financing activities during the first quarter of
1997 were the payment of dividends, the redemption of preferred stock, the
redemption or repayment of long-term debt and the sale of pollution control
revenue bonds and HL&P trust securities, as described in greater detail below.
SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
As of March 31, 1997, HL&P had approximately $328 million of
commercial paper outstanding. HL&P's commercial paper borrowings are supported
by a bank line of credit of $400 million. A temporary $346 million increase in
the amount of the facility was in effect during a portion of the first quarter
of 1997.
In January 1997, the BRA and MCND issued on behalf of HL&P $118
million aggregate principal amount of pollution control revenue bonds. As of
March 31, 1997, the new bonds bore a floating daily interest rate and mature in
2018 and 2028, respectively. HL&P used the proceeds from the sale of these
securities to redeem, at 102% of their aggregate principal amount, pollution
control revenue bonds aggregating $118 million. For additional information
regarding the bonds, see Note 6 to the Interim Financial Statements.
- 22 -
<PAGE> 23
In February 1997, two Delaware business trusts established by HL&P
issued capital securities and preferred securities aggregating $350 million.
The Trusts sold securities to the public ($100 million of 8.257% capital
securities and $250 million of 8.125% preferred securities) and used the
proceeds to purchase subordinated debentures from HL&P. HL&P used the proceeds
from the sale of the subordinated debentures for general corporate purposes,
including the repayment of short-term debt and the redemption of three series
of cumulative preferred stock having an aggregate liquidation value of $125
million. For additional information regarding these securities, see Note 7 to
the Interim Financial Statements.
In the first quarter of 1997, HL&P repaid at maturity $40 million
aggregate principal amount of its 5 1/4% series first mortgage bonds and $150
million aggregate principal amount of its 7 5/8% series first mortgage bonds.
HL&P redeemed the remaining $25.7 million of its $9.375 series preferred stock
in April 1997.
RATIOS OF EARNINGS TO FIXED CHARGES
HL&P's ratios of earnings to fixed charges for the three and twelve
months ended March 31, 1997 were 2.56 and 4.13, respectively. HL&P's ratios of
earnings to fixed charges and preferred dividends for the three and twelve
months ended March 31, 1997 were 2.43 and 3.71, respectively. HL&P believes
that the ratios for the three-month period are not necessarily indicative of
the ratios for a twelve-month period due to the seasonal nature of HL&P's
business.
NEW ACCOUNTING ISSUES
For information regarding SFAS No. 128, "Earnings Per Share," which
will be effective for the Company's 1997 fiscal year, see Note 5 to the Interim
Financial Statements.
- 23 -
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company
and its subsidiaries, reference is made to Note 8 of the
Interim Financial Statements, Item 3 of the Form 10-K and
Notes 2(b), 3, 10 and 11(c) to the Financial Statements in the
Form 10-K, which information is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Company
At the annual meeting of the Company's shareholders held on
May 9, 1997, the matters voted upon and the number of votes
cast for, against or withheld, as well as the number of
abstentions and broker non- votes as to such matters
(including a separate tabulation with respect to each nominee
for office) were as stated below:
For Item 1, the election of four nominees for Class I
directors to serve three-year terms expiring in 2000:
<TABLE>
<CAPTION>
For Against or Withheld Broker Non-Vote
----- ------------------- ---------------
<S> <C> <C> <C>
Robert J. Cruikshank 207,334,178 6,513,323 0
Linnet F. Deily 207,634,170 6,213,331 0
Lee W. Hogan 207,578,134 6,269,367 0
Alexander F. Schilt 207,436,204 6,411,297 0
</TABLE>
For Item 2, the adoption of an Amendment to the 1994 Houston
Industries Incorporated Long-Term Incentive Compensation Plan:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
--------- ---------- ---------- ----------------
<S> <C> <C> <C>
193,894,695 15,772,203 4,180,599 4
</TABLE>
For Item 3, the ratification of the appointment of Deloitte &
Touche LLP as independent accountants and auditors for the
Company for 1997:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
--------- ---------- ---------- ----------------
<S> <C> <C> <C>
210,392,841 1,950,691 1,503,968 1
</TABLE>
HL&P
The annual shareholder meeting of HL&P was held on May 9,
1997. The Company, the owner and holder of all of the
outstanding Class A voting common stock of HL&P,
- 24 -
<PAGE> 25
by the duly authorized vote of its Chairman and Chief
Executive Officer, Don D. Jordan, elected the following Board
of Directors for the ensuing year or until their successors
shall have qualified:
<TABLE>
<S> <C>
Charles R. Crisp Hugh Rice Kelly
William T. Cottle R. Steve Letbetter
Jack D. Greenwade David M. McClanahan
Lee W. Hogan Stephen W. Naeve
Don D. Jordan Stephen C. Schaeffer
Robert L. Waldrop
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Houston Industries Incorporated:
Exhibit 3 - Amended and Restated Bylaws of the Company
(effective December 4, 1996).
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), 1(n), 1(o), 1(p), 2, 3, 11 and 16
to the Financial Statements included on pages
60 through 65, pages 76 through 77, and pages
80 through 81 of the Form 10-K.
Houston Lighting & Power Company:
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), 1(n), 1(o), 1(p), 2, 3, 11 and 16
to the Financial Statements included on pages
60 through 65, pages 76 through 77, and pages
80 through 81 of the Form 10-K.
(b) Reports on Form 8-K.
Form 8-K of HL&P dated February 4, 1997. (Item 5)
Form 8-K of the Company and HL&P dated February 5, 1997. (Item 5)
- 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: May 14,1997
- 26 -
<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: May 14, 1997
- 27 -
<PAGE> 28
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
Houston Industries Incorporated:
Exhibit 3 - Amended and Restated Bylaws of the Company
(effective December 4, 1996).
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), 1(n), 1(o), 1(p), 2, 3, 11 and 16
to the Financial Statements included on pages
60 through 65, pages 76 through 77, and pages
80 through 81 of the Form 10-K.
Houston Lighting & Power Company:
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), 1(n), 1(o), 1(p), 2, 3, 11 and 16
to the Financial Statements included on pages
60 through 65, pages 76 through 77, and pages
80 through 81 of the Form 10-K.
<PAGE> 1
Exhibit 3
AMENDED AND RESTATED BYLAWS
OF
HOUSTON INDUSTRIES INCORPORATED
Adopted and Amended by Resolution of the Board of Directors on
December 4, 1996
ARTICLE I
CAPITAL STOCK
Section 1. Share Ownership. Shares for the capital stock of the
Company may be certificated or uncertificated. Owners of shares of the capital
stock of the Company shall be recorded in the share transfer records of the
Company and ownership of such shares shall be evidenced by a certificate or
book entry notation in the share transfer records of the Company. Any
certificates representing such shares shall be signed by the Chairman of the
Board, if there is one, the Chief Executive Officer, if there is one, the
President or a Vice President and either the Secretary or an Assistant
Secretary and shall be sealed with the seal of the Company, which signatures
and seal may be facsimiles. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased to
be such officer before such certificate is issued, it may be issued by the
Company with the same effect as if he were such officer at the date of its
issuance.
Section 2. Shareholders of Record. The Board of Directors of the
Company may appoint one or more transfer agents or registrars of any class of
stock of the Company. The Company may be its own transfer agent if so
appointed by the Board of Directors. The Company shall be entitled to treat
the holder of record of any shares of the Company as the owner thereof for all
purposes, and shall not be bound to recognize any equitable or other claim to,
or interest in, such shares or any rights deriving from such shares, on the
part of any other person, including (but without limitation) a purchaser,
assignee or transferee, unless and until such other person becomes the holder
of record of such shares, whether or not the Company shall have either actual
or constructive notice of the interest of such other person.
Page 1 of 20
<PAGE> 2
Section 3. Transfer of Shares. The shares of the capital stock of
the Company shall be transferable in the share transfer records of the Company
by the holder of record thereof, or his duly authorized attorney or legal
representative. All certificates representing shares surrendered for transfer,
properly endorsed, shall be cancelled and new certificates for a like number of
shares shall be issued therefor. In the case of lost, stolen, destroyed or
mutilated certificates representing shares for which the Company has been
requested to issue new certificates, new certificates or other evidence of such
new shares may be issued upon such conditions as may be required by the Board
of Directors or the Secretary for the protection of the Company and any
transfer agent or registrar. Uncertificated shares shall be transferred in the
share transfer records of the Company upon the written instruction originated
by the appropriate person to transfer the shares.
Section 4. Shareholders of Record and Fixing of Record Date. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive a
distribution by the Company (other than a distribution involving a purchase or
redemption by the Company of any of its own shares) or a share dividend, or in
order to make a determination of shareholders for any other proper purpose
(other than determining shareholders entitled to consent to action by
shareholders proposed to be taken without a meeting of shareholders), the Board
of Directors may provide that the share transfer records shall be closed for a
stated period of not more than sixty days, and in the case of a meeting of
shareholders not less than ten days, immediately preceding the meeting, or it
may fix in advance a record date for any such determination of shareholders,
such date to be not more than sixty days, and in the case of a meeting of
shareholders not less than ten days, prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If the
share transfer records are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive a distribution (other than a
distribution involving a purchase or redemption by the Company of any of its
own shares) or a share dividend, the date on which notice of the meeting is
mailed or the date on which the resolution of the Board of Directors declaring
such distribution or share dividend is adopted, as the case may be, shall be
the record date for such determination of shareholders. When a determination
of shareholders entitled to vote at any meeting of shareholders has been made
as herein provided, such determination shall apply to any adjournment thereof
except where the determination has been made through the closing of the share
transfer records and the stated period of closing has expired.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings. All meetings of shareholders shall be
held at the registered office of the Company, in the City of Houston, Texas, or
at such other place within or without the State of Texas as may be designated
by the Board of Directors or officer calling the meeting.
Page 2 of 20
<PAGE> 3
Section 2. Annual Meeting. The annual meeting of the shareholders
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors or as may otherwise be stated in the notice of
the meeting. Failure to designate a time for the annual meeting or to hold the
annual meeting at the designated time shall not work a dissolution of the
Company.
Section 3. Special Meetings. Special meetings of the shareholders
may be called by the Chairman of the Board, if there is one, the Chief
Executive Officer, if there is one, the President, the Secretary, the Board of
Directors, the holders of not less than one-tenth of all of the shares
outstanding and entitled to vote at such meeting or such other persons as may
be authorized in the Articles of Incorporation of the Company.
Section 4. Notice of Meeting. Written or printed notice of all
meetings stating the place, day and hour of the meeting and, in case of a
special meeting, the purpose or purposes for which the meeting is called, shall
be delivered not less than ten nor more than sixty days before the date of the
meeting, either personally or by mail, by or at the direction of the Chairman
of the Board, if there is one, the Chief Executive Officer, if there is one,
the President, the Secretary or the officer or person calling the meeting to
each shareholder of record entitled to vote at such meetings . If mailed, such
notice shall be deemed to be delivered when deposited in the United States mail
addressed to the shareholder at his address as it appears on the share transfer
records of the Company, with postage thereon prepaid.
Any notice required to be given to any shareholder, under any
provision of the Texas Business Corporation Act, as amended (TBCA), the
Articles of Incorporation of the Company or these Bylaws, need not be given to
a shareholder if notice of two consecutive annual meetings and all notices of
meetings held during the period between those annual meetings, if any, or all
(but in no event less than two) payments (if sent by first class mail) of
distributions or interest on securities during a 12-month period have been
mailed to that person, addressed at his address as shown on the share transfer
records of the Company, and have been returned undeliverable. Any action or
meeting taken or held without notice to such person shall have the same force
and effect as if the notice had been duly given. If such a person delivers to
the Company a written notice setting forth his then current address, the
requirement that notice be given to that person shall be reinstated.
Section 5. Voting List. The officer or agent having charge of the
share transfer records for shares of the Company shall make, at least ten days
before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
which list, for a period of ten days prior to such meeting, shall be kept on
file at the registered office of the Company and shall be subject to inspection
by any shareholder at any time during usual business hours. Such list shall
also be produced and kept open at the time and place of the meeting and shall
be subject to the inspection of any shareholder during the whole time of the
meeting. The original share transfer records shall be prima facie evidence as
to who are the shareholders entitled to examine such list or to vote at any
meeting of shareholders. Failure to comply with any requirements of this
Section 5 shall not affect the validity of any action taken at such meeting.
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Section 6. Voting; Proxies. Except as otherwise provided in the
Articles of Incorporation of the Company or as otherwise provided in the TBCA,
each holder of shares of capital stock of the Company entitled to vote shall be
entitled to one vote for each share standing in his name on the records of the
Company, either in person or by proxy executed in writing by him or by his duly
authorized attorney-in-fact. A proxy shall be revocable unless expressly
provided therein to be irrevocable and the proxy is coupled with an interest.
At each election of directors, every holder of shares of the Company entitled
to vote shall have the right to vote, in person or by proxy, the number of
shares owned by him for as many persons as there are directors to be elected,
and for whose election he has a right to vote, but in no event shall he be
permitted to cumulate his votes for one or more directors.
Section 7. Quorum and Vote of Shareholders. Except as otherwise
provided by law, the Articles of Incorporation of the Company or these Bylaws,
the holders of a majority of shares entitled to vote, represented in person or
by proxy, shall constitute a quorum at a meeting of shareholders, but, if a
quorum is not represented, a majority in interest of those represented may
adjourn the meeting from time to time. Directors shall be elected by a
plurality of the votes cast by the holders of shares entitled to vote in the
election of directors at a meeting of shareholders at which a quorum is
present. With respect to each matter other than the election of directors as
to which no other voting requirement is specified by law, the Articles of
Incorporation of the Company or in this Section 7 or in Article VII of these
Bylaws, the affirmative vote of the holders of a majority of the shares
entitled to vote on that matter and represented in person or by proxy at a
meeting at which a quorum is present shall be the act of the shareholders.
With respect to a matter submitted to a vote of the shareholders as to which a
shareholder approval requirement is applicable under the shareholder approval
policy of the New York Stock Exchange, Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (Exchange Act), or any provision of the Internal
Revenue Code, in each case for which no higher voting requirement is specified
by law, the Articles of Incorporation of the Company or these Bylaws, the
affirmative vote of the holders of a majority of the shares entitled to vote
on, and voted for or against, that matter at a meeting at which a quorum is
present shall be the act of the shareholders, provided that approval of such
matter shall also be conditioned on any more restrictive requirement of such
shareholder approval policy, Rule 16b- 3 or Internal Revenue Code provision, as
applicable, being satisfied. With respect to the approval of independent
public accountants (if submitted for a vote of the shareholders), the
affirmative vote of the holders of a majority of the shares entitled to vote
on, and voted for or against, that matter at a meeting of shareholders at which
a quorum is present shall be the act of the shareholders.
Section 8. Presiding Officer and Conduct of Meetings. The Chairman
of the Board, if there is one, or in his absence, the Chief Executive Officer,
if there is one, or in his absence, the President shall preside at all meetings
of the shareholders or, if such officers are not present at a meeting, by such
other person as the Board of Directors shall designate or if no such person is
designated by the Board of Directors, the most senior officer of the Company
present at the meeting. The Secretary of the Company, if present, shall act as
secretary of each meeting of shareholders; if he is not present at a meeting,
then such person as may be designated by the presiding officer shall act as
secretary of the meeting. Meetings of shareholders shall follow reasonable and
fair procedure. Subject to the
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foregoing, the conduct of any meeting of shareholders and the determination of
procedure and rules shall be within the absolute discretion of the officer
presiding at such meeting (Chairman of the Meeting), and there shall be no
appeal from any ruling of the Chairman of the Meeting with respect to procedure
or rules. Accordingly, in any meeting of shareholders or part thereof, the
Chairman of the Meeting shall have the sole power to determine appropriate
rules or to dispense with theretofore prevailing rules. Without limiting the
foregoing, the following rules shall apply:
(a) If disorder should arise which prevents continuation of
the legitimate business of meeting, the Chairman of the Meeting may
announce the adjournment of the meeting; and upon so doing, the
meeting shall be immediately adjourned.
(b) The Chairman of the Meeting may ask or require that
anyone not a bona fide shareholder or proxy leave the meeting.
(c) A resolution or motion shall be considered for vote only
if proposed by a shareholder or a duly authorized proxy, and seconded
by an individual who is a shareholder or a duly authorized proxy,
other than the individual who proposed the resolution or motion,
subject to compliance with any other requirements concerning such
proposed resolution or motion contained in these Bylaws. The Chairman
of the Meeting may propose any motion for vote.
(d) The order of business at all meetings of shareholders
shall be determined by the Chairman of the Meeting.
(e) The Chairman of the Meeting may impose any reasonable
limits with respect to participation in the meeting by shareholders,
including, but not limited to, limits on the amount of time taken up
by the remarks or questions of any shareholder, limits on the number
of questions per shareholder and limits as to the subject matter and
timing of questions and remarks by shareholders.
(f) Before any meeting of shareholders, the Board of
Directors may appoint three persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If
no inspectors of election are so appointed, the Chairman of the
Meeting may, and on the request of any shareholder or a shareholder's
proxy shall, appoint inspectors of election at the meeting of the
shareholders and the number of such inspectors shall be three. If any
person appointed as inspector fails to appear or fails or refuses to
act, the Chairman of the Meeting may, and upon the request of any
shareholder or a shareholder's proxy shall, appoint a person to fill
such vacancy.
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The duties of the inspectors shall be to:
(i) determine the number of shares outstanding and
the voting power of each, the shares represented at the
meeting, the existence of a quorum, and the authenticity,
validity and effect of proxies and ballots;
(ii) receive votes or ballots;
(iii) hear and determine all challenges and
questions in any way arising in connection with the vote;
(iv) count and tabulate all votes;
(v) report to the Board of Directors the results
based on the information assembled by the inspectors; and
(vi) do any other acts that may be proper to conduct
the election or vote with fairness to all shareholders.
Notwithstanding the foregoing, the final certification of the
results of the election or other matter acted upon at a
meeting of shareholders shall be made by the Board of
Directors.
All determinations of the Chairman of the Meeting shall be conclusive
unless a matter is determined otherwise upon motion duly adopted by the
affirmative vote of the holders of at least 80% of the voting power of the
shares of capital stock of the Company entitled to vote in the election of
directors held by shareholders present in person or represented by proxy at
such meeting.
ARTICLE III
DIRECTORS
Section 1. Number and Classification of Board of Directors;
Qualifications. The business and affairs of the Company shall be managed by
the Board of Directors. The number of directors that shall constitute the
whole Board of Directors of the Company shall be not less than nine nor more
than eighteen as specified from time to time by the affirmative vote of at
least 80% of all directors then in office at any regular or special meeting of
the Board of Directors called for that purpose. The directors shall be divided
into three classes, Class I, Class II and Class III. Such classes shall be as
nearly equal in number of directors as possible. Each director, other than
those who may be elected by the holders of Preference Stock pursuant to Section
6 of Division A of Article VI of the Articles of Incorporation of the Company
(or elected by such directors to fill a vacancy) and except as provided in the
penultimate paragraph of this Section 1, shall serve for a term ending
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<PAGE> 7
on the third annual meeting following the annual meeting at which such director
was elected. Each director elected by the holders of Preference Stock pursuant
to Section 6 of Division A of Article VI of the Articles of Incorporation of
the Company (or elected by such directors to fill a vacancy) shall serve for a
term ending upon the earlier of the election of his successor or the
termination at any time of a right of the holders of Preference Stock to elect
members of the Board of Directors.
At each annual election, the directors chosen to succeed those whose
terms then expire shall be of the same class as the directors they succeed,
unless, by reason of any intervening changes in the authorized number of
directors, the Board of Directors shall designate one or more directorships
whose term then expires as directorships of another class in order more nearly
to achieve equality of number of directors among the classes.
Notwithstanding the rule that the three classes shall be as nearly
equal in number of directors as possible, in the event of any change in the
authorized number of directors, each director then continuing to serve as such
shall nevertheless continue as a director of the class of which he is a member
until the expiration of his current term, or his prior death, resignation,
disqualification or removal. If any newly created directorship may, consistent
with the rule that the three classes shall be as nearly equal in number of
directors as possible, be allocated to any of the three classes, the Board of
Directors shall allocate it to that available class whose term of office is due
to expire at the earliest date following such allocation. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
No person shall be eligible to serve as a director of the Company
subsequent to the annual meeting of shareholders occurring on or after the
first day of the month immediately following the month of such person's
seventieth birthday. No person shall be eligible to stand for reelection at
the annual meeting of shareholders on or immediately following the tenth
anniversary of such person's initial election or appointment to the Board of
Directors. Any vacancy on the Board of Directors resulting from any director
being rendered ineligible to serve as a director of the Company by the
immediately preceding two sentences shall be filled by the shareholders
entitled to vote thereon at such annual meeting of shareholders. Any director
chosen to succeed a director who is so rendered ineligible to serve as a
director of the Company shall be of the same class as the director he succeeds.
Notwithstanding the rule that a director may not stand for reelection at the
annual meeting of shareholders on or immediately following the tenth
anniversary of such person's initial election or appointment to the Board of
Directors, an incumbent director may nevertheless continue as a director until
the expiration of his current term, or his prior death, resignation,
disqualification or removal; provided, however, that no person serving as a
director as of April 1, 1992 shall be affected by such term limitation
provision, nor shall such term limitation provision apply to directors who are
also employees of the Company or its corporate affiliates.
The above notwithstanding, each director shall serve until his
successor shall have been duly elected and qualified, unless he shall resign,
become disqualified, disabled or shall otherwise be removed.
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No person shall be eligible for election or reelection or to continue
to serve as a member of the Board of Directors who is an officer, director,
agent, representative, partner, employee, or nominee of, or otherwise acting at
the direction of, or acting in concert with, (a) a "public-utility company"
(other than any direct or indirect subsidiary of the company) as such term is
defined in Section 2(a)(5) of the Public Utility Holding Company Act of 1935,
as in effect on May 1, 1996 (35 Act), or (b) an "affiliate" (as defined in
either Section 2(a)(11) of the 35 Act or in Rule 405 under the Securities Act
of 1933, as amended) of any such "public-utility company" specified in clause
(a) immediately preceding.
Section 2. Newly Created Directorships and Vacancies. Newly created
directorships resulting from any increase in the number of directors may be
filled by the affirmative vote of a majority of the directors then in office
for a term of office continuing only until the next election of one or more
directors by the shareholders entitled to vote thereon, or may be filled by
election at an annual or special meeting of the shareholders called for that
purpose; provided, however, that the Board of Directors shall not fill more
than two such directorships during the period between two successive annual
meetings of shareholders. Except as provided in Section 1 of this Article III,
any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause may be filled by the affirmative vote
of a majority of the remaining directors then in office, even though less than
a quorum of the Board of Directors, or may be filled by election at an annual
or special meeting of the shareholders called for that purpose. Any director
elected to fill any such vacancy shall hold office for the remainder of the
full term of the director whose departure from the Board of Directors created
the vacancy and until such newly elected director's successor shall have been
duly elected and qualified.
Notwithstanding the foregoing paragraph of this Section 2, whenever
holders of outstanding shares of Preference Stock are entitled to elect members
of the Board of Directors pursuant to the provisions of Section 6 of Division A
of Article VI of the Articles of Incorporation of the Company, any vacancy or
vacancies resulting by reason of the death, resignation, disqualification or
removal of any director or directors or any increase in the number of directors
shall be filled in accordance with the provisions of such section.
Section 3. Nomination of Directors. Nominations for the election of
directors may be made by the Board of Directors or by any shareholder
(Nominator) entitled to vote in the election of directors. Such nominations,
other than those made by the Board of Directors, shall be made in writing
pursuant to timely notice delivered to or mailed and received by the Secretary
of the Company as set forth in this Section 3. To be timely in connection with
an annual meeting of shareholders, a Nominator's notice, setting forth the name
and address of the person to be nominated, shall be delivered to or mailed and
received at the principal executive offices of the Company not less than ninety
days nor more than 180 days prior to the date on which the immediately
preceding year's annual meeting of shareholders was held. To be timely in
connection with any election of a director at a special meeting of the
shareholders, a Nominator's notice, setting forth the name of the person to be
nominated, shall be delivered to or mailed and received at the principal
executive offices of the Company not less than forty days nor more than sixty
days prior to the date of such
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<PAGE> 9
meeting; provided, however, that in the event that less than forty-seven days'
notice or prior public disclosure of the date of the special meeting of the
shareholders is given or made to the shareholders, the Nominator's notice to be
timely must be so received not later than the close of business on the seventh
day following the day on which such notice of date of the meeting was mailed or
such public disclosure was made. At such time, the Nominator shall also submit
written evidence, reasonably satisfactory to the Secretary of the Company, that
the Nominator is a shareholder of the Company and shall identify in writing (a)
the name and address of the Nominator, (b) the number of shares of each class
of capital stock of the Company owned beneficially by the Nominator, (c) the
name and address of each of the persons with whom the Nominator is acting in
concert, (d) the number of shares of capital stock beneficially owned by each
such person with whom the Nominator is acting in concert, and (e) a description
of all arrangements or understandings between the Nominator and each nominee
and any other persons with whom the Nominator is acting in concert pursuant to
which the nomination or nominations are to be made. At such time, the
Nominator shall also submit in writing (i) the information with respect to each
such proposed nominee that would be required to be provided in a proxy
statement prepared in accordance with Regulation 14A under the Exchange Act and
(ii) a notarized affidavit executed by each such proposed nominee to the effect
that, if elected as a member of the Board of Directors, he will serve and that
he is eligible for election as a member of the Board of Directors. Within
thirty days (or such shorter time period that may exist prior to the date of
the meeting) after the Nominator has submitted the aforesaid items to the
Secretary of the Company, the Secretary of the Company shall determine whether
the evidence of the Nominator's status as a shareholder submitted by the
Nominator is reasonably satisfactory and shall notify the Nominator in writing
of his determination. The failure of the Secretary of the Company to find such
evidence reasonably satisfactory, or the failure of the Nominator to submit the
requisite information in the form or within the time indicated, shall make the
person to be nominated ineligible for nomination at the meeting at which such
person is proposed to be nominated. The presiding person at each meeting of
shareholders shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures prescribed by
these Bylaws, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded. Beneficial ownership shall
be determined in accordance with Rule 13d-3 under the Exchange Act.
Section 4. Place of Meetings and Meetings by Telephone. Meetings of
the Board of Directors may be held either within or without the State of Texas,
at whatever place is specified by the officer calling the meeting. Meetings of
the Board of Directors may also be held by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other. Participation in such a meeting by means of
conference telephone or similar communications equipment shall constitute
presence in person at such meeting, except where a director participates in a
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened. In the
absence of specific designation by the officer calling the meeting, the
meetings shall be held at the principal office of the Company.
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Section 5. Regular Meetings. The Board of Directors shall meet each
year immediately following the annual meeting of the shareholders for the
transaction of such business as may properly be brought before the meeting.
The Board of Directors shall also meet regularly at such other times as shall
be designated by the Board of Directors. No notice of any kind to either
existing or newly elected members of the Board of Directors for such annual or
regular meetings shall be necessary.
Section 6. Special Meetings. Special meetings of the Board of
Directors may be held at any time upon the call of the Chairman of the Board,
if there is one, the Chief Executive Officer, if there is one, the President or
the Secretary of the Company or a majority of the directors then in office.
Notice shall be sent by mail, facsimile or telegram to the last known address
of the director at least two days before the meeting, or oral notice may be
substituted for such written notice if received not later than the day
preceding such meeting. Notice of the time, place and purpose of such meeting
may be waived in writing before or after such meeting, and shall be equivalent
to the giving of notice. Attendance of a director at such meeting shall also
constitute a waiver of notice thereof, except where he attends for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened. Except as otherwise provided by
these Bylaws, neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
Section 7. Quorum and Voting. Except as otherwise provided by law,
the Articles of Incorporation of the Company or these Bylaws, a majority of the
number of directors fixed in the manner provided in these Bylaws as from time
to time amended shall constitute a quorum for the transaction of business.
Except as otherwise provided by law, the Articles of Incorporation of the
Company or these Bylaws, the affirmative vote of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors. Any regular or special directors' meeting may be adjourned from
time to time by those present, whether a quorum is present or not.
Section 8. Compensation. Directors shall receive such compensation
for their services as shall be determined by the Board of Directors.
Section 9. Removal. No director of the Company shall be removed from
his office as a director by vote or other action of the shareholders or
otherwise except (a) with cause, as defined below, by the affirmative vote of
the holders of at least a majority of the voting power of all outstanding
shares of capital stock of the Company entitled to vote in the election of
directors, voting together as a single class, or (b) without cause by (i) the
affirmative vote of at least 80% of all directors then in office at any regular
or special meeting of the Board of Directors called for that purpose or (ii)
the affirmative vote of the holders of at least 80% of the voting power of all
outstanding shares of capital stock of the Company entitled to vote in the
election of directors, voting together as a single class.
Except as may otherwise be provided by law, cause for removal of a
director shall be construed to exist only if: (a) the director whose removal
is proposed has been convicted, or where
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a director is granted immunity to testify where another has been convicted, of
a felony by a court of competent jurisdiction and such conviction is no longer
subject to direct appeal; (b) such director has been found by the affirmative
vote of at least 80% of all directors then in office at any regular or special
meeting of the Board of Directors called for that purpose or by a court of
competent jurisdiction to have been negligent or guilty of misconduct in the
performance of his duties to the Company in a matter of substantial importance
to the Company; or (c) such director has been adjudicated by a court of
competent jurisdiction to be mentally incompetent, which mental incompetency
directly affects his ability as a director of the Company.
Notwithstanding the first paragraph of this Section 9, whenever
holders of outstanding shares of Preference Stock are entitled to elect members
of the Board of Directors pursuant to the provisions of Section 6 of Division A
of Article VI of the Articles of Incorporation of the Company, any director of
the Company may be removed in accordance with the provisions of such section.
No proposal by a shareholder to remove a director of the Company,
regardless of whether such director was elected by holders of outstanding
shares of Preference Stock (or elected by such directors to fill a vacancy),
shall be voted upon at a meeting of the shareholders unless such shareholder
shall have delivered or mailed in a timely manner (as set forth in this Section
9) and in writing to the Secretary of the Company (a) notice of such proposal,
(b) a statement of the grounds, if any, on which such director is proposed to
be removed, (c) evidence, reasonably satisfactory to the Secretary of the
Company, of such shareholder's status as such and of the number of shares of
each class of the capital stock of the Company beneficially owned by such
shareholder, (d) a list of the names and addresses of other beneficial owners
of shares of the capital stock of the Company, if any, with whom such
shareholder is acting in concert, and of the number of shares of each class of
the capital stock of the Company beneficially owned by each such beneficial
owner, and (e) an opinion of counsel, which counsel and the form and substance
of which opinion shall be reasonably satisfactory to the Board of Directors of
the Company (excluding the director proposed to be removed), to the effect
that, if adopted at a duly called special or annual meeting of the shareholders
of the Company by the required vote as set forth in the first paragraph of this
Section 9, such removal would not be in conflict with the laws of the State of
Texas, the Articles of Incorporation of the Company or these Bylaws. To be
timely in connection with an annual meeting of shareholders, a shareholder's
notice and other aforesaid items shall be delivered to or mailed and received
at the principal executive offices of the Company not less than ninety nor more
than 180 days prior to the date on which the immediately preceding year's
annual meeting of shareholders was held. To be timely in connection with the
removal of any director at a special meeting of the shareholders, a
shareholder's notice and other aforesaid items shall be delivered to or mailed
and received at the principal executive offices of the Company not less than
forty days nor more than sixty days prior to the date of such meeting;
provided, however, that in the event that less than forty-seven days' notice or
prior public disclosure of the date of the special meeting of shareholders is
given or made to the shareholders, the shareholder's notice and other aforesaid
items to be timely must be so received not later than the close of business on
the seventh day following the day on which such notice of date of the meeting
was mailed or such public disclosure was made. Within thirty days (or such
shorter period that may exist prior to the date of the meeting) after such
shareholder shall have
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delivered the aforesaid items to the Secretary of the Company, the Secretary
and the Board of Directors of the Company shall respectively determine whether
the items to be ruled upon by them are reasonably satisfactory and shall notify
such shareholder in writing of their respective determinations. If such
shareholder fails to submit a required item in the form or within the time
indicated, or if the Secretary or the Board of Directors of the Company
determines that the items to be ruled upon by them are not reasonably
satisfactory, then such proposal by such shareholder may not be voted upon by
the shareholders of the Company at such meeting of shareholders. The presiding
person at each meeting of shareholders shall, if the facts warrant, determine
and declare to the meeting that a proposal to remove a director of the Company
was not made in accordance with the procedures prescribed by these Bylaws, and
if he should so determine, he shall so declare to the meeting and the defective
proposal shall be disregarded. Beneficial ownership shall be determined as
specified in accordance with Rule 13d-3 under the Exchange Act.
Section 10. Executive and Other Committees. The Board of Directors,
by resolution or resolutions adopted by a majority of the full Board of
Directors, may designate one or more members of the Board of Directors to
constitute an Executive Committee, and one or more other committees, which
shall in each case be comprised of such number of directors as the Board of
Directors may determine from time to time. Subject to such restrictions as may
be contained in the Company's Articles of Incorporation or that may be imposed
by the TBCA, any such committee shall have and may exercise such powers and
authority of the Board of Directors in the management of the business and
affairs of the Company as the Board of Directors may determine by resolution
and specify in the respective resolutions appointing them, or as permitted by
applicable law, including, without limitation, the power and authority to (a)
authorize a distribution, (b) authorize the issuance of shares of the Company
and (c) exercise the authority of the Board of Directors vested in it pursuant
to Article 2.13 of the TBCA or such successor statute as may be in effect from
time to time. Each duly- authorized action taken with respect to a given
matter by any such duly-appointed committee of the Board of Directors shall
have the same force and effect as the action of the full Board of Directors and
shall constitute for all purposes the action of the full Board of Directors
with respect to such matter.
The designation of any such committee and the delegation thereto of
authority shall not operate to relieve the Board of Directors, or any member
thereof, of any responsibility imposed upon it or him by law, nor shall such
committee function where action of the Board of Directors cannot be delegated
to a committee thereof under applicable law. The Board of Directors shall have
the power at any time to change the membership of any such committee and to
fill vacancies in it. A majority of the members of any such committee shall
constitute a quorum. The Board of Directors shall name a chairman at the time
it designates members to a committee. Each such committee shall appoint such
subcommittees and assistants as it may deem necessary. Except as otherwise
provided by the Board of Directors, meetings of any committee shall be
conducted in accordance with the provisions of Sections 4 and 6 of this Article
III as the same shall from time to time be amended. Any member of any such
committee elected or appointed by the Board of Directors may be removed by the
Board of Directors whenever in its judgment the best interests of the Company
will be served
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thereby, but such removal shall be without prejudice to the contract rights, if
any, of the person so removed. Election or appointment of a member of a
committee shall not of itself create contract rights.
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Company shall consist of a
President and a Secretary and such other officers and agents as the Board of
Directors may from time to time elect or appoint, which may include, without
limitation, a Chairman of the Board, a Chief Executive Officer, one or more
Vice Presidents (whose seniority and titles, including Executive Vice
Presidents, Senior Vice Presidents and such assistant or subordinate Vice
Presidents, may be specified by the Board of Directors), a Treasurer, one or
more Assistant Treasurers, and one or more Assistant Secretaries. Each officer
shall hold office until his successor shall have been duly elected and shall
qualify or until his death or until he shall resign or shall have been removed
in the manner hereinafter provided. Any two or more offices may be held by the
same person. Except for the Chairman of the Board, if any, no officer need be
a director.
Section 2. Vacancies; Removal. Whenever any vacancies shall occur in
any office by death, resignation, increase in the number of offices of the
Company, or otherwise, the officer so elected shall hold office until his
successor is chosen and qualified. The Board of Directors may at any time
remove any officer of the Company, whenever in its judgment the best interests
of the Company will be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Election
or appointment of an officer or agent shall not of itself create contract
rights.
Section 3. Powers and Duties of Officers. The officers of the
Company shall have such powers and duties as generally pertain to their offices
as well as such powers and duties as from time to time shall be conferred by
the Board of Directors.
ARTICLE V
INDEMNIFICATION
Section 1. General. The Company shall indemnify and hold harmless
the Indemnitee (as this and all other capitalized words are defined in this
Article or in Article 2.02-1 of the TBCA), to the fullest extent permitted, or
not prohibited, by the TBCA or other applicable law as the same exists or may
hereafter be amended (but in the case of any such amendment, with respect to
Matters occurring before such amendment, only to the extent that such amendment
permits the Company to
Page 13 of 20
<PAGE> 14
provide broader indemnification rights than said law permitted the Company to
provide prior to such amendment). The provisions set forth below in this
Article are provided as means of furtherance and implementation of, and not in
limitation on, the obligation expressed in this Section 1.
Section 2. Advancement or Reimbursement of Expenses. The rights of
the Indemnitee provided under Section 1 of this Article shall include, but not
be limited to, the right to be indemnified and to have Expenses advanced
(including the payment of expenses before final disposition of a Proceeding) in
all Proceedings to the fullest extent permitted, or not prohibited, by the TBCA
or other applicable law. If the Indemnitee is not wholly successful, on the
merits or otherwise, in a Proceeding, but is successful, on the merits or
otherwise, as to any Matter in such Proceeding, the Company shall indemnify the
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf relating to each Matter. The termination of any Matter in a
Proceeding by dismissal, with or without prejudice, shall be deemed to be a
successful result as to such Matter. In addition, to the extent the Indemnitee
is, by reason of his Corporate Status, a witness or otherwise participates in
any Proceeding at a time when he is not named a defendant or respondent in the
Proceeding, he shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection therewith. The
Indemnitee shall be advanced Expenses, within ten days after any request for
such advancement, to the fullest extent permitted, or not prohibited, by
Article 2.02-1 of the TBCA; provided that the Indemnitee has provided to the
Company all affirmations, acknowledgments, representations and undertakings
that may be required of the Indemnitee by Article 2.02-1 of the TBCA.
Section 3. Determination of Request. Upon written request to the
Company by an Indemnitee for indemnification pursuant to these Bylaws, a
determination, if required by applicable law, with respect to an Indemnitee's
entitlement thereto shall be made in accordance with Article 2.02-1 of the
TBCA; provided, however, that notwithstanding the foregoing, if a Change in
Control shall have occurred, such determination shall be made by Special Legal
Counsel selected by the Indemnitee, unless the Indemnitee shall request that
such determination be made in accordance with Article 2.02-1F (1) or (2). The
Company shall pay any and all reasonable fees and expenses of Special Legal
Counsel incurred in connection with any such determination. If a Change in
Control shall have occurred, the Indemnitee shall be presumed (except as
otherwise expressly provided in this Article) to be entitled to
indemnification under this Article upon submission of a request to the Company
for indemnification, and thereafter the Company shall have the burden of proof
in overcoming that presumption in reaching a determination contrary to that
presumption. The presumption shall be used by Special Legal Counsel, or such
other person or persons determining entitlement to indemnification, as a basis
for a determination of entitlement to indemnification unless the Company
provides information sufficient to overcome such presumption by clear and
convincing evidence or the investigation, review and analysis of Special Legal
Counsel or such other person or persons convinces him or them by clear and
convincing evidence that the presumption should not apply.
Section 4. Effect of Certain Proceedings. The termination of any
Proceeding or of any Matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or
Page 14 of 20
<PAGE> 15
its equivalent, shall not (except as otherwise expressly provided in this
Article) of itself adversely affect the right of the Indemnitee to
indemnification or create a presumption that (a) the Indemnitee did not conduct
himself in good faith and in a manner which he reasonably believed, in the case
of conduct in his official capacity as a director of the Company, to be in the
best interests of the Company, or, in all other cases, that at least his
conduct was not opposed to the Company's best interests, or (b) with respect to
any criminal Proceeding, that the Indemnitee had reasonable cause to believe
that his conduct was unlawful.
Section 5. Expenses of Enforcement of Article. In the event that an
Indemnitee, pursuant to this Article, seeks a judicial adjudication to enforce
his rights under, or to recover damages for breach of, rights created under or
pursuant to this Article, the Indemnitee shall be entitled to recover from the
Company, and shall be indemnified by the Company against, any and all Expenses
actually and reasonably incurred by him in such judicial adjudication but only
if he prevails therein. If it shall be determined in said judicial
adjudication that the Indemnitee is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by
Indemnitee in connection with such judicial adjudication shall be reasonably
prorated in good faith by counsel for the Indemnitee. Notwithstanding the
foregoing, if a Change in Control shall have occurred, Indemnitee shall be
entitled to indemnification under this Section regardless of whether indemnitee
ultimately prevails in such judicial adjudication.
Section 6. Nonexclusive Rights. The rights of indemnification and to
receive advancement of Expenses as provided by this Article shall not be deemed
exclusive of any other rights to which the Indemnitee may at any time be
entitled under applicable law, the Articles of Incorporation of the Company,
these Bylaws, agreement, insurance, arrangement, a vote of shareholders or a
resolution of directors, or otherwise. No amendment, alteration or repeal of
this Article or any provision thereof shall be effective as to any Indemnitee
for acts, events and circumstances that occurred, in whole or in part, before
such amendment, alteration or repeal. The provisions of this Article shall
continue as to an Indemnitee whose Corporate Status has ceased and shall inure
to the benefit of his heirs, executors and administrators.
Section 7. Invalidity. If any provision or provisions of this
Article shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby; and, to the
fullest extent possible, the provisions of this Article shall be construed so
as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
Section 8. Definitions. For purposes of this Article:
"Change of Control" means a change in control of the Company
occurring after the date of adoption of these Bylaws in any of the
following circumstances: (a) there shall have occurred an event
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item on any similar
schedule or form) promulgated under the Exchange Act, whether or not
the Company is then subject to such
Page 15 of 20
<PAGE> 16
reporting requirement; (b) any "person" (as such term is used in
Section 13(d) and 14(d) of the Exchange Act), other than a trustee or
other fiduciary holding securities under an employee benefit plan of
the Company or a corporation or other entity owned directly or
indirectly by the shareholders of the Company in substantially the
same proportions as their ownership of stock of the Company, shall
have become the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of the Company's
then outstanding voting securities without prior approval of at least
two-thirds of the members of the Board of Directors in office
immediately prior to such person attaining such percentage interest;
(c) the Company is a party to a merger, consolidation, share exchange,
sale of assets or other reorganization, or a proxy contest, as a
consequence of which members of the Board of Directors in office
immediately prior to such transaction or event constitute less than a
majority of the Board of Directors thereafter; (d) during any fifteen
month period, individuals who at the beginning of such period
constituted the Board of Directors (including for this purpose any new
director whose election or nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of
such period) cease for any reason to constitute at least a majority of
the Board of Directors.
"Corporate Status" means the status of a person who is or was
a director, officer, partner, venturer, proprietor, trustee, employee
(including an employee acting in his Designated Professional
Capacity), or agent or similar functionary of the Company or of any
other foreign or domestic corporation, partnership, joint venture,
sole proprietorship, trust, employee benefit plan or other enterprise
which such person is or was serving in such capacity at the request of
the Company. The Company hereby acknowledges that unless and until
the Company provides the Indemnitee with written notice to the
contrary, the Indemnitee's service as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary
of an Affiliate of the Company shall be conclusively presumed to be at
the Company's request. An Affiliate of the Company shall be deemed to
be (a) any foreign or domestic corporation in which the Company owns
or controls, directly or indirectly, 5% or more of the shares entitled
to be voted in the election of directors of such corporation; (b) any
foreign or domestic partnership, joint venture, proprietorship or
other enterprise in which the Company owns or controls, directly or
indirectly, 5% or more of the revenue interests in such partnership,
joint venture, proprietorship or other enterprise; or (c) any trust or
employee benefit plan the beneficiaries of which include the Company,
any Affiliate of the Company as defined in the foregoing clauses (a)
and (b) or any of the directors, officers, partners, venturers,
proprietors, employees, agents or similar functionaries of the Company
or of such Affiliates of the Company.
"Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness
fees, travel expenses, duplicating costs, printing and binding costs,
telephone charges, postage, delivery service fees, and all other
disbursements or expenses of the types customarily incurred in
connection with prosecuting, defending,
Page 16 of 20
<PAGE> 17
preparing to prosecute or defend, investigating, or being or preparing
to be a witness in a Proceeding.
"Indemnitee" includes any person who is, or is threatened to
be made, a witness in or a party to any Proceeding as described in
Section 1 or 2 of this Article by reason of his Corporate Status.
"Matter" is a claim, a material issue, or a substantial
request for relief.
"Proceeding" includes any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution proceeding,
investigation, administrative hearing and any other proceeding,
whether civil, criminal, administrative, investigative or other, any
appeal in such action, suit, arbitration, proceeding or hearing, or
any inquiry or investigation, whether conducted by or on behalf of the
Company, a subsidiary of the Company or any other party, formal or
informal, that the Indemnitee in good faith believes might lead to the
institution of any such action, suit, arbitration, proceeding,
investigation or hearing, except one initiated by an Indemnitee
pursuant to Section 5 of this Article.
"Special Legal Counsel" means a law firm, or member of a law
firm, that is experienced in matters of corporation law and neither
presently is, nor in the five years previous to his selection or
appointment has been, retained to represent: (a) the Company or the
Indemnitee in any matter material to either such party; (b) any other
party to the Proceeding giving rise to a claim for indemnification
hereunder; or (c) the beneficial owner, directly or indirectly, of
securities of the Company representing 30% or more of the combined
voting power of the Company's then outstanding voting securities.
Notwithstanding the foregoing, the term "Special Legal Counsel" shall
not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of
interest in representing either the Company or the Indemnitee in an
action to determine the Indemnitee's rights to indemnification under
these Bylaws.
For the purposes of this Article, an employee acting in his
"Designated Professional Capacity" shall include, but not be limited
to, a physician, nurse, psychologist or therapist, registered
surveyor, registered engineer, registered architect, attorney,
certified public accountant or other person who renders such
professional services within the course and scope of his employment,
who is licensed by appropriate regulatory authorities to practice such
profession and who, while acting in the course of such employment,
committed or is alleged to have committed any negligent acts, errors
or omissions in rendering such professional services at the request of
the Company or pursuant to his employment (including, without
limitation, rendering written or oral opinions to third parties).
Section 9. Notice. Any communication required or permitted to the
Company under this Article shall be addressed to the Secretary of the Company
and any such communication to the
Page 17 of 20
<PAGE> 18
Indemnitee shall be addressed to his home address unless he specifies otherwise
and shall be personally delivered or delivered by overnight mail or courier
delivery.
Section 10. Insurance and Self-Insurance Arrangements. The Company
may procure or maintain insurance or other similar arrangements, at its
expense, to protect itself and any Indemnitee against any expense, liability or
loss asserted against or incurred by such person, incurred by him in such a
capacity or arising out of his Corporate Status as such a person, whether or
not the Company would have the power to indemnify such person against such
expense or liability. In considering the cost and availability of such
insurance, the Company (through the exercise of the business judgment of its
directors and officers) may, from time to time, purchase insurance which
provides for any and all of (a) deductibles, (b) limits on payments required to
be made by the insurer, or (c) coverage which may not be as comprehensive as
that previously included in insurance purchased by the Company. The purchase
of insurance with deductibles, limits on payments and coverage exclusions will
be deemed to be in the best interest of the Company but may not be in the best
interest of certain of the persons covered thereby. As to the Company,
purchasing insurance with deductibles, limits on payments, and coverage
exclusions is similar to the Company's practice of self-insurance in other
areas. In order to protect the Indemnitees who would otherwise be more fully
or entirely covered under such policies, the Company shall indemnify and hold
each of them harmless as provided in Section 1 or 2 of this Article, without
regard to whether the Company would otherwise be entitled to indemnify such
officer or director under the other provisions of this Article, or under any
law, agreement, vote of shareholders or directors or other arrangement, to the
extent (i) of such deductibles, (ii) of amounts exceeding payments required to
be made by an insurer or (iii) that prior policies of officer's and director's
liability insurance held by the Company or its predecessors would have provided
for payment to such officer or director. Notwithstanding the foregoing
provision of this Section, no Indemnitee shall be entitled to indemnification
for the results of such person's conduct that is intentionally adverse to the
interests of the Company. This Section is authorized by Section 2.02-1(R) of
the TBCA as in effect on May 1, 1996, and further is intended to establish an
arrangement of self-insurance pursuant to that section.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 1. Offices. The principal office of the Company shall be
located in Houston, Texas, unless and until changed by resolution of the Board
of Directors. The Company may also have offices at such other places as the
Board of Directors may designate from time to time, or as the business of the
Company may require. The principal office and registered office may be, but
need not be, the same.
Section 2. Resignations. Any director or officer may resign at any
time. Such resignations shall be made in writing and shall take effect at the
time specified therein, or, if no time be specified, at the time of its receipt
by the Chairman of the Board, if there is one, the Chief Executive Officer,
Page 18 of 20
<PAGE> 19
if there is one, the President or the Secretary. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation.
Section 3. Seal. The seal of the Company shall be circular in form,
with the name "HOUSTON INDUSTRIES INCORPORATED."
Section 4. Separability. If one or more of the provisions of these
Bylaws shall be held to be invalid, illegal or unenforceable, such invalidity,
illegality or unenforceability shall not affect any other provision hereof and
these Bylaws shall be construed as if such invalid, illegal or unenforceable
provision or provisions had never been contained herein.
ARTICLE VII
AMENDMENT OF BYLAWS
Section 1. Vote Requirements. The Board of Directors shall have the
power to alter, amend or repeal the Bylaws or adopt new Bylaws by the
affirmative vote of at least 80% of all directors then in office at any regular
or special meeting of the Board of Directors, subject to repeal or change by
the affirmative vote of the holders of at least 80% of the voting power of all
the shares of the Company entitled to vote in the election of directors, voting
together as a single class.
Section 2. Shareholder Proposals. No proposal by a shareholder made
pursuant to Section 1 of this Article VII may be voted upon at a meeting of
shareholders unless such shareholder shall have delivered or mailed in a timely
manner (as set forth in this Section 2) and in writing to the Secretary of the
Company (a) notice of such proposal and the text of the proposed alteration,
amendment or repeal, (b) evidence reasonably satisfactory to the Secretary of
the Company, of such shareholder's status as such and of the number of shares
of each class of capital stock of the Company of which such shareholder is the
beneficial owner, (c) a list of the names and addresses of other beneficial
owners of shares of the capital stock of the Company, if any, with whom such
shareholder is acting in concert, and the number of shares of each class of
capital stock of the Company beneficially owned by each such beneficial owner
and (d) an opinion of counsel, which counsel and the form and substance of
which opinion shall be reasonably satisfactory to the Board of Directors of the
Company, to the effect that the Bylaws (if any) resulting from the adoption of
such proposal would not be in conflict with the Articles of Incorporation of
the Company or the laws of the State of Texas. To be timely in connection with
an annual meeting of shareholders, a shareholder's notice and other aforesaid
items shall be delivered to or mailed and received at the principal executive
offices of the Company not less than ninety nor more than 180 days prior to the
date on which the immediately preceding year's annual meeting of shareholders
was held. To be timely in connection with the voting on any such proposal at a
special meeting of the shareholders, a shareholder's notice and other aforesaid
items shall be delivered to or mailed and received at the principal executive
offices of the Company not less than forty days nor more than sixty days prior
to the date of such meeting; provided, however, that in the event that less
than forty-seven days' notice or prior public disclosure
Page 19 of 20
<PAGE> 20
of the date of the special meeting of the shareholders is given or made to the
shareholders, the shareholder's notice and other aforesaid items to be timely
must be so received not later than the close of business on the seventh day
following the day on which such notice of date of the meeting was mailed or
such public disclosure was made. Within thirty days (or such shorter period
that may exist prior to the date of the meeting) after such shareholder shall
have submitted the aforesaid items, the Secretary and the Board of Directors of
the Company shall respectively determine whether the items to be ruled upon by
them are reasonably satisfactory and shall notify such shareholder in writing
of their respective determinations. If such shareholder fails to submit a
required item in the form or within the time indicated, or if the Secretary or
the Board of Directors of the Company determines that the items to be ruled
upon by them are not reasonably satisfactory, then such proposal by such
shareholder may not be voted upon by the shareholders of the Company at such
meeting of shareholders. The presiding person at each meeting of shareholders
shall, if the facts warrant, determine and declare to the meeting that a
proposal made pursuant to Section 1 of this Article VII was not made in
accordance with the procedures prescribed by these Bylaws, and if he should so
determine, he shall so declare to the meeting and the defective proposal shall
be disregarded. Beneficial ownership shall be determined in accordance with
Rule 13d-3 under the Exchange Act.
Page 20 of 20
<PAGE> 1
Exhibit 11
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Primary Earnings (Loss) Per Share:
(1) Weighted average shares of
common stock outstanding . . . . . . . . . . . . . . . . . . . . . . . 233,689,318 248,466,091
(2) Effect of issuance of shares from assumed
exercise of stock options
(treasury stock method) . . . . . . . . . . . . . . . . . . . . . . . . 31,761 21,668
------------ ------------
(3) Weighted average shares . . . . . . . . . . . . . . . . . . . . . . . . . . 233,721,079 248,487,759
============ ============
(4) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,620 $ (16,740)
(5) Primary earnings (loss) per share
(line 4 divided by line 3) . . . . . . . . . . . . . . . . . . . . . . $ .26 $ (.07)
Fully Diluted Earnings (Loss) Per Share:
(6) Weighted average shares per
computation (line 3) . . . . . . . . . . . . . . . . . . . . . . . . . 233,721,079 248,487,759
(7) Shares applicable to options
included (line 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,761) (21,668)
(8) Dilutive effect of stock options based on the
average price for the quarter or quarter-end
price, whichever is higher, of $22.50 and
$22.75 for 1997 and 1996, respectively
(treasury stock method) . . . . . . . . . . . . . . . . . . . . . . . . 31,761 21,668
------------ ------------
(9) Weighted average shares . . . . . . . . . . . . . . . . . . . . . . . . . . 233,721,079 248,487,759
============ ============
(10) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,620 $ (16,740)
(11) Fully diluted earnings (loss) per
share (line 10 divided by line 9) . . . . . . . . . . . . . . . . . . $ .26 $ (.07)
</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 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>
Three Twelve
Months Ended Months Ended
March 31, 1997 March 31, 1997
------------------ ------------------
<S> <C> <C>
Fixed Charges as Defined:
(1) Interest on Long-Term Debt . . . . . . . . . . . $ 62,801 $ 267,648
(2) Other Interest . . . . . . . . . . . . . . . . . 16,410 49,718
(3) Distributions on HL&P Trust Securities . . . . . 4,519 4,519
(4) Preferred Dividends Factor
of Subsidiary . . . . . . . . . . . . . . . 2,848 26,721
(5) Interest Component of Rentals
Charged to Operating Expense . . . . . . . . 211 768
------------------ ------------------
(6) Total Fixed Charges . . . . . . . . . . . . . . $ 86,789 $ 349,374
================== ==================
Earnings as Defined:
(7) Net Income . . . . . . . . . . . . . . . . . . . $ 59,620 $ 481,304
(8) Income Tax . . . . . . . . . . . . . . . . . . . 20,482 230,558
(9) Fixed Charges (line 6) . . . . . . . . . . . . . 86,789 349,374
------------------ ------------------
(10) Income from Continuing Operations
Before Income Taxes and
Fixed Charges . . . . . . . . . . . . . . . $ 166,891 $ 1,061,236
================== ==================
Preferred Dividends Factor of
Subsidiary:
(11) Preferred Stock Dividends of
Subsidiary . . . . . . . . . . . . . . . . . $ 2,125 $ 18,055
(12) Ratio of Pre-Tax Income (Loss) from
Continuing Operations to Income
(Loss) from Continuing Operations
(line 7 plus line 8 divided
by line 7) . . . . . . . . . . . . . . . . . 1.34 1.48
------------------ ------------------
(13) Preferred Dividends Factor of
Subsidiary (line 11 times
line 12) . . . . . . . . . . . . . . . . . . $ 2,848 $ 26,721
================== ==================
Ratio of Earnings to Fixed Charges
(line 10 divided by line 6) . . . . . . . . . . . . . . 1.92 3.04
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000202131
<NAME> HOUSTON INDUSTRIES INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 8,601,262
<OTHER-PROPERTY-AND-INVEST> 1,636,003
<TOTAL-CURRENT-ASSETS> 325,407
<TOTAL-DEFERRED-CHARGES> 1,141,235
<OTHER-ASSETS> 516,232
<TOTAL-ASSETS> 12,220,139
<COMMON> 1,844,786
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 1,969,454
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,814,240
0
9,740
<LONG-TERM-DEBT-NET> 3,025,105
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 5,000
<COMMERCIAL-PAPER-OBLIGATIONS> 1,434,622
<LONG-TERM-DEBT-CURRENT-PORT> 35,130
25,700
<CAPITAL-LEASE-OBLIGATIONS> 1,475
<LEASES-CURRENT> 2,224
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,866,903
<TOT-CAPITALIZATION-AND-LIAB> 12,220,139
<GROSS-OPERATING-REVENUE> 878,101
<INCOME-TAX-EXPENSE> 20,482
<OTHER-OPERATING-EXPENSES> 721,885
<TOTAL-OPERATING-EXPENSES> 721,885
<OPERATING-INCOME-LOSS> 156,216
<OTHER-INCOME-NET> 8,641
<INCOME-BEFORE-INTEREST-EXPEN> 164,857
<TOTAL-INTEREST-EXPENSE> 82,630
<NET-INCOME> 61,745
2,125
<EARNINGS-AVAILABLE-FOR-COMM> 59,620
<COMMON-STOCK-DIVIDENDS> 87,656
<TOTAL-INTEREST-ON-BONDS> 52,533<F1>
<CASH-FLOW-OPERATIONS> 38,694
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
<FN>
<F1>TOTAL ANNUAL INTEREST CHARGES ON ALL BONDS FOR YEAR-TO-DATE 3/31/97.
</FN>
</TABLE>
<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>
Three Twelve
Months Ended Months Ended
March 31, 1997 March 31, 1997
------------------- ------------------
<S> <C> <C>
Fixed Charges as Defined:
(1) Interest on Long-Term Debt . . . . . . . . . . . . $ 52,533 $ 216,894
(2) Other Interest . . . . . . . . . . . . . . . . . . 2,212 12,565
(3) Distributions on Trust Securities. . . . . . . . . 4,519 4,519
(4) Amortization of (Premium)
Discount . . . . . . . . . . . . . . . . . . . 2,294 9,099
(5) Interest Component of Rentals
Charged to Operating Expense . . . . . . . . . . . 211 768
------------------ ------------------
(6) Total Fixed Charges . . . . . . . . . . . $ 61,769 $ 243,845
================== ==================
Earnings as Defined:
(7) Net Income (Loss) . . . . . . . . . . . . . . . . $ 63,164 $ 496,136
------------------ ------------------
Federal Income Taxes:
(8) Current . . . . . . . . . . . . . . . . . . . . . 29,254 231,079
(9) Deferred (Net) . . . . . . . . . . . . . . . . . . 3,876 35,859
------------------ ------------------
(10) Total Federal Income Taxes . . . . . . . . . . . . 33,130 266,938
------------------ ------------------
(11) Fixed Charges (line 6) . . . . . . . . . . . . . . 61,769 243,845
------------------ ------------------
(12) Earnings Before Income Taxes and
Fixed Charges (line 7 plus
line 10 plus line 11) . . . . . . . . . . . . $ 158,063 $ 1,006,919
================== ==================
Ratio of Earnings to Fixed Charges
(line 12 divided by line 6) . . . . . . . . . . . . . . 2.56 4.13
Preferred Dividends Requirements:
(13) Preferred Dividends . . . . . . . . . . . . . . . $ 2,125 $ 18,055
(14) Less Tax Deduction for
Preferred Dividends . . . . . . . . . . . . . 14 54
------------------ ------------------
(15) Total . . . . . . . . . . . . . . . . . . 2,111 18,001
(16) Ratio of Pre-Tax Income (Loss) to Net
Income (Loss) (line 7 plus line 10
divided by line 7) . . . . . . . . . . . . . . 1.52 1.54
------------------ ------------------
(17) Line 15 times line 16 . . . . . . . . . . . . . . 3,209 27,722
(18) Add Back Tax Deduction
(line 14) . . . . . . . . . . . . . . . . . . 14 54
------------------ ------------------
(19) Preferred Dividends Factor . . . . . . . . . . . . $ 3,223 $ 27,776
================== ==================
(20) Fixed Charges (line 6) . . . . . . . . . . . . . . $ 61,769 $ 243,845
(21) Preferred Dividends Factor
(line 19) . . . . . . . . . . . . . . . . . . 3,223 27,776
------------------ ------------------
(22) Total . . . . . . . . . . . . . . . . . . $ 64,992 $ 271,621
================== ==================
Ratio of Earnings to Fixed Charges and
Preferred Dividends
(line 12 divided by line 22) . . . . . . . . . . . . . . 2.43 3.71
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000048732
<NAME> HOUSTON LIGHTING & POWER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 8,601,262
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 281,543
<TOTAL-DEFERRED-CHARGES> 1,092,007
<OTHER-ASSETS> 515,003
<TOTAL-ASSETS> 10,489,815
<COMMON> 1,675,927
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 2,206,730
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,882,657
0
9,740
<LONG-TERM-DEBT-NET> 2,675,961
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 327,722
<LONG-TERM-DEBT-CURRENT-PORT> 35,130
25,700
<CAPITAL-LEASE-OBLIGATIONS> 1,475
<LEASES-CURRENT> 2,224
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,529,206
<TOT-CAPITALIZATION-AND-LIAB> 10,489,815
<GROSS-OPERATING-REVENUE> 856,534
<INCOME-TAX-EXPENSE> 33,322
<OTHER-OPERATING-EXPENSES> 697,017
<TOTAL-OPERATING-EXPENSES> 730,339
<OPERATING-INCOME-LOSS> 126,195
<OTHER-INCOME-NET> (4,867)
<INCOME-BEFORE-INTEREST-EXPEN> 121,328
<TOTAL-INTEREST-EXPENSE> 58,164
<NET-INCOME> 63,164
2,125
<EARNINGS-AVAILABLE-FOR-COMM> 61,039
<COMMON-STOCK-DIVIDENDS> 82,250
<TOTAL-INTEREST-ON-BONDS> 52,533<F1>
<CASH-FLOW-OPERATIONS> 39,826
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Total annual interest charges on all bonds for year-to-date 3/31/97.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99(A)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(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, 1996
-----------------
(Millions of Dollars)
<S> <C>
Deferred plant costs - net ............................. $ 587
Malakoff and Trinity mine investments .................. 164
Regulatory tax asset - net ............................. 362
Unamortized loss on reacquired debt .................... 116
Deferred debits ........................................ 102
Unamortized investment tax credit ...................... (374)
Accumulated deferred income taxes-regulatory tax asset . (101)
</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 Nos. 71, 101 (Accounting for the
Discontinuation of Application of SFAS No. 71) and 121 (Accounting
for the Impairment of Long- Lived Assets and for Long-Lived Assets
to be Disposed of) 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.
57
<PAGE> 2
(n) 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. For a
description of the Merger, see Note 16 to the Financial
Statements.
(o) 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.
(p) LONG-LIVED ASSETS. Effective January 1, 1996, the Company and
HL&P adopted SFAS No. 121. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used
or disposed of by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company and HL&P
have determined that no impairment loss need be recognized for
applicable assets of continuing operations as of December 31,
1996. This conclusion, however, may change in the future as
competition influences wholesale and retail pricing in the
electric utility industry.
58
<PAGE> 3
(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 MW 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, 1996, HL&P's investment in the South Texas Project
was $2.0 billion (net of $503 million accumulated depreciation).
HL&P's investment in nuclear fuel (including AFUDC) was $65
million (net of $176 million amortization) as of such date.
(b) REGULATORY PROCEEDINGS AND 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.
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. 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 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.
In July 1996, HL&P and the City of San Antonio, acting through
the 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, (ii) a cash payment by HL&P to CPS of $75 million, (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 guarantees 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 operating agreement. In 1996, savings
generated for CPS' account for a partial year of joint operations
were approximately $14 million.
The operating company (OPCO) which is being formed to replace
HL&P as project manager of the South Texas Project will be a
Texas non-profit corporation. Regulatory and governmental
approvals are being sought for the implementation of OPCO. Once
this process is completed, HL&P's employees working at the South
Texas Project will become employees of OPCO and OPCO will assume
responsibility for managing the South Texas Project. Oversight
will be provided by an Owners' Committee and OPCO's board of
directors, under the direction of directors appointed by each of
the co-owners.
In 1996, the capability factor at the South Texas Project
improved to 93.9 percent from 87.7 percent in 1995 (the 1995
median capability factor for U.S. nuclear facilities was 75.9
percent).
59
<PAGE> 4
In 1996, the Nuclear Regulatory Commission (NRC) graded the South
Texas Project "superior" in the areas of maintenance and support
and "good" in areas of operations and engineering in the NRC's
most recent Systematic Assessment of Licensees Performance.
Between June 1993 and February 1995, the South Texas Project had
been listed on the NRC's "watch list" of plants with weaknesses
that warrant increased NRC regulatory attention.
(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 1996),
HL&P and the other owners of the South Texas Project are subject
to assessments, the maximum aggregate assessment under current
policies being $14.8 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 of owners of nuclear power plants, such as the
South Texas Project, was $8.92 billion as of December 1996.
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 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 currently 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
60
<PAGE> 5
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.
(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.
The Rate Case Settlement gives HL&P the option to write down up
to $50 million per year of its investment in the South Texas
Project through December 31, 1999, which write-downs will be
treated under the terms of the Rate Case Settlement as reasonable
and necessary expenses for purposes of reviews of HL&P's earnings
and any rate review proceeding initiated against HL&P. In both
1995 and 1996, HL&P recorded a $50 million pre-tax write down of
its investment in the South Texas Project as amortization
expense. In 1996, HL&P also amortized $50 million (pre-tax) of
its $153 million investment in certain lignite reserves
associated with a canceled generating station. In accordance with
the settlement, HL&P's remaining investment in the canceled
generating station and certain lignite reserves ($164 million
at December 31, 1996) will be amortized fully no later than
December 31, 2002.
(b) RATE CASE APPEALS. The only HL&P rate order currently under
appeal is Docket No. 6668 (the Utility Commission's inquiry into
the prudence of the planning and construction of the South Texas
Project). 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.
In June 1996, the Supreme Court of Texas unanimously upheld the
decision of the 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 canceled generating station.
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.
61
<PAGE> 6
(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 cancelation
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 $194
million in 1997, $200 million in 1998 and $204 million in 1999.
Additionally, minimum payment obligations for lignite mining and
lease agreements are approximately $8 million for 1997, $9
million for 1998 and $9 million for 1999. Collectively, the fixed
price gas supply contracts, which expire in 1997, could amount to
9 percent of HL&P's annual natural gas requirements for 1997.
Minimum payment obligations for both natural gas purchase and
storage contracts are approximately $38 million in 1997, $9
million in 1998 and $9 million in 1999.
HL&P also has commitments to purchase firm capacity from
cogenerators of approximately $22 million in each of the years
1997 through 1999. 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
62
<PAGE> 7
provisions allowing HL&P to suspend or reduce payments and seek
repayment for amounts disallowed.
(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. 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.
In February 1996, the cities of Wharton, Galveston and Pasadena
filed suit, for themselves and a proposed class, against HL&P and
Houston Industries Finance Inc., (formerly a wholly-owned
subsidiary of the Company), citing underpayment of municipal
franchise fees. The principal claim contends that, from 1957 to
the present, franchise fees should have been paid on sales taxes
collected by HL&P and on non-electric receipts as well as on
electric sales. Plaintiffs advance such assertion notwithstanding
that no such claim had been noticed over the previous four
decades. Because all of the franchise ordinances affecting HL&P
expressly impose fees only on electric sales, the Company regards
plaintiffs' allegations as spurious and is aggressively contesting
the matter. With regard to damages, the pleadings make no specific
dollar claim, although one plaintiff-sponsored witness claims to
have calculated damages of $220 million on the theory that
franchise fees are owed on all sales taxes and receipts, electric
or otherwise. The class action aspects of this case are currently
under a stay order by the Texas Supreme Court pending its review
of the class action certifications of the lower courts. The
Company and HL&P cannot estimate a range of possible loss, if any,
from this lawsuit, nor can any assurance be given as to its
ultimate outcome. The case is pending in the District Court of
Harris County, Texas.
63
<PAGE> 8
(16) NORAM MERGER
On December 17, 1996, the shareholders of the Company and NorAm
approved the Merger Agreement under which the Company will merge
into HL&P, and NorAm will merge into a subsidiary of the Company.
Upon consummation of the Merger, HL&P, the surviving corporation
of the Company/HL&P merger, will be renamed "Houston Industries
Incorporated" (Houston) and will continue to conduct HL&P's
electric utility business under HL&P's name. Merger Sub, the
surviving corporation of the NorAm/Merger Sub merger, will be
renamed "NorAm Energy Corp." and will continue to conduct NorAm's
natural gas distribution and transmission business under NorAm's
name. As a result of the Merger, NorAm will become a wholly owned
subsidiary of Houston.
The closing of the Merger is subject to the satisfaction or
waiver of various conditions precedent contained in the Merger
Agreement, including the obtaining of all required governmental
authorizations and consents.
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. If the closing does not occur by May 11, 1997, the
cash consideration (but not the stock consideration) will
increase thereafter by two percent per quarter until the
consummation of the Merger. The increase, if any, will be
calculated pro rata on a daily basis for the period from May 11,
1997, until consummation. The Merger Agreement contains
provisions generally designed to result in 50 percent of the
outstanding shares of NorAm common stock being converted into
stock consideration and 50 percent being converted into cash
consideration.
The Company intends to finance the cash portion of the Merger
consideration (estimated to be approximately $1.25 billion)
through bank borrowings under new bank credit facilities to be
arranged by a newly formed subsidiary of Houston with a group of
commercial banks. As of the date hereof, the term, structure and
provisions of these facilities are being negotiated with
potential lenders and have not been finalized.
The Company and HL&P will account for the Merger as a purchase
and, following consummation of the Merger, will include the
results of operation of NorAm in Houston's consolidated statement
of income.
Unless otherwise stated, the information presented in the
Financial Statements and Notes in this Form 10-K relates solely
to the Company and HL&P without giving effect to the Merger.
64
