<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7629
HOUSTON INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 74-1885573
(State or other jurisdiction of incorporation or
organization) (I.R.S. employer identification number)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-3000
(Address and zip code of principal executive offices) (Registrant's telephone number, including area code)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<C> <C>
Common Stock, without par value, New York Stock Exchange
and associated rights to purchase Chicago Stock Exchange
preference stock London Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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 number)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-1111
(Address and zip code of principal executive offices) (Registrant's telephone number, including area code)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
Preferred stock, cumulative, no par-$4 Series and $9.375 Series.
Indicate by check mark whether each of the registrants: (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
Houston Industries Incorporated was $5,752,350,875 as of March 3, 1997, using
the definition of beneficial ownership contained in Rule 13d-3 promulgated
pursuant to the Securities Exchange Act of 1934 and excluding shares held by
directors and executive officers.
As of March 3, 1997, Houston Industries Incorporated had 246,793,389 shares
of Common Stock outstanding, including 13,131,390 ESOP shares not deemed
outstanding for financial statement purposes. Excluded from the number of shares
of Common Stock outstanding are 16,042,027 shares held by the Company as
treasury stock. As of March 1, 1997, all outstanding shares of Houston Lighting
& Power Company's Common Stock were held, directly or indirectly, by Houston
Industries Incorporated.
Portions of the definitive proxy statement relating to the 1996 Annual
Meeting of Shareholders of Houston Industries Incorporated, which will be filed
within 120 days of December 31, 1996, are incorporated by reference in Item 10,
Item 11, Item 12 and Item 13 of Part III of this Form 10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of each of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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HOUSTON INDUSTRIES INCORPORATED AND
HOUSTON LIGHTING & POWER COMPANY
Form 10-K for the Year Ended December 31, 1996
<TABLE>
<CAPTION>
PART I TABLE OF CONTENTS Page No.
- ------ --------
<S> <C> <C>
Item 1. Business:
The Company and Its Subsidiaries.................................................................. 3
Special Factors................................................................................... 4
Business of HL&P.................................................................................. 4
Business of HI Energy............................................................................. 14
Regulation of the Company......................................................................... 15
Executive Officers of the Company................................................................. 16
Executive Officers of HL&P........................................................................ 18
Item 2. Properties........................................................................................ 19
Item 3. Legal Proceedings................................................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............................................... 21
PART II
- -------
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................... 22
Item 6. Selected Financial Data:
The Company....................................................................................... 23
HL&P.............................................................................................. 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................... 25
Item 8. Financial Statements and Supplementary Data:
Consolidated Financial Statements................................................................. 41
HL&P Financial Statements......................................................................... 50
Notes to Consolidated Financial Statements........................................................ 57
Notes to HL&P Financial Statements................................................................ 79
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................................................... 86
PART III
- --------
Item 10. Directors and Executive Officers of the Company and HL&P.......................................... 87
Item 11. Executive Compensation............................................................................ 88
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 97
Item 13. Certain Relationships and Related Transactions.................................................... 99
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 100
</TABLE>
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THIS COMBINED ANNUAL REPORT ON FORM 10-K IS SEPARATELY FILED BY
HOUSTON INDUSTRIES INCORPORATED (COMPANY) AND HOUSTON LIGHTING & POWER COMPANY
(HL&P). INFORMATION CONTAINED HEREIN RELATING TO HL&P IS FILED BY THE COMPANY
AND SEPARATELY BY HL&P ON ITS OWN BEHALF. HL&P MAKES NO REPRESENTATION AS TO
INFORMATION RELATING TO THE COMPANY (EXCEPT AS IT MAY RELATE TO HL&P), HOUSTON
INDUSTRIES ENERGY, INC. (HI ENERGY) OR ANY OTHER AFFILIATE OR SUBSIDIARY OF THE
COMPANY.
THE MERGER
On December 17, 1996, the shareholders of the Company and NorAm Energy
Corp. (NorAm) approved an Agreement and Plan of Merger (Merger Agreement)
pursuant to which the Company will merge into HL&P, and NorAm will merge into a
subsidiary of the Company (Merger Sub). NorAm is principally engaged in the
distribution and transmission of natural gas, including the gathering, storage
and marketing of natural gas. Upon consummation of the mergers (collectively,
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 Merger Agreement also provides
for alternative merger structures in certain circumstances.
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.
The closing of the Merger is subject to the satisfaction or waiver of
various conditions precedent, including the obtaining of all required
governmental authorizations and consents. For additional information regarding
the Merger, including the status of governmental authorizations with respect
thereto, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--The Merger" in Item 7 of this Report and Note 16 of the
Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report
(Financial Statements).
Unless otherwise stated, the information presented in this Form 10-K
relates solely to the Company and HL&P without giving effect to the Merger.
PART I
ITEM 1. BUSINESS.
THE COMPANY AND ITS SUBSIDIARIES
The Company, incorporated in Texas in 1976, is a holding company
operating principally in the electric utility business. Based on the intrastate
operations of HL&P and the exemptions applicable to affiliates of HI Energy,
the Company is exempt from regulation as a "registered" holding company under
the Public Utility Holding Company Act of 1935 (1935 Act), except with respect
to the acquisition of voting securities of other domestic public utility
companies and utility holding companies. For additional information regarding
the Company's status under the 1935 Act, including the Company's application to
the Securities and Exchange Commission (SEC) for an exemption under Section
3(a)(2) of the 1935 Act in connection with the Merger, see "--Regulation of the
Company--Federal."
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HL&P, incorporated in Texas in 1906, is the principal subsidiary of
the Company and is engaged in the generation, transmission, distribution and
sale of electric energy. HI Energy, a subsidiary of the Company formed in 1993,
participates primarily in the development and acquisition of foreign
independent power projects and the privatization of foreign generating and
distribution facilities. The business and operations of HL&P historically have
accounted for substantially all of the Company's consolidated income from
continuing operations and common stock equity. Following consummation of the
Merger, it is anticipated that HL&P's electric utility operations and business
will continue to account for the predominant portion of the consolidated income
from continuing operations and common stock equity of Houston. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Merger" in Item 7 of this Report.
In connection with the sale of the Company's cable television
subsidiary in 1995, the Company received 1 million shares of Time Warner Inc.
(Time Warner) common stock and 11 million shares of Time Warner convertible
preferred stock, which are recorded on the Company's consolidated balance
sheet at approximately $1 billion. During 1996, the Company received $41.6
million in dividends attributable to these securities. For information regarding
how the Company accounts for these securities, see Note 1(j) to the Financial
Statements.
The Company and HL&P's executive offices are located at Houston
Industries Plaza, 1111 Louisiana, Houston, Texas 77002 (Telephone Number
713-207-3000). As of December 31, 1996, the Company and its subsidiaries had
8,100 full-time employees.
SPECIAL FACTORS
HL&P's electric utility operations are subject to a number of risk
factors, including increasing levels of competition; legislative and regulatory
changes in the basic rules governing electric utility operations and the
uncertainties associated with such changes; new technologies; stringent
environmental regulations and contingencies associated with the ownership and
operation of a nuclear power plant. The Company's involvement, through HI
Energy, in foreign power projects also entails significant political and
financial uncertainties, including currency exchange rate fluctuations,
political instability and potential expropriation. The effects of these and
other factors on the Company's and HL&P's business and operations are
described elsewhere in this Report. See "--Business of HL&P--Competition,"
"--Business of HI Energy" and "--Regulation of the Company" below and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors Affecting Future Earnings of the Company and HL&P"
in Item 7 of this Report.
BUSINESS OF HL&P
SERVICE AREA
HL&P's service area covers a 5,000 square mile area on the Texas Gulf
Coast, including Houston (the nation's fourth largest city). HL&P serves
approximately 1.5 million residential, commercial and industrial customers.
HL&P is a member of the Electric Reliability Council of Texas, Inc. and is
interconnected to a transmission grid encompassing most of the state of Texas.
Although the economy of HL&P's service area encompasses a wide range
of products and services, Houston's economy is centered primarily on energy
sector industries, such as oil companies, petrochemical and refining complexes,
industrial and petrochemical construction firms and natural gas distribution
and processing centers. During the year ended December 31, 1996, energy sector
industries accounted for approximately 32 percent of HL&P's industrial electric
base revenues and 8 percent of its total electric base revenues. Other
important sectors of Houston's economy include the Port of Houston, the Johnson
Space Center and the Texas Medical Center.
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SYSTEM CAPABILITY AND LOAD
The following table sets forth information with respect to HL&P's
system capability and load:
<TABLE>
<CAPTION>
Maximum Hourly Firm Demand
--------------------------------------
Installed % Change
Net Purchased Total Net From Reserve
Capability Power Capability Prior Margin
Year (MW) (MW)(1) (MW) Date MW (2) Year (%)
- ---- ----------- ------------ ------------ -------- ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 13,583 945 14,528 Jul. 30 10,783 (1.1) 34.7
1993 13,679 945 14,624 Aug. 19 11,397 5.7 28.3
1994 13,666 720 14,386 Jun. 28 11,245 (1.3) 27.9
1995 13,921 445 14,366 Jul. 27 11,419 1.5 25.8
1996 13,960 445 14,405 Jul. 23 11,718 2.6 22.9
</TABLE>
- -------------------
(1) Reflects firm capacity purchased. For additional information on
purchased power commitments, see "--Fuel--Purchased Power" below.
(2) Does not include interruptible load. Including interruptible demand,
the maximum hourly demand served in 1996 was 12,667 megawatts (MW)
compared to 12,377 MW in 1995.
Based on present trends, HL&P expects maximum hourly firm demand for
electricity to grow at a compound annual rate of approximately 1.5 percent over
the next ten years. Assuming growth at that rate and average weather conditions
and including the net effects of HL&P's demand-side management programs, HL&P
projects that its reserve margin will decrease to an estimated 15 percent by
2001. For long-term planning purposes, HL&P intends to maintain its reserve
margin at approximately 15 percent in excess of maximum hourly firm demand load
requirements.
HL&P experiences significant seasonal variation in its sales of
electricity. Sales during the summer months are higher than sales during other
months of the year due to the reliance on air conditioning. See Note 15 to the
Financial Statements for a presentation of certain unaudited quarterly
financial information for 1995 and 1996.
COMPETITION
The electric utility industry historically has been composed of
vertically integrated companies providing electric service on an exclusive
basis within governmentally-defined geographic areas. Prices for electric
service typically have been set by governmental authorities under principles
designed to provide the utility with an opportunity to recover its cost of
providing electric service plus a reasonable return on its invested capital.
Federal legislation as well as legislative and regulatory initiatives in
various states have encouraged competition among electric utility and
non-utility owned power generators. These developments, combined with
increasing demand for lower-priced electricity and technological advances in
electric generation, are acting to accelerate the electric utility industry's
movement toward more competition.
For information on competition, including a discussion of stranded
cost issues, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Certain Factors Affecting Future Earnings of the
Company and HL&P--Competition" in Item 7 of this Report, which is incorporated
herein by reference.
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CAPITAL PROGRAM
HL&P has an ongoing program to maintain its existing production,
transmission and distribution facilities and to expand its physical plant in
response to customer needs. Assuming a target reserve margin of 15 percent,
HL&P does not currently forecast a need for additional capacity until 2002.
Under an integrated resource planning rule adopted by the Public Utility
Commission of Texas (Utility Commission) in 1996, Texas electric utilities are
required to conduct public solicitations for generating capacity to satisfy
their future energy needs. The integrated resource plan rules are intended to
complement the development of a competitive wholesale market for electric
power. HL&P is required to file a preliminary integrated resource plan by
January 1998.
In 1996, HL&P's capital and nuclear fuel expenditures were
approximately $383 million, excluding Allowance for Funds Used During
Construction (AFUDC). HL&P's capital program (excluding AFUDC) is currently
estimated to cost approximately $239 million in 1997, $253 million in 1998 and
$276 million in 1999. HL&P's capital program for the three-year period 1997
through 1999 consists primarily of improvements to its existing electric
generating, distribution, and general plant facilities. For the three-year
period 1997 through 1999, HL&P's projected capital program consists of the
following estimated expenditures:
<TABLE>
<CAPTION>
Amount Percent of Total
(millions) Expenditures
--------- ------------
<S> <C> <C>
Generating facilities .................. $104 14%
Transmission facilities ................ 39 5%
Distribution facilities ................ 378 49%
Substation facilities .................. 48 6%
General plant facilities ............... 128 17%
Nuclear fuel ........................... 71 9%
---- ----
Total ............................. $768 100%
==== ====
</TABLE>
Actual capital expenditures will vary from estimates as a result of
numerous factors, including, but not limited to, changes in the rate of
inflation, availability and relative cost of fuels and purchased power, changes
in environmental laws, regulatory and legislative changes and the effect of
regulatory proceedings. For information regarding expenditures associated with
(i) HL&P's share of nuclear fuel costs and (ii) environmental programs, see
"--Fuel--Nuclear Fuel--Supply" and "--Regulatory Matters--Environmental
Quality" below.
FUEL
Based upon various assumptions relating to the cost and availability
of fuels, plant operation schedules, load growth, load management and
environmental protection requirements, HL&P's estimate of its future energy mix
is as follows:
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<TABLE>
<CAPTION>
Energy Mix (%)
Historical ------------ Estimated -------------
1996 1997 1999 2001
---------- ---- ---- ----
<S> <C> <C> <C> <C>
Gas......................................... 32 29 33 42
Coal and Lignite............................ 40 42 41 40
Nuclear..................................... 9 8 8 8
Purchased Power............................. 19 21 18 10
--- --- --- ---
Total.............................. 100 100 100 100
=== === === ===
</TABLE>
There can be no assurance that the various assumptions upon which the
estimates set forth in the table above are based will prove to be correct.
Accordingly, HL&P's actual energy mix in future years may vary materially from
the percentages shown in the table. For information regarding HL&P's fuel
costs, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--HL&P--Fuel and Purchased Power
Expense - HL&P" in Item 7 of this Report and Note 11(b) to the Financial
Statements.
NATURAL GAS SUPPLY. During 1996, HL&P purchased approximately 65
percent of its natural gas requirements pursuant to long-term contracts having
terms of five years or longer. HL&P purchased the remaining 35 percent of its
natural gas requirements in the spot market. In 1996, no individual supplier
provided more than 21 percent of HL&P's total natural gas requirements.
Substantially all of HL&P's natural gas supply contracts contain pricing
provisions based on fluctuating spot market prices.
Based on the current market for, and availability of, natural gas,
HL&P believes that it will be able to replace the supplies of natural gas
covered under its present long-term contracts with gas purchased in the spot
market or under short-term contracts as such long-term contracts expire. HL&P's
average daily gas consumption during 1996 was 612 billion British thermal units
(BBtu) with peak daily consumption of 1,361 BBtu. HL&P's average cost of
natural gas was $2.31 per million British thermal units (MMBtu) in 1996, $1.69
per MMBtu in 1995 and $1.90 per MMBtu in 1994.
Although natural gas has been relatively plentiful in recent years,
supplies available to HL&P and other consumers are vulnerable to disruption due
to weather conditions, transportation disruptions, price changes and other
events. As a result of these factors, supplies of natural gas may become
unavailable from time to time, or prices may increase rapidly in response to
temporary supply constraints or other factors.
COAL AND LIGNITE SUPPLY. HL&P purchases approximately three-fourths of
the coal required to operate its four coal-fired units at the W. A. Parish
Electric Generating Station (W. A. Parish) under two long-term contracts from
mines in the Powder River Basin area of Wyoming. The first of these contracts
expires in 2010, and the other expires in 2011. HL&P obtains the remaining coal
required to operate these units under short-term contracts. The majority of the
coal purchased is transported to the W. A. Parish coal-handling facilities
under a long-term rail transportation contract. In the second quarter of 1997,
HL&P expects to complete construction of a rail spur connecting these
facilities to another rail transporter. The additional rail spur is expected to
provide a competitive alternative for the transportation of coal not subject to
the existing long-term transportation agreement.
HL&P obtains the lignite used to fuel the two units of the Limestone
Electric Generating Station (Limestone) from a surface mine adjacent to the
plant. HL&P owns the mining equipment, facilities and a portion of the lignite
leases at the mine, which is operated under a long-term contract.
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The lignite reserves currently under lease and contract are expected to provide
substantially all of the lignite requirements for Limestone through 2014.
The mining of coal/lignite reserves is subject to federal and state
requirements with respect to the development and operation of coal mines, and
to state and federal regulations relating to land reclamation and environmental
protection.
NUCLEAR FUEL. Supply. HL&P is the project manager (and one of four
co-owners) of the South Texas Project Electric Generating Station (South Texas
Project). The supply of fuel for nuclear generating facilities involves the
acquisition of uranium concentrates, conversion of such concentrates into
uranium hexafluoride, enrichment of the uranium hexafluoride and fabrication of
nuclear fuel assemblies. The South Texas Project fuel requirements are procured
in common by the South Texas Project owners. HL&P and the other South Texas
Project owners have on-hand or have contracted for the raw materials and
services they expect to need for operation of the South Texas Project units
through the years shown in the following table:
<TABLE>
<S> <C>
Uranium.....................................2000 (1)
Conversion..................................2001
Enrichment .................................2014 (2)
Fabrication.................................2005
</TABLE>
(1) Contracts provide for over 50 percent of the uranium concentrates
required. The balance of uranium concentrates requirements is expected
to be provided by future spot and medium-term contracts.
(2) The South Texas Project has suspended its enrichment services contract
for the period between October 2000 through September 2006 pursuant to
an option available under such contract. During this period, the South
Texas Project intends to obtain such services through a competitive
bidding process.
Although HL&P and the other South Texas Project owners cannot predict
the future availability of uranium and related services, they do not
anticipate, based on current market conditions, difficulty in obtaining
requirements for the remaining years of the South Texas Project's operations.
Spent Fuel Disposal. By contract, the United States Department of
Energy (DOE) has committed itself ultimately to take possession of all spent
fuel generated by the South Texas Project. HL&P has been advised that the DOE
currently plans to place the spent fuel in a permanent underground storage
facility. The DOE contract currently requires payment of a spent fuel disposal
fee on nuclear plant-generated electricity of one mill (one-tenth of a cent)
per net kilowatt-hour (KWH) sold. This fee is subject to adjustment to ensure
full cost recovery by the DOE. In December 1996, the DOE notified utilities
that it anticipates a delay in assuming its obligation to begin disposing of
spent fuel, and solicited input from the utilities as to how the delay can best
be accommodated. Although the DOE's efforts to arrange long-term disposal have
been unsuccessful to date, the South Texas Project is designed to have
sufficient on-site storage facilities to accommodate nearly 40 years of spent
fuel disposal for each unit.
Enrichment Decontamination and Decommissioning Assessment Fees. The
Energy Policy Act of 1992 (Energy Policy Act) includes a provision that
assesses a fee upon domestic utilities that purchased nuclear fuel enrichment
services from the DOE before October 24, 1992. This fee covers a portion of the
cost to decontaminate and decommission facilities providing for such enrichment
services. The South Texas Project's assessment is approximately $2 million per
year (subject to escalation for inflation). HL&P's share of such fees is 30.8
percent. These assessments
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<PAGE> 9
will continue until the earlier of October 24, 2007 or when $2.25 billion
(adjusted for inflation) has been collected from domestic utilities with
nuclear generating units. HL&P has a remaining estimated liability of $6.5
million for such assessments.
OIL SUPPLY. HL&P maintains limited fuel oil stocks to satisfy fuel
needs in emergency situations. In addition, certain of HL&P's gas-fired
generating plants are designed to operate on fuel oil if fuel oil becomes more
economical to use than natural gas.
PURCHASED POWER. At December 31, 1996, HL&P had contracts covering 445
MW of firm capacity and associated energy. These contracts expire as follows:
1998 - 125 MW and 2005 - 320 MW. Capacity payments under HL&P's firm purchased
power commitments for the next three years are approximately $22 million per
year. Current Utility Commission rules permit full recovery of costs incurred
under these purchased power contracts through HL&P's rates for electric
service. The two principal firm capacity contracts (covering 320 MW of firm
capacity) contain provisions allowing HL&P to suspend or reduce purchased power
payments in the event that the Utility Commission disallows future recovery of
these costs through HL&P's rates for electric service.
RECOVERY OF FUEL COSTS. Utility Commission rules provide for the
recovery of certain fuel and purchased power energy 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 a fuel factor proceeding and is
to be generally effective for a minimum of six months. In any event, a
reconciliation of the fuel revenues and the fuel costs is required every three
years. HL&P can request a revision to its fuel factor in April and October of
each year. Fuel revenues accrued pursuant to such factor are adjusted monthly
to equal fuel expenses; therefore, such revenues and expenses have no effect on
earnings unless fuel costs are determined 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, respectively. Fuel costs are
reviewed during periodic fuel reconciliation proceedings.
For information regarding the recovery of fuel costs, including a $70 million
temporary fuel surcharge implemented to address an under-recovery of eligible
fuel costs during the period February 1995 through August 1996, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--HL&P--Operating Revenues and Sales - HL&P"
in Item 7 of this Report.
REGULATORY MATTERS
RATES AND SERVICES. HL&P operates under a certificate of convenience
and necessity granted by the Utility Commission which covers HL&P's present
service area and facilities. In addition, HL&P holds franchises to provide
electric service within the incorporated municipalities in its service
territory. None of these franchises expires before 2007.
Under the Texas Public Utility Regulatory Act (PURA), the Utility
Commission has original jurisdiction over electric rates and services in
unincorporated areas of the state of Texas and in the incorporated
municipalities that have relinquished original jurisdiction. Original
jurisdiction over electric rates and services in the remaining incorporated
municipalities served by HL&P is exercised by such municipalities, including
the City of Houston, but the Utility Commission has appellate jurisdiction
over electric rates and services within those incorporated municipalities.
UTILITY COMMISSION RATE PROCEEDINGS. Beginning in 1995, HL&P
implemented a reduction in its base rates under the terms of the settlement of
its 1995 rate case (Docket No. 12065)(Rate Case Settlement). For additional
information regarding terms of the Rate Case Settlement, see "Management's
Discussion and Analysis of Financial Condition and Results of
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<PAGE> 10
Operations--Certain Factors Affecting Future Earnings of the Company and
HL&P--Rate Matters and Contingencies" in Item 7 of this Report and Note 3(a) to
the Financial Statements.
ENVIRONMENTAL QUALITY. HL&P is subject to a number of federal, state
and local environmental requirements that govern its discharge of emissions
into the air and water and regulate its handling of solid and hazardous waste.
HL&P has incurred substantial expenditures in the past to comply with these
requirements and anticipates that further expenditures will be incurred in the
future. Most of the environmental requirements applicable to HL&P are
implemented by the Texas Natural Resource Conservation Commission (TNRCC),
which shares regulatory jurisdiction with the United States Environmental
Protection Agency (EPA).
Air Quality. A major provision of the federal Clean Air Act (Clean Air
Act) affecting electric utilities, like HL&P, is the Acid Rain Program, which
is designed to reduce emissions of sulfur dioxide (SO2) from electric utility
generating units. The Acid Rain Program requires that after a certain date a
utility must have been granted a regulatory "allowance" for each ton of SO2
emitted from its facilities. Allowances have been distributed to utilities by
the EPA based on their historic operations. If a utility is not allocated
sufficient allowances to cover its future SO2 emissions, it must either
purchase allowances from other utilities or reduce SO2 emissions from its units
through the installation of additional controls and equipment. HL&P believes
that it has been allocated a sufficient number of emission allowances for it to
continue operating its existing facilities for the foreseeable future.
Provisions of the Clean Air Act dealing with urban air pollution
require establishing new emission limitations for nitrogen oxides (NOx) from
existing sources. Initial limitations were finalized in 1993, but the
implementation of these emission reductions has been delayed by the EPA and
TNRCC until 1999. Although HL&P did not incur any additional NOx pollution
control costs in 1996, HL&P estimates that, based on current market conditions
and other factors, it could be required to spend $40 million between 1997 and
1999 in order to fully comply with new NOx requirements scheduled to be
implemented in 1999.
The Ozone Transport Assessment Group (OTAG) was established in 1995.
It is comprised of state air directors from 37 states, including Texas, which
is represented by the TNRCC. OTAG is responsible for evaluating the long-range
transport of pollutants related to ozone formation, which includes NOx, and to
identify levels of NOx emission reductions deemed necessary for attainment of
the standard. The results of OTAG's evaluation are expected in mid-1997. The
EPA has issued an Advanced Notice of Proposed Rulemaking (ANPR) in which the
EPA indicated that it intends to require each state to develop a state
implementation plan to ensure that reductions in ozone-related pollutants will
be achieved. In addition, the EPA has proposed new air quality standards for
ozone and for small particle pollutants. The outcome of either or both of these
and other related rulemakings may affect the magnitude and the timing of future
expenditures necessary for NOx reduction from HL&P facilities. Furthermore, the
ANPR does not contain sufficient details upon which the Company or HL&P can
estimate the potential costs of implementing the proposed rules.
In both 1995 and 1996, HL&P incurred costs of approximately $3 million
per year in order to comply with requirements under the Clean Air Act mandating
electric utilities to install continuous emission monitoring equipment.
Installation of the new systems was completed in 1996, and, based on existing
regulatory requirements, no additional expenditures are currently projected. To
implement these Clean Air Act programs, an Operating Permit Program has been
established that will be administered in Texas by the TNRCC. Although HL&P is
required to submit applications for affected HL&P facilities to the TNRCC
during 1997, it is not anticipated, based on existing regulatory requirements,
that HL&P will be required to make any significant changes to its current air
quality control requirements. Current air quality related permit programs
administered by the TNRCC impose fees on HL&P of approximately $1 million
annually.
10
<PAGE> 11
Water Quality. The federal Clean Water Act governs the discharge of
pollutants into surface waters and is administered jointly in Texas by the
TNRCC and the EPA. HL&P has obtained permits from both the TNRCC and the EPA
for all of its facilities that require such permits and anticipates obtaining
timely renewal of such permits as they expire.
Solid and Hazardous Waste. HL&P's handling and disposal of solid waste
is also subject to regulation by the TNRCC. HL&P's cost in 1996 for commercial
disposal of industrial solid waste was approximately $4.6 million.
Electric and Magnetic Fields. The issue of whether exposure to
electric and magnetic fields (EMFs) may result in adverse health effects or
damage to the environment is currently being debated. EMFs are produced by all
devices which carry or use electricity, including home appliances as well as
electric transmission and distribution lines. Results of studies concerning the
effect of EMFs have been inconclusive and EMFs are not the subject of any
federal, state or local regulations affecting HL&P. However, lawsuits have
arisen in several states (including Texas) against electric utilities and
others alleging that the presence or use of electric power transmission and
distribution lines has an adverse effect on health and/or property values.
FEDERAL REGULATION OF NUCLEAR POWER. Under the 1954 Atomic Energy Act
and the 1974 Energy Reorganization Act, operation of nuclear plants is
extensively regulated by the United States Nuclear Regulatory Commission (NRC),
which has broad power to impose licensing and safety requirements. In the event
of non-compliance, the NRC has the authority to impose fines or shut down
nuclear plants, or both, depending upon its assessment of the severity of the
situation, until compliance is achieved.
HL&P holds an operating license from the NRC in connection with its
role as project manager of the South Texas Project. For information regarding
the formation of an operating company to replace HL&P as project manager of the
South Texas Project, see Note 2(b) to the Financial Statements.
LOW-LEVEL RADIOACTIVE WASTE DISPOSAL. The 1980 federal Low-Level
Radioactive Waste Policy Act directed states to assume responsibility for the
disposal of low-level nuclear waste generated within their borders. Under this
Act, states may combine with other states and seek consent from Congress for
regional compacts to construct and operate low-level nuclear waste sites. The
only facility licensed to receive commercial low-level nuclear waste that is
currently available to the South Texas Project is located in Barnwell, South
Carolina. The South Texas Project has entered into a contract with the operator
of the Barnwell facility to dispose of all of its low-level nuclear waste
through December 1997.
The Texas Low-Level Radioactive Waste Disposal Authority (Waste
Disposal Authority) is currently seeking authority to build and operate a
low-level waste disposal facility in Hudspeth County, Texas. A bill that
establishes an interstate compact among Texas, Maine and Vermont is currently
pending before Congress. Ratification of the compact would limit access to the
proposed facility to the three compact members. Although lack of Congressional
action would not prohibit the Waste Disposal Authority from constructing the
site unilaterally, failure to ratify the compact would result in the loss of
contributions from Maine and Vermont toward the construction of the facility.
HL&P expects that the measure will be considered by Congress in 1997.
The Waste Disposal Authority is authorized to assess a planning and
implementation fee to waste generators to fund development of the proposed
Texas disposal facility. For the authority's 1997 fiscal year, HL&P's share of
this assessment fee is approximately $3.7 million. Subject to
11
<PAGE> 12
licensing of the facility in 1998, the Waste Disposal Authority estimates that
the Texas site (construction of which has not yet begun) could begin receiving
waste in late 1999. In the event the Barnwell facility stops accepting waste
before the Texas site is opened, the South Texas Project would store its waste
in an interim storage facility located at the nuclear plant. The plant
currently has storage capacity for at least five years of low-level nuclear
waste generated by the project.
NUCLEAR INSURANCE AND NUCLEAR DECOMMISSIONING
For information concerning nuclear insurance and nuclear
decommissioning, see Notes 2(c) and 2(d) to the Financial Statements.
LABOR MATTERS
As of December 31, 1996, HL&P had 7,864 full-time employees of whom
3,042 were hourly-paid employees represented by the International Brotherhood
of Electrical Workers under a collective bargaining agreement which expires on
May 25, 1998.
12
<PAGE> 13
OPERATING STATISTICS OF HL&P
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Electric Energy Generated and Purchased (Megawatt-
Hours (MWH)):
Generated -- Net Station Output .................. 55,170,841 53,447,128 53,894,994
Purchased ........................................ 12,540,172 10,452,818 10,107,449
Net Interchange .................................. 1,486 (1,488) (1,018)
------------ ------------ ------------
Total ........................................ 67,712,499 63,898,458 64,001,425
Company Use, Lost and Unaccounted for Energy ..... (3,350,400) (2,822,876) (2,678,629)
------------ ------------ ------------
Total Energy Sold ............................ 64,362,099 61,075,582 61,322,796
============ ============ ============
Electric Sales (MWH):
Residential ...................................... 19,048,238 18,103,209 17,194,724
Commercial ....................................... 14,640,762 14,233,413 13,631,381
Small Industrial (1) ............................. 11,727,500 11,174,404 10,940,813
Large Industrial (1) ............................. 13,519,845 12,493,029 13,537,677
Street Lighting -- Government and Municipal ...... 119,339 117,253 116,643
------------ ------------ ------------
Total Firm Retail Sales ...................... 59,055,684 56,121,308 55,421,238
Other Electric Utilities ......................... 205,463 169,750 167,286
------------ ------------ ------------
Total Firm Sales ............................. 59,261,147 56,291,058 55,588,524
Interruptible .................................... 4,038,277 4,093,385 5,027,743
Off-System ....................................... 1,062,675 691,139 706,529
------------ ------------ ------------
Total ........................................ 64,362,099 61,075,582 61,322,796
============ ============ ============
Number of Customers (End of Period): (2)
Residential ...................................... 1,353,631 1,327,168 1,301,074
Commercial ....................................... 185,031 175,998 170,959
Small Industrial (1) ............................. 1,692 1,543 1,525
Large Industrial (Including Interruptible) (1) ... 126 127 145
Street Lighting -- Government and Municipal ...... 83 82 81
Other Electric Utilities (Including Off-System) .. 15 11 11
------------ ------------ ------------
Total ........................................ 1,540,578 1,504,929 1,473,795
============ ============ ============
Operating Revenue (Thousands of Dollars):
Residential ...................................... $ 1,603,591 $ 1,471,702 $ 1,586,074
Commercial ....................................... 986,591 923,223 1,029,104
Small Industrial (1) ............................. 611,495 564,609 643,383
Large Industrial (1) ............................. 473,451 431,499 541,188
Street Lighting -- Government and Municipal ...... 22,125 20,679 25,902
------------ ------------ ------------
Total Electric Revenue -- Firm Retail Sales .. 3,697,253 3,411,712 3,825,651
Other Electric Utilities ......................... 18,841 22,207 25,669
------------ ------------ ------------
Total Electric Revenue -- Firm Sales ......... 3,716,094 3,433,919 3,851,320
Interruptible .................................... 97,164 81,707 108,730
Off-System ....................................... 25,995 12,250 13,691
------------ ------------ ------------
Total Electric Revenue ....................... 3,839,253 3,527,876 3,973,741
Miscellaneous Electric Revenues .................. 185,774 152,421 (227,656)
------------ ------------ ------------
Total ........................................ $ 4,025,027 $ 3,680,297 $ 3,746,085
============ ============ ============
Installed Net Generating Capability (Kilowatts (KW))
(End of Period) ................................ 13,960,370 13,921,370 13,666,000
Cost of Fuel (Cents per MMBtu):
Gas ............................................ 231.3 168.5 189.8
Coal (3) ....................................... 210.8 202.5 159.0
Lignite ........................................ 111.1 124.8 110.8
Nuclear ........................................ 61.6 58.2 57.4
Average .................................... 181.6 159.3 153.6
</TABLE>
(1) For reporting purposes, HL&P classifies customers with an electric demand
in excess of 600 kilovolt-amperes as industrial. Small industrial
customers typically are retail stores, office buildings, universities and
other customers not associated with large industrial plants.
(2) In 1996, HL&P began calculating the number of customers based on the
number of active customers at month end (as opposed to number of billing
transactions). This change had the effect of increasing the number of
customers (primarily commercial) reported in 1996 by approximately 4,400.
Prior periods have not been restated.
(3) The cost of coal for 1994 reflects the receipt of approximately $66.1
million (38.2 cents per MMBtu) related to the sale of certain railroad
settlement payments. See Note 14 to the Financial Statements.
13
<PAGE> 14
BUSINESS OF HI ENERGY
HI Energy, a subsidiary of the Company formed in 1993, participates
primarily in the development and acquisition of foreign independent power
projects and the privatization of foreign generating and distribution
facilities. As of December 31, 1996, the Company's Consolidated Balance Sheet
included approximately $567 million invested in foreign utility and
non-regulated companies. In 1996, HI Energy reported earnings of approximately
$0.2 million compared to a loss of $33 million in 1995, a year which included
an $18 million after-tax one-time charge to earnings related to an investment
in two waste tire-to-energy projects.
For additional information regarding HI Energy, see "--Regulation of
the Company--Federal and State Regulation of Foreign Investments" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors Affecting Future Earnings of the Company and
HL&P--HI Energy" in Item 7 of this Report and Notes 1(a) and 4 to the Financial
Statements.
MAJOR FOREIGN INVESTMENTS
In May 1996, a subsidiary of HI Energy acquired 11.35 percent of the
common stock of Light - Servicos de Eletricidade S.A., a publicly held Brazilian
corporation (Light), for $392 million. Light is the operator of an integrated
electric power and distribution system that serves a portion of the state of Rio
de Janeiro, Brazil, including the city of Rio de Janeiro. HI Energy acquired the
shares as a bidder in the government-sponsored auction of 60 percent of Light's
outstanding shares. Subsequent to the auction, the winning bidders, including a
subsidiary of HI Energy, formed a consortium whose aggregate ownership interest
of 50.44 percent represents a controlling interest in Light.
HI Energy also owns 49 percent of the capital stock of an electric
utility operating in La Plata, Argentina, which as of December 31, 1996 was
recorded as an equity investment in the amount of $81 million. In 1995, HI
Energy acquired 90 percent of the capital stock of an electric utility in
north-central Argentina for $16 million. In late 1997, a subsidiary of HI
Energy expects to complete development of a 160 MW cogeneration facility in
Argentina at an estimated cost of approximately $100 million. In 1998, another
subsidiary of HI Energy, together with various other investors, expects to
complete development of a coke calcining and power generation facility in the
state of Andhra Pradesh, India. The waste gases from the calcining facility
will be used to generate electricity for sale to industrial customers and a
local utility. Assuming the project is completed on schedule, HI Energy's
estimated share of the cost of this project is approximately $9 million.
RISKS OF OVERSEAS OPERATIONS
The financing, development and operation of foreign power projects
entail political and financial uncertainties, including risks associated with
currency exchange rate fluctuations, currency repatriation and convertibility
restrictions, political instability and potential expropriation. The
uncertainty of the legal environment in certain countries in which HI Energy is
or in the future may be operating could make it more difficult for HI Energy to
enforce its rights under agreements relating to its overseas operations. HI
Energy seeks to minimize the risks of its overseas operations in a variety of
ways, including co-investing with local partners and reviewing the potential
return of any investment against related political and other risks.
Notwithstanding these efforts, there can be no assurance that HI Energy's
efforts to minimize overseas operational risks will be successful.
14
<PAGE> 15
REGULATION OF THE COMPANY
FEDERAL
The Company is a holding company as defined in the 1935 Act; however,
based upon the intrastate operations of HL&P and the exemptions applicable to
the affiliates of HI Energy, the Company is exempt from regulation as a
"registered" holding company under the 1935 Act, except with respect to the
acquisition of voting securities of other domestic public utility companies and
utility holding companies. In connection with the Merger, the Company and HL&P
have filed an application with the SEC requesting an order granting Houston an
exemption from regulation as a registered public utility holding company under
Section 3(a)(2) of the 1935 Act. For information regarding the application, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Merger." Following the Merger, Houston will be the holding
company for NorAm, which is a public utility under the 1935 Act.
In June 1995, the SEC issued a comprehensive report on the regulation
of utility holding companies in which it recommended repeal of the 1935 Act,
subject to a minimum one-year transition period and legislation that would
provide for access by state commissions to the books and records of holding
companies and their affiliates and oversight by the Federal Energy Regulatory
Commission of intrasystem transactions. Several bills have been introduced in
Congress which would repeal the 1935 Act. Repeal or significant modification of
the 1935 Act could have a significant effect on the electric utility industry.
STATE
The Company is not subject to regulation by the Utility Commission
under PURA or by the incorporated municipalities served by HL&P. Those
regulatory bodies do, however, have authority to review accounts, records and
contracts relating to transactions by HL&P with the Company and its other
subsidiaries.
FEDERAL AND STATE REGULATION OF FOREIGN INVESTMENTS
Section 33(a)(1) of the 1935 Act exempts foreign utility company
affiliates of the Company from regulation as "public utility companies,"
thereby permitting the Company to invest in foreign utility companies without
registration under the 1935 Act as a holding company. The exemption, however,
is dependent upon the SEC's receiving from each state commission having
jurisdiction over the retail rates of any U.S. utility company that is
associated or affiliated with the foreign utility company, a certification to
the effect that such commission has the authority and resources to protect
ratepayers subject to its jurisdiction and that such commission intends to
exercise its authority.
The Utility Commission has provided such a certification to the SEC
subject, however, to the right of the Utility Commission to revise or withdraw
the certification as to any future acquisition. The Company is required to
notify the Utility Commission in the event that its aggregate investment in
foreign exempt wholesale generators (EWGs) and utility companies exceeds 30
percent of the Company's consolidated net worth or if the Company's operating
losses attributable to its direct or indirect foreign investments exceed 5
percent of consolidated retained earnings during the previous four quarters.
Subject to certain limited exceptions, Section 33(f)(1) of the 1935
Act prohibits any public utility (such as HL&P or, after the Merger, Houston)
from issuing any security for the purpose of financing the acquisition,
ownership or operation of a foreign utility company, or assuming any obligation
or liability with respect to a foreign utility company.
15
<PAGE> 16
EXECUTIVE OFFICERS OF THE COMPANY (1)
As of March 3, 1997
<TABLE>
<CAPTION>
Officer
Name Age(2) Since Business Experience 1992-1997 and Positions(3)
------ ----- ------- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Don D. Jordan...................... 64 1976 Chairman and Chief Executive Officer 1997-
and Director
Chairman, Chief Executive Officer and 1996-1997
President and Director
Chairman and Chief Executive 1993-1996
Officer and Director
Chairman, President and Chief 1992-1993
Executive Officer and Director
Chairman and Chief Executive 1992-
Officer and Director - HL&P
R. Steve Letbetter................. 48 1978 President and Chief Operating Officer 1997-
and Director
Senior Vice President and Director 1996-1997
Vice President and Director 1995-1996
Vice President 1993-1995
President and Chief 1993-
Operating Officer - HL&P
Group Vice President - Finance 1992-1993
and Regulatory Relations - HL&P
Lee W. Hogan....................... 52 1990 Executive Vice President and Director 1997-
Senior Vice President and Director 1996-1997
Vice President and Director 1995-1996
Vice President 1993-1995
President and Chief Operating 1993-1997
Officer - HI Energy
Group Vice President - 1992-1993
External Affairs - HL&P
Hugh Rice Kelly.................... 54 1984 Executive Vice President, General 1997-
Counsel and Corporate Secretary
Senior Vice President, General 1994-1997
Counsel and Corporate Secretary
Vice President, General Counsel 1992-1994
and Corporate Secretary
Executive Vice President, General 1997-
Counsel and Corporate Secretary
- HL&P
Senior Vice President, General 1992-1997
Counsel and Corporate Secretary
- HL&P
Stephen W. Naeve................... 49 1988 Executive Vice President and Chief 1997-
Financial Officer
Senior Vice President and Chief 1996-1997
Financial Officer
Vice President - Strategic Planning 1993-1996
and Administration
Vice President - Corporate Planning 1992-1993
and Treasurer - HL&P
Charles R. Crisp................... 49 1996 Senior Vice President 1997-
Executive Vice President and General 1996-
Manager - Energy Production
and Director - HL&P
President and Director, Tejas Gas 1992-1996
Corporation
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C>
B. Bruce Gibson.................... 43 1994 Senior Vice President - Governmental Affairs 1997-
Vice President - Government and 1996-1997
Regulatory Affairs
Vice President - Government and 1996-
Regulatory Affairs - HL&P
Vice President - Governmental Relations 1994-1996
President and CEO, Texas Chamber of 1994
Commerce
Executive Assistant to the Texas 1992-1994
Lt. Governor
Robert L. Waldrop.................. 49 1988 Senior Vice President - Communications 1997-
Senior Vice President - External Affairs - HL&P 1996-
Senior Vice President - Marketing and 1996
Customer Service - HL&P
Group Vice President - External Affairs - HL&P 1993-1996
Vice President - Public and Customer 1992-1993
Relations - HL&P
Mary P. Ricciardello............... 41 1993 Vice President and Comptroller 1996-
Vice President and Comptroller 1996-
- HL&P
Comptroller 1993-1996
Assistant Corporate Secretary 1992-1993
and Assistant Treasurer - HL&P
</TABLE>
- --------------------
(1) All of the officers have been elected to serve until the annual meeting
of the Board of Directors scheduled to occur on May 9, 1997 and until
their successors qualify.
(2) At December 31, 1996.
(3) In 1997, the Board of Directors of the Company appointed certain
divisional officers of the Company. Pursuant to those appointments, the
following Executive Officers of the Company and/or HL&P also hold the
following divisional officer titles within the Company:
Charles R. Crisp President & Chief Operating Officer, HII
Power Generation Group
Lee. W. Hogan President & Chief Operating Officer, HI
Retail Energy Group
David M. McClanahan President & Chief Operating Officer, HL&P
Division, HI Retail Energy Group
Stephen C. Shaeffer Executive Vice President, Retail Energy
Regulation, HI Retail Energy Group
17
<PAGE> 18
EXECUTIVE OFFICERS OF HL&P (1)(2)
As of March 3, 1997
<TABLE>
<CAPTION>
Officer
Name Age(3) Since Business Experience 1992-1997 and Positions
----- ------- ------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Don D. Jordan...................... 64 1971 Chairman and Chief Executive 1992-
Officer and Director
R. Steve Letbetter................. 48 1978 President and Chief Operating Officer 1995-
and Director
President and Chief Operating Officer 1993-1995
Group Vice President - Finance 1992-1993
and Regulatory Relations
William T. Cottle.................. 51 1993 Executive Vice President and General 1996-
Manager - Nuclear and Director
Group Vice President - Nuclear 1993-1996
Vice President - Operations - 1992-1993
Grand Gulf Nuclear Station,
Entergy Operations, Inc.
Charles R. Crisp................... 49 1996 Executive Vice President and General 1996-
Manager - Energy Production
and Director
President and Director, Tejas Gas 1992-1996
Corporation
Jack D. Greenwade.................. 57 1982 Senior Vice President and Assistant 1996-
to the President and Director
Group Vice President - Operations 1992-1996
Hugh Rice Kelly.................... 54 1984 Senior Vice President, General 1992-
Counsel and Corporate Secretary
David M. McClanahan................ 47 1986 Executive Vice President and General 1996-
Manager - Energy Delivery and
Customer Service and Director
Group Vice President - Finance 1993-1996
and Regulatory Relations
Senior Vice President and Chief 1992-1993
Financial Officer - KBLCOM
Stephen C. Schaeffer............... 49 1989 Executive Vice President - Shared 1996-
Services and Financial and
Regulatory Affairs and Director
Senior Vice President - Treasurer - 1993-1996
HI Energy
Group Vice President - Administration 1992-1993
and Support
Robert L. Waldrop.................. 49 1988 Senior Vice President - External Affairs 1996-
And Director
Senior Vice President - Marketing and 1996
Customer Service
Group Vice President - External Affairs 1993-1996
Vice President - Public and 1992-1993
Customer Relations
Mary P. Ricciardello............... 41 1993 Vice President and Comptroller 1996-
Comptroller - Company 1993-1996
Assistant Corporate Secretary 1992-1993
and Assistant Treasurer
</TABLE>
- -------------------
(1) All of the officers have been elected to serve until the annual meeting
of the Board of Directors scheduled to occur on May 9, 1997 and until
their successors qualify.
(2) For the purposes of the requirements of this Report, the HL&P officers
listed may also be deemed to be executive officers of the Company.
(3) At December 31, 1996.
18
<PAGE> 19
ITEM 2. PROPERTIES.
The Company considers its property and the property of its
subsidiaries to be well maintained, in good operating condition and suitable
for their intended purposes.
HL&P
All of HL&P's electric generating stations and all of the other
operating properties of HL&P are located in the state of Texas.
ELECTRIC GENERATING STATIONS. As of December 31, 1996, HL&P owned 12
electric generating stations (62 generating units) with a combined turbine
nameplate rating of 13,544,608 KW, including a 30.8 percent interest in one
nuclear generating station (two units) with a combined turbine nameplate rating
of 2,623,676 KW.
SUBSTATIONS. As of December 31, 1996, HL&P owned 212 major substations
(with capacities of at least 5 megavolt amperes (Mva)) having a total installed
rated transformer capacity of 54,307 Mva (exclusive of spare transformers),
including a 30.8 percent interest in one major substation with an installed
rated transformer capacity of 3,080 Mva.
ELECTRIC LINES--OVERHEAD. As of December 31, 1996, HL&P operated
25,003 pole miles of overhead distribution lines and 3,606 circuit miles of
overhead transmission lines, including 474 circuit miles operated at 69,000
volts, 2,035 circuit miles operated at 138,000 volts and 1,097 circuit miles
operated at 345,000 volts.
ELECTRIC LINES--UNDERGROUND. As of December 31, 1996, HL&P operated
9,636 circuit miles of underground distribution lines and 12.6 circuit miles of
underground transmission lines, including 4.5 circuit miles operated at 69,000
volts and 8.1 circuit miles operated at 138,000 volts.
GENERAL PROPERTIES. HL&P owns various properties, which include a
47-story headquarters office building, division offices, service centers,
telecommunications equipment and other facilities used for general purposes.
TITLE. The electric generating plants and other important units of
property of HL&P are situated on lands owned in fee by HL&P. Transmission lines
and distribution systems have been constructed in part on or across privately
owned land pursuant to easements or on streets and highways and across
waterways pursuant to authority granted by municipal and county permits, and by
permits issued by state and federal governmental authorities. Under the laws of
the state of Texas, HL&P has the right of eminent domain pursuant to which it
may secure or perfect rights-of-way over private property, if necessary.
MORTGAGE. HL&P's mortgage, which secures first mortgage bonds issued
by HL&P and collateralizes certain other securities issued on behalf of HL&P,
constitutes a direct first lien on substantially all of HL&P's properties. The
terms of the mortgage contain significant restrictions on the ability of HL&P
to pledge, sell or otherwise dispose of its assets.
HI ENERGY
For information with respect to property owned directly or indirectly
by HI Energy, see "Business--Business of HI Energy" in Item 1 of this Report
and Note 4 to the Financial Statements.
19
<PAGE> 20
ITEM 3. LEGAL PROCEEDINGS.
NORAM MERGER LAWSUIT. In August 1996, a purported NorAm
shareholder filed a lawsuit, Shaw v. NorAm Energy Corp., et al.,
in the District Court of Harris County, Texas, against NorAm,
certain of its officers and directors and the Company to enjoin
the Merger or to rescind the Merger and/or to recover damages in
the event that the Merger is consummated. The complaint alleges,
among other things, that the consideration for the Merger is
inadequate, that NorAm's Board of Directors breached its fiduciary
duties and that the Company aided and abetted such breaches of
fiduciary duties. In addition, the plaintiff seeks certification
as a class action. The Company believes that the claims are
without merit.
ENVIRONMENTAL. HL&P is a defendant in litigation arising out of
the environmental remediation of a site in Corpus Christi, Texas.
The site was operated by third parties as a metals reclaiming
operation. Although HL&P neither operated nor owned the site,
certain transformers and other equipment originally sold by HL&P
may have been delivered to the site by third parties, and HL&P and
others have remediated the site pursuant to a plan approved by
appropriate state agencies and a federal court. To date, HL&P has
recovered from other responsible parties $1.4 million of the more
than $3 million it has spent on remediation. In Dumes, et al. v.
HL&P, et al. (pending in the U.S. District Court for the Southern
District of Texas, Corpus Christi Division), landowners near the
site have asserted claims that their property has been
contaminated as a result of the remediation effort and are seeking
approximately $70 million in compensatory damages, in
addition to punitive damages of $51 million. The Dumes case is
currently subject to a stay due to the bankruptcy of two
co-defendants. Although the ultimate outcome of this case cannot
be predicted at this time, the Company and HL&P do not believe
that this case will have a material adverse effect on the
Company's or HL&P's financial condition, liquidity or results of
operations.
The EPA has identified HL&P as a "potentially responsible party"
(PRP) under the Comprehensive Environmental Response,
Compensation, and Liability Act for the costs of cleaning up a
site located adjacent to one of HL&P's transmission lines. In
October 1992, the EPA issued an Administrative Order to HL&P and
several other companies purporting to require them to manage the
remediation of the site. HL&P believes that the EPA took this
action solely on the basis of information indicating that HL&P in
the 1950s acquired record title to a portion of the land on which
the site is located. HL&P does not believe that it now nor
previously has had any ownership interest in the land in question
and has obtained a judgment from a court in Galveston County,
Texas, to that effect. Accordingly, HL&P has not complied with
this order, even though HL&P understands that other responsible
parties are proceeding with site remediation. To date, neither the
EPA nor any other PRP has instituted a claim against HL&P for any
share of the remediation costs, but under current law if HL&P is
determined to be a responsible party, HL&P could be found to be
jointly and severally liable for the remediation costs (estimated
to be approximately $80 million in the aggregate) and could be
subjected to substantial fines and damage claims.
For a description of certain other legal and regulatory proceedings
affecting the Company and HL&P, reference is made to the information set forth
in Notes 2(b), 3, 10 and 11(c) to the Financial Statements, which notes are
incorporated herein by reference.
20
<PAGE> 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a special meeting of the Company's shareholders held on December
17, 1996, the shareholders of the Company approved the Merger Agreement. As
part of the approval of the Merger Agreement, T. Milton Honea, Robert C. Hanna,
O. Holcombe Crosswell and Joseph M. Grant were elected directors of Houston
effective upon the consummation of the Merger.
The number of votes cast for, cast against or withheld, as well as the number
of abstentions and broker non-votes recorded, with respect to the proposal to
approve the Merger Agreement are as follows:
<TABLE>
<S> <C>
Votes in favor of the Proposal: 196,946,951
Votes against the Proposal (or withheld): 1,459,637
Abstentions: 1,276,532
Broker non-votes: None
</TABLE>
21
<PAGE> 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, which at March 3, 1997 was held of record
by approximately 66,000 shareholders, is listed on the New York, Chicago and
London Stock Exchanges (symbol: HOU). All of HL&P's common stock is currently
held, directly or indirectly, by the Company. Following the Merger, each share
of the Company's Common Stock, including associated preference rights,
automatically will be converted into one share of Houston Common Stock (and one
associated Houston preference right).
The following table sets forth the high and low sales prices of the
Company's Common Stock on the composite tape during the periods indicated, as
reported by The Wall Street Journal, and the dividends declared for such
periods, in each case as adjusted to give effect to the two-for-one stock split
effected by a stock distribution in December 1995. Dividend payout was $1.50
per share for 1996 and 1995. The dividend declared during the fourth quarter of
1996 is payable in March 1997.
<TABLE>
<CAPTION>
Market Price
---------------------- Dividend Declared
High Low Per Share
---- --- ---------
<S> <C> <C> <C>
1996
First Quarter $0.375
January 17 $25 5/8
March 29 $21 5/8
Second Quarter $0.375
April 19 $20 1/2
June 28 $24 3/4
Third Quarter $0.375
July 1 $24 3/4
September 5 $21 1/8
Fourth Quarter $0.375
November 11 $24 1/8
December 6 $20 3/4
1995
First Quarter $0.375
January 3 $17 11/16
February 3 $20 1/2
Second Quarter $0.375
April 3 $18 15/16
June 5 $21 7/8
Third Quarter $0.375
September 1 $21 1/16
September 28 $22 3/4
Fourth Quarter $0.375
October 2 $22 1/16
December 29 $24 1/2
</TABLE>
The closing market price of the Company's Common Stock on December 31,
1996 was $22 5/8 per share.
Future dividends will be subject to determination based upon the
results of operations and financial condition of the Company, the Company's
future business prospects, any applicable contractual restrictions and such
other factors as the Company's Board of Directors considers relevant. For
information regarding restrictions on the payment of dividends as contained in
the credit facility expected to be entered into in connection with the Merger,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Company--Sources of Capital
Resources and Liquidity--The Merger" in Item 7 of this Report.
22
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA OF THE COMPANY.
The following table sets forth selected financial data with respect to
the Company's consolidated financial condition and results of consolidated
operations and should be read in conjunction with the Financial Statements and
the related notes in Item 8 of this Report. Certain amounts from prior years
have been reclassified to conform with the 1996 presentation. Such
reclassifications do not affect earnings. On July 6, 1995, the Company closed
the sale of its cable television operations. The operations of KBLCOM have been
accounted for as discontinued operations.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(Thousands of Dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues (1) .................................... $ 4,095,277 $ 3,729,271 $ 3,752,573 $ 4,083,238 $ 3,857,932
------------ ------------ ------------ ------------ ------------
Income from continuing operations before
cumulative effect of change in
accounting (2) .............................. $ 404,944 $ 397,400 $ 423,985 $ 440,531 $ 370,031
Gain on sale of cable television subsidiary ..... 708,124
Loss from discontinued operations ............... (16,524) (24,495) (29,544)
Cumulative effect of change in accounting (3) ... (8,200) 94,180
------------ ------------ ------------ ------------ ------------
Net income (2) .................................. $ 404,944 $ 1,105,524 $ 399,261 $ 416,036 $ 434,667
============ ============ ============ ============ ============
Earnings per common share (4):
Continuing operations before cumulative
effect of change in accounting (2) ....... $ 1.66 $ 1.60 $ 1.72 $ 1.69 $ 1.43
Gain on sale of cable television subsidiary . 2.86
Loss from discontinued operations ........... (.07) (.09) (.11)
Cumulative effect of change in
accounting (3) ........................... (.03) .36
------------ ------------ ------------ ------------ ------------
Earnings per common share (2) ................... $ 1.66 $ 4.46 $ 1.62 $ 1.60 $ 1.68
============ ============ ============ ============ ============
Cash dividends declared per common
share (4)(5) ................................ $ 1.50 $ 1.50 $ 1.50 $ 1.875 $ 1.49
Dividend pay-out ratio from continuing
operations .................................. 89% 94% 87% 89% 104%
Return on average common equity (6)(7) .......... 10.2% 29.5% 12.0% 12.7% 13.3%
Ratio of earnings from continuing
operations to fixed charges before
cumulative effect of change in accounting ... 2.76 2.71 2.89 2.78 2.29
- -----------------------------------------------------------------------------------------------------------------------------------
At year-end:
Book value per common share (2)(4) .......... $ 16.41 $ 16.61 $ 13.64 $ 12.53 $ 12.68
Market price per common share (4) ........... $ 22.63 $ 24.25 $ 17.82 $ 23.82 $ 22.94
Market price as a percent of book value (2) . 138% 146% 131% 190% 181%
- -----------------------------------------------------------------------------------------------------------------------------------
At year-end:
Total assets of continuing operations ....... $ 12,287,857 $ 11,819,606 $ 10,784,095 $ 10,867,581 $ 11,075,897
Net assets of discontinued operations ....... 618,982 487,026 231,252
------------ ------------ ------------ ------------ ------------
Total assets ............................. $ 12,287,857 $ 11,819,606 $ 11,403,077 $ 11,354,607 $ 11,307,149
============ ============ ============ ============ ============
Long-term obligations including current
maturities - continuing operations (8) ... $ 3,280,113 $ 3,768,928 $ 3,905,518 $ 3,950,576 $ 4,244,077
Long-term obligations including current
maturities included in net assets of
discontinued operations .................. 504,580 514,964 740,453
Capitalization from continuing operations:
Common stock equity ...................... 53% 50% 44% 43% 42%
Cumulative preferred stock of HL&P
(including current maturities) ........ 2% 5% 7% 7% 7%
Long-term debt (including current
maturities) ........................... 45% 45% 49% 50% 51%
- -----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures:
HL&P electric capital and nuclear fuel
expenditures (excluding AFUDC) (9) ....... $ 314,934 $ 296,635 $ 412,899 $ 329,016 $ 337,082
Non-regulated electric power project
expenditures and advances (excluding
capitalized interest) ...................... 493,179 49,835 7,087 35,796 1,625
Cable television additions and other
cable-related investments - discontinued . 47,601 84,071 61,856 45,233
Corporate headquarters expenditures
(excluding capitalized interest) (9) ..... 5,308 89,627 44,250 26,034
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects a reclassification of HI Energy's equity income from Other-Income
Expense) to Revenues.
(2) The Company adopted Statement of Position (SOP) 93-6, "Employers'
Accounting for Employee Stock Ownership Plans," effective January 1, 1994,
which had the effect of reducing net income while increasing earnings per
share. See Note 9(b) to the Financial Statements. SOP 93-6 is effective
only with respect to financial statements for periods after January 1,
1994, and no restatement was permitted for prior periods.
(3) The 1994 cumulative effect relates to the change in accounting for
postemployment benefits. See also Note 9(d) to the Financial Statements.
The 1992 cumulative effect relates to the change in accounting for
revenues.
(4) All common share data reflect a two-for-one common stock dividend
distribution in December 1995.
(5) Year ended December 31, 1993 includes five quarterly dividends of $.375
per share due to a change in the timing of the Company's Board of
Directors' declaration of dividends. Dividend payout was $1.50 per share
for 1993.
(6) The return on average common equity for 1995 includes the gain on the sale
of the Company's cable television subsidiary. The return on average common
equity excluding the gain was 11.7%.
(7) The calculation of return on average common equity has been changed from a
13-month average to a beginning plus ending balance formula. Prior years
have been restated for consistent presentation.
(8) Includes Cumulative Preferred Stock subject to mandatory redemption.
(9) During 1995 and 1996, HL&P made payments toward the purchase of its
corporate headquarters building. Such payments are not reflected in the
Company's electric capital and nuclear fuel expenditures because they are
affiliate transactions eliminated upon consolidation.
23
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA OF HL&P.
The following table sets forth selected financial data with respect to
HL&P's financial condition and results of operations and should be read in
conjunction with the Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 4,025,027 $ 3,680,297 $ 3,746,085 $ 4,079,863 $ 3,826,841
------------ ------------ ------------ ------------ ------------
Income after preferred dividends but
before cumulative effect of change
in accounting ......................... $ 406,855 $ 450,977 $ 461,381 $ 449,750 $ 375,955
Cumulative effect of change in
accounting (1) ........................ (8,200) 94,180
------------ ------------ ------------ ------------ ------------
Income after preferred dividends .......... $ 406,855 $ 450,977 $ 453,181 $ 449,750 $ 470,135
============ ============ ============ ============ ============
Return on average common
equity ................................ 10.5% 11.8% 12.0% 12.3% 13.3%
Ratio of earnings to fixed charges
before cumulative effect of change
in accounting ......................... 3.71 3.75 3.80 3.40 2.73
Ratio of earnings to fixed charges and
preferred dividend requirements
before cumulative effect of change
in accounting ......................... 3.24 3.20 3.20 2.90 2.34
- ------------------------------------------------------------------------------------------------------------------------------
At year-end:
Total assets .......................... $ 10,596,232 $ 10,665,259 $ 10,850,981 $ 10,753,616 $ 10,790,052
Long-term obligations including
current maturities (2) ............. $ 2,931,015 $ 3,220,015 $ 3,356,789 $ 3,402,032 $ 3,796,719
Capitalization:
Common stock equity ................ 56% 52% 51% 50% 47%
Cumulative preferred stock
(including current maturities) .. 2% 6% 7% 7% 7%
Long-term debt (including current
maturities) ..................... 42% 42% 42% 43% 46%
- ------------------------------------------------------------------------------------------------------------------------------
Capital and nuclear fuel expenditures
(excluding AFUDC) (3) ................. $ 382,992 $ 391,550 $ 412,899 $ 329,016 $ 337,082
Percent of capital expenditures
financed internally from
operations ............................ 140% 110% 216% 158% 137%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1994 cumulative effect relates to the change in accounting for
postemployment benefits. The 1992 cumulative effect relates to the
change in accounting for revenues from a cycle billing to a full accrual
method effective January 1, 1992.
(2) Includes Cumulative Preferred Stock subject to mandatory redemption.
(3) 1995 and 1996 expenditures include payments toward the purchase of HL&P's
corporate headquarters building.
24
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in combination
with the financial statements and notes contained in Item 8 of this Form 10-K.
Statements contained in this Form 10- K 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 might 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
Houston Industries Incorporated (Company) and Houston Lighting & Power Company
(HL&P) with the Securities and Exchange Commission (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 MERGER
On December 17, 1996, the shareholders of the Company and NorAm Energy
Corp. (NorAm) approved an Agreement and Plan of Merger (Merger Agreement)
pursuant to which the Company will merge into HL&P, and NorAm will merge into a
subsidiary of the Company (Merger Sub). Upon consummation of the mergers
(collectively, 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.
NorAm is principally engaged in the distribution and transmission of
natural gas, including the gathering, storage and marketing of natural gas.
Through its Entex, Arkla and Minnegasco distribution divisions, NorAm is the
nation's third-largest natural gas utility in terms of customers served, with
over 2.7 million customers in six states. NorAm operates interstate gas
pipeline facilities through NorAm Gas Transmission Company and Mississippi
River Transmission Corporation. It also owns natural gas gathering assets in
Oklahoma, Louisiana, Arkansas and Texas and is engaged in various other
energy-related businesses, including natural gas and electric wholesale
trading, gas storage, wholesale electric services and providing unregulated
retail energy services to industrial and large commercial customers.
The acquisition of NorAm is expected to add 2.1 million customers to
Houston's customer base (net of NorAm customers who are already in HL&P's
service territory) and to increase the combined companies' domestic retail
customer base to approximately 3.6 million customers in six states. In
addition, the Company and HL&P expect to benefit from NorAm's gas and electric
wholesale trading organization and, by combining the expertise of the NorAm
trading organization with HL&P's electric power expertise, develop a wholesale
energy trading and risk management business. NorAm's international strategy,
which emphasizes investments in the gas transmission and distribution
businesses, should complement the Company's existing international operations,
which are currently focused on power plant development and acquisition of
electric distribution systems.
Unless otherwise stated, the information presented in this Form 10-K
relates solely to the Company and HL&P without giving effect to the Merger.
Merger Consideration. Under the Merger Agreement, each share of common
stock of the Company, including each associated preference stock right,
outstanding immediately prior to the effective time of the Merger (other than
shares owned by the Company or HL&P, which will be canceled) will be converted
automatically into one share of Houston common stock, and each
25
<PAGE> 26
outstanding share of common stock of NorAm will be converted into the right to
receive cash or Houston common stock. The cash consideration for each NorAm
share will be $16.00 in cash (subject to increase if the Merger closes after
May 11, 1997). 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 number of shares of Houston common stock issued per share of NorAm
common stock will be not less than 0.6154 shares nor more than 0.7529 shares
(the actual number of shares will depend upon the average closing price of
Houston common stock (Average Price of HI Common Stock) on the New York Stock
Exchange for each of the first 20 consecutive trading days in the period
commencing 25 trading days prior to the closing date of the Merger). Depending
on the Average Price of HI Common Stock prior to the closing of the Merger and
assuming that 50 percent of the NorAm shares of common stock are converted into
shares of Houston common stock, it is estimated that the total number of shares
of Houston common stock issued and outstanding immediately after the Merger
would increase by a range of 47 million to 58 million shares.
The Merger 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. The
Company intends to finance the cash portion of the Merger consideration through
bank borrowings and will account for the Merger as a purchase. For additional
information regarding the financing of the Merger, see "--Liquidity and Capital
Resources--Company--Sources of Capital Resources and Liquidity--The Merger"
below.
Regulatory Approvals and Consents. The closing of the Merger is
subject to the satisfaction or waiver of various conditions contained in the
Merger Agreement, including the obtaining of all required governmental
consents. As of March 1, 1997, approvals have been received from all state
regulatory commissions and municipalities whose prior approval was required.
In February 1997, the Federal Energy Regulatory Commission (FERC)
initiated a jurisdictional inquiry to determine whether its prior approval of
the Merger is required under Section 203 of the Federal Power Act of 1935
(Federal Power Act). FERC directed NorAm Energy Services, Inc. (NES), a
subsidiary of NorAm engaged in the power marketing business, to set forth its
views as to whether such prior approval 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. The Company believes that FERC approval is not
required for the Merger and that application of FERC jurisdiction to a
transaction of this nature would be unprecedented. In March 1997, NES filed a
response with FERC stating NES' view that FERC does not have jurisdiction over
the Merger and requesting that FERC promptly issue an order ruling on the basis
of its jurisdiction. NES noted, however, that it was considering, based on the
possibility of an expedited review of the Merger under guidelines recently
issued by FERC, the possibility of filing an application under Section 203 of
the Federal Power Act for approval of the Merger.
The Company and HL&P have filed an application with the SEC requesting
an order granting Houston 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). If the order is not granted and HL&P determines
that upon consummation of the Merger Houston would not be an exempt public
utility holding company under Section 3(a)(2) of the 1935 Act, the Merger
Agreement provides that NorAm and the Company would both be merged into HL&P,
with HL&P being the surviving corporation and being renamed "Houston Industries
Incorporated ". The primary difference resulting
26
<PAGE> 27
from this alternative merger structure is that NorAm would not be a wholly
owned subsidiary of Houston and all of the regulated utility assets of HL&P and
NorAm would be held within the same corporation. Under such circumstances, no
public utility holding company would exist.
27
<PAGE> 28
RESULTS OF OPERATIONS
HOUSTON INDUSTRIES INCORPORATED
A summary of selected consolidated financial data for the Company and
its subsidiaries is set forth below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------- Percent
1996 1995 Change
---------- ---------- ------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues ............................... $4,095,277 $3,729,271 10
Operating Expenses ..................... 3,104,811 2,823,821 10
Operating Income ....................... 990,466 905,450 9
Interest and Other Charges ............. 329,945 326,340 1
Income Taxes ........................... 200,165 199,555 --
Income from Continuing Operations ...... 404,944 397,400 2
Gain from Discontinued Operations ...... 708,124 --
Net Income ............................. 404,944 1,105,524 (63)
<CAPTION>
Year Ended December 31,
----------------------- Percent
1995 1994 Change
---------- ---------- ------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues ............................... $ 3,729,271 $ 3,752,573 (1)
Operating Expenses ..................... 2,823,821 2,785,521 1
Operating Income ....................... 905,450 967,052 (6)
Interest and Other Charges ............. 326,340 318,599 2
Income Taxes ........................... 199,555 230,424 (13)
Income from Continuing Operations ...... 397,400 423,985 (6)
Gain (Loss) from Discontinued
Operations ........................... 708,124 (16,524) --
Net Income ............................. 1,105,524 399,261 177
</TABLE>
- -----------------
All common stock data included in Item 7 of this Report reflect the Company's
two-for-one common stock dividend distribution in December 1995. In July 1995,
the Company sold KBLCOM Incorporated (KBLCOM), its cable television subsidiary.
The operations of KBLCOM are reflected as discontinued operations. For
additional information, see Notes 5(a) and 13 to the Company's Consolidated and
HL&P's Financial Statements in Item 8 of this Report (Financial Statements).
EARNINGS - THE COMPANY
1996 Compared to 1995. Consolidated earnings from continuing
operations were $405 million, or $1.66 per share, for 1996, compared to
earnings of $397 million, or $1.60 per share, in 1995. The Company's 1995 net
income was $1.1 billion, or $4.46 per share, including a one-time after-tax
gain of $708 million, or $2.86 per share, recorded upon the sale of the
Company's cable television subsidiary.
The Company's earnings include non-recurring, after-tax charges
amounting to $67 million in 1996 and $24 million in 1995. The non-recurring
charges in 1996 included a $62 million after-tax
28
<PAGE> 29
charge associated with HL&P's settlement of litigation relating to the South
Texas Electric Generating Station (South Texas Project) and $5 million
associated with the write down of an additional portion of Houston Industries
Energy, Inc.'s (HI Energy) investment in two suspended waste tire-to-energy
plants in Illinois. After adjusting for non-recurring gains and charges in both
years, consolidated earnings from continuing operations per share rose nearly 14
percent to $1.93 in 1996 from $1.70 in 1995, while income from continuing
operations rose to $472 million in 1996 from $422 million the previous year. The
improvement in earnings resulted from increased sales at HL&P, improved results
at HI Energy and a full year of after-tax dividend income ($37 million in 1996
compared to $18 million in 1995) from the Company's investment in Time Warner
Inc. (Time Warner) securities.
HL&P's 1996 contribution to net income of the Company was $407 million
after dividends on preferred stock as compared to $451 million in 1995. HI
Energy reported 1996 earnings of approximately $0.2 million compared to a loss
of $33 million in 1995.
Other revenues of the Company increased from $49 million in 1995 to
$70 million in 1996 due primarily to equity earnings from a Brazilian electric
utility in which HI Energy acquired an 11.35 percent interest in May of 1996.
Other operating expenses were $73 million and $121 million in 1996 and 1995,
respectively. The decline is primarily attributed to reduced HI Energy
expenses, including a $21 million reduction in nonrecurring charges related to
the previously discussed Illinois projects and reduced project development
costs.
1995 Compared to 1994. Consolidated earnings per share were $4.46 for
1995, an increase of $2.84 per share from 1994. The Company's 1995 earnings
benefited significantly from a one-time after-tax gain of $708 million or $2.86
per share recorded upon the sale of the Company's cable television subsidiary.
The gain was reflected in discontinued operations on the Company's Statements
of Consolidated Income. The Company's 1995 consolidated earnings per share from
continuing operations were $1.60 per share, compared to $1.72 per share in
1994.
HL&P contributed $1.82 per share in 1995 (reflecting net income of
$451 million after dividends on preferred stock). In 1995, HI Energy sustained
a net loss of $33 million or $.13 per share. The net loss included an $18
million after-tax charge to earnings resulting from the establishment of a
valuation allowance reflecting the impairment of the ability of the two waste
tire- to-energy projects to repay $28 million in subordinated debt advanced to
the projects by HI Energy. This impairment is a result of the repeal by the
State of Illinois of an operating subsidy benefiting the projects, see Note
4(c) to the Financial Statements. Earnings for 1995 included after-tax dividend
income of approximately $18 million related to Time Warner securities.
The Company had other revenues of $49 million in 1995 compared to $6
million in 1994. Other revenues are principally from electric sales and
operating revenues from HI Energy. The increase in other revenues was primarily
due to revenues from Edese S.A. (Edese), a foreign electric utility operating
company in which HI Energy acquired a 90 percent ownership interest in 1995.
Other operating expenses for the Company were $121 million for 1995 compared to
$36 million in 1994. The increase is principally due to increased HI Energy
operating expenses for Edese, the $18 million after-tax charge to earnings
relating to the waste tire-to-energy projects and increased project development
costs.
29
<PAGE> 30
HL&P
Summary of selected financial data for HL&P is set forth below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------- Percent
1996 1995 Change
---------- ----------- ------
(Thousands of Dollars)
<S> <C> <C> <C>
Base Revenues (1) ................. $ 2,743,375 $ 2,645,303 4
Reconcilable Fuel Revenues (2) .... 1,281,652 1,034,994 24
Operating Expenses (3) ............ 3,292,699 2,945,633 12
Operating Income (3) .............. 732,328 734,664 --
Other Income (Expense) ............ (70,879) (5,923) --
Interest Charges .................. 232,031 247,809 (6)
Income After Preferred Dividends .. 406,855 450,977 (10)
<CAPTION>
Year Ended December 31,
------------------------- Percent
1995 1994 Change
---------- ----------- ------
(Thousands of Dollars)
<S> <C> <C> <C>
Base Revenues (1) ................. $ 2,645,303 $ 2,673,146 (1)
Reconcilable Fuel Revenues (2) .... 1,034,994 1,072,939 (4)
Operating Expenses (3) ............ 2,945,633 3,003,203 (2)
Operating Income (3) .............. 734,664 742,882 (1)
Other Income (Expense) ............ (5,923) 1,554 --
Interest Charges .................. 247,809 249,472 (1)
Income After Preferred Dividends .. 450,977 453,181 --
</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 - HL&P" in
this section for further discussion.
(3) Includes income taxes.
EARNINGS - HL&P
1996 Compared to 1995. HL&P's net earnings after preferred dividends
were $407 million for 1996 compared with $451 million the previous year. The
decrease was due to a $62 million (after-tax) one-time charge associated with
the settlement of litigation claims related to the South Texas Project, and the
$33 million (after-tax) amortization of HL&P's investment in certain lignite
reserves. Increased sales resulting from favorable weather and economic
conditions helped offset the effects discussed above. Total kilowatt-hour (KWH)
sales rose 6 percent during 1996, with increases of 4 percent in the
residential class, 3 percent in commercial and 7 percent in industrial sales.
1995 Compared to 1994. HL&P's 1995 earnings were $451 million, a
decline of $2 million from 1994. Earnings for 1995 benefited from 5 percent
growth in residential and 4 percent growth in commercial KWH sales resulting
from continued customer growth and warmer summer weather in 1995. However, the
revenue improvements were offset by (i) reduced electric rates stemming from
the settlement of HL&P's most recent rate case (Rate Case Settlement), (ii)
HL&P's decision to write down $50 million ($33 million after-tax) of its
investment in the South Texas Project as
30
<PAGE> 31
permitted under the Rate Case Settlement and (iii) increased non-routine
operating expenses partially associated with staff severance costs and
litigation. HL&P's earnings for 1994 reflected a one-time after-tax charge of
$46 million in the fourth quarter also related to the Rate Case Settlement.
OPERATING REVENUES AND SALES - HL&P
1996 Compared to 1995. The base revenue increase is primarily the
result of sales growth in 1996 and, to a lesser degree, the impact of weather.
The increase of 24 percent in reconcilable fuel revenues resulted
primarily from increased natural gas prices. Reconcilable fuel revenues are
revenues that are collected through a fixed fuel factor. The Public Utility
Commission of Texas (Utility Commission) provides for 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. Revenues collected through such factor are adjusted
monthly to equal expenses; therefore, such revenues and expenses have no effect
on earnings unless fuel costs are determined 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, respectively. Fuel costs are
reviewed during periodic fuel reconciliation proceedings, which are required at
least every three years.
At December 31, 1996, HL&P's cumulative under-recovery of fuel costs
was $84 million. In October 1996, HL&P filed with the Utility Commission a
request to implement a temporary fuel surcharge over a six-month period to
address a material under-recovery in eligible fuel costs during the period
February 1995 through August 1996. This proceeding (Docket No. 16486) was
settled and became effective on January 1, 1997. According to the terms of the
settlement, the amount to be recovered by HL&P through the surcharge is
approximately $70 million, inclusive of interest through June 30, 1997.
1995 Compared to 1994. The $28 million decline in 1995 base revenues
was primarily due to (i) decreased base rates resulting from the Rate Case
Settlement, (ii) decreased firm industrial KWH sales and (iii) a reduction of
revenues associated with recovery of certain firm capacity purchased power
costs included in base rates. See Note 11(b) to the Financial Statements for
discussion of firm capacity costs.
FUEL AND PURCHASED POWER EXPENSE - HL&P
Fuel costs constitute the single largest expense for HL&P. The mix of
fuel sources for generation of electricity is determined primarily by system
load and the unit cost of fuel consumed. The average cost of fuel used by HL&P
in 1996 was $1.82 per million British Thermal Units (MMBtu) ($2.31 for natural
gas, $2.11 for coal, $ 1.11 for lignite and $0.62 for nuclear). In 1995, the
average cost of fuel was $1.59 per MMBtu ($1.69 for natural gas, $2.03 for
coal, $1.25 for lignite and $0.58 for nuclear).
1996 Compared to 1995. Fuel expenses in 1996 increased by $146 million
or 17 percent over 1995 expenses. The increase was driven by significant
increases in the average unit cost of natural gas, which rose to $2.31 in 1996
from $1.69 per MMBtu in 1995. Purchased power expenses also increased in 1996
by $89 million over 1995 expenses. This change was driven by an increase in
both the amount of KWH purchased by HL&P and the unit cost paid.
1995 Compared to 1994. Fuel expense increased in 1995 by 2 percent, or
$18 million when compared to 1994, primarily due to the receipt in 1994 of $66
million from the sale of receivables
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received by HL&P as a result of a litigation settlement. For additional
information on this transaction, see Note 14 to the Financial Statements.
Excluding the effects of such transaction, 1995 fuel expense declined by 5
percent from 1994. This decline was attributable to (i) a general decline in
the unit cost of natural gas and (ii) the increased use of nuclear generation
(which has a per unit fuel cost that is substantially lower than HL&P's other
fuel sources). Purchased power expense decreased $175 million in 1995 as
compared to 1994 resulting primarily from the expiration of certain purchased
power contracts.
OPERATION AND MAINTENANCE EXPENSES, DEPRECIATION, AMORTIZATION AND OTHER - HL&P
1996 Compared to 1995. Operations and maintenance expense increased by
$23 million or 3 percent in 1996. This increase is largely attributable to the
implementation of an employee incentive program and an increase in severance
payments paid to employees, as described below. A significant decline in
employee benefits-related expenses partially offset the other increases in
operations and maintenance expense.
In 1995, HL&P incurred $15 million in work force severance costs as a
result of its efforts to streamline and improve certain business activities. In
1996, HL&P incurred additional severance costs of $30 million. These severance
costs reflect total staff reductions of 1,164 employees over the two-year
period.
Depreciation and amortization expense increased $71 million in 1996
compared to 1995. The increase is due to the accelerated amortization of $50
million ($33 million after-tax) of HL&P's investment in certain lignite
reserves. In 1996, HL&P began amortizing its $153 million investment in these
lignite reserves, which are associated with a cancelled generation project. The
lignite reserves will be fully amortized no later than 2002. The 1996 increase
in depreciation and amortization expense also included a full year of
amortization for HL&P's 1995 early retirement program and increased
depreciation expense related to electric plant in service. In 1996, HL&P
continued to write down its investment in the South Texas Project at a rate of
approximately $50 million per year. This amortization is in addition to
ordinary depreciation associated with the South Texas Project. The accelerated
amortization of the lignite reserves and the South Texas Project is pursuant to
HL&P's most recent rate order.
For additional information regarding these amortizations, see Note
3(a) to the Financial Statements.
1995 Compared to 1994. 1995 operation and maintenance expenses
increased $37 million over 1994 expenses. Substantially all of the increase
resulted from (i) employee severance expenses, (ii) other employee benefits
adjustments and (iii) certain litigation expenses. Depreciation and
amortization expense for 1995 increased $77 million compared to 1994, primarily
due to the $50 million amortization recorded on the South Texas Project. See
Note 3(a) to the Financial Statements. Other taxes decreased $6 million for
1995 compared to 1994, primarily due to decreased state gross receipts
obligations attributable to base and fuel refunds. Other-net expense for 1995
increased $13 million compared to 1994 primarily as a result of a one-time,
pre-tax charge of $9 million incurred in connection with mine-related costs
which are not recoverable under the Rate Case Settlement.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
OF THE COMPANY AND HL&P
Earnings for the past three years are not necessarily indicative of
future earnings and results. The level of future earnings depends on numerous
factors ranging from growth in energy sales, weather, HI Energy's future
results of operations, competition, legislative and other regulatory
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changes, the rate of economic growth in HL&P's service area and the ability of
the Company and HL&P to control costs and maintain a pricing structure that is
both attractive to customers and profitable to the Company and HL&P. Future
earnings will also be affected by the impact of the acquisition of NorAm and
its integration into the Company's consolidated operations.
RATE MATTERS AND CONTINGENCIES
The Utility Commission has jurisdiction (or in some cases appellate
jurisdiction) over HL&P's electric rates and as such monitors HL&P's earnings
to ensure that HL&P is not earning in excess of its permitted rate of return.
Subject to certain changes in existing regulation or legislation, HL&P
is precluded under the terms of its Rate Case Settlement from seeking any
increase in its rates until December 31, 1997. For information regarding the
terms of the settlement, see Note 3 to the Financial Statements.
The Company and HL&P are involved in other legal, tax and regulatory
proceedings before various courts, regulatory agencies and governmental
authorities, some of which may involve substantial amounts. For additional
information regarding such matters, see Notes 3(a) and 11 to the Financial
Statements.
COMPETITION
Due to changing government regulations, technological developments and
the availability of alternative energy sources, the U.S. electric utility
industry has become increasingly competitive. Such competition affects HL&P's
business both in terms of sources of power supply available to HL&P and
alternatives available to traditional customers of HL&P to meet their power
needs.
Long-Term Trends in Industry. Based on a strategic review of the
Company and HL&P's business and of ongoing developments in the electric utility
and related industries regarding competition, regulation and consolidation, the
Company's management believes that the pace of change affecting the electric
utility industry is likely to accelerate, albeit in a state-by-state fashion.
The Company's management also believes that the businesses of electricity and
natural gas are converging and consolidating and that these trends will alter
the structure and business practices of companies serving these markets in the
future. In particular, the Company's management has observed a trend toward
performance-based rate making for regulated distribution and transmission
operations. This trend should increase the pressure on electric utilities to
become more efficient operators.
In order to adapt to the increasingly competitive environment in which
HL&P operates, the Company and HL&P intend to evaluate and consider a wide
array of potential business strategies. These may include business combinations
or acquisitions involving other utility or non-utility businesses or
properties, internal restructuring, and reorganizations or dispositions of
currently owned properties or currently operating business units. In addition,
the Company and HL&P may engage in new business ventures, such as electric
power marketing, which arise from competitive and regulatory changes in the
utility industry. Pursuit of any of the above strategies, or any combination
thereof, may significantly affect the business operations and financial
condition of the Company. For a discussion of the expected impact of the Merger
on the Company's and HL&P's competitive position, see "--The Merger" above.
Competition in Wholesale Market. The Energy Policy Act of 1992 and the
Texas Public Utility Regulatory Act (PURA) both contain provisions intended to
facilitate the development of a wholesale energy market. Although HL&P's
wholesale sales traditionally have accounted for less than 1 percent of its
total revenues, the expansion of competition in the wholesale electric market
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is significant in that it has increased the range of non-utility competitors,
such as exempt wholesale generators (EWGs) and power marketers, in the Texas
electric market as well as resulted in fundamental changes in the operation of
the state transmission grid.
In February 1996, the Utility Commission adopted rules granting
third-party users of transmission systems open access to such systems at rates,
terms and conditions comparable to those available to utilities owning such
transmission assets. Under the Utility Commission order implementing the rule,
HL&P was required to separate, on an operational basis, its wholesale power
marketing operations from the operations of the transmission grid and, for
purposes of transmission pricing, to disclose each of its separate costs of
generation, transmission and distribution.
In January 1997, the Utility Commission approved interim transmission
cost of service rates under the new transmission access pricing rules. Although
the actual impact on HL&P of the new pricing rules will not be known until
final approval of the rates (which is not expected to occur until April 1997),
HL&P estimates that the final rates will result in increased transmission costs
of between $22 and $25 million per year. To mitigate any cost increases to
utilities and/or their customers, the Utility Commission will phase in the
increased transmission costs in 10 percent increments during the three-year
period beginning with the implementation of the rule. At the end of the
phase-in period, the Utility Commission expects that each transmission-owning
utility will have either adjusted its cost structures or requested a change in
rates to account for such increased transmission cost. In 1997, HL&P expects to
pay increased transmission costs under the rule of between $2.2 and $2.5
million. In addition, based on rate substitution provisions contained in HL&P's
existing transportation contracts, HL&P expects that its rights to receive
contractual payments for transmission wheeling, which in 1996 amounted to $9.4
million, will be terminated.
The Company believes that the transmission access pricing rules
discriminate against utilities, like HL&P, that have low cost transmission
facilities and operate in compact service territories. Under the rules, HL&P and
similarly situated utilities are expected to pay more in transmission fees than
they will receive in fees, while utilities with high cost transmission
facilities operating in spread-out service territories will receive more in
transmission fees than they pay out. HL&P and other interested parties have
petitioned the Utility Commission to amend the transmission pricing rules to,
among other things, simplify transmission pricing and eliminate cross- subsidies
inherent in the current rules. In March 1997, HL&P also filed a lawsuit alleging
that the Utility Commission's transmission pricing rules are unlawful because
they violate state statutory law, the Texas and U.S. Constitutions and, in
adopting the rules, the Utility Commission failed to comply with the notice,
comment and reasoned justification requirements of the Texas Governmental Code.
HL&P has asked the court to (a) declare invalid the portion of the rules that
created a transmission subsidy for some transmission providers and a deficit for
HL&P and others and (b) remand the rulemaking to the Utility Commission for
further proceedings. No assurance, however, can be given to the ultimate outcome
of this lawsuit.
In August 1996, the Utility Commission approved the creation of an
independent system operator (ISO) to manage the state's electric grid. The ISO
is a key component of implementing the Utility Commission's overall strategy to
create a competitive wholesale market. The ISO is responsible for ensuring that
all power producers and traders have fair access to the Texas electric
transmission system. The Texas ISO plan is the first ISO proposal to be
implemented in the U.S. The ISO is governed by an equal number of
representatives from each of six wholesale market groups: investor owned
utilities, municipally owned utilities, electric cooperatives and river
authorities, transmission dependent utilities, independent power producers and
power marketers.
Competition from Self-Generation. HL&P estimates that since 1978,
cogeneration projects representing approximately one-third of HL&P's current
total peak generating capability have been built in the Houston area and that,
as a result, HL&P has lost approximately 2,500 megawatts (MW) in customer load
to self-generation. HL&P has implemented flexible pricing to respond to the
threat
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of competition in situations where large industrial customers have an
alternative to buying power from HL&P, primarily by constructing their own
generating facilities. Under a tariff option approved by the Utility Commission
in 1995, HL&P can price its industrial rate to new or expanding loads within a
range between 6 percent above its marginal cost and its full embedded cost
rate. HL&P determines the size of the discount based on its assessment of the
customer's alternative power price. While flexible tariff structures may help
HL&P increase or retain sales to industrial customers (and reduce costs that
would otherwise be borne by other customers), such tariffs generally result in
sales at lower margins. The future effect of self-generation facilities cannot
currently be determined but may be adverse.
Competition in Retail Market. Although neither federal nor Texas law
currently permits retail sales by unregulated entities such as cogenerators or
EWGs, HL&P anticipates that cogenerators, EWGs and other interests will
continue to exert pressure to obtain access to the electric transmission and
distribution systems of regulated utilities for the purpose of making retail
sales to customers of regulated utilities.
In January 1997, the Utility Commission delivered a report to the
Texas legislature on the scope of competition in Texas electric markets and the
impact of competition and industry restructuring on customers in both
competitive and non-competitive markets (including legislative recommendations
to promote the public interest in such markets). In its report, the Utility
Commission recommended that the Texas legislature enact legislation to
implement retail competition in Texas but recommended against any legislation
that would introduce broad-based retail competition before 2000.
Stranded Costs. As the U.S. electric utility industry continues its
transition to a more competitive environment, a substantial amount of fixed
costs previously approved for recovery under traditional utility regulatory
practices (including regulatory assets and liabilities) may become "stranded,"
i.e., unrecoverable at competitive market prices. The issue of stranded costs
could be particularly significant with respect to fixed costs incurred in
connection with the past construction of generation plants, such as nuclear
power plants which, because of their high fixed costs, would not command the
same price for their output as they have in a regulated environment.
In January 1997, the Utility Commission delivered a report to the
Texas legislature on stranded investments in the electric industry in Texas.
The report estimated that the total amount of stranded costs for all Texas
utilities could be as high as $21 billion, based on one set of assumptions, and
alternatively projected that such costs could be minimal or non-existent, based
on another set of assumptions. The broad range of estimates illustrates the
inherent uncertainty in calculating these costs.
The Utility Commission has identified five possible mechanisms for
recovering stranded costs, including (i) access charges to all transmission and
distribution customers; (ii) exit fees to be charged to large wholesale or
industrial customers switching to an alternate supplier; (iii) writing down
over-valued generation assets and writing up transmission and distribution
assets; (iv) accelerating depreciation of generation assets while decelerating
depreciation of transmission and distribution assets; and (v) freezing rates at
current levels and applying any additional earnings from efficiency gains,
decreases in fuel prices, or service area growth against the stranded costs
allocated to customers. The Utility Commission, whose mandate under PURA with
respect to stranded cost issues was limited to preparing the report, has
requested that the legislature provide it further direction on these matters.
HI ENERGY
HI Energy participates primarily in the development and acquisition of
foreign independent power projects and the privatization of foreign generating
and distribution facilities. At December 31,
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1996, HI Energy's investments in these projects amounted to approximately $567
million. In May 1996, HI Energy purchased for $45 million an additional interest
in an Argentine utility. In May 1996, HI Energy also purchased for $392 million
an 11.35 percent ownership interest in Light Servicos de Eletricidade S.A.
(Light), an integrated electric power and distribution system that serves a
portion of the state of Rio de Janeiro, Brazil, including the City of Rio de
Janeiro.
During 1996, HI Energy satisfied its cash requirements primarily
through equity contributions and intercompany borrowings from the Company. As
of December 31, 1996, the balance of such intercompany borrowings was
approximately $162 million. Following the Merger, Houston will become subject
to limitations under the 1935 Act and applicable state regulations concerning
the financing, directly or indirectly, of foreign utility company and EWG
investments by a public utility. HI Energy intends to fund future cash
requirements for foreign investments through non-recourse borrowings, dividends
from its investments, equity contributions and permitted intercompany
borrowings.
For additional information regarding HI Energy, see "--Results of
Operations--Earnings--The Company " above and the discussion of non-regulated
electric power project expenditures and advances contained in "--Liquidity and
Capital Resources--Overview " below and Note 4 to the Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The liquidity and capital requirements of the Company and its
subsidiaries are affected primarily by capital programs and debt service
requirements. The capital requirements for 1996 were, and as estimated for 1997
through 1999 are, as follows:
<TABLE>
<CAPTION>
Millions of Dollars
---------------------------------
1996 1997 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Electric capital and nuclear fuel (excluding Allowance
for Funds Used During Construction) (AFUDC) (1) .... $ 315 $ 239 $ 253 $ 276
Non-regulated electric power project expenditures
and advances (excluding capitalized interest) (2) .. 493 42
Maturities of long-term debt, preferred stock
and minimum capital lease payments ................. 379 254 5 171
------ ------ ------ ------
Total .................................................. $1,187 $ 535 $ 258 $ 447
====== ====== ====== ======
</TABLE>
- --------------
(1) During 1996, HL&P made a payment toward the purchase of its corporate
headquarters building. Such payment is not reflected in the Company's
electric capital and nuclear fuel expenditures because it is an
intercompany transaction eliminated upon consolidation.
(2) Expenditures in the table reflect only expenditures made or to be made
under existing contractual commitments entered into by HI Energy.
Additional capital expenditures are dependent upon the nature and
extent of future project commitments (some of which may be
substantial) entered into by HI Energy. Expenditures for 1996 include
a $392 million investment in Light, a Brazilian electric utility.
The foregoing estimates are based on numerous assumptions, some of
which may prove to be incorrect. Actual liquidity and capital requirements will
also vary because of changes in
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governmental regulations, the resolution of various litigation and other
contingencies and changes in economic conditions.
COMPANY CONSOLIDATED CAPITAL REQUIREMENTS
The cash requirements of the Company and its subsidiaries stem
primarily from operating expenses, capital expenditures, payment of common and
HL&P's preferred stock dividends, and interest and principal payments on debt.
In 1996, net cash provided by operating activities totaled $914 million.
Investing activities resulted in a net outflow of $833 million, primarily due
to construction and nuclear fuel expenditures, and additional investments in
non-regulated foreign electric power projects. Financing activities for 1996
resulted in a net cash outflow of $85 million primarily due to open market
purchases of common stock of the Company, the extinguishment of long-term debt,
redemption of preferred stock and payment of common stock dividends offset by
additional commercial paper borrowings.
During 1996, the Company purchased 16,042,027 shares of its common
stock for an aggregate purchase price (including commissions) of $361 million.
The purchases were financed with short-term borrowings. For additional
information on the Company's stock repurchase program, see Note 5(c) to the
Financial Statements.
In the fourth quarter of 1996, the Company repaid at maturity $200
million of its 7 1/4% debentures. The retirement was funded using proceeds from
short-term borrowings.
HL&P CAPITAL REQUIREMENTS
Cash Requirements. HL&P's cash requirements stem primarily from
operating expenses, capital expenditures, payment of common and preferred stock
dividends, interest and principal payments on debt, and redemptions of
preferred stock. In 1996, HL&P's net cash provided by operating activities
totaled approximately $917 million, and net cash used in HL&P's investing
activities totaled $395 million, including allowance for borrowed funds used
during construction. HL&P's financing activities for 1996 resulted in a net
cash outflow of $597 million. Included in these activities were the payment of
dividends, the extinguishment of long-term debt, the redemption of preferred
stock and the payment of matured bonds. For information with respect to these
matters, see Notes 6 and 7(b) to the Financial Statements.
Capital Program. In 1996, HL&P's capital and nuclear fuel expenditures
(excluding AFUDC) totaled approximately $383 million with estimated
expenditures for 1997, 1998 and 1999 totaling $239 million, $253 million and
$276 million, respectively. HL&P's capital programs for the next three years,
which are expected to relate to costs for production, transmission,
distribution and general plant, are subject to periodic review and may be
revised at any time due to changes in load forecasts, regulatory and
environmental standards, and other factors.
During the next three years, it is anticipated that HL&P will require
approximately $430 million for repayment of maturing long-term debt, preferred
stock subject to mandatory redemption and capital leases. These expenditures
are anticipated to be $254 million in 1997, $5 million in 1998 and $171 million
in 1999.
Environmental Expenditures. The Federal Clean Air Act (Clean Air Act)
has required, and will continue to require, HL&P to increase its environmental
expenditures. It is estimated that requirements under the Clean Air Act for
modifications to existing facilities to reduce emissions of nitrogen oxides
(NOx) may result in expenditures of $40 million through 1999. No significant
expenditure is currently planned for the installation of continuous emissions
monitoring systems for 1997; however, approximately $1 million was incurred for
this equipment in 1996.
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The Environmental Protection Agency (EPA) identified HL&P as a
"potentially responsible party" (PRP) under the Comprehensive Environmental
Response, Compensation, and Liability Act for the costs of cleaning up a site
located adjacent to one of HL&P's transmission lines. HL&P believes that the
EPA took this action solely on the basis of information indicating that HL&P in
the 1950s acquired record title to a portion of the land on which the site is
located. HL&P does not believe that it now nor previously has had any ownership
interest in the land in question and has obtained a judgment from a court in
Galveston County, Texas to that effect. Accordingly, HL&P has not complied with
this order, even though HL&P understands that other responsible parties are
proceeding with site remediation. To date, neither the EPA nor any other PRP
has instituted a claim against HL&P for any share of the remediation costs, but
under current law if HL&P is determined to be a responsible party, HL&P could
be found to be jointly and severally liable for the remediation costs (which
HL&P estimates to be approximately $80 million in the aggregate) and could be
subjected to substantial fines and damage claims.
There exists the possibility that additional legislation related to
global climate change, electromagnetic fields and other environmental and
health issues may be enacted. Compliance with such legislation could
significantly affect the Company and HL&P. The precise impact of new
legislation, if any, will depend on the form of the legislation and the
subsequent development and implementation of applicable regulations.
COMPANY--SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
As of December 31, 1996, the Company had approximately $1.1 billion of
commercial paper outstanding, supported by two bank credit facilities
aggregating $1.5 billion (exclusive of bank credit facilities of subsidiaries).
Rates paid by the Company on its short-term borrowings are generally lower than
the prime rate.
The Merger. 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 finance subsidiary of Houston (Borrower) with a group of
commercial banks. As of the date hereof, the structure, terms and provisions of
the Bank Facilities are being negotiated with prospective lenders and have not
yet been finalized.
The Bank Facilities are expected to bear interest at a rate based upon
either the London Interbank Offered Rate plus a margin or a base rate plus a
margin or at a rate determined through a bidding process.
The borrowings may be secured by liens on or first priority security
interests in assets, which may include (i) the shares of common stock of NorAm
held by Houston or its affiliates after the Merger, (ii) the shares of common
and preferred stock of Time Warner currently owned by the Company, (iii) the
capital stock of subsidiaries of the Borrower and (iv) intercompany notes
evidencing any loans made by the Borrower to Houston or its direct or indirect
subsidiaries. The obligations under the Bank Facilities will not be secured by
the utility properties of HL&P or NorAm.
In order to provide liquidity to the Borrower to meet its financial
obligations, Houston may issue to the Borrower a new series of
preference stock of Houston and/or enter into a support agreement under which
it would agree to make cash contributions or advances to the Borrower from
excess cash flow (with calculations, definitions and payment mechanics to be
agreed upon). Houston may also agree to certain covenants, including certain
limitations on the payment of dividends on or the repurchase of Houston common
stock. The net proceeds of any disposition or monetization of the Time Warner
stock may be used to prepay borrowings under the Bank Facilities, subject to a
corresponding release by the banks of their security interest in the Time Warner
stock to the extent of any such prepayment.
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The Bank Facilities are also expected to contain customary covenants and
default provisions applicable to the Borrower and its subsidiaries, including
limitations on the ability of the Borrower and its subsidiaries to, among other
things, incur additional indebtedness (other than certain permitted
indebtedness), create liens and make investments or loans.
Other Sources of Capital. The Company has registered with the SEC 10
million shares of its common stock and $250 million principal amount of its
debt securities, all of which securities remain unissued. Subject to market
conditions, such securities could be sold to raise additional capital for the
Company prior to the Merger. Proceeds from the sale of these securities can be
used for general corporate purposes, including, but not limited to, the
redemption, repayment or retirement of outstanding indebtedness of the Company
or the advance or contribution of funds to one or more of the Company's
subsidiaries to be used for their general corporate purposes, including,
without limitation, the redemption, repayment or retirement of indebtedness or
preferred stock. In connection with the Merger, the Company has registered with
the SEC 315 million shares of common stock for issuance upon the consummation
of the Merger.
The Company owns 1 million shares of common stock and 11 million shares
of non-publicly traded convertible preferred stock of Time Warner. The Time
Warner preferred stock, which is entitled to cumulative annual dividends of
$3.75 per share until July 6, 1999, is currently convertible at the option of
the Company into 22.9 million shares of Time Warner common stock. The Company
reviews its investment in Time Warner on a regular basis and does not expect to
maintain its investment in Time Warner indefinitely. For additional information
regarding the Company's investment in Time Warner securities, see Notes 1(j)
and 13 to the Financial Statements.
Money Fund. The Company has consolidated its financing activities in
order to provide a coordinated, cost-effective method of meeting short- and
long-term capital requirements. As part of the consolidated financing program,
the Company has established a "money fund" through which its subsidiaries can
borrow or invest on a short-term basis. The funding requirements of individual
subsidiaries are aggregated and borrowing or investing is conducted by the
Company based on the net cash position.
In 1996, net funding requirements under the money fund were met with
borrowings under the Company's commercial paper program, except that HL&P's
short-term borrowing requirements were generally met with HL&P's commercial
paper program. In 1997, net funding requirements of the Company and HL&P are
expected to be met with a combination of commercial paper and bank borrowings.
HL&P--SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
HL&P expects to finance its 1997 through 1999 capital program with funds
generated internally from operations. HL&P has registered with the SEC $230
million aggregate liquidation value of its preferred stock and $580 million
aggregate principal amount of its debt securities that may be issued as first
mortgage bonds. Subject to market conditions, these securities could be issued
as another source of capital for HL&P. Proceeds from any sale of these
securities are expected to be used for general corporate purposes including the
purchase, redemption (to the extent permitted by the terms of the outstanding
securities), repayment or retirement of outstanding indebtedness or preferred
stock of HL&P. HL&P's existing registration statements will remain in effect
after the Merger.
In 1996, HL&P's interim financing requirements were met with the
issuance of commercial paper. At December 31, 1996, HL&P had a commercial paper
program supported by a bank line of credit of $400 million. A temporary $346
million increase in the amount of the facility was in effect
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<PAGE> 40
during a portion of the first quarter of 1997. At December 31, 1996, HL&P had
approximately $235 million of commercial paper outstanding.
In the fourth quarter of 1996, HL&P redeemed at 100 percent of their
liquidation value plus accrued dividends all four series of its variable term
preferred stock having an aggregate liquidation price of $220 million. The
redemption was funded using proceeds from short-term borrowings. 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 of its 7 5/8% series
first mortgage bonds. HL&P is required to redeem the remaining $25.7 million of
its $9.375 series preferred stock in April 1997. In January 1997, pollution
control revenue bonds aggregating $118 million were issued on behalf of HL&P by
the Brazos River Authority ($50 million) and the Matagorda County Navigation
District Number One ($68 million). The new bonds bear a floating interest rate,
and mature in 2018 and 2028, respectively. Proceeds from these issuances were
used to redeem, at 102% of their aggregate principal amount, pollution control
revenue bonds aggregating $118 million.
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 8.257% capital
securities and $250 million 8.125% preferred securities) and used the proceeds
to purchase subordinated debentures from HL&P. Proceeds from the sale of the
subordinated debentures were used by HL&P 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 information regarding these securities, see Note 17(b) to the
Financial Statements.
NEW ACCOUNTING ISSUES
The staff of the SEC has questioned certain current accounting practices
of the electric utility industry regarding the recognition, measurement and
classification of decommissioning costs for nuclear generating facilities
recorded on the financial statements of electric utilities. In response to
these questions, the Financial Accounting Standards Board (FASB) initiated a
project entitled "Accounting for Certain Liabilities Related to Closure or
Removal of Long-Lived Assets." Throughout 1995, the FASB reviewed the
accounting for closure or removal obligations, including decommissioning of
nuclear facilities. In February 1996, FASB issued an Exposure Draft
communicating the results of this project. The Exposure Draft outlines the
following: (i) the requirement of recognition of a liability based on the
present value of the estimated future cash outflows that will be required to
satisfy the closure or removal obligations, using a risk-free interest rate
(U.S. Treasury securities), (ii) an equal amount capitalized as part of the
costs of the related long-lived asset, depreciated over the life of the asset
and (iii) recognition of a regulatory asset or liability under Statements of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation," for differences in expenses recognized under this
statement and amounts charged to customers in rate-regulated entities. HL&P
believes that, while the proposed standard would also significantly increase
disclosure requirements, it would have minimal impact on the Company's and
HL&P's financial condition or results of operations.
40
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Electric utility ............................ $ 4,025,027 $ 3,680,297 $ 3,746,085
Other ....................................... 70,250 48,974 6,488
----------- ----------- -----------
Total .............................. 4,095,277 3,729,271 3,752,573
----------- ----------- -----------
EXPENSES:
Electric utility:
Fuel .................................... 1,024,945 879,148 860,936
Purchased power ......................... 322,263 233,494 408,963
Operation and maintenance ............... 888,699 866,170 828,748
Taxes other than income taxes ........... 246,288 245,890 251,421
Depreciation and amortization ............... 550,038 478,034 399,341
Other operating expenses .................... 72,578 121,085 36,112
----------- ----------- -----------
Total .............................. 3,104,811 2,823,821 2,785,521
----------- ----------- -----------
OPERATING INCOME ................................. 990,466 905,450 967,052
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Litigation settlements ...................... (95,000)
Allowance for other funds used during
construction ............................ 4,124 7,760 4,115
Time Warner dividend income ................. 41,610 20,132
Interest income ............................. 6,246 9,774 6,628
Other - net ................................. (12,392) (19,821) (4,787)
----------- ----------- -----------
Total .............................. (55,412) 17,845 5,956
----------- ----------- -----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt .................. 276,242 279,491 265,494
Other interest .............................. 33,738 21,586 25,076
Allowance for borrowed funds used during
construction ............................ (2,598) (4,692) (5,554)
Preferred dividends of subsidiary ........... 22,563 29,955 33,583
----------- ----------- -----------
Total .............................. 329,945 326,340 318,599
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING ........................ 605,109 596,955 654,409
INCOME TAXES ..................................... 200,165 199,555 230,424
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING ............................... 404,944 397,400 423,985
DISCONTINUED OPERATIONS (NET OF INCOME TAXES):
Gain on sale of cable television subsidiary . 708,124
Loss from discontinued cable television
operations .............................. (16,524)
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING ............................... 404,944 1,105,524 407,461
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS (NET OF INCOME
TAXES OF $4,415) ............................ (8,200)
----------- ----------- -----------
NET INCOME ....................................... $ 404,944 $ 1,105,524 $ 399,261
=========== =========== ===========
</TABLE>
(continued on next page)
41
<PAGE> 42
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING .......... $ 1.66 $ 1.60 $ 1.72
DISCONTINUED OPERATIONS:
Gain on sale of cable television
subsidiary ......................... 2.86
Loss from discontinued cable television
operations ......................... (.07)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POSTEMPLOYMENT BENEFITS ............. (.03)
----------- ----------- -----------
EARNINGS PER COMMON SHARE ........................ $ 1.66 $ 4.46 $ 1.62
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000) ........................... 244,443 247,706 245,707
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE> 43
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at Beginning of Year ............... $ 1,953,672 $ 1,221,221 $ 1,191,230
Add - Net Income ........................... 404,944 1,105,524 399,261
----------- ----------- -----------
Total ............................. 2,358,616 2,326,745 1,590,491
Common Stock Dividends:
1996, $1.50; 1995, $1.50; 1994, $1.50
(per share) ........................... (361,126) (371,760) (369,270)
Stock Dividend Distribution ................ (1,313)
----------- ----------- -----------
Balance at End of Year ..................... $ 1,997,490 $ 1,953,672 $ 1,221,221
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE> 44
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Production ........................................... $ 7,495,244 $ 7,423,891
Transmission ......................................... 934,086 927,027
Distribution ......................................... 2,818,636 2,711,482
General .............................................. 1,139,409 1,027,090
Construction work in progress ........................ 251,497 320,040
Nuclear fuel ......................................... 241,001 217,604
Plant held for future use ............................ 48,631 48,631
Other property .......................................... 86,969 105,624
----------- -----------
Total ............................................. 13,015,473 12,781,389
Less accumulated depreciation and amortization .......... 4,259,050 3,916,540
----------- -----------
Property, plant and equipment - net ............... 8,756,423 8,864,849
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ............................... 8,001 11,779
Special deposits ........................................ 10 433
Accounts receivable - net ............................... 36,277 39,635
Accrued unbilled revenues ............................... 77,853 59,017
Time Warner dividends receivable ..................... 10,313 10,313
Fuel stock .............................................. 61,795 59,699
Materials and supplies, at average cost ................. 130,380 138,007
Prepayments ............................................. 19,291 18,562
----------- -----------
Total current assets .............................. 343,920 337,445
----------- -----------
OTHER ASSETS:
Investment in Time Warner securities .................... 1,027,500 1,027,875
Deferred plant costs - net .............................. 587,352 613,134
Fuel-related debits ..................................... 84,435
Deferred debits ......................................... 306,473 311,758
Unamortized debt expense and premium on reacquired debt . 153,823 161,788
Regulatory tax asset - net .............................. 362,310 228,587
Recoverable project costs - net ......................... 163,630 232,775
Equity investments in and advances to foreign and
non-regulated affiliates - net ....................... 501,991 41,395
----------- -----------
Total other assets ................................ 3,187,514 2,617,312
----------- -----------
Total ............................................. $12,287,857 $11,819,606
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE> 45
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
CAPITALIZATION (STATEMENTS ON FOLLOWING PAGES):
Common stock equity ...................................... $ 3,827,961 $ 4,123,563
----------- -----------
Preference stock, no par; authorized, 10,000,000 shares;
none outstanding
Cumulative preferred stock of subsidiary:
Not subject to mandatory redemption ................... 135,179 351,345
Subject to mandatory redemption ....................... 51,055
----------- -----------
Total cumulative preferred stock ................... 135,179 402,400
----------- -----------
Long-term debt ........................................... 3,025,650 3,338,422
----------- -----------
Total capitalization ........................... 6,988,790 7,864,385
----------- -----------
CURRENT LIABILITIES:
Notes payable ............................................ 1,337,872 6,300
Accounts payable ......................................... 157,682 136,008
Taxes accrued ............................................ 191,011 174,925
Interest accrued ......................................... 67,707 79,380
Dividends declared ....................................... 92,515 98,502
Accrued liabilities to municipalities .................... 23,228 20,773
Customer deposits ........................................ 53,633 61,582
Current portion of long-term debt and preferred stock .... 254,463 379,451
Other .................................................... 66,010 58,664
----------- -----------
Total current liabilities ...................... 2,244,121 1,015,585
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes ........................ 2,265,031 2,067,246
Unamortized investment tax credit ........................ 373,749 392,153
Fuel-related credits ..................................... 74,639 122,063
Other .................................................... 341,527 358,174
----------- -----------
Total deferred credits ......................... 3,054,946 2,939,636
----------- -----------
COMMITMENTS AND CONTINGENCIES
Total ....................................... $12,287,857 $11,819,606
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
45
<PAGE> 46
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
COMMON STOCK EQUITY:
Common stock, no par; authorized, 400,000,000 shares;
issued, 262,748,447 and 262,672,468 shares at
December 31, 1996 and 1995, respectively ................................. $ 2,446,754 $ 2,441,790
Treasury Stock, at cost; 16,042,027 and 0 shares at
December 31, 1996 and 1995, respectively ................................. (361,196)
Unearned ESOP shares, 13,370,939 and 14,355,758 shares at
December 31, 1996 and 1995, respectively ................................. (251,350) (268,405)
Retained earnings ........................................................... 1,997,490 1,953,672
Unrealized loss on investment in Time Warner common
stock .................................................................... (3,737) (3,494)
----------- -----------
Total common stock equity ................................... 3,827,961 4,123,563
----------- -----------
CUMULATIVE PREFERRED STOCK, no par; authorized, 10,000,000 shares; outstanding,
1,604,397 and 4,318,397 shares at December 31, 1996 and 1995, respectively
(entitled upon involuntary liquidation to $100 per share):
Houston Lighting & Power Company:
Not subject to mandatory redemption:
$4.00 series, 97,397 shares ...................................... 9,740 9,740
$6.72 series, 250,000 shares ...................................... 25,115 25,115
$7.52 series, 500,000 shares ...................................... 50,226 50,226
$8.12 series, 500,000 shares ...................................... 50,098 50,098
Series A - 1992, 500,000 shares ...................................... 49,094
Series B - 1992, 500,000 shares ...................................... 49,104
Series C - 1992, 600,000 shares ...................................... 58,984
Series D - 1992, 600,000 shares ...................................... 58,984
----------- -----------
Total .......................................................... 135,179 351,345
----------- -----------
Subject to mandatory redemption:
$9.375 series, 257,000 and 771,000 shares at
December 31, 1996 and 1995, respectively .......................... 25,700 76,755
Current redemptions ...................................................... (25,700) (25,700)
----------- -----------
Total .......................................................... 51,055
----------- -----------
Total cumulative preferred stock ............................ 135,179 402,400
----------- -----------
LONG-TERM DEBT:
Debentures:
7 1/4% series, due 1996 ............................................... 200,000
9 3/8% series, due 2001 ............................................... 250,000 250,000
7 7/8% series, due 2002 ............................................... 100,000 100,000
Unamortized discount .................................................. (902) (1,087)
----------- -----------
Total debentures ............................................... 349,098 548,913
----------- -----------
Houston Lighting & Power Company:
First mortgage bonds:
5 1/4% series, due 1996 ............................................... 40,000
5 1/4% series, due 1997 ............................................... 40,000 40,000
7 5/8% series, due 1997 ............................................... 150,000 150,000
6 3/4% series, due 1997 ............................................... 35,000 35,000
6 3/4% series, due 1998 ............................................... 35,000
7 1/4% series, due 2001 ............................................... 50,000
9.15 % series, due 2021 ............................................... 160,000 160,000
8 3/4% series, due 2022 ............................................... 62,275 62,275
7 3/4% series, due 2023 ............................................... 250,000 250,000
7 1/2% series, due 2023 ............................................... 200,000 200,000
</TABLE>
(continued on next page)
46
<PAGE> 47
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
(CONTINUED)
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
4.90 % pollution control series, due 2003 ................... $ 16,600 $ 16,600
7 % pollution control series, due 2008 ................... 19,200 19,200
6 3/8% pollution control series, due 2012 ................... 33,470 33,470
6 3/8% pollution control series, due 2012 ................... 12,100 12,100
8 1/4% pollution control series, due 2015 ................... 90,000 90,000
5.80 % pollution control series, due 2015 ................... 91,945 91,945
7 3/4% pollution control series, due 2015 ................... 68,700 68,700
5.80 % pollution control series, due 2015 ................... 58,905 58,905
7 7/8% pollution control series, due 2016 ................... 68,000 68,000
6.70 % pollution control series, due 2017 ................... 43,820 43,820
5.60 % pollution control series, due 2017 ................... 83,565 83,565
7 7/8% pollution control series, due 2018 ................... 50,000 50,000
7.20 % pollution control series, due 2018 ................... 75,000 75,000
7.20 % pollution control series, due 2018 ................... 100,000 100,000
7 7/8% pollution control series, due 2019 ................... 29,685 29,685
7.70 % pollution control series, due 2019 ................... 75,000 75,000
8 1/4% pollution control series, due 2019 ................... 100,000 100,000
8.10 % pollution control series, due 2019 ................... 100,000 100,000
7 5/8% pollution control series, due 2019 ................... 100,000 100,000
7 1/8% pollution control series, due 2019 ................... 100,000 100,000
7.60 % pollution control series, due 2019 ................... 70,315 70,315
6.70 % pollution control series, due 2027 ................... 56,095 56,095
Medium-term notes series A, 9.80%-9.85%, due 1996-1999 ...... 170,500 180,500
Medium-term notes series B, 8 5/8%, due 1996 ................ 100,000
Medium-term notes series C, 6.10%, due 2000 ................. 150,000 150,000
Medium-term notes series B, 8.15%, due 2002 ................. 100,000 100,000
Medium-term notes series C, 6.50%, due 2003 ................. 150,000 150,000
----------- -----------
Total first mortgage bonds ........................... 2,910,175 3,145,175
----------- -----------
Pollution control revenue bonds:
Gulf Coast 1980-T series, floating rate, due 1998 ....... 5,000 5,000
----------- -----------
Total pollution control revenue bonds ................ 5,000 5,000
----------- -----------
Unamortized premium (discount) - net ........................... (15,134) (16,456)
Capitalized lease obligations, discount rates of
5.2%-11.7%, due 1996-2018 ................................... 4,418 8,560
Notes payable .................................................. 856 981
----------- -----------
Subtotal ............................................. (9,860) (6,915)
----------- -----------
Total ............................................. 2,905,315 3,143,260
----------- -----------
Total ......................................... 3,254,413 3,692,173
Current maturities ............................ (228,763) (353,751)
----------- -----------
Total long-term debt .......................... 3,025,650 3,338,422
----------- -----------
Total capitalization ...................... $ 6,988,790 $ 7,864,385
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
47
<PAGE> 48
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations .................. $ 404,944 $ 397,400 $ 423,985
Adjustments to reconcile income from continuing
operations to net cash provided by
operating activities:
Depreciation and amortization .................. 550,038 478,034 399,341
Amortization of nuclear fuel ................... 33,875 28,545 21,561
Deferred income taxes .......................... 54,098 78,382 85,547
Investment tax credit .......................... (18,404) (19,427) (19,416)
Allowance for other funds used during
construction .............................. (4,124) (7,760) (4,115)
Fuel refund .................................... (189,571)
Fuel cost over (under) recovery ................ (137,362) 76,970 277,940
Regulatory tax asset - net ..................... 10,096 6,876 11,300
Net cash provided by discontinued
cable television operations ............... 16,391 19,349
Changes in other assets and liabilities:
Accounts receivable - net ................. (15,478) (46,299) (19,295)
Inventory ................................. 21,624 13,901 22,428
Other current assets ...................... (306) (14,900) 14,710
Accounts payable .......................... 21,674 (23,217) (45,081)
Interest and taxes accrued ................ 4,413 11,088 (17,979)
Other current liabilities ................. (4,135) (9,215) (5,102)
Other - net ............................... (6,633) 47,697 40,099
----------- ----------- -----------
Net cash provided by operating activities . 914,320 844,895 1,205,272
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction) ...................... (317,532) (301,327) (418,453)
Non-regulated electric power project expenditures
and advances ................................... (495,379) (49,835) (7,087)
Settlement of subsidiary debt in connection with
sale of cable television subsidiary ............ 619,345
Corporate headquarters expenditures (including
capitalized interest) .......................... (6,543) (96,469) (46,829)
Net cash used in discontinued cable television
operations ..................................... (47,601) (84,071)
Other - net ........................................ (13,446) (4,643) (13,562)
----------- ----------- -----------
Net cash provided by (used in) investing
activities ............................ (832,900) 119,470 (570,002)
----------- ----------- -----------
</TABLE>
(continued on next page)
48
<PAGE> 49
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock ..................... $ (361,196)
Proceeds from first mortgage bonds ............. $ 142,972
Payment of matured bonds ....................... (150,000) $ (19,500)
Payment of common stock dividends .............. (361,126) (371,731) (368,790)
Redemption of preferred stock .................. (271,400) (91,400) (20,000)
Increase (decrease) in notes payable-net ....... 1,331,572 (416,991) (168,094)
Extinguishment of long-term debt ............... (285,263) (195,224)
Net cash used in discontinued cable television
operations ................................. (40,798) (68,184)
Other - net .................................... 12,215 10,143 4,857
----------- ----------- -----------
Net cash used in financing activities ...... (85,198) (963,029) (639,711)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .................................... (3,778) 1,336 (4,441)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...... 11,779 10,443 14,884
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............ $ 8,001 $ 11,779 $ 10,443
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) .......... $ 311,792 $ 342,551 $ 366,548
Income taxes ................................... 139,898 104,228 174,657
</TABLE>
See Notes to Consolidated Financial Statements.
49
<PAGE> 50
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES ............................ $ 4,025,027 $ 3,680,297 $ 3,746,085
----------- ----------- -----------
OPERATING EXPENSES:
Fuel ..................................... 1,024,945 879,148 860,936
Purchased power .......................... 322,263 233,494 408,963
Operation ................................ 640,152 615,924 580,892
Maintenance .............................. 248,547 250,246 247,856
Depreciation and amortization ............ 545,685 475,124 398,142
Federal income taxes ..................... 264,819 245,807 254,993
Other taxes .............................. 246,288 245,890 251,421
----------- ----------- -----------
Total ........................... 3,292,699 2,945,633 3,003,203
----------- ----------- -----------
OPERATING INCOME .............................. 732,328 734,664 742,882
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Litigation settlements (net of tax) ...... (61,750)
Allowance for other funds used during
construction ......................... 4,124 7,760 4,115
Interest income .......................... 6,998 12,218 10,000
Other - net .............................. (20,251) (25,901) (12,561)
----------- ----------- -----------
Total ........................... (70,879) (5,923) 1,554
----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES ................ 661,449 728,741 744,436
----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt ............... 221,865 244,384 246,533
Other interest ........................... 12,764 8,117 8,493
Allowance for borrowed funds used during
construction ......................... (2,598) (4,692) (5,554)
----------- ----------- -----------
Total ........................... 232,031 247,809 249,472
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING ............................ 429,418 480,932 494,964
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS (NET OF INCOME
TAXES OF $4,415) ......................... (8,200)
----------- ----------- -----------
NET INCOME .................................... 429,418 480,932 486,764
DIVIDENDS ON PREFERRED STOCK .................. 22,563 29,955 33,583
----------- ----------- -----------
INCOME AFTER PREFERRED DIVIDENDS .............. $ 406,855 $ 450,977 $ 453,181
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
50
<PAGE> 51
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at Beginning of Year . $2,150,086 $2,153,109 $2,028,924
Add - Net Income ............. 429,418 480,932 486,764
---------- ---------- ----------
Total ........................ 2,579,504 2,634,041 2,515,688
---------- ---------- ----------
Deduct - Cash Dividends:
Preferred:
$4.00 Series ........ 389 389 390
$6.72 Series ........ 1,680 1,680 1,680
$7.52 Series ........ 3,760 3,760 3,760
$8.12 Series ........ 4,060 4,060 4,060
Series A - 1992 ..... 2,030 2,324 1,740
Series B - 1992 ..... 2,066 2,322 1,683
Series C - 1992 ..... 2,648 2,823 2,040
Series D - 1992 ..... 2,316 2,747 2,075
$8.50 Series ........ 1,417 4,108
$9.375 Series ....... 3,614 8,433 12,047
Common .................. 329,000 454,000 328,996
---------- ---------- ----------
Total ............... 351,563 483,955 362,579
---------- ---------- ----------
Balance at End of Year ....... $2,227,941 $2,150,086 $2,153,109
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
51
<PAGE> 52
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Production ........................................... $ 7,495,244 $ 7,423,891
Transmission ......................................... 934,086 927,027
Distribution ......................................... 2,818,636 2,711,482
General .............................................. 1,139,409 1,027,090
Construction work in progress ........................ 251,497 320,040
Nuclear fuel ......................................... 241,001 217,604
Plant held for future use ............................ 48,631 48,631
----------- -----------
Total ............................................. 12,928,504 12,675,765
Less accumulated depreciation and amortization .......... 4,252,745 3,906,139
----------- -----------
Property, plant and equipment - net ............... 8,675,759 8,769,626
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ............................... 643 75,851
Special deposits ........................................ 10 433
Accounts receivable - affiliated companies .............. 1,493 2,845
Accounts receivable - others ............................ 16,996 23,858
Accrued unbilled revenues ............................... 77,853 59,017
Fuel stock .............................................. 61,795 59,699
Materials and supplies, at average cost ................. 130,281 137,584
Prepayments ............................................. 10,770 11,876
----------- -----------
Total current assets .............................. 299,841 371,163
----------- -----------
OTHER ASSETS:
Deferred plant costs - net .............................. 587,352 613,134
Fuel-related debits ..................................... 84,435
Deferred debits ......................................... 270,381 290,012
Unamortized debt expense and premium on reacquired debt . 152,524 159,962
Regulatory tax asset - net .............................. 362,310 228,587
Recoverable project costs - net ......................... 163,630 232,775
----------- -----------
Total other assets ................................ 1,620,632 1,524,470
----------- -----------
Total ......................................... $10,596,232 $10,665,259
=========== ===========
</TABLE>
See Notes to Financial Statements.
52
<PAGE> 53
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
CAPITALIZATION (STATEMENTS ON FOLLOWING PAGES):
Common stock equity ................................... $ 3,903,868 $ 3,826,013
Cumulative preferred stock:
Not subject to mandatory redemption ................ 135,179 351,345
Subject to mandatory redemption .................... 51,055
Long-term debt ........................................ 2,676,552 2,989,509
----------- -----------
Total capitalization ............................ 6,715,599 7,217,922
----------- -----------
CURRENT LIABILITIES:
Notes payable ......................................... 234,665
Notes payable to affiliated companies ................. 19,600
Accounts payable ...................................... 142,439 119,032
Accounts payable to affiliated companies .............. 5,744 6,982
Taxes accrued ......................................... 196,444 192,673
Interest accrued ...................................... 60,234 70,823
Accrued liabilities to municipalities ................. 23,228 20,773
Customer deposits ..................................... 53,633 61,582
Current portion of long-term debt and preferred stock . 254,463 179,451
Other ................................................. 62,046 54,149
----------- -----------
Total current liabilities ....................... 1,052,496 705,465
----------- -----------
DEFERRED CREDITS:
Accumulated deferred federal income taxes ............. 2,124,567 1,947,488
Unamortized investment tax credit ..................... 373,749 392,153
Fuel-related credits .................................. 74,639 122,063
Other ................................................. 255,182 280,168
----------- -----------
Total deferred credits .......................... 2,828,137 2,741,872
----------- -----------
COMMITMENTS AND CONTINGENCIES
Total .................................... $10,596,232 $10,665,259
=========== ===========
</TABLE>
See Notes to Financial Statements.
53
<PAGE> 54
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
COMMON STOCK EQUITY:
Common stock, Class A; no par; authorized and outstanding,
1,000 shares, voting ..................................................... $ 1,524,949 $ 1,524,949
Common stock, Class B; no par; authorized and outstanding,
100 shares, non-voting ................................................... 150,978 150,978
Retained earnings ........................................................... 2,227,941 2,150,086
----------- -----------
Total common stock equity ................................... 3,903,868 3,826,013
----------- -----------
CUMULATIVE PREFERRED STOCK, no par; authorized, 10,000,000 shares; outstanding,
1,604,397 and 4,318,397 shares at December 31, 1996 and 1995, respectively
(entitled upon involuntary liquidation to $100 per share):
Not subject to mandatory redemption:
$4.00 series, 97,397 shares ...................................... 9,740 9,740
$6.72 series, 250,000 shares ...................................... 25,115 25,115
$7.52 series, 500,000 shares ...................................... 50,226 50,226
$8.12 series, 500,000 shares ...................................... 50,098 50,098
Series A - 1992, 500,000 shares ...................................... 49,094
Series B - 1992, 500,000 shares ...................................... 49,104
Series C - 1992, 600,000 shares ...................................... 58,984
Series D - 1992, 600,000 shares ...................................... 58,984
----------- -----------
Total .......................................................... 135,179 351,345
----------- -----------
Subject to mandatory redemption:
$9.375 series, 257,000 and 771,000 shares at
December 31, 1996 and 1995, respectively .......................... 25,700 76,755
Current redemptions ...................................................... (25,700) (25,700)
----------- -----------
Total .......................................................... 51,055
----------- -----------
Total cumulative preferred stock ............................ 135,179 402,400
----------- -----------
LONG-TERM DEBT:
First mortgage bonds:
5 1/4% series, due 1996 ............................................... 40,000
5 1/4% series, due 1997 ............................................... 40,000 40,000
6 3/4% series, due 1997 ............................................... 35,000 35,000
7 5/8% series, due 1997 ............................................... 150,000 150,000
6 3/4% series, due 1998 ............................................... 35,000
7 1/4% series, due 2001 ............................................... 50,000
9.15 % series, due 2021 ............................................... 160,000 160,000
8 3/4% series, due 2022 ............................................... 62,275 62,275
7 3/4% series, due 2023 ............................................... 250,000 250,000
7 1/2% series, due 2023 ............................................... 200,000 200,000
4.90 % pollution control series, due 2003 ............................. 16,600 16,600
7 % pollution control series, due 2008 ............................. 19,200 19,200
6 3/8% pollution control series, due 2012 ............................. 33,470 33,470
6 3/8% pollution control series, due 2012 ............................. 12,100 12,100
5.80 % pollution control series, due 2015 ............................. 91,945 91,945
7 3/4% pollution control series, due 2015 ............................. 68,700 68,700
8 1/4% pollution control series, due 2015 ............................. 90,000 90,000
5.80 % pollution control series, due 2015 ............................. 58,905 58,905
7 7/8% pollution control series, due 2016 ............................. 68,000 68,000
6.70 % pollution control series, due 2017 ............................. 43,820 43,820
5.60 % pollution control series, due 2017 ............................. 83,565 83,565
7 7/8% pollution control series, due 2018 ............................. 50,000 50,000
7.20 % pollution control series, due 2018 ............................. 75,000 75,000
7.20 % pollution control series, due 2018 ............................. 100,000 100,000
</TABLE>
(continued on next page)
54
<PAGE> 55
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
(CONTINUED)
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
7.70 % pollution control series, due 2019 .............. $ 75,000 $ 75,000
8 1/4% pollution control series, due 2019 .............. 100,000 100,000
8.10 % pollution control series, due 2019 .............. 100,000 100,000
7 7/8% pollution control series, due 2019 .............. 29,685 29,685
7.60 % pollution control series, due 2019 .............. 70,315 70,315
7 1/8% pollution control series, due 2019 .............. 100,000 100,000
7 5/8% pollution control series, due 2019 .............. 100,000 100,000
6.70 % pollution control series, due 2027 .............. 56,095 56,095
Medium-term notes series A, 9.80%-9.85%, due 1996-1999 . 170,500 180,500
Medium-term notes series B, 8 5/8%, due 1996 ........... 100,000
Medium-term notes series C, 6.10%, due 2000 ............ 150,000 150,000
Medium-term notes series B, 8.15%, due 2002 ............ 100,000 100,000
Medium-term notes series C, 6.50%, due 2003 ............ 150,000 150,000
----------- -----------
Total first mortgage bonds ....................... 2,910,175 3,145,175
----------- -----------
Pollution control revenue bonds:
Gulf Coast 1980-T series, floating rate, due 1998 ...... 5,000 5,000
----------- -----------
Total pollution control revenue bonds ............ 5,000 5,000
----------- -----------
Unamortized premium (discount) - net ....................... (15,134) (16,456)
Capitalized lease obligations, discount rates of
5.2%-11.7%, due 1996-2018 .............................. 4,418 8,560
Notes payable .............................................. 856 981
----------- -----------
Subtotal ......................................... (9,860) (6,915)
----------- -----------
Total ........................................ 2,905,315 3,143,260
Current maturities ........................... (228,763) (153,751)
----------- -----------
Total long-term debt ......................... 2,676,552 2,989,509
----------- -----------
Total capitalization ..................... $ 6,715,599 $ 7,217,922
=========== ===========
</TABLE>
See Notes to Financial Statements.
55
<PAGE> 56
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 429,418 $ 480,932 $ 486,764
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 545,685 475,124 398,142
Amortization of nuclear fuel ...................................... 33,875 28,545 21,561
Deferred federal income taxes ..................................... 33,261 71,188 81,739
Investment tax credits ............................................ (18,404) (19,427) (19,416)
Allowance for other funds used during
construction ................................................. (4,124) (7,760) (4,115)
Fuel refund ....................................................... (189,571)
Fuel cost over (under) recovery ................................... (137,362) 76,970 277,940
Cumulative effect of change in accounting
for postemployment benefits .................................. 8,200
Regulatory tax asset - net ........................................ 10,096 6,876 11,300
Changes in other assets and liabilities:
Accounts receivable - net .................................... (10,622) (34,239) (17,827)
Materials and supplies ....................................... 23,397 17,227 20,604
Fuel stock ................................................... (2,096) (2,988) 1,874
Accounts payable ............................................. 22,169 (32,964) (40,054)
Interest and taxes accrued ................................... (6,818) 17,721 (6,980)
Other current liabilities .................................... 4,502 (7,816) (4,936)
Other - net .................................................. (6,331) (12,128) 12,115
----------- ----------- -----------
Net cash provided by operating activities ......................... 916,646 867,690 1,226,911
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction) ......................................... (385,590) (396,242) (418,453)
Other - net ........................................................... (9,100) (10,618) (15,822)
----------- ----------- -----------
Net cash used in investing activities ............................. (394,690) (406,860) (434,275)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from first mortgage bonds .................................... 142,972
Payment of matured bonds .............................................. (150,000) (19,500)
Payment of dividends .................................................. (353,663) (485,793) (363,083)
Increase (decrease) in notes payable - net ............................ 234,665 (171,100)
Increase in notes payable to affiliated company ....................... 19,600
Redemption of preferred stock ......................................... (271,400) (91,400) (20,000)
Extinguishment of long-term debt ...................................... (85,263) (195,224)
Other - net ........................................................... 8,897 8,599 4,501
----------- ----------- -----------
Net cash used in financing activities ............................. (597,164) (620,846) (569,182)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ...................................................... (75,208) (160,016) 223,454
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................. 75,851 235,867 12,413
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................................... $ 643 $ 75,851 $ 235,867
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized) ................................. $ 234,003 $ 250,951 $ 253,918
Income taxes .......................................................... 201,986 157,400 196,655
</TABLE>
See Notes to Financial Statements.
56
<PAGE> 57
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION. The consolidated financial
statements include the accounts of the Company and its wholly
owned and majority owned subsidiaries. Certain investments in
joint ventures or other entities in which the Company or its
subsidiaries have a 50 percent or less interest are recorded
using the equity method or the cost method. For additional
information regarding investments and advances, see Notes 1(j)
and 4.
All significant intercompany transactions and balances are
eliminated in consolidation.
(b) SYSTEM OF ACCOUNTS AND EFFECTS OF REGULATION. HL&P, the principal
subsidiary of the Company, maintains its accounting records in
accordance with the FERC Uniform System of Accounts. HL&P's
accounting practices are subject to regulation by the Utility
Commission, which has adopted the FERC Uniform System of
Accounts.
As a result of its regulated status, HL&P follows the accounting
policies set forth in SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," which allows a utility with
cost-based rates to defer certain costs in concert with rate
recovery that would otherwise be expensed. In accordance with
this statement, HL&P has deferred certain costs pursuant to rate
actions of the Utility Commission and is recovering or expects to
recover such costs in electric rates charged to customers. The
regulatory assets are included in other assets on the Company's
Consolidated and HL&P's Balance Sheets. The regulatory
liabilities are included in deferred credits on the Company's
Consolidated and HL&P's Balance Sheets. The following is a list
of significant regulatory assets and liabilities reflected on the
Company's Consolidated and HL&P's Balance Sheets:
<TABLE>
<CAPTION>
December 31, 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> 58
(c) ELECTRIC PLANT. HL&P capitalizes at cost all additions to
electric plant, betterments to existing property and replacements
of units of property. Cost includes the original cost of
contracted services, direct labor and material, indirect charges
for engineering supervision and similar overhead items and AFUDC.
AFUDC represents the estimated debt and equity cost of funds used
to finance construction. Customer payments for construction
reduce additions to electric plant.
HL&P computes depreciation using the straight-line method. The
depreciation provision as a percentage of the depreciable cost of
plant was 3.2 percent for 1994 through 1996.
(d) DEFERRED PLANT COSTS. Under a "deferred accounting" plan
authorized by the Utility Commission, HL&P was permitted for
regulatory purposes to accrue carrying costs in the form of AFUDC
on its investment in the South Texas Project and defer and
capitalize depreciation and other operating costs on its
investment after commercial operation until such costs were
reflected in rates. In addition, the Utility Commission
authorized HL&P under a "qualified phase-in plan" to capitalize
allowable costs (including return) deferred for future recovery
as deferred charges.
In 1991, HL&P ceased all cost deferrals related to the South
Texas Project and began amortizing such amounts on a
straight-line basis. The accumulated deferrals for "deferred
accounting" are being amortized over the estimated depreciable
life of the South Texas Project. The accumulated deferrals for
the "qualified phase-in plan" are being amortized over a ten-year
phase-in period that commenced in 1991. The amortization of all
deferred plant costs (which totaled $25.8 million for each of the
years 1996, 1995 and 1994) is included on the Company's
Statements of Consolidated Income and HL&P's Statements of Income
as depreciation and amortization expense.
(e) REVENUES. HL&P records electricity sales under the full accrual
method, whereby unbilled electricity sales are estimated and
recorded each month. Other revenues include electricity sales of
a majority owned foreign electric utility, which are also
recorded under the full accrual method and the Company's equity
income in unconsolidated investments of HI Energy. Also included
in other revenues are management fees and other sales and
services, which are recorded when earned.
(f) INCOME TAXES. The Company and its subsidiaries file a
consolidated federal income tax return. The Company follows a
policy of comprehensive interperiod income tax allocation.
Investment tax credits were deferred and are being amortized over
the estimated lives of the related property.
(g) EARNINGS PER COMMON SHARE. Earnings per common share for the
Company are computed by dividing net income by the weighted
average number of shares outstanding during the respective
period. All earnings per common share amounts reflect the
two-for-one common stock split effected in the form of a stock
distribution on December 9, 1995.
(h) STATEMENTS OF CONSOLIDATED CASH FLOWS. For purposes of reporting
cash flows, cash equivalents are considered to be short-term,
highly liquid investments readily convertible to cash.
(i) DISCONTINUED OPERATIONS. In July 1995, the Company sold KBLCOM,
its cable television subsidiary. The operations of KBLCOM are
reflected as discontinued operations for all periods presented.
See Note 13.
(j) INVESTMENTS IN DEBT AND EQUITY SECURITIES. The Company owns one
million shares of Time Warner common stock and 11 million shares
of non-publicly traded Time Warner convertible preferred stock.
The Company has recorded its investment in these securities at
a combined value of approximately $1 billion on the Company's
Consolidated Balance Sheets. Investment in the Time Warner common
stock is considered an "available-for-sale" equity security
58
<PAGE> 59
under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Consequently, the Company excludes
unrealized net changes in the fair value of Time Warner common
stock (exclusive of dividends and write downs) from earnings and,
until realized, reports such changes as a net amount in the
shareholders' equity section of the Company's Consolidated
Balance Sheets. Investment in the Time Warner convertible
preferred stock (which is not subject to the requirements of SFAS
No. 115, since it is a non-publicly traded equity security) is
accounted for under the cost method.
The securities held in the Company's nuclear decommissioning
trust are classified as "available-for-sale" and, in accordance
with SFAS No. 115, are reported at estimated fair value of $67
million as of December 31, 1996 and $44.5 million as of December
31, 1995 on the Company's Consolidated and HL&P's Balance Sheets
under deferred debits. The liability for nuclear decommissioning
is reported on the Company's Consolidated and HL&P's Balance
Sheets under deferred credits. Any unrealized gains or losses are
accounted for in accordance with SFAS No. 71 as a regulatory
asset/liability and reported on the Company's Consolidated and
HL&P's Balance Sheets as a deferred debit.
(k) FUEL STOCK. Gas inventory (at average cost) was $19.6 million at
December 31, 1996. Coal, lignite, and oil inventory balances
(using last-in, first-out) were $27.3 million, $11.8 million and
$3.0 million, respectively.
(l) DEPRECIATION. The Company and HL&P compute depreciation using the
straight-line method. The Company's depreciation expense for 1996
was $360 million compared to $349 million and $338 million for
1995 and 1994, respectively. HL&P's depreciation expense for 1996
was $358 million compared to $347 million and $338 million for
1995 and 1994, respectively.
(m) RECLASSIFICATION. Certain amounts from the previous years have
been reclassified to conform to the 1996 presentation of
financial statements. Such reclassifications do not affect
earnings.
(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.
59
<PAGE> 60
(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).
60
<PAGE> 61
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
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<PAGE> 62
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.
(4) INVESTMENTS OF HI ENERGY
(a) GENERAL. HI Energy, a wholly owned subsidiary of the Company
formed in 1993, participates primarily in the development and
acquisition of foreign independent power projects and the
privatization of foreign generating and distribution companies.
The Company generally accounts for affiliate investments of HI
Energy under the equity method of accounting where: (i) HI
Energy's ownership interest in the affiliate ranges from 20
percent to 50 percent or (ii) HI Energy exercises significant
influence over operating and financial policies of such
affiliate. The Company's proportionate share of the equity in net
income/(loss) in these affiliates for the years ended December 31,
1996, 1995 and 1994 was $17.0 million, $0.5 million and $(1.6)
million, respectively. These amounts are included on the
Company's Statement of Consolidated Income as "Other Revenues."
The Company's equity investments in and advances to foreign and
non-regulated affiliates at December 31, 1996 and 1995 were $502
million and $41 million, respectively.
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<PAGE> 63
(b) FOREIGN INVESTMENTS. In May 1996, a subsidiary of HI Energy
acquired 11.35 percent of the common shares of Light, a publicly
held Brazilian corporation, for $392 million. Light is the
operator under a 30-year concession agreement of an integrated
electric power and distribution system that serves a portion of
the state of Rio de Janeiro, Brazil, including the city of Rio de
Janeiro. HI Energy acquired the shares as a bidder in the
government-sponsored auction of 60 percent of Light's outstanding
shares. Subsequent to the auction, the winning bidders, including
a subsidiary of HI Energy, formed a consortium whose aggregate
ownership interest of 50.44 percent represents a controlling
interest in Light.
The Company has accounted for this transaction under purchase
accounting and has recorded its investment and its interest in
Light's operations after June 1, 1996, using the equity method.
The purchase price was allocated on the basis of the estimated
fair market value of the assets acquired and the liabilities
assumed as of the date of acquisition.
A subsidiary of HI Energy has entered into a $167.5 million loan
agreement in order to refinance a portion of the acquisition
costs of Light. The full proceeds of the loan, net of a $17.5
million debt reserve account to be established for the benefit of
the lenders, will not be funded until the satisfaction of various
conditions precedent, including the obtaining of political risk
insurance. The loan is non-recourse to the Company and HL&P. The
loan is secured by, among other things, a pledge of the shares of
Light and a subsidiary of HI Energy that is the indirect holder
of the shares of Light.
In addition to the investment in Brazil, HI Energy had total
equity investments in and advances to affiliates in Argentina of
$81 million and $36 million at December 31, 1996 and 1995,
respectively, representing a 49 percent interest in the capital
stock of an electric utility operating in the Province of Buenos
Aires. In addition, HI Energy owns a 90 percent ownership
interest in an Argentine electric utility distribution system and
is constructing a 160 MW cogeneration facility in San Nicolas,
Argentina. HI Energy's investment in these projects was
approximately $68 million and $22 million at December 31, 1996 and
1995, respectively.
HI Energy also owns a 36 percent interest in a coke calcining and
power generation facility in India with an investment of
approximately $8 million and $5 million at December 31, 1996 and
December 31, 1995, respectively.
(c) VALUATION ALLOWANCE. In 1995, the Company recorded a $28 million
valuation allowance (resulting in an $18 million after-tax charge
in that year) with respect to two waste tire-to-energy projects
that were being developed in reliance on the terms of a state
subsidy intended to encourage development of energy production
facilities for the disposal of solid waste. In March 1996, the
subsidy was repealed. In 1996, the Company recorded an additional
valuation allowance of $7 million with respect to these projects,
which resulted in a $5 million after-tax charge to 1996 earnings.
The valuation allowance reflects the combined amounts lent to the
projects on a subordinated basis by HI Energy. HI Energy also is
a party to two separate note purchase agreements committing it,
under certain circumstances, to lend up to an additional $16
million. The Company has entered into a support agreement to
enable HI Energy to honor its obligation under these note
purchase agreements. In the Company's opinion, it is unlikely
that additional loans would be required to be made under the note
purchase agreements, unless construction activities with respect
to these projects were recommenced at some future date. In March
1996, a subsidiary of HI Energy purchased from a senior lending
bank all notes relating to one of the projects
63
<PAGE> 64
(approximately $4.1 million). As a consequence, HI Energy has
discretion over when, if ever, the construction activities for
this project will reconvene and in turn control over future
obligations of HI Energy to acquire additional subordinated notes
for this project.
(5) COMMON STOCK
(a) DISTRIBUTION AND DIVIDENDS. The Company effected a two-for-one
stock split in the form of a common stock distribution on
December 9, 1995. All prior periods have been restated for
consistency to reflect the stock distribution in terms of the
number of common shares outstanding and the per share amounts for
earnings, dividends and market price. The nominal consideration
established by the Board of Directors for the common stock
distributed ($.01 per share) is reflected as a deduction from
retained earnings in the Company's Statements of Consolidated
Retained Earnings.
In 1996, the Company paid four regular quarterly dividends
aggregating $1.50 per share on its common stock pursuant to
dividend declarations made in December 1995, March 1996, June
1996, and September 1996. In December 1996, the Company declared
its regular quarterly dividend of $0.375 per share to be paid in
March 1997. Dividends paid have been included in common stock
dividends on the Company's Statements of Consolidated Cash Flows.
Dividends declared are included in common stock dividends on the
Company's Statements of Consolidated Retained Earnings.
(b) LONG-TERM INCENTIVE COMPENSATION PLANS. The Company has Long-Term
Incentive Compensation Plans (LICP) providing for the issuance of
stock incentives (including performance-based restricted shares
and stock options) to key employees of the Company, including
officers. As of December 31, 1996, 27 current and former
employees participated in the plans. A maximum of five million
shares of common stock may be issued under the LICP. Beginning
one year after the grant date, the options become exercisable in
one-third increments each year. The options expire ten years from
the grant date.
Performance-based restricted shares issued were 69,905, 49,792
and 100,524 for 1996, 1995 and 1994, respectively. Stock option
activity for the years 1994 through 1996 is summarized below:
<TABLE>
<CAPTION>
Option Price at
Number Date of Grant
of Shares or Exercise
--------- -----------
<S> <C> <C>
Outstanding at December 31, 1993 ......... 251,898 $ 23.25
Options Granted ...................... 131,452
Options Canceled ..................... (80,772)
Outstanding at December 31, 1994 ......... 302,578
Options Granted ...................... 133,324 $ 17.75; $21.25
Options Canceled ..................... (24,560)
Outstanding at December 31, 1995 ......... 411,342
Options Granted ...................... 101,798 $ 24.375
Options Exercised .................... (574) $ 17.75
Options Withheld for Taxes ........... (90)
Options Canceled ..................... (13,824)
Outstanding at December 31, 1996 498,652
Exercisable at:
December 31, 1996 .................... 280,270 $ 17.75-23.25
December 31, 1995 .................... 181,924 $ 21.75-23.25
December 31, 1994 .................... 107,664 $ 21.75-23.125
</TABLE>
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<PAGE> 65
Effective January 1, 1996, the Company and HL&P adopted SFAS No.
123, "Accounting for Stock- Based Compensation." In accordance
with SFAS No. 123, the Company and HL&P will continue to apply
the existing rules contained in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and
disclose the required pro forma effect on net income and earnings
per share of the fair value based method of accounting for stock
compensation as required by SFAS No. 123.
The following pro forma summary of the Company's consolidated
results of operations have been prepared as if the fair value
based method of accounting for employee stock compensation as
required by SFAS No. 123 had been applied:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Net income as reported $ 404,944 $ 1,105,524
SFAS 123 adjustment (1,098) (244)
----------- -----------
Pro forma net income $ 403,846 $ 1,105,280
=========== ===========
Earnings per Common Share As Reported $ 1.66 $ 4.46
Pro forma $ 1.65 $ 4.46
</TABLE>
(c) REPURCHASE PROGRAM. The Company repurchased a total of 16,042,027
shares of common stock in 1996 for an aggregate purchase price of
approximately $361 million. The Company's Board of Directors has
authorized additional stock purchases of approximately $89
million. Additional repurchases of common stock are subject to
the discretion of management, market conditions, applicable legal
requirements, available cash and other factors.
(d) SHAREHOLDER RIGHTS PLAN. In July 1990, the Company adopted a
shareholder rights plan and declared a dividend of one right for
each outstanding share of the Company's common stock (including
shares of common stock issued in the Company's 1995 two-for-one
stock split). The rights, which under certain circumstances
entitle their holders to purchase one two-hundredth of a share of
Series A Preference Stock for an exercise price of $42.50, will
expire on July 11, 2000. The rights will become exercisable only
if a person or entity acquires 20 percent or more of the
Company's outstanding common stock or if a person or entity
commences a tender offer or exchange offer for 20 percent or more
of the outstanding common stock. At any time after the occurrence
of such events, the Company may exchange unexercised rights at an
exchange ratio of one share of common stock, or equity securities
of the Company of equivalent value, per right. The rights are
redeemable by the Company for $.01 per right at any time prior to
the date the rights become exercisable.
When the rights become exercisable, each right will entitle the
holder to receive, in lieu of the right to purchase Series A
Preference Stock, upon the exercise of such right, a number of
shares of the Company's common stock (or under certain
circumstances cash, property, other equity securities or debt of
the Company) having a current market price (as defined in the
plan) equal to twice the exercise price of the right, except
pursuant to an offer for all outstanding shares of common stock
65
<PAGE> 66
which a majority of the independent directors of the Company
determines to be a price which is in the best interests of the
Company and its shareholders (Permitted Offer).
In the event that the Company is a party to a merger or other
business combination (other than a merger that follows a
Permitted Offer), rights holders will be entitled to receive,
upon the exercise of a right, a number of shares of common stock
of the acquiring company having a current market price (as
defined in the plan) equal to twice the exercise price of the
right.
(6) PREFERRED STOCK OF HL&P
The following table sets forth, at December 31, 1996, the per
share redemption prices of HL&P's outstanding cumulative
preferred stock. The per share redemption prices do not include
accrued dividends upon the date of redemption.
<TABLE>
<CAPTION>
Redemption
Series Price Per Share
- ------ ---------------
<S> <C>
Not Subject to Mandatory Redemption:
$4.00 ............................................ $ 105.00
$6.72 ............................................ 102.51
$7.52 ............................................ 102.35
$8.12 ............................................ 102.25
Subject to Mandatory Redemption:
$9.375 (a) ....................................... --
</TABLE>
- -------------------
(a) HL&P is required to redeem all remaining 257,000
outstanding shares of $9.375 cumulative preferred stock at
$100 per share (plus accrued dividends) in April 1997.
In 1996, HL&P redeemed 514,000 of its $9.375 cumulative preferred
stock at $100 per share. The redemption included 257,000 shares
in satisfaction of mandatory sinking fund requirements and an
additional 257,000 shares as an optional redemption. In 1996,
HL&P redeemed all issued and outstanding shares of its Variable
Term Preferred Stock at a redemption price of $100 per share plus
accrued dividends as follows:
<TABLE>
<CAPTION>
Number of Redemption
Series Shares Date
------ ------ ---------
<S> <C> <C>
A 500,000 12/11/96
B 500,000 12/18/96
C 600,000 12/26/96
D 600,000 12/27/96
</TABLE>
For information with respect to the redemption in 1997 of three
series of preferred stock and the related issuances of trust
securities, see Note 17(b). In 1995, HL&P redeemed 514,000 shares
of its $9.375 cumulative preferred stock at $100 per share and
the remaining 400,000 shares of its $8.50 cumulative preferred
stock at $100 per share. In 1994, HL&P redeemed 200,000 shares of
its $8.50 cumulative preferred stock at $100 per share.
(7) LONG-TERM DEBT
(a) COMPANY. In December 1996, the Company repaid at maturity $200
million aggregate principal amount of its outstanding 7 1/4%
debentures using short-term borrowings under its existing credit
facilities. Consolidated annual maturities of long-term debt and
minimum capital lease payments
66
<PAGE> 67
for the Company are approximately $254 million in 1997, $5
million in 1998, $171 million in 1999, $150 million in 2000 and
$250 million in 2001.
(b) HL&P. Sinking or improvement fund requirements of HL&P's first
mortgage bonds outstanding will be approximately $37 million for
each of the years 1997 through 2001. Of such requirements,
approximately $35 million for each of the years 1997 through 2001
may be satisfied by certification of property additions at 100
percent of the requirements, and the remainder through
certification of such property additions at 166 2/3 percent of the
requirements. Sinking or improvement fund requirements for 1996
and prior years have been satisfied by certification of property
additions.
HL&P has agreed to expend an amount each year for replacements
and improvements in respect of its depreciable mortgaged utility
property equal to $1,450,000 plus 2 1/2 percent of net additions
to such mortgaged property made after March 31, 1948 and before
July 1 of the preceding year. Such requirement may be met with
cash, first mortgage bonds, gross property additions or
expenditures for repairs or replacements, or by taking credit for
property additions at 100 percent of the requirements. With
respect to first mortgage bonds of a series subject to special
redemption, HL&P has the option to use deposited cash to redeem
first mortgage bonds of such series at the applicable special
redemption price. The replacement fund requirement to be
satisfied in 1997 is approximately $305 million.
The amount of HL&P's first mortgage bonds is unlimited as to
issuance, but limited by property, earnings and other provisions
of the Mortgage and Deed of Trust dated as of November 1, 1944,
between HL&P and South Texas Commercial National Bank of Houston
(Texas Commerce Bank National Association, as Successor Trustee)
and the supplemental indentures thereto. Substantially all
properties of HL&P are subject to liens securing HL&P's long-term
debt under the mortgage.
In January 1996, HL&P repaid upon maturity $100 million principal
amount of its Collateralized Medium-Term Notes Series B and $10
million principal amount of its Collateralized Medium-Term Notes
Series A, plus accrued interest on the two issues. In April 1996,
HL&P repaid upon maturity $40 million principal amount of its 5
1/4% first mortgage bonds plus accrued interest. In May 1996,
HL&P redeemed $50 million of its 7 1/4% first mortgage bonds due
February 1, 2001 at a redemption price of 100.42%, plus accrued
interest, and $35 million of its 6 3/4% first mortgage bonds due
April 1, 1998 at a redemption price of 100.15%, plus accrued
interest. HL&P's annual maturities of long-term debt and the
present value of minimum capital lease payments are approximately
$228 million in 1997, $5 million in 1998, $171 million in 1999,
$150 million in 2000, and $0.1 million in 2001.
(8) SHORT-TERM FINANCING
The interim financing requirements of the Company and its
subsidiaries are met through short-term bank loans, the issuance
of commercial paper and short-term advances from the Company. The
Company and its subsidiaries had bank credit facilities
aggregating $1.9 billion at December 31, 1996 and $1.5 billion at
December 31, 1995, under which borrowings are classified as
short-term indebtedness. These bank facilities limit total
short-term borrowings and provide for interest at rates generally
less than the prime rate. The Company's weighted average
short-term borrowing rates for commercial paper for the years
ended December 31, 1996 and 1995 were 5.67% and 6.33%,
respectively. Outstanding commercial paper of the Company and its
subsidiaries was $1.3 billion at December 31, 1996 and $6 million
at December 31, 1995. Facility fees are required on the credit
facilities.
67
<PAGE> 68
(9) RETIREMENT PLANS
(a) PENSION. The Company has a noncontributory retirement plan
covering substantially all employees. The plan provides
retirement benefits based on years of service and compensation.
The Company's funding policy is to contribute amounts annually in
accordance with applicable regulations in order to achieve
adequate funding of projected benefit obligations. The assets of
the plan consist principally of common stocks and high-quality,
interest-bearing obligations.
Net pension cost for the Company attributable to continuing
operations includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost - benefits earned during the period .... $ 24,392 $ 22,852 $ 21,977
Interest cost on projected benefit obligation ....... 51,560 49,317 46,091
Actual (return) loss on plan assets ................. (75,326) (96,004) 5,357
Net amortization and deferrals ...................... 17,514 50,889 (51,491)
-------- -------- --------
Net pension cost .............................. 18,140 27,054 21,934
SFAS No. 88 - curtailment expense ................... 12,871 5,645
-------- -------- --------
Total pension cost ............................ $ 31,011 $ 32,699 $ 21,934
======== ======== ========
</TABLE>
The funded status of the Company's retirement plans attributable
to continuing operations was as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
---- ----
(Thousands of Dollars)
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation ............... $ 542,714 $ 504,655
========= =========
Accumulated benefit obligation .......... $ 578,786 $ 541,278
========= =========
Plan assets at fair value ................... $ 675,401 $ 595,192
Projected benefit obligation ................ 756,597 704,871
--------- ---------
Assets less than projected benefit obligation (81,196) (109,679)
Unrecognized transitional asset ............. (11,502) (13,421)
Unrecognized prior service cost ............. 31,154 46,627
Unrecognized net loss ....................... 19,405 22,522
--------- ---------
Accrued pension cost ........................ $ (42,139) $ (53,951)
========= =========
</TABLE>
Net pension cost and funding attributable to discontinued
operations was not material.
The projected benefit obligation was determined using an assumed
discount rate of 7.25 percent in 1996 and 7.5 percent in 1995. A
long-term annual rate of compensation increase ranging from 4
percent to 6 percent was assumed for both 1996 and 1995. The
assumed long-term rate of return on plan assets was 9.5 percent
in 1996 and 1995. The transitional asset at January 1, 1986, is
being recognized over approximately 17 years, and the prior
service cost is being recognized over approximately 15 years.
In 1995, the Company offered eligible employees (excluding
officers) of the Company, HL&P and HI Energy, who were 55 years
of age or older and had at least 10 years of service as of July
31,
68
<PAGE> 69
1995, an incentive program to retire early. For employees
electing early retirement, the program added five years of
service credit and five years in age up to 35 years of service
and age 65, respectively, in determining an employee's pension.
Each participating employee (under age 62) would also receive a
supplemental benefit to age 62. During July 1995, the early
retirement incentive was accepted by approximately 300 employees.
Pension benefits and supplemental benefits (if applicable) are
being paid out from the Houston Industries Incorporated
Retirement Trust. Based on the projected costs associated with
the program, HL&P increased its retirement plan and supplemental
benefits in 1995 by approximately $28 million and $5 million,
respectively. Pursuant to SFAS No. 71, HL&P deferred the costs
associated with the increases in these benefit obligations and is
amortizing the costs through the period ending December 31, 1997.
In 1996 and 1995, the Company and HL&P amortized $12.9 million
and $5.6 million, respectively, of those costs as a curtailment
under SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits," with regards to the Company's and HL&P's early
retirement program.
(b) SAVINGS PLAN. The Company has an employee savings plan that
qualifies as cash or deferred arrangements under Section 401(k)
of the Internal Revenue Code of 1986, as amended (IRC). Under the
plan, participating employees may contribute a portion of their
compensation, pretax or after-tax, up to a maximum of 16 percent
of compensation limited by an annual deferral limit ($9,500 for
calendar year 1996) prescribed by IRC Section 402(g) and the IRC
Section 415 annual additions limits. The Company matches 70
percent of the first 6 percent of each employee's compensation
contributed, subject to a vesting schedule which entitles the
employee to a percentage of the matching contributions depending
on years of service. Substantially all of the Company's match is
invested in the Company's common stock.
In October 1990, the Company amended its savings plan to add a
leveraged Employee Stock Ownership Plan (ESOP) component. The
Company may use ESOP shares to satisfy its obligation to make
matching contributions under the savings plan. Debt service on
the ESOP loan is paid using all dividends on shares in the ESOP,
interest earnings on funds held in the ESOP and cash
contributions by the Company. Shares of the Company's common
stock are released from the encumbrance of the ESOP loan based on
the proportion of debt service paid during the period.
The Company adopted Statement of Position (SOP) 93-6, effective
January 1, 1994, which requires that the Company recognize
benefit expense for the ESOP equal to the fair value of the ESOP
shares committed to be released. In accordance with SOP 93-6, the
Company credits to unearned ESOP shares the original purchase
price of ESOP shares committed to be released to plan
participants with the difference between the fair value of the
shares and the original purchase price recorded to common stock.
Dividends on allocated ESOP shares are recorded as a reduction to
retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt or accrued interest on the ESOP
loan. SOP 93-6 is effective only with respect to financial
statements for periods after January 1, 1994.
The Company's savings plan benefit expense attributable to
continuing operations was $16.0 million, $18.9 million and $17.0
million in 1996, 1995 and 1994, respectively. HL&P's portion of
the savings plan benefit expense was $15.3 million, $18.3 million
and $16.5 million in 1996, 1995 and 1994, respectively. Savings
plan benefit expense attributable to discontinued operations was
not material.
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<PAGE> 70
The ESOP shares (after restatement for the two-for-one stock
dividend distribution) were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Allocated shares ........................... 5,391,245 4,406,426
Unearned shares ............................ 13,370,939 14,355,758
------------ ------------
Total ESOP shares ...................... 18,762,184 18,762,184
============ ============
Fair value of unearned ESOP shares ......... $302,517,495 $348,127,132
</TABLE>
(c) POSTRETIREMENT BENEFITS. The Company and HL&P record the
liability for post-retirement benefit plans other than pensions
(primarily healthcare) under SFAS No. 106, "Employer's Accounting
for Postretirement Benefits Other Than Pensions." In accordance
with SFAS No. 106, the Company and HL&P are amortizing over a 22
year period approximately $213 million ($211 million for HL&P) to
cover the "transition cost" of adopting SFAS No. 106 (i.e., the
Company and HL&P's liability for postretirement benefits payable
with respect to employee service years accrued prior to the
adoption of SFAS No. 106).
As provided in the Rate Case Settlement, HL&P is required to fund
during each year in an irrevocable external trust approximately
$22 million of postretirement benefit costs which are included in
rates. In December 1995, HL&P commenced funding by contributing a
total of $15.1 million to three Voluntary Employees' Beneficiary
Association trusts and one Section 401(h) account of the
retirement plan. This contribution represented the amount of
postretirement benefits included in HL&P's rates (which included
HL&P's interest in the South Texas Project costs) less the
estimated pay-as-you-go amounts for 1995 plus interest as if the
contributions had been made on a monthly basis during the year.
Beginning in 1996, HL&P funded postretirement benefits costs on a
monthly basis for the amount included in its rates. The Company,
excluding HL&P, will continue funding its postretirement benefits
on a pay-as-you-go basis. The net postretirement benefit cost for
the Company includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
------ ------ ------
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost - benefits earned during the period ...... $ 8,242 $ 9,093 $ 9,131
Interest cost on accumulated benefit obligation ....... 12,265 11,143 10,265
Actual return on plan assets .......................... (2,342)
Net amortization and deferrals ........................ 5,983 6,061 7,868
-------- -------- --------
Net postretirement benefit cost ....................... $ 24,148 $ 26,297 $ 27,264
======== ======== ========
</TABLE>
70
<PAGE> 71
The funded status of the Company's postretirement benefit costs
was as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Accumulated benefit obligation:
Retirees ................................... $(107,642) $(127,653)
Fully eligible active plan participants .... (16,340) (13,307)
Other active plan participants ............. (26,090) (27,492)
--------- ---------
Total ............................... (150,072) (168,452)
Plan assets at fair market value ............... 38,493 18,310
--------- ---------
Assets less than accumulated benefit obligation (111,579) (150,142)
Unrecognized transitional obligation ........... 173,954 183,727
Unrecognized net gain .......................... (99,417) (73,613)
--------- ---------
Accrued postretirement benefit cost ............ $ (37,042) $ (40,028)
========= =========
</TABLE>
The assumed health care cost trend rates used in measuring the
accumulated postretirement benefit obligation in 1996 are as
follows:
Medical - under 65 7.3%
Medical - 65 and over 8.1%
Dental 7.0%
The assumed healthcare rates gradually decline to 5.4 percent for
both medical categories and 3.7 percent for dental by 2001. The
accumulated postretirement benefit obligation was determined
using an assumed discount rate of 7.25 percent for 1996 and 7.5
percent for 1995.
If the healthcare cost trend rate assumptions were increased by 1
percent, the accumulated postretirement benefit obligation as of
December 31, 1996 would be increased by approximately 8 percent.
The annual effect of the 1 percent increase on the total of the
service and interest costs would be an increase of approximately
11 percent.
(d) POSTEMPLOYMENT BENEFITS. Effective January 1, 1994, the Company
and HL&P adopted SFAS No. 112, "Employer's Accounting for
Postemployment Benefits," which requires the recognition of a
liability for benefits, not previously accounted for on the
accrual basis, provided to former or inactive employees, their
beneficiaries and covered dependents, after employment but before
retirement (primarily health care and life insurance benefits for
participants in the long-term disability plan). As required by
SFAS No. 112, the Company and HL&P expensed the transition
obligation (liability from prior years) upon adoption and
recorded a one-time, after-tax charge to income of $8.2 million
in the first quarter of 1994. Ongoing charges to income are not
material.
(10) INCOME TAXES
The Company and HL&P record income taxes under SFAS No. 109,
"Accounting for Income Taxes," which, among other things, (i)
requires the liability method be used in computing deferred taxes
on all temporary differences between book and tax bases of assets
other than nondeductible goodwill; (ii) requires that deferred
tax liabilities and assets be adjusted for an enacted change in
tax laws or rates; and (iii) prohibits net-of-tax accounting and
reporting. SFAS No. 109 requires that regulated enterprises
recognize such adjustments as regulatory assets or liabilities if
it is probable that such amounts will be recovered from or
returned to customers in future rates.
71
<PAGE> 72
The Company's current and deferred components of income tax
expense from continuing operations are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Current ............................................... $150,658 $141,076 $153,440
Deferred .............................................. 49,507 58,479 76,984
-------- -------- --------
Income taxes for continuing operations before
cumulative effect of change in accounting ......... $200,165 $199,555 $230,424
======== ======== ========
</TABLE>
The Company's effective income tax rates are lower than statutory
corporate rates for each year as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995 1994
----------- ---------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Income from continuing operations before
income taxes and cumulative effect of
change in accounting ......................... $ 605,109 $ 596,955 $ 654,409
Preferred dividends of subsidiary ................ 22,563 29,955 33,583
--------- --------- ---------
Total ...................................... 627,672 626,910 687,992
Statutory rate ................................... 35% 35% 35%
--------- --------- ---------
Income taxes at statutory rate ................... 219,685 219,419 240,797
--------- --------- ---------
Net reduction in taxes resulting from:
AFUDC - other included in income .............. 1,443 2,716 1,440
Amortization of investment tax credit ......... 18,404 19,427 19,416
Excess deferred taxes ......................... 4,331 4,384 3,537
Difference between book and tax
depreciation for which deferred
taxes have not been normalized ............. (22,638) (15,211) (15,455)
Equity dividend exclusion ..................... 10,194 4,932
Equity income - foreign affiliates ............ 5,936
Other - net ................................... 1,850 3,616 1,435
--------- --------- ---------
Total ...................................... 19,520 19,864 10,373
--------- --------- ---------
Income taxes before cumulative effect of
change in accounting ......................... $ 200,165 $ 199,555 $ 230,424
========= ========= =========
Effective rate ................................... 31.9% 31.8% 33.5%
</TABLE>
72
<PAGE> 73
Following are the Company's tax effects of temporary differences
attributable to continuing operations resulting in deferred tax
assets and liabilities:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Deferred Tax Assets:
Alternative minimum tax .............................. $ 19,014 $ 46,516
Internal Revenue Service (IRS) audit assessment ...... 74,966 74,966
Disallowed plant cost - net .......................... 23,237 22,687
Other ................................................ 94,139 96,628
---------- ----------
Total deferred tax assets - net .................. 211,356 240,797
---------- ----------
Deferred Tax Liabilities:
Depreciation ......................................... 1,450,894 1,391,573
Deferred plant costs - net ........................... 194,243 200,028
Regulatory assets - net .............................. 362,310 228,587
Capitalized taxes, employee benefits and removal costs 108,530 110,065
Gain on sale of cable television subsidiary .......... 228,449 227,515
Other ................................................ 131,961 150,275
---------- ----------
Total deferred tax liabilities ................... $2,476,387 $2,308,043
---------- ----------
Accumulated deferred income taxes - net ... $2,265,031 $2,067,246
========== ==========
</TABLE>
See Note 13 for income taxes related to discontinued operations.
In July 1990, the Company paid approximately $104.5 million to the
Internal Revenue Service (IRS) in connection with an IRS audit of
the Company's 1983 and 1984 federal income tax returns. In
November 1991, the Company filed a refund suit in the U.S. Court
of Federal Claims seeking the return of $52.1 million of tax and
$36.3 million of accrued interest, plus interest on both of those
amounts accruing after July 1990. The major contested issue in the
refund case involved the IRS's allegation that certain amounts
related to the over-recovery of fuel costs should have been
included as taxable income in 1983 and 1984 even though HL&P had
an obligation to refund the over-recoveries to its ratepayers. In
October 1994, the Court granted the Company's Motion for Partial
Summary Judgment on the fuel cost over-recovery issue, and in
October 1996 entered final judgment in favor of the Company. The
government has appealed this decision. If the government does not
prevail on appeal, the Company would be entitled to a refund of
overpaid tax, interest paid on the overpaid tax through July 1990
and interest on both of those amounts from July 1990. If the
government prevails on appeal, the Company's ultimate financial
exposure should be immaterial because of offsetting tax deductions
to which the Company is entitled for the year the over-recovery
was refunded to ratepayers.
(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
73
<PAGE> 74
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.
(12) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1996 1995
---------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments ............. $ 8,001 $ 8,001 $ 11,779 $ 11,779
Investment in Time Warner securities ........ 1,027,500 1,027,500 1,027,875 1,027,875
Investments held by HL&P's nuclear
decommissioning trust ..................... 67,229 67,229 44,540 44,540
Financial liabilities:
Short-term notes payable .................... 1,337,872 1,337,872 6,300 6,300
Cumulative preferred stock of
subsidiary (subject to mandatory
redemption) ............................... 25,700 25,957 76,755 79,250
Debentures .................................. 349,098 380,455 548,913 599,575
Long-term debt of subsidiaries:
Electric:
First mortgage bonds ................. 2,895,041 3,045,833 3,128,719 3,397,295
Pollution control revenue bonds ...... 5,000 5,000 5,000 5,000
Other notes payable .................. 856 856 981 981
</TABLE>
The fair values of cash and short-term investments, investment in
equity securities and short-term and other notes payable are
estimated to be equivalent to the carrying amounts.
The fair values of the Company's debentures, HL&P's cumulative
preferred stock subject to mandatory redemption, HL&P's first
mortgage bonds and pollution control revenue bonds issued
74
<PAGE> 75
on behalf of HL&P are estimated using rates currently available
for securities with similar terms and remaining maturities.
(13) CABLE TELEVISION--DISCONTINUED OPERATIONS
The Company's 1995 earnings include a one-time, after-tax gain of
$708 million related to the sale of the Company's cable
television subsidiary to Time Warner in July 1995. Effective
January 1, 1995, the operations of KBLCOM were accounted for as
discontinued and prior periods were restated for consistency in
reflecting KBLCOM as a discontinued operation.
As consideration for the sale of KBLCOM, the Company received 1
million shares of Time Warner common stock and 11 million shares
of non-publicly traded convertible preferred stock. Time Warner
also purchased from the Company for cash approximately $619
million (after post-closing adjustments) of KBLCOM's intercompany
indebtedness and assumed approximately $650 million of KBLCOM's
external debt and other liabilities. The convertible preferred
stock has an aggregate liquidation preference (redeemable after
July 6, 2000) of $100 per share (plus accrued and unpaid
dividends), is entitled to cumulative annual dividends of $3.75
per share until July 6, 1999, is currently convertible by the
Company and after four years is exchangeable by Time Warner into
approximately 22.9 million shares of Time Warner common stock.
Each share of preferred stock is entitled to two votes (voting
together with the holders of the Time Warner common stock as a
single class). Subject to certain exceptions, the terms of the
sale prohibit the Company from acquiring additional shares of
Time Warner securities or selling shares of Time Warner
securities to any holder of more than 5 percent of the
outstanding Time Warner voting securities (including any person
who becomes such a holder after giving effect to the sale).
Dividends on the Time Warner securities are recognized as income
at the time they are earned. The Company recorded pre-tax
dividend income of $41.6 million and $20.1 million in 1996 and
1995, respectively.
Operating results from discontinued operations for the years
ended December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994
---- ----
(Thousands of Dollars)
<S> <C> <C>
Revenues ........................................ $ 143,925 $ 255,772
Operating expenses (a) .......................... 86,938 156,084
--------- ---------
Gross operating margin (a) ...................... 56,987 99,688
Depreciation, amortization, interest and other .. 81,409 128,023
Income taxes (benefit) .......................... (4,997) (11,811)
Deferred loss (b) ............................... 19,425
--------- ---------
Loss from discontinued operations (c) ........... $ 0 $ (16,524)
========= =========
</TABLE>
-----------------
(a) Exclusive of depreciation and amortization.
(b) The net loss for discontinued operations of KBLCOM
through the date of sale (July 6, 1995) was deferred by
the Company. Upon closing of the sale, the deferred loss
was included as an adjustment to the gain on sale of
cable television subsidiary on the Company's Statements
of Consolidated Income.
75
<PAGE> 76
(c) Loss from discontinued operations of KBLCOM excludes the
effects of corporate overhead charges and includes
interest expense relating to the amount of intercompany
debt that Time Warner purchased from the Company.
(14) RAILROAD SETTLEMENT PAYMENTS
In July 1994, HL&P contributed to a wholly owned subsidiary the
right of HL&P to receive certain receivables relating to a
litigation settlement. This subsidiary transferred the
receivables to a trust, which in turn sold certificates
evidencing a senior interest in the trust to a commercial bank
for $66.1 million. The subsidiary retained a subordinate interest
in the trust. HL&P recorded the transaction as a $66.1 million
reduction to reconcilable fuel expense in July 1994. The
reduction to reconcilable fuel expense had no effect on earnings.
(15) UNAUDITED QUARTERLY INFORMATION
The following unaudited quarterly financial information includes,
in the opinion of management, all adjustments (which comprise
only normal recurring accruals) necessary for a fair
presentation. Quarterly results are not necessarily indicative of
a full year's operations because of seasonality and other
factors, including rate increases and variations in operating
expense patterns.
<TABLE>
<CAPTION>
Year Ended December 31, 1995
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
(Thousands of Dollars, except per share amounts)
<S> <C> <C> <C> <C>
Revenues (a) ................................ $ 755,668 $ 989,397 $ 1,184,311 $ 799,895
Operating income (a) ........................ 115,581 283,571 421,904 84,394
Income from continuing operations ........... 23,849 133,260 235,861 4,430
Gain (loss) on sale of cable television
subsidiary .............................. 90,607 618,088 (571)
Net income .................................. 114,456 133,260 853,949 3,859
Earnings per common share (b):
Income from continuing operations ....... $ .10 $ .54 $ .95 $ .02
Net income .............................. .46 .54 3.44 .02
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------
(Thousands of Dollars, except per share amounts)
<S> <C> <C> <C> <C>
Revenues (a) ................................ $ 823,507 $1,113,719 $1,252,090 $ 905,961
Operating income (a) ........................ 137,139 286,926 441,699 124,702
Net income (loss) ........................... (16,740) 145,334 240,024 36,326
Earnings (loss) per common share (b) ........ $ (.07) $ .58 $ .98 $ .15
</TABLE>
- ----------
(a) Reflects a reclassification of HI Energy's equity income from
Other Income (Expense) to Revenues.
(b) Quarterly earnings per common share are based on the weighted
average number of shares outstanding during the quarter, and
the sum of the quarters may not equal annual earnings per
common share. See Note 5(a).
76
<PAGE> 77
(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.
(17) SUBSEQUENT EVENTS
(a) POLLUTION CONTROL BONDS. In January 1997, pollution control
bonds aggregating $118 million were issued on behalf of HL&P by
the Brazos River Authority (BRA) and the Matagorda County
Navigation District Number One (MCND). Proceeds of $50 million
from the BRA Series 1997 bonds, maturing 2018, were used to
redeem, at 102% of the aggregate principal amount, the BRA Series
1986A pollution control revenue bonds issued in November 1986.
Proceeds of $68 million from the MCND Series 1997 bonds, maturing
2028, were used to redeem, at 102% of the aggregate principal
amount, the MCND Series 1986A pollution control revenue bonds
issued in November 1986. The new bonds initially will bear
interest at a floating rate. Bond tenders are permitted. Proceeds
from the remarketing of tendered bonds are expected to be
available to pay for tendered bonds. However, liquidity
facilities aggregating approximately $120 million have been
77
<PAGE> 78
established with banks for the purchase of tendered bonds in the
event such proceeds are not available. Facility fees are payable
in connection with the liquidity facilities.
(b) TRUST SECURITIES. In February 1997, two Delaware statutory
business trusts established by HL&P issued (i) $100 million of
capital securities having a distribution rate of 8.257% and
maturing February 1, 2037 and (ii) $250 million of preferred
securities having a distribution rate of 8.125% and maturing
March 31, 2046. For financial reporting purposes, the trusts will
be treated as subsidiaries of HL&P. The trusts sold securities to
the public and used the proceeds to purchase subordinated
debentures from HL&P having the same amounts, rates and maturity
dates as the securities issued by the trusts. The subordinated
debentures purchased by the trusts constitute substantially all
the assets of the trusts. 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>
Subject to certain limitations, HL&P has the option of
deferring payment of interest on the subordinated debentures
held by the trust. If and for so long as payments on HL&P's
subordinated debentures have been deferred, or HL&P has
defaulted on the indenture relating thereto, HL&P may not pay
dividends on its capital stock.
78
<PAGE> 79
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Except as modified below, the Notes to the Company's Consolidated Financial
Statements are incorporated herein by reference insofar as they relate to HL&P:
(1) Summary of Significant Accounting Policies, (2) Jointly-Owned Nuclear
Plant, (3) Rate Matters, (6) Preferred Stock of HL&P, (7) Long-Term Debt,
(9) Retirement Plans, (10) Income Taxes, (11) Commitments and Contingencies,
(12) Estimated Fair Value of Financial Instruments, (14) Railroad Settlement
Payments, (16) NorAm Merger and (17) Subsequent Events.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(g) EARNINGS PER COMMON SHARE. All issued and outstanding Class A
voting common stock of HL&P is held by the Company and all issued
and outstanding Class B non-voting common stock of HL&P is held by
Houston Industries (Delaware) Incorporated, a wholly owned
subsidiary of the Company. Accordingly, earnings per share are not
computed.
(h) STATEMENTS OF CASH FLOWS. At December 31, 1996, HL&P did not have
any affiliate investments (considered to be cash equivalents). At
December 31, 1995 and 1994, HL&P had affiliate investments of $75.5
million and $227.6 million, respectively.
(8) SHORT-TERM FINANCING
In 1996 and 1995, the interim financing requirements of HL&P were
primarily met through the issuance of commercial paper. HL&P had
bank credit facilities of $400 million at December 31, 1996 and
1995, which limited total short-term borrowings and provided for
interest at rates generally less than the prime rate. A temporary
$346 million increase in the amount of the facility was in effect
during a portion of the first quarter of 1997. HL&P's weighted
average short-term borrowing rates for commercial paper for the
years ended December 31, 1996 and 1995 were 5.52% and 6.21%,
respectively. HL&P had approximately $234.7 million of commercial
paper outstanding at December 31, 1996 and no commercial paper
outstanding at December 31, 1995. Facility fees are required on
HL&P's bank credit facility.
(9) RETIREMENT PLANS
(a) PENSION. Net pension cost for HL&P includes the following
components:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995 1994
-------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost - benefits earned during the period ...... $ 23,583 $ 22,264 $ 21,335
Interest cost on projected benefit obligation ......... 50,268 48,144 45,064
Actual (return) loss on plan assets ................... (73,089) (93,023) 4,737
Net amortization and deferrals ........................ 16,677 48,696 (50,012)
-------- -------- --------
Net pension cost ................................ 17,439 26,081 21,124
SFAS No. 88 - curtailment expense ..................... 12,871 5,645
-------- -------- --------
Total pension cost .............................. $ 30,310 $ 31,726 $ 21,124
======== ======== ========
</TABLE>
79
<PAGE> 80
The funded status of HL&P's retirement plan was as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation ...................$ 528,608 $ 493,006
========= =========
Accumulated benefit obligation ..............$ 563,398 $ 528,467
========= =========
Plan assets at fair value .......................$ 658,285 $ 581,194
Projected benefit obligation .................... 735,727 687,420
--------- ---------
Assets less than projected benefit obligation ... (77,442) (106,226)
Unrecognized transitional asset ................. (11,348) (13,252)
Unrecognized prior service cost ................. 31,006 46,462
Unrecognized net loss ........................... 15,247 19,343
--------- ---------
Accrued pension cost ............................$ (42,537) $ (53,673)
========= =========
</TABLE>
(c) POSTRETIREMENT BENEFITS. The net postretirement benefit cost for
HL&P includes the following components:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost - benefits earned during the period .... $ 7,922 $ 8,779 $ 8,904
Interest cost on projected benefit obligation ....... 11,860 10,794 9,946
Actual return on plan assets ........................ (2,342) -- --
Net amortization and deferrals ...................... 5,766 5,893 7,757
-------- -------- --------
Net postretirement benefit cost ..................... $ 23,206 $ 25,466 $ 26,607
======== ======== ========
</TABLE>
The funded status of HL&P's postretirement benefit costs was as
follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
(Thousands of Dollars)
<S> <C> <C>
Accumulated benefit obligation:
Retirees ...................................... $(105,638) $(125,925)
Fully eligible active plan participants ....... (13,468) (10,532)
Other active plan participants ................ (25,169) (26,515)
--------- ---------
Total ..................................... (144,275) (162,972)
Plan assets at fair market value .................. 38,493 18,310
--------- ---------
Assets less than accumulated benefit obligation ... (105,782) (144,662)
Unrecognized transitional obligation .............. 171,909 181,567
Unrecognized net gain ............................. (100,880) (75,451)
--------- ---------
Accrued postretirement benefit cost ............... $ (34,753) $ (38,546)
========= =========
</TABLE>
80
<PAGE> 81
(10) INCOME TAXES
HL&P's current and deferred components of income tax expense are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Current ............................................ $ 242,695 $ 188,104 $ 184,669
Deferred ........................................... 22,124 57,703 70,324
--------- --------- ---------
Federal income tax expense ......................... 264,819 245,807 254,993
Federal income taxes charged to other income (a) ... (32,410) (851) (836)
--------- --------- ---------
Income taxes before cumulative effect of change
in accounting ............................... $ 232,409 $ 244,956 $ 254,157
========= ========= =========
</TABLE>
(a) The tax effect of litigation settlements of $33,250 is
included for the year ended December 31, 1996.
The following table sets forth the reconciliation of HL&P's
statutory income tax rate to the effective income tax rate:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Income before income taxes, preferred dividends
and cumulative effect of change in accounting ...... $ 661,827 $ 725,888 $ 749,121
Statutory rate ....................................... 35% 35% 35%
--------- --------- ---------
Income taxes at statutory rate ....................... 231,639 254,061 262,192
--------- --------- ---------
Net reduction in taxes resulting from:
AFUDC - other included in income ................... 1,443 2,716 1,440
Amortization of investment tax credit .............. 18,404 19,427 19,416
Difference between book and tax depreciation for
which deferred taxes have not been normalized .... (22,638) (15,211) (15,455)
Excess deferred taxes .............................. 4,331 4,384 3,537
Other - net ........................................ (2,310) (2,211) (903)
--------- --------- ---------
Total ........................................... (770) 9,105 8,035
--------- --------- ---------
Income taxes before cumulative effect of change
in accounting ................................... $ 232,409 $ 244,956 $ 254,157
========= ========= =========
Effective rate ....................................... 35.1% 33.7% 33.9%
</TABLE>
81
<PAGE> 82
The following table sets forth HL&P's tax effects of temporary
differences resulting in deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Deferred Tax Assets:
IRS audit assessment ................................... $ 48,513 $ 48,513
Disallowed plant cost - net ............................ 23,237 22,687
Other .................................................. 49,628 59,558
---------- ----------
Total deferred tax assets ........................ 121,378 130,758
---------- ----------
Deferred Tax Liabilities:
Depreciation ........................................... 1,450,434 1,391,277
Regulatory assets - net ................................ 362,310 228,587
Deferred plant costs - net ............................. 194,243 200,028
Capitalized taxes, employee benefits and removal costs . 108,638 110,177
Other .................................................. 130,320 148,177
---------- ----------
Total deferred tax liabilities ................... 2,245,945 2,078,246
---------- ----------
Accumulated deferred income taxes - net ................ $2,124,567 $1,947,488
========== ==========
</TABLE>
(12) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of HL&P's cash and
short-term investments was $643 thousand for 1996 and $75.9 million
for 1995.
(15) UNAUDITED QUARTERLY INFORMATION
The following unaudited quarterly financial information includes,
in the opinion of management, all adjustments (which comprise only
normal recurring accruals) necessary for a fair presentation.
Quarterly results are not necessarily indicative of a full year's
operations because of seasonality and other factors, including rate
increases and variations in operating expense patterns.
<TABLE>
<CAPTION>
Income (Loss)
Operating After Preferred
Quarter Ended Revenues Income Dividends
------------- -------- ------ ---------
(Thousands of Dollars)
1995
----
<S> <C> <C> <C>
March 31 ..................... $ 746,166 $ 104,566 $ 33,909
June 30 ...................... 978,225 217,419 141,873
September 30 ................. 1,171,789 308,258 241,159
December 31 .................. 784,117 104,421 34,036
1996
----
March 31 ..................... $ 811,965 $ 119,654 $ (10,187)
June 30 ...................... 1,099,971 210,880 144,327
September 30 ................. 1,230,298 304,400 239,989
December 31 .................. 882,793 97,394 32,726
</TABLE>
82
<PAGE> 83
(18) PRINCIPAL AFFILIATE TRANSACTIONS
<TABLE>
<CAPTION>
Year Ended December 31,
Affiliated ---------------------------------------------
Company Description 1996 1995 1994
- --------- ----------------------------------- ----------- ------------ --------
(Thousands of Dollars)
<S> <C> <C> <C>
Houston Dividends $329,000 $454,000 $328,996
Industries
(Delaware)
Incorporated
Houston Service Fees (a) 36,785 26,582 26,913
Industries Money Fund Income (b) 2,013 10,837 6,025
Incorporated
Houston Purchase of Corporate
Industries Headquarters (c) $ 68,058 $ 94,915
Building, Inc.
Corporate Headquarters
Operating Expenses (a) 3,025 416
</TABLE>
- ------------
(a) Included in Operating Expenses.
(b) Included in Other Income (Expense).
(c) Included in Electric Plant in Service.
83
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
HOUSTON INDUSTRIES INCORPORATED:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capitalization of Houston Industries Incorporated
and its subsidiaries as of December 31, 1996 and 1995, and the related
statements of consolidated income, consolidated retained earnings and
consolidated cash flows for each of the three years in the period ended
December 31, 1996. Our audits also included the Company's financial statement
schedule listed in Item 14(a)(2). These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Notes 9(b) and 9(d), respectively, to the consolidated
financial statements, the Company changed its method of accounting in 1994 for
(i) the Employee Stock Ownership Plan to conform with AICPA Statement of
Position 93-6 and (ii) postemployment benefits to conform with Statement of
Financial Accounting Standards No. 112.
DELOITTE & TOUCHE LLP
Houston, Texas
February 21, 1997
84
<PAGE> 85
INDEPENDENT AUDITORS' REPORT
HOUSTON LIGHTING & POWER COMPANY:
We have audited the accompanying balance sheets and the statements of
capitalization of Houston Lighting & Power Company (HL&P) as of December 31,
1996 and 1995, and the related statements of income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule of HL&P listed in Item
14(a)(2). These financial statements and the financial statement schedule are
the responsibility of HL&P's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of HL&P at December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 9(d) to the financial statements, HL&P changed
its method of accounting for postemployment benefits to conform with Statement
of Financial Accounting Standards No. 112 in 1994.
DELOITTE & TOUCHE LLP
Houston, Texas
February 21, 1997
85
<PAGE> 86
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
86
<PAGE> 87
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND HL&P.
(a) The Company
The information called for by Item 10, to the extent not set forth
under Item 1 "Business- Executive Officers of The Company", is or will be set
forth in the definitive proxy statement relating to the Company's 1997 annual
meeting of shareholders pursuant to the Commission's Regulation 14A. Such
definitive proxy statement relates to a meeting of shareholders involving the
election of directors and the portions thereof called for by Item 10 are
incorporated herein by reference pursuant to Instruction G to Form 10-K.
(b) HL&P
The information set forth under Item 1. "Business-Executive Officers
of HL&P" is incorporated herein by reference.
Information is set forth below with respect to the business experience
for the last five years of each person who currently serves as a member of the
board of directors of HL&P, certain other directorships held by each such
person and certain other information. Unless otherwise indicated, each person
has had the same principal occupation for at least five years.
CHARLES R. CRISP, age 49, has been a director since 1996. Mr. Crisp is Senior
Vice President of the Company, having served in that capacity since January
1997, and Executive Vice President and General Manager-Energy Production of
HL&P, having served in that capacity since September 1996. Prior to joining
HL&P, Mr. Crisp served as President, Chief Operating Officer and Director of
Tejas Gas Corporation from November 1988 to September 1996. In January 1997,
Mr. Crisp was appointed President and Chief Operating Officer of the HI Power
Generation Division, a newly created division of the Company.
WILLIAM T. COTTLE, age 51, has been a director since 1996. Mr. Cottle is
Executive Vice President and General Manager - Nuclear for HL&P, having served
in that capacity since February 1996. From April 1993 through February 1996, he
served as Group Vice President - Nuclear of HL&P. Prior to joining HL&P, Mr.
Cottle served as Vice President, Operations, Grand Gulf Nuclear Station,
Entergy Operations, Inc. from March 1987 through April 1993. In January 1997,
Mr. Cottle was appointed Executive Vice President and General Manager of the
Nuclear (STP) Division, a newly created division of the Company.
JACK D. GREENWADE, age 57, has been a director since 1996. Mr. Greenwade is
Senior Vice President and Assistant to the President of HL&P, having served in
that capacity since February 1996. From 1990 through February 1996, he served
as Group Vice President - Operations of HL&P.
LEE W. HOGAN, age 52, has been a director since 1995. Mr. Hogan is Executive
Vice President of the Company, having served in that capacity since January
1997. Previously, he served as Senior Vice President of the Company, having
served in that capacity since February 1996 and as Vice President of the Company
and as Chief Operating Officer of HI Energy, having served in those capacities
since 1993. From 1990 to 1993 he served as Group Vice President - External
Affairs for HL&P. In January 1997, Mr. Hogan was appointed President and Chief
Executive Officer of the HI Retail Energy Group, a newly created division of
the Company.
DON D. JORDAN, age 64, has been a director since 1974. Mr. Jordan is Chairman
and Chief Executive Officer of the Company and Chairman and Chief Executive
Officer of HL&P. He also serves as an advisory director of Texas Commerce Bank
National Association and a director of BJ Services Company, Inc.
HUGH RICE KELLY, age 54, has been a director since 1996. Mr. Kelly is
Executive Vice President, General Counsel and Corporate Secretary of the
Company and HL&P, having served in those capacities since
87
<PAGE> 88
January 1997. He previously served as Senior Vice President, General Counsel and
Corporate Secretary of HL&P from 1984 through 1997, as Senior Vice President,
General Counsel and Corporate Secretary of the Company from 1994 through January
1997 and as Vice President, General Counsel and Corporate Secretary of the
Company from 1984 through 1994.
R. STEVE LETBETTER, age 48, has been a director since 1995. Mr. Letbetter is
President and Chief Operating Officer of the Company, having served in that
capacity since January 1997 and President and Chief Operating Officer of HL&P,
having served in that capacity since 1993. He has served in various positions
as an officer of HL&P since 1978 and also served as a Senior Vice President of
the Company from 1993 to January 1997.
DAVID M. MCCLANAHAN, age 47, has been a director since 1996. He is Executive
Vice President and General Manager - Energy Delivery and Customer Service of
HL&P, having served in that capacity since February 1996. He has previously
served as Group Vice President - Finance and Regulatory Relations of HL&P from
1993 through February 1996 and as Senior Vice President and Chief Financial
Officer of KBLCOM from 1991 through 1993. In January 1997, Mr. McClanahan was
appointed President and Chief Operating Officer of the Houston Lighting & Power
Division, a newly created division of the Company.
STEPHEN W. NAEVE, age 49, has been a director since 1996. He is Executive Vice
President and Chief Financial Officer of the Company, having served in that
capacity since January 1997. He previously served as Senior Vice President and
Chief Financial Officer of the Company from February 1996 through January 1997,
Vice President, Strategic Planning and Administration of the Company from 1993
through February 1996 and as Vice President, Corporate Planning and Treasurer
of HL&P from 1990 through 1993.
STEPHEN C. SCHAEFFER, age 49, has been a director since 1996. He is Executive
Vice President Shared Services and Finance and Regulatory Affairs of HL&P,
having served in that capacity since February 1996. He previously served as
Senior Vice President - Analysis and Finance and Treasurer of HI Energy from
June 1994 through February 1996, Senior Vice President - Planning and Operations
and Treasurer of HI Energy from June 1993 through June 1994, Group Vice
President - Administration and Support of HL&P from 1992 through 1993 and Vice
President - Regulatory Relations of HL&P from 1989 through 1992. In January
1997, Mr. Schaeffer was appointed Executive Vice President-Retail Energy
Regulation of the HI Retail Energy Group, a newly created division of the
Company.
ROBERT L. WALDROP, age 49, has been a director since 1996. He is Senior Vice
President Communications of the Company, having served in that capacity since
January 1997 and Senior Vice President - External Affairs of HL&P, having
served in that capacity since May 1996. He previously served as Senior Vice
President -- Marketing and Customer Service of HL&P from February to May 1996,
Group Vice President - External Affairs of HL&P from 1993 through February 1996,
Vice President - Public and Customer Relations of HL&P from 1992 to 1993 and
Vice President - Public Affairs of HL&P from 1990 to 1992.
ITEM 11. EXECUTIVE COMPENSATION.
(a) The Company
The information called for by Item 11 with respect to the Company is
or will be set forth in the definitive proxy statement relating to the
Company's 1997 annual meeting of shareholders pursuant to the Commission's
Regulation 14A. Such definitive proxy statement relates to a meeting of
shareholders involving the election of directors and the portions thereof
called for by Item 11 (excluding any information required by paragraphs (i),
(k) and (l) of Item 402 of Regulation S-K) are incorporated herein by reference
pursuant to Instruction G to Form 10-K.
88
<PAGE> 89
(b) HL&P
SUMMARY COMPENSATION TABLE. The following table shows, for the years ended
December 31, 1994, 1995 and 1996, the annual, long-term and certain other
compensation paid by the Company and its subsidiaries to the chief executive
officer and the other four most highly compensated executive officers of HL&P
that served as executive officers during 1996 (Named Officers).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Awards Payouts
Annual Compensation ------ -------
------------------- Securities
Name and Other Annual Underlying LTIP All Other
Principal Position Year Salary(1) Bonus(1) Compensation Options(#) Payouts(2) Compensation(3)
------------------ ---- --------- -------- ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Don D. Jordan 1996 $ 962,292 $1,050,000 $ 13,300 27,985 $ 767,440 $ 819,105
Chairman and 1995 884,500 907,226 3,969 36,316 407,437 734,023
Chief Executive Officer 1994 859,500 734,873 114,648 27,726 550,567 717,261
of the Company and HL&P
R. Steve Letbetter 1996 416,000 330,750 228 7,815 138,831 45,151
President and Chief 1995 363,500 285,750 190 9,746 84,201 47,242
Operating Officer of 1994 321,000 246,525 31,133 6,366 117,607 43,818
the Company and HL&P
Hugh Rice Kelly 1996 344,833 209,400 705 5,563 176,311 37,495
Executive Vice President, 1995 334,000 195,773 637 7,414 100,925 44,245
General Counsel and 1994 323,500 190,820 42,147 5,470 145,107 50,546
Corporate Secretary
of the Company and
of HL&P
William T. Cottle 1996 269,000 164,400 450 4,299 121,217 18,547
Executive Vice 1995 254,500 157,200 401 5,566 0 16,711
President and General 1994 241,000 129,675 337 4,044 0 13,126
Manager - Nuclear of HL&P
David M. McClanahan 1996 263,017 143,518 361 4,153 67,221 26,297
Executive Vice 1995 238,100 151,860 317 5,028 35,806 23,162
President and General 1994 208,100 129,398 12,195 3,322 41,512 23,376
Manager - Energy
Delivery and Customer
Services of HL&P
</TABLE>
- ----------
(1) The amounts shown include salary and bonus earned as well as earned but
deferred by the Named Officers.
(2) The amounts shown for 1996 represent the dollar value of shares of the
Company's Common Stock paid out in 1996 under the Company's 1989
long-term incentive compensation plan (LICP) based on the achievement of
certain performance goals for the 1993-1995 performance cycle, plus
dividend equivalent accruals during the performance period.
89
<PAGE> 90
(3) The amounts shown for 1996 include (i) Company contributions to the
Company's savings plan and accruals under its savings restoration plan
on behalf of the Named Officers, as follows: Mr. Jordan, $19,416; Mr.
Letbetter, $29,474; Mr. Kelly, $14,289; Mr. Cottle, $17,900; and Mr.
McClanahan, $15,830; (ii) the term portion of the premiums paid by the
Company under split-dollar life insurance policies purchased in 1994 in
connection with the Company's executive life insurance plan, as follows:
Mr. Jordan, $19,100; Mr. Letbetter, $327; Mr. Kelly, $1,012; Mr. Cottle,
$647; and Mr. McClanahan, $519; and (iii) the portion of accrued
interest on amounts of compensation deferred under the Company's
deferred compensation plan and executive incentive compensation plan
that exceeds 120 percent of the applicable federal long-term rate
provided under Section 1274(d) of the Internal Revenue Code, as follows:
Mr. Jordan, $780,589; Mr. Letbetter, $15,350; Mr. Kelly, $22,194; Mr.
Cottle, none; and Mr. McClanahan, $9,948.
90
<PAGE> 91
STOCK OPTION GRANTS. The following table contains information concerning grants
of stock options during 1996 under the Company's 1994 LICP to the Named
Officers.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
Grant
Date
Individual Grants Value
-------------------------------------------------------- --------
% of Total
Number of Options
Securities Granted to Exercise Grant
Underlying Employees or Base Date
Options in Fiscal Price Per Expiration Present
Name Granted(#)(1) Year Share Date Value(2)
- ---- ------------- ---- ----- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Don D. Jordan................... 27,985 27.49% $24.375 01/01/06 $67,724
R. Steve Letbetter.............. 7,815 7.68% 24.375 01/01/06 18,912
Hugh Rice Kelly................. 5,563 5.46% 24.375 01/01/06 13,462
William T. Cottle............... 4,299 4.22% 24.375 01/01/06 10,404
David M. McClanahan............. 4,153 4.08% 24.375 01/01/06 10,050
</TABLE>
- -------------------
(1) The nonstatutory options for shares of the Company's Common Stock
included in the table were granted on January 2, 1996, have a ten-year
term and generally become exercisable annually in one-third increments
commencing one year after date of grant, so long as employment with the
Company or its subsidiaries continues. A change in control of the
Company would result in all options becoming immediately exercisable.
For the purposes of the LICP, a "change in control" generally is deemed
to have occurred if (i) any person or group becomes the direct or
indirect beneficial owner of 30 percent or more of the Company's
outstanding voting securities; (ii) the majority of the Board changes as
a result of, or in connection with, certain transactions; (iii) as a
result of the Company merging or consolidating with another corporation,
less than 70 percent of the surviving corporation's outstanding voting
securities is owned by the former shareholders of the Company (excluding
any party to such a transaction or any affiliates of any such party);
(iv) a tender offer or exchange offer is made and consummated for the
ownership of 30 percent or more of the Company's outstanding voting
securities; or (v) the Company transfers all or substantially all of its
assets to another corporation that is not wholly-owned by the Company.
(2) The values are based on the Black-Scholes option pricing model adjusted
for the payment of dividends. The calculations were based on the
following assumptions: volatility of 15.713 percent (based on daily
closing prices of the Company's Common Stock for the one-year period
prior to grant date); risk-free interest rate of 5.65 percent (interest
rate on a U.S. Treasury security with a maturity date corresponding to
that of the option term); option price of $24.375 (fair market value of
the underlying stock on the date of grant); current dividend rate of
$1.50 per share per year; and option term equal to the full ten-year
period until the stated expiration date. No reduction has been made in
the valuations on account of non-transferability of the options or
vesting or forfeiture provisions. Valuations would change if different
assumptions were made. Option values are dependent on general market
conditions and the performance of the Company's Common Stock. There can
be no assurance that the values in this table will be realized.
STOCK OPTION VALUES. The following table sets forth information on the
unexercised options to purchase Common Stock held by each of the Named Officers
as of December 31, 1996. No options were exercised by the Named Officers during
1996.
91
<PAGE> 92
1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options at
at December 31, 1996 December 31, 1996 (1)
---------------------------- ------------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ---- ---------------------------- ------------------------
<S> <C> <C> <C> <C>
Don D. Jordan....................... 82,900 / 61,437 $77,289 / $114,998
R. Steve Letbetter.................. 16,070 / 16,435 18,670 / 30,866
Hugh Rice Kelly..................... 16,694 / 12,329 15,743 / 23,475
William T. Cottle................... 4,552 / 9,357 8,816 / 17,623
David M. McClanahan................. 8,038 / 8,613 9,565 / 15,922
</TABLE>
- -------------------
(1) Based on the average of the high and low sales prices of the Company's
Common Stock on the New York Stock Exchange Composite Tape, as reported
in The Wall Street Journal for December 31, 1996.
LONG-TERM INCENTIVE COMPENSATION. The following table sets forth, for each of
the Named Officers, information concerning awards made during 1996 for the
1996-1998 performance cycle under the Company's 1994 LICP. The amounts shown
represent potential payouts of awards of shares of Common Stock based on the
achievement of performance goals over a three year performance cycle. The
performance goals include a Company consolidated goal and subsidiary or business
unit goals, weighted 25 percent on consolidated performance and 75 percent on
subsidiary or business unit performance. The Company consolidated goal is
achieving a certain level of total shareholder return in relation to a group of
other companies. The subsidiary or business unit goals are achieving certain
cash flow performance in relation to a group of other companies and improving
competitive position through a combination of cost reduction and revenue growth.
An additional goal applicable to Messrs. Jordan and Kelly is based on the
success of HI Energy in closing certain transactions and its achievement of
specified internal rates of return. If a change in control of the Company occurs
before the end of a performance cycle, the payout of awards for performance
shares will occur without regard to achievement of the performance goals. See
Note 1 to the Option Grants in 1996 table for information regarding the
definition of a change in control under the LICP.
LONG-TERM INCENTIVE PLAN AWARDS IN 1996
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
Performance NON-STOCK PRICE-BASED PLANS(1)
or Other ------------------------------
Period Until Threshold Target Maximum
Number Maturation or Number Number Number
Name of Shares Payout of Shares of Shares of Shares
- ---- --------- ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Don D. Jordan.................... 27,359 12/31/98 13,680 27,359 41,039
R. Steve Letbetter............... 8,187 12/31/98 4,094 8,187 12,281
Hugh Rice Kelly.................. 5,827 12/31/98 2,914 5,827 8,741
William T. Cottle................ 4,504 12/31/98 2,252 4,504 6,756
David M. McClanahan.............. 4,351 12/31/98 2,176 4,351 6,527
</TABLE>
- -------------------
(1) The table does not reflect dividend equivalent accruals during the
performance period.
92
<PAGE> 93
RETIREMENT PLANS, RELATED BENEFITS AND OTHER AGREEMENTS. The following table
shows the estimated annual benefit payable under the Company's retirement plan,
benefit restoration plan and, in certain cases, supplemental agreements, to
officers in various compensation classifications upon retirement at age 65
after the indicated periods of service, determined on a single-life annuity
basis. The benefits listed in the table are not subject to any deduction for
Social Security or other offsetting amounts.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Final Average
Annual Estimated Annual Pension Based on Years of Service (1)
Compensation ------------------------------------------------------------ Greater than
At Age 65 15 20 25 30 or equal to 35
--------- -------- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$ 300,000 $ 85,480 $113,973 $142,467 $ 170,960 $ 199,453
400,000 114,580 152,773 190,967 229,160 267,353
500,000 143,680 191,573 239,467 287,360 335,253
600,000 172,780 230,373 287,967 345,560 403,153
700,000 201,880 269,173 336,467 403,760 471,053
800,000 230,980 307,973 384,967 461,960 538,953
900,000 260,080 346,773 433,467 520,160 606,853
1,000,000 289,180 385,573 481,967 578,360 674,753
1,200,000 347,380 463,173 578,967 694,760 810,553
1,400,000 405,580 540,773 675,967 811,160 946,353
1,600,000 463,780 618,373 772,967 927,560 1,082,153
1,800,000 521,980 695,973 869,967 1,043,960 1,217,953
2,000,000 580,180 773,573 966,967 1,160,360 1,353,753
</TABLE>
- -------------------
(1) The qualified pension plan limits compensation in accordance with
Section 401(a)(17) of the Internal Revenue Code and also limits
benefits in accordance with Section 415 of the Internal Revenue Code.
Pension benefits based on compensation above the qualified plan limit
or in excess of the limit on annual benefits are provided through the
benefit restoration plan.
For the purpose of the pension table above, final average annual
compensation means the average of covered compensation for 36 consecutive
months out of the 120 consecutive months immediately preceding retirement in
which the participant's covered compensation was the highest. Covered
compensation includes only the amounts shown in the "Salary" and "Bonus"
columns of the Summary Compensation Table. At December 31, 1996, the credited
years of service for the following persons are: 35 years for Mr. Jordan; 23
years for Mr. Letbetter; 22 years for Mr. Kelly, 10 of which result from a
supplemental agreement; 4 years for Mr. Cottle; and 22 years for Mr.
McClanahan.
The Company maintains an executive benefits plan that provides certain
salary continuation, disability and death benefits to key officers of the
Company and certain of its subsidiaries, including
93
<PAGE> 94
HL&P. The Named Officers participate in this plan pursuant to individual
agreements that generally provide for (i) a salary continuation benefit of 100
percent of the officer's current salary for twelve months after death during
active employment and then 50 percent of salary for nine years or until the
deceased officer would have attained age 65, if later, and (ii) if the officer
retires after attainment of age 65, an annual post-retirement death benefit of
50 percent of the officer's preretirement annual salary payable for six years.
This benefit plan is no longer being offered to new officers.
The Company has an executive life insurance plan providing split-dollar
life insurance in the form of a death benefit for certain officers of the
Company and its subsidiaries. The death benefit coverage varies but in each case
is based on coverage (either single life or second to die) that is available for
the same amount of premium that could purchase coverage equal to four times
current salary for Mr. Letbetter; two times current salary for Messrs. Kelly,
Cottle and McClanahan;and thirty million dollars for Mr. Jordan. The plan also
provides that the Company may make payments to the covered individuals to
compensate for tax consequences of imputed income that they must recognize for
federal income tax purposes based on the term portion of the annual premiums. If
a covered executive retires at age 65 or at an earlier age under circumstances
approved by the Board of Directors, rights under the plan vest so that coverage
is continued based on the same death benefit in effect at the time of
retirement. Upon death, the Company will receive the balance of the insurance
proceeds payable in excess of the specified death benefit which is expected to
be at least sufficient to cover the Company's cumulative outlays to pay premiums
and the after-tax cost to the Company of the tax reimbursement payments. There
is no arrangement or understanding under which any covered individuals will
receive or be allocated any interest in any cash surrender value under the
policy.
The Company and its subsidiaries HL&P and HI Energy have entered into
a trust agreement with an independent trustee establishing a "rabbi trust" for
the purpose of funding benefits payable to participants (which include each of
the Named Officers) under the Company's deferred compensation plans, executive
incentive compensation plans, benefits restoration plan and savings restoration
plan (Designated Plans). The trust is a grantor trust, irrevocable except in
the event of an unfavorable ruling by the Internal Revenue Service as to the
tax status of the trust or certain changes in tax law. It is currently funded
with a nominal amount of cash. The Company, HL&P and HI Energy are required to
make future contributions to the grantor trust when required by the provisions
of the Designated Plans or when required by the Company's benefits committee.
The benefits committee consists of officers of the Company designated by the
board of directors and has general responsibility for funding decisions and
selection of investment managers for the Company's retirement plan and other
administrative matters in connection with other employee benefit plans of the
Company. If there is a change in control (defined in a manner generally the
same as the comparable definition in the Company's long-term incentive
compensation plan), the Company, HL&P and HI Energy are required to fully fund
the grantor trust, within 15 days following the change in control, with an
amount equal to the entire benefit which each participant would be entitled
under the Designated Plans as of the date of the change in control (calculated
on the basis of the present value of the projected future benefits payable
under the Designated Plans). The assets of the grantor trust are required to be
held separate and apart from the other funds of the Company and its
subsidiaries, but remain subject to claims of general creditors under
applicable state and federal law.
In February 1997, the Company entered into an amended and restated
employment agreement (Agreement) with Mr. Jordan extending his employment for
two years beyond his normal retirement
94
<PAGE> 95
date (June 1, 1997). The restated agreement replaces an original agreement
entered in 1994 which provided for benefits in the event of termination of
employment following a change of control and for extension of Mr. Jordan's
employment until he reaches age 67 if he remained employed by the Company at
age 65. The agreement, as restated, provides for the employment of Mr. Jordan
at his present position with the Company during the two and one-half year
period commencing January 8, 1997 and ending June 1, 1999 (Employment Period).
During the Employment Period, Mr. Jordan will receive benefits including (i)
base salary in an amount not less than his salary in effect on January 8, 1997,
(ii) annual bonus awards based on amounts payable under the Company's executive
incentive compensation plan (EICP) and LICP, and (iii) participation in other
employee benefit plans and programs on generally the same basis as other peer
executives, except that Mr. Jordan will not receive any LICP Award for
performance cycles commencing in 1998 and 1999 but will instead receive an
award of 300,000 restricted shares of Common Stock. The award of restricted
shares of Common Stock is implemented through bookkeeping entry until
applicable vesting conditions are satisfied, at which time shares of Common
Stock will be delivered out of shares held in the Company's treasury, together
with accumulated dividends.
Mr. Jordan's right to 150,000 of the restricted shares of Common Stock
(Vested Shares) shall vest on June 1, 1999 if he has remained in the continuous
employment of the Company during the Employment Period. If, during the
Employment Period, the Company terminates Mr. Jordan's employment for Cause (as
defined in the Agreement) or he voluntarily terminates employment without Good
Reason (as defined in the Agreement), Mr. Jordan will forfeit all rights to the
Vested Shares as of the date of termination. If, during the Employment Period,
the Company terminates Mr. Jordan's employment without Cause, he terminates
employment for Good Reason, or Mr. Jordan's employment terminates by reason of
death, Disability (as defined in the Agreement) or retirement with consent of
the Company, his right to the Vested Shares will vest as of the date of
termination.
Mr. Jordan's right to an additional 150,000 restricted shares of
Common Stock (Performance Shares) is generally subject to vesting provisions
based on achievement of certain performance goals (the same performance goals
that are applicable to Mr. Jordan's restricted stock award under the LICP for
the 1997 performance cycle); provided that (1) if, during the Employment
Period, the Company terminates Mr. Jordan's employment without Cause or he
terminates employment for Good Reason, Mr. Jordan's right to the Performance
Shares will vest as of the date of termination, (2) if, during the Employment
Period, the Company terminates Mr. Jordan's employment for Cause or he
voluntarily terminates employment without Good Reason, Mr. Jordan will forfeit
all right to the Performance Shares as of the date of termination, and (3) if,
prior to the end of the Employment Period and during calendar year 1997, Mr.
Jordan terminates employment by reason of death, Disability or retirement with
the consent of the Company, he will forfeit all right to the Performance Shares
as of the date of termination. If Mr. Jordan terminates employment prior to the
end of the Employment Period and during calendar year 1998 or 1999, he will have
a vested right to a portion of the Performance Shares, based on the Compensation
Committee's determination of the extent to which the performance goals for the
1997 LICP performance cycle are, based on information then available, expected
to be achieved and prorated based on time elapsed in the performance cycle.
Upon Mr. Jordan's completion of the Employment Period without termination of
employment, he will have a vested right to all or a portion of the Performance
Shares, based on the Compensation Committee's determination of the extent to
which the performance goals for the 1997 LICP performance cycle are, based on
information then available, expected to be achieved.
The restated agreement provides that Mr. Jordan has the right to
receive payments of salary and bonus previously deferred under the Company's
deferred compensation plan in fifteen annual installments and that the Company
may not exercise any right it otherwise has to make payment in a lump sum. In
addition, the agreement provides for an extension of the commencement date of
the
95
<PAGE> 96
deferred payments under the deferred compensation plan from June 1, 1999 until
June 1, 2000 in consideration of Mr. Jordan's agreement to make himself
available for up to 40 hours per month as a consultant from June 2, 1999, until
June 1, 2000.
Upon the Company's termination of Mr. Jordan without Cause or his
termination of employment for Good Reason following a Change of Control (as
defined below), the Company will pay Mr. Jordan a cash payment equal to 2.99
times Mr. Jordan's base amount (generally, his average taxable compensation
received from the Company for the five calendar years prior to the Change of
Control) under Internal Revenue Code (Code) Section 280G, in addition to
fulfillment of certain other obligations generally applicable upon termination
of employment, and any unvested portion of the 300,000 restricted shares of
Common Stock will vest. To the extent that payments made to Mr. Jordan upon a
Change of Control would result in the application of an excise tax (and related
loss of deduction to the Company) under the Code, such payments will be reduced
as necessary to avoid this result. In the event that an overpayment is made,
such payment will be recharacterized as a loan that Mr. Jordan is obligated to
repay with interest in order to avoid the excise tax and lost deduction.
Generally, a Change of Control will be deemed to occur under the Agreement if
(i) an individual, entity or group acquires beneficial ownership of 30 percent
or more of the Company's Common Stock, (ii) the individuals constituting the
Board of Directors of the Company on January 1, 1997, including their designated
successors (Incumbent Board) cease to constitute a majority of the Board or
(iii) a merger or other business combination to which the Company is a party is
consummated unless (1) the Company's stockholders prior to the business
combination own more than 70 percent of the resulting parent entity, (2) there
is not a 30 percent stockholder of the resulting parent entity except to the
extent such ownership existed prior to the business combination and (3) a
majority of the board of the resulting parent entity after the transaction were
members of the Incumbent Board at the time of the initial agreement or board
action providing for the business combination.
HL&P and Mr. Cottle entered into an employment agreement in 1993 that
continues indefinitely, subject to termination by either party on 30 days'
notice (Employment Period). The agreement generally provides for employment of
Mr. Cottle as a group vice president - nuclear or in such other executive
capacities as may be determined from time to time, a minimum annual base salary
($235,000), bonuses and participation in those employee benefit plans and
programs available to similarly situated employees during the Employment
Period. In addition, if the Employment Period terminates after April 5, 2003,
Mr. Cottle will be eligible for supplemental pension, disability or death
benefits determined as if his employment had commenced ten years prior to the
initial date of the Employment Period.
The Company and Mr. McClanahan entered into a benefits agreement in
1991 which provided for the treatment of his employee benefits while he served
as an officer of the Company's cable television subsidiary from 1991 to 1993
(sold in July 1995). The agreement provided that Mr. McClanahan would be
compensated for the difference between the cable television subsidiary benefits
and the Company benefits he would have received if he had been an employee of
the Company during his period of employment with the subsidiary. Such amounts
will be paid to Mr. McClanahan at such time benefits are due to him under the
terms of the Company's pension and savings plans.
96
<PAGE> 97
COMPENSATION OF DIRECTORS. The directors of HL&P do not receive any separate
compensation for their service on the HL&P board of directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) The Company
The information called for by Item 12 with respect to the Company is or
will be set forth in the definitive proxy statement relating to the Company's
1997 annual meeting of shareholders pursuant to the Commission's Regulation
14A. Such definitive proxy statement relates to a meeting of shareholders
involving the election of directors and the portions thereof called for by Item
12 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
(b) HL&P
As of the date of this Report, the Company owned all 1,000 authorized,
issued and outstanding shares of HL&P's Class A voting common stock, without
par value.
97
<PAGE> 98
The following table sets forth information as of March 1, 1997, with
respect to the beneficial ownership of shares of the Company's Common Stock by
each current director, the Named Officers and, as a group, by such persons and
other executive officers of HL&P. No person or member of the group listed owns
any equity securities of HL&P or any other subsidiary of the Company. Unless
otherwise indicated, each person or member of the group listed has sole voting
and sole investment power with respect to the shares of Common Stock listed. No
ownership shown in the table represents 1 percent or more of the outstanding
shares of Common Stock.
<TABLE>
<CAPTION>
Name Shares of Common Stock Beneficially Owned
---- -----------------------------------------
<S> <C>
William T. Cottle ........................... 19,445(1)(2)
Charles Crisp ............................... 0
Jack Greenwade .............................. 52,906(1)(2)(3)
Lee W. Hogan ................................ 31,719(1)(2)(3)
Don D. Jordan ............................... 279,905(1)(2)(4)
Hugh Rice Kelly ............................. 73,992(1)(2)(3)
R. Steve Letbetter .......................... 66,911(1)(2)(3)
David M. McClanahan ......................... 32,696(1)(2)(3)
Stephen W. Naeve ............................ 32,658(1)(2)
Stephen C. Schaeffer ........................ 39,855(1)(2)
Robert L. Waldrop ........................... 25,998(1)(2)(5)
All of the above and other executive officers
as a group (12 persons) ................ 668,912(1)(2)(3)
</TABLE>
- --------------
(1) Includes shares held under the Company's savings plan, as to which the
participant has sole voting power (subject to such power being
exercised by the plan's trustee in the same proportion as directed
shares in the savings plan are voted in the event the participant does
not exercise voting power). The shares held under the plan are
reported as of December 31, 1996.
(2) The ownership shown in the table includes shares which may be acquired
within 60 days on exercise of outstanding stock options granted under
the Company's long-term incentive compensation plan by each of the
Named Officers and the group, as follows: Mr. Cottle - 9,187 shares;
Mr. Jordan - 113,574 shares; Mr. Kelly - 22,842 shares; Mr. Letbetter
- 24,047 shares; Mr. McClanahan - 12,206 shares; and the group
-234,106 shares.
(3) Includes shares held under the Company's Investor's Choice dividend
reinvestment and stock purchase plan as of December 31, 1996.
(4) Voting power and investment power with respect to 1,152 of the shares
listed are shared with Mr. Jordan's spouse.
(5) Mr. Waldrop disclaims beneficial ownership of 126 of the shares
listed, which are owned by his wife.
98
<PAGE> 99
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) The Company
The information called for by Item 13 is or will be set forth in the
definitive proxy statement relating to the Company's 1996 annual meeting of
shareholders pursuant to the Commission's Regulation 14A. Such definitive proxy
statement relates to a meeting of shareholders involving the election of
directors and the portions thereof called for by Item 13 are incorporated
herein by reference pursuant to Instruction G to Form 10-K.
(b) HL&P
As of March 16, 1997 Mr. Crisp, one of HL&P's directors, was indebted
to HL&P in the amount of $300,000. The indebtedness arose from a cash payment
to Mr. Crisp in 1996 in connection with his acceptance of employment with
HL&P. The terms of the loan provide that it does not bear interest and that
one-half of the principal will be forgiven six months after Mr. Crisp's
initial employment date of September 23, 1996 and the balance twelve months
after such date, except in the event of his voluntary termination of employment.
99
<PAGE> 100
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statements of Consolidated Income for the Three Years Ended
December 31, 1996.................................................... 41
Statements of Consolidated Retained Earnings for the Three Years
Ended December 31, 1996.............................................. 43
Consolidated Balance Sheets at December 31, 1996 and 1995................. 44
Consolidated Statements of Capitalization at December 31, 1996 and 1995... 46
Statements of Consolidated Cash Flows for the Three Years
Ended December 31, 1996.............................................. 48
HL&P Statements of Income for the Three Years Ended December 31, 1996..... 50
HL&P Statements of Retained Earnings for the Three Years
Ended December 31, 1996.............................................. 51
HL&P Balance Sheets at December 31, 1996 and 1995......................... 52
HL&P Statements of Capitalization at December 31, 1996 and 1995........... 54
HL&P Statements of Cash Flows for the Three Years
Ended December 31, 1996.............................................. 56
Notes to Consolidated Financial Statements................................ 57
Notes to HL&P's Financial Statements...................................... 79
Independent Auditors' Report - The Company................................ 84
Independent Auditors' Report - HL&P....................................... 85
(a)(2) FINANCIAL STATEMENT SCHEDULES FOR THE THREE YEARS ENDED DECEMBER 31, 1996.
THE COMPANY:
II -- Reserves............................................................ 101
HL&P:
II -- Reserves............................................................ 102
The following schedules are omitted because of the absence of the conditions
under which they are required or because the required information is included
in the financial statements:
I, III, IV and V.
(a)(3) EXHIBITS......................................................... 105
</TABLE>
See Index of Exhibits on page 105, which also includes the management contracts
or compensatory plans or arrangements required to be filed as exhibits to this
Form 10-K by Item 601(10)(iii) of Regulation S-K.
(b) REPORTS ON FORM 8-K.
Form 8-K of the Company and HL&P dated August 11, 1996.
Form 8-K of HL&P dated February 4, 1997.
Form 8-K of the Company and HL&P dated February 5, 1997.
100
<PAGE> 101
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
SCHEDULE II - RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
========================================================================================================================
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------------------------------------------------------------------------------------------
Additions
------------------------
Balance at Charged Charged Deductions Balance at
Beginning to to Other from End
Description of Period Income Accounts Reserves of Period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Accumulated provisions deducted
from related assets on
balance sheet:
Uncollectible advances ............ $ 27,412 $ 5,015 $ 732 $ 33,159
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ................ (2,117) 2,187 70
Injuries and damages .............. 1,523 3,156 $ 3,551 1,128
Non-regulated project contingencies 2,929 (633) 2,296
Year Ended December 31, 1995:
Accumulated provisions deducted from
related assets on balance sheet:
Uncollectible advances ............ $ 27,412 $ 27,412
Net assets of discontinued
cable television operations ... $ 282,958 $ 282,958
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ................ (3,468) 2,187 836 (2,117)
Injuries and damages .............. 2,241 2,327 3,045 1,523
Year Ended December 31, 1994:
Accumulated provisions deducted
from related assets on balance
sheet:
Net assets of discontinued
cable television operations ... $ 243,400 $ 44,319 $ 1,799 $ 6,560 $ 282,958
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ................ (2,891) 2,187 2,764 (3,468)
Injuries and damages .............. 2,891 3,099 3,749 2,241
</TABLE>
- ---------------
Notes:
(A) Deductions from reserves represent losses or expenses for which the
respective reserves were created. In the case of the uncollectible
accounts reserve, such deductions are net of recoveries of amounts
previously written off.
(B) The uncollectible advances reflect the combined amounts lent by HI
Energy on a subordinated basis to the Ford Heights and Fulton
Projects as of December 31, 1996. If the two projects no longer
receive or qualify to receive the operating subsidy provided by the
Illinois Retail Rate Law, the projects would be unable to repay such
amounts.
101
<PAGE> 102
HOUSTON LIGHTING & POWER COMPANY
SCHEDULE II - RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
========================================================================================================================
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------------------------------------------------------------------------------------------
Additions
------------------------
Balance at Charged Charged Deductions Balance at
Beginning to to Other from End
Description of Period Income Accounts Reserves of Period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ................. $ (2,117) $ 2,187 $ 70
Injuries and damages ............... 1,523 3,156 $ 3,551 1,128
Year Ended December 31, 1995:
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ................. $ (3,468) $ 2,187 $ 836 $(2,117)
Injuries and damages ............... 2,241 2,327 3,045 1,523
Year Ended December 31, 1994:
Reserves other than those
deducted from assets on
balance sheet:
Property insurance ................. $ (2,891) $ 2,187 $ 2,764 $(3,468)
Injuries and damages ............... 2,891 3,099 3,749 2,241
</TABLE>
- ---------------
Notes:
(A) Deductions from reserves represent losses or expenses for which the
respective reserves were created.
(B) HL&P has no reserves for uncollectible accounts due to sales of accounts
receivable.
102
<PAGE> 103
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, IN THE CITY OF
HOUSTON AND STATE OF TEXAS, ON THE 20TH DAY OF MARCH, 1997.
HOUSTON INDUSTRIES INCORPORATED (Registrant)
By DON D. JORDAN
-------------------------------
(Don D. Jordan, Chairman and
Chief Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 20, 1997.
SIGNATURE TITLE
--------- -----
DON D. JORDAN Chairman and Chief Executive
- ------------------------------- Officer and Director
(Don D. Jordan) (Principal Executive Officer)
STEPHEN W. NAEVE Executive Vice President
- ------------------------------- and Chief Financial Officer
(Stephen W. Naeve) (Principal Financial Officer)
MARY P. RICCIARDELLO Vice President and Comptroller
- ------------------------------- (Principal Accounting Officer)
(Mary P. Ricciardello)
JAMES A. BAKER
- ------------------------------- Director
(James A. Baker)
RICHARD E. BALZHISER
- ------------------------------- Director
(Richard E. Balzhiser)
MILTON CARROLL
- ------------------------------- Director
(Milton Carroll)
JOHN T. CATER
- ------------------------------- Director
(John T. Cater)
ROBERT J. CRUIKSHANK
- ------------------------------- Director
(Robert J. Cruikshank)
LINNET F. DEILY
- ------------------------------- Director
(Linnet F. Deily)
LEE W. HOGAN
- ------------------------------- Director
(Lee W. Hogan)
HOWARD W. HORNE
- ------------------------------- Director
(Howard W. Horne)
R. STEVE LETBETTER
- ------------------------------- Director
(R. Steve Letbetter)
ALEXANDER F. SCHILT
- ------------------------------- Director
(Alexander F. Schilt)
JACK T. TROTTER
- ------------------------------- Director
(Jack T. Trotter)
BERTRAM WOLFE
- -------------------------------
(Bertram Wolfe) Director
103
<PAGE> 104
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, IN THE CITY OF
HOUSTON AND STATE OF TEXAS, ON THE 20TH DAY OF MARCH, 1997. THE SIGNATURE OF
HOUSTON LIGHTING & POWER COMPANY SHALL BE DEEMED TO RELATE ONLY TO MATTERS
HAVING REFERENCE TO SUCH COMPANY AND ANY SUBSIDIARIES THEREOF.
HOUSTON INDUSTRIES INCORPORATED (Registrant)
By DON D. JORDAN
-------------------------------
(Don D. Jordan, Chairman and
Chief Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 20, 1997. THE SIGNATURE OF
EACH OF THE UNDERSIGNED SHALL BE DEEMED TO RELATE ONLY TO MATTERS HAVING
REFERENCE TO HOUSTON LIGHTING & POWER COMPANY AND ANY SUBSIDIARIES THEREOF.
SIGNATURE TITLE
--------- -----
DON D. JORDAN Chairman and Chief Executive
- ------------------------------- Officer and Director
(Don D. Jordan) (Principal Executive Officer and
Principal Financial Officer)
MARY P. RICCIARDELLO Vice President and Comptroller
- ------------------------------- (Principal Accounting Officer)
(Mary P. Ricciardello)
CHARLES R. CRISP
- ------------------------------- Director
(Charles R. Crisp)
WILLIAM T. COTTLE
- ------------------------------- Director
(William T. Cottle)
JACK D. GREENWADE
- ------------------------------- Director
(Jack D. Greenwade)
LEE W. HOGAN
- ------------------------------- Director
(Lee W. Hogan)
HUGH RICE KELLY
- ------------------------------- Director
(Hugh Rice Kelly)
R. STEVE LETBETTER
- ------------------------------- Director
(R. Steve Letbetter)
DAVID M. MCCLANAHAN
- ------------------------------- Director
(David M. McClanahan)
STEPHEN W. NAEVE
- ------------------------------- Director
(Stephen W. Naeve)
STEPHEN C. SCHAEFFER
- ------------------------------- Director
(Stephen C. Schaeffer)
ROBERT L. WALDROP
- ------------------------------- Director
(Robert L. Waldrop)
104
<PAGE> 105
HOUSTON INDUSTRIES INCORPORATED
HOUSTON LIGHTING & POWER COMPANY
EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
INDEX OF EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by a
cross (+); all exhibits not so designated are incorporated herein by reference
to a prior filing as indicated. Exhibits designated by an asterisk (*) are
management contracts or compensatory plans or arrangements required to be filed
as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K.
(a) Houston Industries Incorporated
<TABLE>
<CAPTION>
Report or SEC File or
Exhibit Registration Registration Exhibit
Number Description Statement Number Reference
------ ----------- --------- ------ ---------
<S> <C> <C> <C> <C>
2(a) Agreement and Plan of Form 8-K for the 1-7629 2
Merger among the quarter dated
Company, HL&P, HI August 11, 1996
Merger, Inc. and
NorAm dated August 11,
1996
2(b) Amendment to Registration Statement 333-11329 2(c)
Agreement and Plan on Form S-4
of Merger among the
Company, HL&P, HI
Merger, Inc. and NorAm
dated August 11, 1996
3(a) Restated Articles of Form 10-Q for 1-7629 3
Incorporation of the the quarter ended
Company (Restated as June 30, 1993
of May 1993)
3(b) Amended and Restated Form 10-Q for the 1-7629 3
Bylaws of the Company quarter ended
(as of May 22, 1996) June 30, 1996
4(a)(1) Mortgage and Deed of Form S-7 of HL&P 2-59748 2(b)
Trust dated November filed on August
1, 1944 between HL&P 25, 1977
and South Texas
Commercial National
Bank of Houston
(Texas Commerce
Bank National Associ-
ation, as successor
trustee), as Trustee, as
amended and supple-
mented by 20
Supplemental Inden-
tures thereto
</TABLE>
105
<PAGE> 106
<TABLE>
<S> <C> <C> <C> <C>
4(a)(2) Twenty-First through HL&P's Form 10-K 1-3187 4(a)(2)
Fiftieth Supplemental for the year ended
Indentures to HL&P December 31, 1989
Mortgage and Deed
of Trust
4(a)(3) Fifty-First Supple- HL&P's Form 10-Q 1-3187 4(a)
mental Indenture dated for the quarter
March 25, 1991 to ended June 30,
HL&P Mortgage and 1991
Deed of Trust
4(a)(4) Fifty-Second through HL&P's Form 10-Q 1-3187 4
Fifty-Fifth Supplemental for the quarter
Indentures, each dated ended March 31,
March 1, 1992, to HL&P 1992
Mortgage and Deed of
Trust
4(a)(5) Fifty-Sixth and Fifty- HL&P's Form 10-Q 1-3187 4
Seventh Supplemental for the quarter
Indentures, each dated ended September 30,
October 1, 1992, to 1992
HL&P Mortgage and
Deed of Trust
4(a)(6) Fifty-Eighth and Fifty- HL&P's Form 10-Q 1-3187 4
Ninth Supplemental for the quarter
Indenture, each dated ended March 31, 1993
as of March 1, 1993 to
HL&P Mortgage and
Deed of Trust
4(a)(7) Sixtieth Supplemental HL&P's Form 10-Q 1-3187 4
Indenture dated as for the quarter
July 1, 1993 to HL&P ended June 30, 1993
Mortgage and Deed of
Trust
4(a)(8) Sixty-First through HL&P's Form 10-K 1-3187 4(a)(8)
Sixty-Third Supplemental for the year ended
Indentures to HL&P December 31, 1993
Mortgage and Deed of
Trust
</TABLE>
106
<PAGE> 107
<TABLE>
<S> <C> <C> <C> <C>
4(a)(9) Sixty-Fourth and Sixty- HL&P's Form 10-K 1-3187 4(a)(9)
Fifth Supplemental for the year ended
Indentures, each dated December 31, 1995
as of July 1, 1995, to
HL&P Mortgage and
Deed of Trust
4(b)(1) Rights Agreement dated Form 8-K dated 1-7629 4(a)(1)
July 11, 1990 between July 11, 1990
the Company and Texas
Commerce Bank National
Association, as Rights
Agent (Rights Agent),
which includes form of
Statement of Resolution
Establishing Series of
Shares designated Series
A Preference Stock and
form of Rights Certificate
4(b)(2) Agreement and Appoint- Form 8-K dated 1-7629 4(a)(2)
ment of Agent dated July 11, 1990
as of July 11, 1990
between the Company
and the Rights Agent
4(b)(3) Form of Amended and Registration 333-11329 4(b)(1)
Restated Rights Agree- Statement on
ment to be executed Form 4
upon the closing of the
Merger, including form
of Statement of Resolu-
tion Establishing Series
Shares Designated
Series A Preference
Stock and Form of Rights
Agreement
4(c)(1) Indenture dated as of Form 10-Q for 1-7629 4(b)
April 1, 1991 between the quarter ended
the Company and June 30, 1991
NationsBank of Texas,
National Association,
as Trustee
</TABLE>
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Company has not filed
as exhibits to this Form 10-K certain long-term debt instruments, under which
the total amount of securities authorized do not exceed 10 percent of the total
assets of the Company and its subsidiaries on a consolidated basis. The Company
hereby agrees to furnish a copy of any such instrument to the SEC upon request.
107
<PAGE> 108
<TABLE>
<S> <C> <C> <C> <C>
*10(a) Executive Benefit Plan Form 10-Q for the 1-7629 10(a)(1)
of the Company and First quarter ended 10(a)(2)
and Second Amendments March 31, 1987 and
thereto (effective as 10(a)(3)
of June 1, 1982, July 1,
1984, and May 7, 1986,
respectively)
*10(b)(1) Executive Incentive Form 10-K for the 1-7629 10(b)
Compensation Plan of year ended
the Company (effective December 31, 1991
as of January 1, 1982)
*10(b)(2) First Amendment to Form 10-Q for the 1-7629 10(a)
Exhibit 10(b)(1) quarter ended
(effective as of March 31, 1992
March 30, 1992)
*10(b)(3) Second Amendment to Form 10-K for the 1-7629 10(b)(3)
Exhibit 10(b)(1) year ended
(effective as of December 31, 1992
November 4, 1992)
*10(b)(4) Third Amendment to Form 10-K for the 1-7629 10(b)(4)
Exhibit 10(b)(1) year ended
(effective as of December 31, 1994
September 7, 1994)
*10(c)(1) Executive Incentive Form 10-Q for the 1-7629 10(b)(1)
Compensation Plan quarter ended
of the Company March 31, 1987
(effective as of
January 1, 1985)
*10(c)(2) First Amendment to Form 10-K for the 1-7629 10(b)(3)
Exhibit 10(c)(1) year ended
(effective as of December 31, 1988
January 1, 1985)
*10(c)(3) Second Amendment to Form 10-K for 1-7629 10(c)(3)
Exhibit 10(c)(1) the year ended
(effective as of December 31, 1991
January 1, 1985)
*10(c)(4) Third Amendment to Form 10-Q for the 1-7629 10(b)
Exhibit 10(c)(1) quarter ended
(effective as of March 31, 1992
March 30, 1992)
</TABLE>
108
<PAGE> 109
<TABLE>
<S> <C> <C> <C> <C>
*10(c)(5) Fourth Amendment to Form 10-K for 1-7629 10(c)(5)
Exhibit 10(c)(1) the year ended
(effective as of December 31, 1992
November 4, 1992)
*10(c)(6) Fifth Amendment to Form 10-K for the 1-7629 10(c)(6)
Exhibit 10(c)(1) the year ended
(effective as of December 31, 1994
September 7, 1994)
*10(d) Executive Incentive Form 10-Q for the 1-7629 10(b)(2)
Compensation Plan of quarter ended
HL&P (effective as March 31, 1987
of January 1, 1985)
*10(e)(1) Executive Incentive Form 10-Q for the 1-7629 10(b)
Compensation Plan quarter ended
of the Company June 30, 1989
(effective as of
January 1, 1989)
*10(e)(2) First Amendment to Form 10-K for the 1-7629 10(e)(2)
Exhibit 10(e)(1) year ended
(effective as of December 31, 1991
January 1, 1989)
*10(e)(3) Second Amendment to Form 10-Q for the 1-7629 10(c)
Exhibit 10(e)(1) quarter ended
(effective as of March 31, 1992
March 30, 1992)
*10(e)(4) Third Amendment to Form 10-K for 1-7629 10(c)(4)
Exhibit 10(e)(1) the year ended
(effective as of December 31, 1992
November 4, 1992)
*10(e)(5) Fourth Amendment to Form 10-K for the 1-7629 10(e)(5)
Exhibit 10(e)(1) year ended December
(effective as of 31, 1994
September 7, 1994)
*10(f)(1) Executive Incentive Form 10-K for the 1-7629 10(b)
Compensation Plan of year ended
the Company (effec- December 31, 1990
tive as of January 1,
1991)
*10(f)(2) First Amendment to Form 10-K for the 1-7629 10(f)(2)
Exhibit 10(f)(1) year ended
(effective as of December 31, 1991
January 1, 1991)
</TABLE>
109
<PAGE> 110
<TABLE>
*10(f)(3) Second Amendment to Form 10-Q for the 1-7629 10(d)
Exhibit 10(f)(1) quarter ended
(effective as of March 31, 1992
March 30, 1982)
<S> <C> <C> <C> <C>
*10(f)(4) Third Amendment to Form 10-K for 1-7629 10(f)(4)
Exhibit 10(f)(1) the year ended
(effective as of December 31, 1992
November 4, 1992)
*10(f)(5) Fourth Amendment to Form 10-K for 1-7629 10(f)(5)
Exhibit 10(f)(1) the year ended
(effective as of December 31, 1992
January 1, 1993)
*10(f)(6) Fifth Amendment to Form 10-K for 1-7629 10(f)(6)
Exhibit 10(f)(1) the year ended
(effective in part as December 31, 1994
of January 1, 1995
and in part as of
September 7, 1994)
*10(f)(7) Sixth Amendment to Form 10-Q for 1-7629 10(a)
Exhibit 10(f)(1) the quarter ended
(effective as of June 30, 1995
August 1, 1995)
*10(f)(8) Seventh Amendment to Form 10-Q for the 1-7629 10(a)
Exhibit 10(f)(1) (effective quarter ended June 30,
as of January 1, 1996) 1996
*10(g)(1) Benefit Restoration Form 10-Q for the 1-7629 10(c)
Plan of the Company quarter ended
(effective as of March 31, 1987
June 1, 1985)
*10(g)(2) Benefit Restoration Form 10-K for 1-7629 10(g)(2)
Plan of the Company, the year ended
as amended and re- December 31, 1991
stated (effective as
of January 1, 1988)
*10(g)(3) Benefit Restoration Form 10-K for 1-7629 10(g)(3)
Plan of the Company, the year ended
as amended and re- December 31, 1991
stated (effective as
of July 1, 1991)
*10(h)(1) Deferred Compensation Form 10-Q for the 1-7629 10(d)
Plan of the Company quarter ended
(effective as of March 31, 1987
September 1, 1985)
*10(h)(2) First Amendment to Form 10-K for the 1-7629 10(d)(2)
Exhibit 10(h)(1) year ended
(effective as of December 31, 1990
September 1, 1985)
</TABLE>
110
<PAGE> 111
<TABLE>
<S> <C> <C> <C> <C>
*10(h)(3) Second Amendment to Form 10-Q for the 1-7629 10(e)
Exhibit 10(h)(1) quarter ended
(effective as of March 31, 1992
March 30, 1992)
*10(h)(4) Third Amendment to Form 10-K for the 1-7629 10(h)(4)
Exhibit 10(h)(1) year ended
(effective as of December 31, 1993
June 2, 1993)
*10(h)(5) Fourth Amendment to Form 10-K for the 1-7629 10(h)(5)
Exhibit 10(h)(1) year ended
(effective as of December 31, 1994
September 7, 1994)
*10(h)(6) Fifth Amendment to Form 10-Q for the 1-7629 10(d)
Exhibit 10(h)(1) the quarter ended
(effective as of June 30, 1995
August 1, 1995)
*10(h)(7) Sixth Amendment to Form 10-Q for the 1-7629 10(b)
Exhibit 10(h)(1) quarter ended
(effective as of June 30, 1995
December 1, 1995)
*10(i)(1) Deferred Compensation Form 10-Q for the 1-7629 10(a)
Plan of the Company quarter ended
(effective as of June 30, 1989
January 1, 1989)
*10(i)(2) First Amendment to Form 10-K for the 1-7629 10(e)(3)
Exhibit 10(i)(1) year ended
(effective as of December 31, 1989
January 1, 1989)
*10(i)(3) Second Amendment to Form 10-Q for the 1-7629 10(f)
Exhibit 10(i)(1) quarter ended
(effective as of March 31, 1992
March 30, 1992)
*10(i)(4) Third Amendment to Form 10-K for the 1-7629 10(i)(4)
Exhibit 10(i)(1) year ended
(effective as of December 31, 1993
June 2, 1993)
*10(i)(5) Fourth Amendment to Form 10-K for the 1-7629 10(i)(5)
Exhibit 10(i)(1) year ended
(effective as of December 31, 1994
September 7, 1994)
</TABLE>
111
<PAGE> 112
<TABLE>
<S> <C> <C> <C> <C>
*10(i)(6) Fifth Amendment to Form 10-Q for the 1-7629 10(c)
Exhibit 10(i)(1) quarter ended
(effective as of June 30, 1995
August 1, 1995)
*10(i)(7) Sixth Amendment to Form 10-Q for the 1-7629 10(c)
Exhibit 10(i)(1) quarter ended
(effective December 1, June 30, 1995
1995)
*10(j)(1) Deferred Compensation Form 10-K for the 1-7629 10(d)(3)
Plan of the Company year ended
(effective as of December 31, 1990
January 1, 1991)
*10(j)(2) First Amendment to Form 10-K for the 1-7629 10(j)(2)
Exhibit 10(j)(1) year ended
(effective as of December 31, 1991
January 1, 1991)
*10(j)(3) Second Amendment to Form 10-Q for the 1-7629 10(g)
Exhibit 10(j)(1) quarter ended
(effective as of March 31, 1992
March 30, 1992)
*10(j)(4) Third Amendment to Form 10-K for the 1-7629 10(j)(4)
Exhibit 10(j)(1) year ended
(effective as of December 31, 1993
June 2, 1993)
*10(j)(5) Fourth Amendment to Form 10-K for the 1-7629 10(j)(5)
Exhibit 10(j)(1) year ended
(effective as of December 31, 1993
December 1, 1993)
*10(j)(6) Fifth Amendment to Form 10-K for the 1-7629 10(j)(6)
Exhibit 10(j)(1) year ended
(effective as of December 31, 1994
September 7, 1994)
*10(j)(7) Sixth Amendment to Form 10-Q for 1-7629 10(b)
Exhibit 10(j)(1) the quarter ended
(effective as of June 30, 1995
August 1, 1995)
*10(j)(8) Seventh Amendment to Form 10-Q for the 1-7629 10(d)
Exhibit 10(j)(1) quarter ended
(effective as of June 30, 1996
December 1, 1995)
*10(k)(1) Long-Term Incentive Form 10-Q for the 1-7629 10(c)
Compensation Plan of quarter ended
the Company (effec- June 30, 1989
tive as of January 1,
1989)
</TABLE>
112
<PAGE> 113
<TABLE>
<S> <C> <C> <C> <C>
*10(k)(2) First Amendment to Form 10-K for the 1-7629 10(f)(2)
Exhibit 10(k)(1) year ended
(effective as of December 31, 1989
January 1, 1990)
*10(k)(3) Second Amendment to Form 10-K for the 1-7629 10(k)(3)
Exhibit 10(k)(1) year ended
(effective as of December 31, 1992
December 22, 1992)
*10(l) Form of stock option Form 10-Q for the 1-7629 10(h)
agreement for nonqual- quarter ended
ified stock options March 31, 1992
granted under the
Company's 1989
Long-Term Incentive
Compensation Plan
*10(m) Forms of restricted Form 10-Q for the 1-7629 10(i)
stock agreement for quarter ended
restricted stock March 31, 1992
granted under the
Company's 1989
Long-Term Incentive
Compensation
Plan
*10(n)(1) 1994 Long-Term Incentive Form 10-K for the 1-7629 10(n)(1)
Compensation Plan of year ended
the Company (effective December 31, 1993
as of January 1, 1994)
*10(n)(2) Form of stock option Form 10-K for the 1-7629 10(n)(2)
agreement for non- year ended
qualified stock options December 31, 1993
granted under the
Company's 1994 Long-
Term Incentive Com-
pensation Plan
*10(o)(1) Savings Restoration Form 10-K for the 1-7629 10(f)
Plan of the Company year ended
(effective as of December 31, 1990
January 1, 1991)
*10(o)(2) First Amendment to Form 10-K for the 1-7629 10(l)(2)
Exhibit 10(o)(1) year ended
(effective as of December 31, 1991
January 1, 1992)
</TABLE>
113
<PAGE> 114
<TABLE>
<S> <C> <C> <C> <C>
*10(p) Director Benefits Form 10-K for the 1-7629 10(m)
Plan, (effective as year ended
of January 1, 1992) December 31, 1991
*10(q)(1) Executive Life Form 10-K for the 1-7629 10(q)
Insurance Plan of year ended
the Company December 31, 1993
(effective as of
January 1, 1994)
*10(q)(2) First Amendment to Form 10-Q for the 1-7629 10
Exhibit 10(q)(1) quarter ended
(effective as of June 30, 1995
January 1, 1994)
*10(r) Employment and Form 10-Q for the 1-7629 10(f)
Supplemental Benefits quarter ended
Agreement between March 31, 1987
HL&P and Hugh Rice
Kelly
10(s)(1) Houston Industries Form 10-K for year 1-7629 10(s)(4)
Incorporated Savings ended December 31,
Trust between the 1995
Company and
The Northern Trust
Company, as Trustee. (As
Amended and Restated
Effective July 1, 1995)
10(s)(2) Note Purchase Agree- Form 10-K for the 1-7629 10(j)(3)
ment between the year ended
Company and the ESOP December 31, 1990
Trustee, dated as of
October 5, 1990
*10(t) Agreement dated June 6, Form 10-Q for the 1-7629 10(a)
1994 between the quarter ended
Company and June 30, 1994
Don D. Jordan
*10(u) Agreement dated June 6, Form 10-Q for the 1-7629 10(b)
1994 between the quarter ended
Company and June 30, 1994
Don D. Sykora
*10(v) Letter Agreement between Form 10-K for the 1-7629 10(v)
the Company and year ended
Jack Trotter December 31, 1994
</TABLE>
114
<PAGE> 115
<TABLE>
<S> <C> <C> <C> <C>
*10(w) Employment Agreement Form 10-K for the 1-3187 10(t)
dated April 5, 1993 year ended
between HL&P and December 31, 1994
William T. Cottle
10(x)(1) Stockholder's Agreement Schedule 13-D 5-19351 2
dated as of July 6, dated July 6,
1995 between the 1995
Company and Time
Warner Inc.
10(x)(2) Registration Rights Schedule 13-D 5-19351 3
Agreement dated as of dated July 6,
July 6, 1995 between 1995
the Company and Time
Warner Inc.
+10(x)(3) Amendment to Exhibits
10(x)(1) and 10(x)(2)
dated November 18,
1996.
10(x)(4) Certificate of Voting Schedule 13-D 5-19351 4
Powers, Designations, dated July 6,
Preferences and 1995
Relative Participating,
Optional or Other
Special rights, and
Qualifications,
Limitations or
Restrictions Thereof of
Series D. Convertible
Preferred Stock of
Time Warner Inc.
*10(y) Houston Industries Form 10-K for the 1-7629 10(7)
Incorporated Executive year ended
Deferred Compensation December 31, 1995
Trust, effective as of
December 19, 1995
*10(z) Agreement dated Form 10-K for the 1-7629 10(aa)
June 14, 1991 between year ended
the Company and December 31, 1995
David M. McClanahan
*10(aa) Supplemental Pension Registration Statement 333-11329 10(aa)
Agreement dated on Form S-4
July 17, 1996, between
the Company and
Lee W. Hogan
</TABLE>
115
<PAGE> 116
<TABLE>
<S> <C> <C> <C> <C>
*+10(bb) Consulting Agreement
dated January 14, 1997,
between the Company
and Milton Carroll
*+10(cc) Employment Agreement
dated February 25, 1997,
between the Company
and Don D. Jordan
+11 Computation of
Earnings Per Common
Share and Common
Equivalent Share
+12 Computation of Ratios
of Earnings to Fixed
Charges
+21 Subsidiaries of the
Company
+23 Consent of Deloitte &
Touche LLP
+27 Financial Data Schedule
</TABLE>
116
<PAGE> 117
(b) Houston Lighting & Power Company
<TABLE>
<CAPTION>
Report or SEC File or
Exhibit Registration Registration Exhibit
Number Description Statement Number Reference
------ ----------- --------- ------ ---------
<S> <C> <C> <C> <C>
2(a) Agreement and Plan of Form 8-K 1-3187 2
Merger among the dated
Company, HL&P, HI August 11, 1996
Merger, Inc. and
NorAm dated
August 11, 1996
2(b) Amendment to Registration Statement 333-11329 2(c)
Agreement and Plan on Form S-4
of Merger among
the Company, HL&P,
HI Merger, Inc. and
NorAm dated
August 11, 1996
3(a) Restated Articles of Form 10-Q for 1-3187 3
Incorporation of HL&P the quarter ended
dated May 11, 1993 June 30, 1993
3(b) Articles of Registration 333-11329 3(b)
Amendment to Statement on
Exhibit 3(a) dated Form S-4
August 9, 1996
+3(c) Articles of
Amendment of HL&P
dated as of December 3,
1996
3(d) Amended and Restated Form 10-Q for the 1-3187 3
Bylaws of HL&P (as quarter ended
of June 5, 1996) June 30, 1996
4(a)(1) Mortgage and Deed of Form S-7 filed on 2-59748 2(b)
Trust dated November August 25, 1977
1, 1944 between HL&P
and South Texas
Commercial National
Bank of Houston (Texas
Commerce Bank National
Association, as
successor trustee), as
Trustee, as amended and
supplemented by 20
Supplemental Indentures
thereto
4(a)(2) Twenty-First through Form 10-K for the 1-3187 4(a)(2)
Fiftieth Supplemental year ended
Indentures to HL&P December 31, 1989
Mortgage and Deed of
Trust
</TABLE>
117
<PAGE> 118
<TABLE>
<S> <C> <C> <C> <C>
4(a)(3) Fifty-First Supple- Form 10-Q for the 1-3187 4(a)
mental Indenture quarter ended
dated March 25, 1991 June 30, 1991
to HL&P Mortgage
and Deed of Trust
4(a)(4) Fifty-Second through Form 10-Q for the 1-3187 4
Fifty-Fifth Supple- quarter ended
mental Indentures, March 31, 1992
each dated March 1,
1992, to HL&P Mortgage
and Deed of Trust
4(a)(5) Fifty-Sixth and Fifty- Form 10-Q for the 1-3187 4
Seventh Supplemental quarter ended
Indentures, each September 30, 1992
dated October 1,
1992, to HL&P Mortgage
and Deed of Trust
4(a)(6) Fifty-Eighth and Fifty- Form 10-Q for the 1-3187 4
Ninth Supplemental quarter ended
Indentures, each March 31, 1993
dated March 1,
1993, to HL&P
Mortgage and Deed
of Trust
4(a)(7) Sixtieth Supplemental Form 10-Q for the 1-3187 4
Indenture dated as of quarter ended
July 1, 1993 to HL&P June 30, 1993
Mortgage and Deed of
Trust
4(a)(8) Sixty-First through HL&P's Form 10-K 1-3187 4(a)(8)
Sixty-Third Supplemental for the year ended
Indentures to HL&P December 31, 1993
Mortgage and Deed of
Trust
4(a)(9) Sixty-Fourth and HL&P's Form 10-K 1-3187 4(a)(9)
Sixty-Fifth Supplemental for the year ended
Indentures, each dated December 31, 1995
as of July 1, 1995, to
HL&P Mortgage and
Deed of Trust
4(a)(10) Junior Subordinated HL&P Form 8-K 1-3187 4.1
Trust Debenture dated February 4,
Indenture between 1997
HL&P and The Bank
of New York, as
Trustee dated as of
February 1, 1997
</TABLE>
118
<PAGE> 119
<TABLE>
<S> <C> <C> <C> <C>
4(a)(11) Supplemental Indenture HL&P Form 8-K 1-3187 4.2A
No. 1 to Junior Subordin- dated February 4,
ated Indenture dated as 1997
of February 1, 1997,
providing for the issuance
of HL&P's 8.125% Junior
Subordinated Deferrable
Interest Debentures,
Series A due March 31,
2046, including form of
8.125% junior
subordinated interest
debenture, Series A
4(a)(12) Supplemental Indenture HL&P Form 8-K 1-3187 4.1
to Junior Subordinated dated February 4,
Indenture dated as of 1997
February 1, 1997,
providing for the
issuance of 8.257%
Junior Subordinated
Deferrable Interest
Debentures, Series B
(due February 1, 2037)
including form of junior
subordinated interest
debenture, Series B
4(a)(13) Amended and Restated HL&P Form 8-K 1-3187 4.5-A
Trust Agreement dated February 4,
dated as of February 4, 1997
1997 of HL&P Capital
Trust 1, including
form of Preferred
Security
4(a)(14) Amended and Restated HL&P Form 8-K 1-3187 4.5-B
Trust Agreement dated February 4,
dated as of February 4, 1997
1997 of HL&P Capital
Trust II, including form
of Capital Security of
HL&P Capital Trust II
4(a)(15) Guarantee Agreement HL&P Form 8-K 1-3187 4.8-A
relating to Capital dated February 4,
Trust I, including 1997
Agreement as to
Expenses and
Liabilities
4(a)(16) Guarantee Agreement HL&P Form 8-K 1-3187 4.8-B
relating to Capital dated February 4,
Trust II, including 1997
Agreement as to
Expenses and
Liabilities
</TABLE>
119
<PAGE> 120
There have not been filed as exhibits to this Form 10-K certain long-term debt
instruments, including indentures, under which the total amount of securities
do not exceed 10 percent of the total assets of HL&P. HL&P hereby agrees to
furnish a copy of any such instrument to the SEC upon request.
<TABLE>
<S> <C> <C> <C> <C>
*10(a) Executive Benefit Plan The Company's 1-7629 10(a)(1)
of the Company and Form 10-Q for the 10(a)(2)
First and Second quarter ended and
Amendments thereto March 31, 1987 10(a)(3)
(effective as of
June 1, 1982, July 1,
1984, and May 7, 1986,
respectively)
*10(b)(1) Executive Incentive The Company's 1-7629 10(b)
Compensation Plan of Form 10-K for the
the Company (effective year ended
as of January 1, 1982) December 31, 1991
*10(b)(2) First Amendment to The Company's 1-7629 10(a)
Exhibit 10(b)(1) Form 10-Q for the
(effective as of quarter ended
March 30, 1992) March 31, 1992
*10(b)(3) Second Amendment to The Company's 1-7629 10(b)(3)
Exhibit 10(b)(1) Form 10-K for the
(effective as of year ended
November 4, 1992) December 31, 1992
*10(b)(4) Third Amendment to The Company's 1-7629 10(b)(4)
Exhibit 10(b)(1) Form 10-K for the
(effective as of year ended
September 7, 1994) December 31, 1994
*10(c)(1) Executive Incentive The Company's 1-7629 10(b)(1)
Compensation Plan Form 10-Q for the
of the Company quarter ended
(effective as of March 31, 1987
January 1, 1985)
*10(c)(2) First Amendment to The Company's 1-7629 10(b)(3)
Exhibit 10(c)(1) Form 10-K for the
(effective as of year ended
January 1, 1985) December 31, 1988
*10(c)(3) Second Amendment to The Company's 1-7629 10(c)(3)
Exhibit 10(c)(1) Form 10-K for the
(effective as of year ended
January 1, 1985) December 31, 1991
*10(c)(4) Third Amendment to The Company's 1-7629 10(b)
Exhibit 10(c)(1) Form 10-Q for the
(effective as of quarter ended
March 30, 1992) March 31, 1992
*10(c)(5) Fourth Amendment to The Company's 1-7629 10(c)(5)
Exhibit 10(c)(1) Form 10-K for the
(effective as of year ended
November 4, 1992) December 31, 1992
</TABLE>
120
<PAGE> 121
<TABLE>
<S> <C> <C> <C> <C>
*10(c)(6) Fifth Amendment to The Company's 1-7629 10(c)(6)
Exhibit 10(c)(1) Form 10-K for the
(effective as of year ended
September 7, 1994) December 31, 1994
*10(d) Executive Incentive The Company's 1-7629 10(b)(2)
Compensation Plan of Form 10-Q for the
HL&P (effective as quarter ended
of January 1, 1985) March 31, 1987
*10(e)(1) Executive Incentive The Company's 1-7629 10(b)
Compensation Plan Form 10-Q for the
of the Company quarter ended
(effective as of June 30, 1989
January 1, 1989)
*10(e)(2) First Amendment to The Company's 1-7629 10(e)(2)
Exhibit 10(e)(1) Form 10-K for the
(effective as of year ended
January 1, 1989) December 31, 1991
*10(e)(3) Second Amendment to The Company's 1-7629 10(c)
Exhibit 10(e)(1) Form 10-Q for the
(effective as of quarter ended
March 30, 1992) March 31, 1992
*10(e)(4) Third Amendment to The Company's 1-7629 10(c)(4)
Exhibit 10(e)(1) Form 10-K for the
(effective as of year ended
November 4, 1992) December 31, 1992
*10(e)(5) Fourth Amendment to The Company's 1-7629 10(e)(5)
Exhibit 10(e)(1) Form 10-K for the
(effective as of year ended
September 7, 1994) December 31, 1994
*10(f)(1) Executive Incentive The Company's 1-7629 10(b)
Compensation Plan Form 10-K for the
of the Company year ended
(effective as of December 31, 1990
January 1, 1991)
*10(f)(2) First Amendment to The Company's 1-7629 10(f)(2)
Exhibit 10(f)(1) Form 10-K for the
(effective as of year ended
January 1, 1991) December 31, 1991
*10(f)(3) Second Amendment to The Company's 1-7629 10(d)
Exhibit 10(f)(1) Form 10-Q for the
(effective as of quarter ended
March 30, 1992) March 31, 1992
*10(f)(4) Third Amendment to The Company's 1-7629 10(f)(4)
Exhibit 10(f)(1) Form 10-K for the
(effective as of year ended
November 4, 1992) December 31, 1992
*10(f)(5) Fourth Amendment to The Company's 1-7629 10(f)(5)
Exhibit 10(f)(1) Form 10-K for the
(effective as of year ended
January 1, 1993) December 31, 1992
</TABLE>
121
<PAGE> 122
<TABLE>
<S> <C> <C> <C> <C>
*10(f)(6) Fifth Amendment to The Company's 1-7629 10(f)(6)
Exhibit 10(f)(1) Form 10-K for the
(effective in part as year ended
of January 1, 1995 December 31, 1994
and in part, as of
September 7, 1994)
*10(f)(7) Sixth Amendment to The Company's 1-7629 10(a)
Exhibit 10(f)(1) Form 10-Q for the
(effective as of quarter ended
August 1, 1995) June 30, 1995
*10(f)(8) Seventh Amendment The Company's 1-7629 10(c)
to Exhibit 10(f)(1) Form 10-Q for
(effective as of the quarter ended
January 1, 1996) June 30, 1996
*10(g)(1) Benefit Restoration The Company 1-7629 10(c)
Plan of the Company Form 10-Q for the
(effective as of quarter ended
June 1, 1985) March 31, 1987
*10(g)(2) Benefit Restoration The Company's 1-7629 10(g)(2)
Plan of the Company Form 10-K for the
as amended and year ended
restated (effective December 31, 1991
as of January 1, 1988)
*10(g)(3) Benefit Restoration The Company's 1-7629 10(g)(3)
Plan of the Company Form 10-K for the
as amended and year ended
restated (effective December 31, 1991
as of July 1, 1991)
*10(h)(1) Deferred Compensation The Company's 1-7629 10(d)
Plan of the Company Form 10-Q for the
(effective as of quarter ended
September 1, 1985) March 31, 1987
*10(h)(2) First Amendment to The Company's 1-7629 10(d)(2)
Exhibit 10(h)(1) Form 10-K for the
(effective as of year ended
September 1, 1985) December 31, 1990
*10(h)(3) Second Amendment to The Company's 1-7629 10(e)
Exhibit 10(h)(1) Form 10-Q for the
(effective as of quarter ended
March 30, 1992) March 31, 1992
*10(h)(4) Third Amendment to The Company's 1-7629 10(h)(4)
Exhibit 10(h)(1) Form 10-K for the
(effective as of year ended
June 2, 1993) December 31, 1993
*10(h)(5) Fourth Amendment to The Company's 1-7629 10(h)(5)
Exhibit 10(h)(1) Form 10-K for
effective as of the year ended
September 7, 1994 December 31, 1994
</TABLE>
122
<PAGE> 123
<TABLE>
<S> <C> <C> <C> <C>
*10(h)(6) Fifth Amendment to The Company's 1-7629 10(d)
Exhibit 10(h)(1) Form 10-Q for
(effective as of the quarter ended
August 1, 1995) June 30, 1995
*10(h)(7) Sixth Amendment to The Company's 1-7629 10(b)
Exhibit 10(h)(1) Form 10-Q for the
(effective as of quarter ended
December 1, 1995) June 30, 1995
*10(i)(1) Deferred Compensation The Company's 1-7629 10(a)
Plan of the Company Form 10-Q for the
(effective as of quarter ended
January 1, 1989) June 30, 1989
*10(i)(2) First Amendment to The Company's 1-7629 10(e)(3)
Exhibit 10(i)(1) Form 10-K for the
(effective as of year ended
January 1, 1989) December 31, 1989
*10(i)(3) Second Amendment to The Company's 1-7629 10(f)
Exhibit 10(i)(1) Form 10-Q for the
(effective as of quarter ended
March 30, 1992) March 31, 1992
*10(i)(4) Third Amendment to The Company's 1-7629 10(i)(4)
Exhibit 10(i)(1) Form 10-K for the
(effective as of year ended
June 2, 1993) December 31, 1993
*10(i)(5) Fourth Amendment to The Company's 1-7629 10(i)(5)
Exhibit 10(i)(1) Form 10-K for
(effective as of the year ended
September 7, 1994) December 31, 1994
*10(i)(6) Fifth Amendment to The Company's 1-7629 10(c)
Exhibit 10(i)(1) Form 10-Q for
(effective as of the quarter ended
August 1, 1995) June 30, 1995
*10(i)(7) Sixth Amendment to The Company's 1-7629 10(c)
Exhibit 10(i)(1) Form 10-Q for
(effective as of the quarter ended
December 1, 1995) June 30, 1996
*10(j)(1) Deferred Compensation The Company's 1-7629 10(d)(3)
Plan of the Company Form 10-K for the
(effective as of year ended
January 1, 1991) December 31, 1990
*10(j)(2) First Amendment to The Company's 1-7629 10(j)(2)
Exhibit 10(j)(1) Form 10-K for the
(effective as of year ended
January 1, 1991) December 31, 1991
*10(j)(3) Second Amendment to The Company's 1-7629 10(g)
Exhibit 10(j)(1) Form 10-Q for the
(effective as of quarter ended
March 30, 1992) March 31, 1992
</TABLE>
123
<PAGE> 124
<TABLE>
<S> <C> <C> <C> <C>
*10(j)(4) Third Amendment to The Company's 1-7629 10(j)(4)
Exhibit 10(j)(1) Form 10-K for the
(effective as of year ended
June 2, 1993) December 31, 1993
*10(j)(5) Fourth Amendment to The Company's 1-7629 10(j)(5)
Exhibit 10(j)(1) Form 10-K for the
(effective as of year ended
December 1, 1993) December 31, 1993
*10(j)(6) Fifth Amendment to The Company's 1-7629 10(j)(6)
Exhibit 10(j)(1) Form 10-K for
(effective as of the year ended
September 7, 1994) December 31, 1994
*10(j)(7) Sixth Amendment to The Company's 1-7629 10(b)
Exhibit 10(j)(1) Form 10-Q for the
(effective as of quarter ended
August 1, 1995) June 30, 1995
*10(j)(8) Seventh Amendment The Company's 1-7629 10(d)
to Exhibit 10(j)(i) Form 10-Q for the
(effective as of quarter ended
December 1, 1995) June 30, 1996
*10(k)(1) Long-Term Incentive The Company's 1-7629 10(c)
Compensation Plan of Form 10-Q for the
the Company quarter ended
(effective as of June 30, 1989
January 1, 1989)
*10(k)(2) First Amendment to The Company's 1-7629 10(f)(2)
Exhibit 10(k)(1) Form 10-K for the
(effective as of year ended
January 1, 1990) December 31, 1989
*10(k)(3) Second Amendment to The Company's 1-7629 10(k)(3)
Exhibit 10(k)(1) Form 10-K for the
(effective as of year ended
December 22, 1992) December 31, 1992
*10(l) Form of stock option The Company's 1-7629 10(h)
agreement for nonqual- Form 10-Q for the
ified stock options quarter ended
granted under the March 31, 1992
Company's 1989
Long-Term Incentive
Compensation Plan
*10(m) Forms of restricted The Company's 1-7629 10(i)
stock agreement for Form 10-Q for the
restricted stock quarter ended
granted under the March 31, 1992
Company's 1989
Long-Term Incentive
Compensation Plan
</TABLE>
124
<PAGE> 125
<TABLE>
<S> <C> <C> <C> <C>
*10(n)(1) 1994 Long-Term Incentive The Company's 1-7629 10(n)(1)
Compensation Plan of Form 10-K for the
the Company (effective year ended
as of January 1, 1994) December 31, 1993
*10(n)(2) Form of Stock Option The Company's 1-7629 10(n)(2)
Agreement for Form 10-K for the
Nonqualified Stock year ended
Options Granted December 31, 1993
under the Company's
1994 Long-Term
Incentive Compen-
sation Plan
*10(o)(1) Savings Restoration The Company's 1-7629 10(f)
Plan of the Company Form 10-K for the
(effective as of year ended
January 1, 1991) December 31, 1990
*10(o)(2) First Amendment to The Company's 1-7629 10(l)(2)
Exhibit 10(o)(1) Form 10-K for the
(effective as of year ended
January 1, 1992) December 31, 1991
*10(p) Director Benefits The Company's 1-7629 10(m)
Plan, effective as Form 10-K for the
of January 1, 1992 year ended
December 31, 1991
*10(q)(1) Executive Life The Company's 1-7629 10(q)
Insurance Plan of Form 10-K for the
the Company (effective year ended
as of January 1, 1994) December 31, 1993
*10(q)(2) First Amendment to The Company's 1-7629 10(e)
Exhibit 10(q) Form 10-Q for the
(effective as of quarter ended
January 1, 1994) June 30, 1995
*10(r) Employment and The Company's 1-7629 10(f)
Supplemental Benefits Form 10-Q for the
Agreement between HL&P quarter ended
and Hugh Rice Kelly March 31, 1987
10(s)(1) Houston Industries The Company's Form 1-7629 10(s)(4)
Incorporated Savings 10-K for the year
Trust (As Amended and ended December 31,
Restated Effective 1995
July 1, 1995)
10(s)(2) Note Purchase Agreement The Company's 1-7629 10(j)(3)
between the Company Form 10-K for the
and the ESOP Trustee, year ended
dated as of December 31, 1990
October 5, 1990
</TABLE>
125
<PAGE> 126
<TABLE>
<S> <C> <C> <C> <C>
*10(t) Employment Agreement Form 10-K for the 1-3187 10(t)
dated April 5, 1993 year ended
between HL&P and December 31, 1994
William T. Cottle
*10(u) Houston Industries The Company's Form 1-7629 10(z)
Incorporated Executive 10-K for the year ended
Deferred Compensation December 31, 1995
Trust, effective as of
December 19, 1995
*10(v) Agreement dated June The Company's 1-7629 10(aa)
14, 1991 between the Form 10-K for the
Company and David M. year ended
McClanahan December 31, 1995
*10(w) Employment Agreement Form 10-Q for 1-3187 10
dated September 16, the quarter ended
1996 between HL&P September 30, 1996
and Charles R. Crisp
+12 Computation of Ratios of
Earnings to Fixed Charges
and Ratios of Earnings
to Fixed Charges and
Preferred Dividends
+23 Consent of Deloitte
& Touche LLP
+27 Financial Data Schedule
</TABLE>
126
<PAGE> 1
EXHIBIT 10(X)(3)
TIME WARNER INC.
75 Rockefeller Plaza
New York, NY 10019
November 18, 1996
Houston Industries Incorporated (the "Stockholder")
1111 Louisiana
Houston, TX 77002
Re: Certain Amendments and Agreements
Dear Sirs:
Reference is made to (i) the Registration Rights Agreement dated as of
July 6, 1995 (as amended from time to time, the "Registration Rights
Agreement"), among Time Warner Companies Inc., formerly named Time Warner Inc.
("Buyer") and the Stockholder, (ii) the Stockholder's Agreement dated as of
July 6, 1995 (as amended from time to time, the "Stockholder's Agreement"),
among Buyer and the Stockholder and (iii) the Agreement and Plan of Merger
dated as of January 26, 1995 (as amended from time to time, the "Merger
Agreement"), among Buyer, KBLCOM Incorporated, Houston Industries Incorporated
and TW KBLCOM Acquisition Corp. Capitalized terms used but not defined in any
of the numbered paragraphs of this letter agreement have the meanings assigned
thereto in the applicable agreement referred to in such numbered paragraph (as
it may be amended by this letter agreement).
This letter agreement is being entered into in connection with Buyer's
acquisition of Turner Broadcasting System, Inc. ("TBS"), in which Buyer and TBS
have merged (the "Holding Company Transaction") with separate subsidiaries of
Time Warner Inc., formerly named TW Inc. (the "Holding Company").
As part of the Holding Company Transaction, the Holding Company has
issued a share of Series D Convertible Preferred Stock, par value $0.10 per
share (the "Holdco Preferred Stock"), in exchange for each outstanding share of
Buyer Preferred Stock, par value $1.00 per share (the "Buyer Preferred Stock"),
and one share of common stock, par value $.0l per share, of the Holding Company
in exchange for each outstanding share of common stock, par value $1.00 per
share, of Buyer. The Holdco Preferred Stock has terms which are the same as
those of the Buyer Preferred Stock (other than being convertible for the common
stock of the Holding Company rather than the common stock of Buyer).
Effective as of the execution of this Agreement, the following
agreements shall be amended as provided below:
1. Registration Rights Agreement. In as much as the Holding Company
Transaction resulted in the Stockholder receiving capital stock of the Holding
Company in exchange for capital stock of Buyer in a transaction that was
registered under the Securities Act of 1933, the parties have
<PAGE> 2
2
concluded that the Registration Rights Agreement is no longer necessary.
Accordingly, the Registration Rights Agreement is hereby terminated.
2. Stockholder's Agreement. The Stockholder's Agreement shall be amended
as follows:
a. The following definitions shall be amended and restated as
follows:
"Parent" means Time Warner Inc., a Delaware corporation, which
was formerly named TW Inc. and is the public holding company
of Old Time Warner as a result of the Holding Company
Transaction.
"Parent Common Stock" means the common stock, par value $.01
per share, of Parent.
"Parent Series D Preferred Stock" means the Series D
Convertible Preferred Stock, par value $0.10 per share, of
Parent.
"Parent Stock" means the Parent Common Stock and the Parent
Series D Preferred Stock.
b. The following definitions shall be added:
"Certificate of Designations" means the Certificate of the
Voting Powers, Designations, Preferences and Relative,
Participating, Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions Thereof, of Series
D Convertible Preferred Stock of Parent as filed with the
Secretary of State of the State of Delaware pursuant to
Section 151 of the DGCL.
"Holding Company Transaction" means the mergers of Old Time
Warner and Turner Broadcasting System, Inc. ("TBS") with
separate subsidiaries of the Company pursuant to the Amended
and Restated Agreement and Plan of Merger dated as of
September 22, 1995 (as amended prior to October 10, 1996),
among Old Time Warner, Parent, Time Warner Acquisition Corp.,
TW Acquisition Corp. and TBS.
"Old Time-Warner" means the corporation known immediately
prior to the Holding Company Transaction as Time Warner Inc.,
a Delaware corporation (which was renamed Time Warner
Companies Inc. as part of the Holding Company Transaction).
c. Section 2.02 shall be amended and restated as follows:
SECTION 2.02. Restrictions on Transfer. (a) Subject
to paragraph (b) of this Section 2.02, the Stockholder agrees
that it shall not (and shall use commercially
<PAGE> 3
3
reasonable efforts to cause its Affiliates not to), without
the prior written consent of the board of directors of Parent,
sell, transfer, pledge, encumber or otherwise dispose of, or
agree to sell, transfer, pledge, encumber or otherwise dispose
of, any securities of Parent, or any rights or options to
acquire such securities, in a transaction or series of related
transactions with a third party where the senior executives of
Stockholder, at the time the Stockholder agrees to make (or if
earlier with respect to a particular third party, at the time
it acquires the right to make) such disposition, know, or
after reasonable inquiry should have known, that such third
party would, after giving effect to such transaction
(including the exercise of any option or right that is the
subject of the transaction), beneficially own directly or
indirectly more than 5% of the aggregate Voting Power of all
classes and series of Voting Securities of Parent that vote
together as a single class on matters on which holders of
Parent Common Stock are entitled to vote.
(b) Without limiting the generality of Section 2.02(a), the
restrictions of Section 2.02(a) shall in no event be applicable
to (i) any disposition pursuant to a firm commitment
underwriting of securities conducted in a manner designed to
effect a broad distribution of securities, (ii) a transaction
that complies with the volume and manner of sale provisions of
Rule 144(e) and (f) as in effect on the date hereof, (iii) a
distribution or exchange offer by Stockholder that is intended
in good faith to be reasonably available to all holders of
Stockholder's equity securities or all holders of its common
equity securities, (iv) any disposition pursuant to a bona fide
pledge to a financial institution as security for money
borrowed or the foreclosure of any such pledge, (v) any
disposition pursuant to the terms of any tender or exchange
offer for Voting Securities of Parent approved by the board of
directors of Parent, (vi) any disposition to an Affiliate of
the Stockholder that agrees in writing substantially in the
form of Annex I hereto to be bound by the terms of this Section
2.02, (vii) any transfer of Voting Securities of Parent to
Parent, (viii) transactions by one or more employee benefit
plans (or trusts for such plans) of Stockholder and its
Subsidiaries, provided that all decisions whether to purchase
or sell Voting Securities of Parent are made by Persons
independent of Stockholder and its Affiliates, (ix) shares of
Parent Common Stock held by individuals that are Affiliates of
the Stockholder within the limits set forth in clause (vii) of
the last sentence of Section 2.01, (x) any shares of Parent
Common Stock issued to the Stockholder pursuant to Section
8.01(g)(iii) of the Merger Agreement and (xi) any shares of
Parent Common Stock issued to the Stockholder pursuant to
Section 3.1 or 4.1 of the Certificate of Designations in
payment of accrued and unpaid dividends on Parent Preferred
Stock. Except as set forth in the immediately preceding
sentence, no transferee will be required to be bound by this
Agreement.
(c) For purposes of this Section 2.02, all determinations
of the total number of outstanding shares of Parent Common
Stock or the total number of
<PAGE> 4
4
outstanding Voting Securities of Parent shall be made on the
basis of Parent's most recently filed Annual Report on Form
10-K, Quarterly Report on Form 10-Q or Current Report on Form
8-K, as applicable.
d. Upon the Stockholder's surrender to Parent of its certificates
for shares of Parent Stock (as defined in the Stockholder's Agreement prior to
these amendments) issued pursuant to the Merger Agreement, Parent shall deliver
to the Stockholder certificates for the same number and type of shares of
Parent Stock without the legend referred to in Section 3.01(b) of the
Stockholder's Agreement (as in effect prior to the amendments effected hereby),
but which shares shall otherwise comply with the provisions of the
Stockholder's Agreement as amended hereby.
e. Sections 3.01(b), (d) and (e) of the Stockholder's Agreement
shall be deleted in their entirety and Sections 3.01 (c) and (f) shall be
redesignated as Sections 3.01(a) and (b) and shall be amended and restated as
follows:
SECTION 3.01. Legends on Certificates for Parent Stock.
(a) The Stockholder agrees that each certificate for
shares of Parent Stock (other than shares of Parent Common Stock issued to the
Stockholder pursuant to (i) Section 8.01(g)(ii) of the Merger Agreement or (ii)
Section 3.1 or 4.1 of the Certificate of Designations in payment of accrued and
unpaid dividends on the Parent Preferred Stock) issued to or held (directly or
indirectly, including through a nominee) by a Person that is subject to the
provisions of this Agreement shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
A STOCKHOLDER'S AGREEMENT DATED AS OF JULY 6, 1995, AS AMENDED
BY LETTER DATED NOVEMBER 18, 1996 (AS SO AMENDED, THE
"STOCKHOLDER'S AGREEMENT"), BETWEEN THE CORPORATION AND THE
ORIGINAL HOLDER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE. A COPY OF THE STOCKHOLDER'S AGREEMENT MAY BE
OBTAINED FROM THE CORPORATION FREE OF CHARGE. BY ITS
ACCEPTANCE HEREOF, THE HOLDER OF THIS CERTIFICATE AGREES TO
COMPLY IN ALL RESPECTS WITH THE REQUIREMENTS OF THE
STOCKHOLDER'S AGREEMENT.
(b) Parent shall deliver new certificates for the Parent
Preferred Stock and shares of Parent Common Stock without the legend specified
by paragraph (a) of this Section 3.01, (x) after the termination of this
Agreement (other than the covenants and agreements of this Article III) and (y)
in connection with any transaction not prohibited by Section 2.02. In the case
of a transaction covered by the foregoing clause (y), the Stockholder shall
upon request provide a certificate signed by an executive officer (i)
certifying as to the Stockholder's compliance with the condition specified in
such clause and (ii) setting forth the basis therefor.
<PAGE> 5
5
f. The form of Annex I hereto shall be deemed to constitute Annex
I to the Stockholder's Agreement.
g. The Holding Company shall become a party to the Stockholder's
Agreement and hereby agrees to assume the rights and obligations of Old Time
Warner thereunder; provided, however, that Old Time Warner shall remain a party
thereto and remain bound by all its obligations thereunder.
3. Merger Agreement. The Merger Agreement shall be amended as follows:
a. The following definitions shall be added:
"Holding Company" means Time Warner Inc., a Delaware
corporation, which was formerly named TW Inc. and is the
public holding company of Buyer as a result of the Holding
Company Transaction.
"Holding Company Common Stock" means the Common Stock, par
value $.01 per share, of the Holding Company.
"Holding Company Transaction" means the mergers of Buyer and
Turner Broadcasting System, Inc. ("TBS") with separate
subsidiaries of the Holding Company pursuant to the Amended
and Restated Agreement and Plan of Merger dated as of
September 22, 1995 (as amended prior to October 10, 1996),
among Buyer, the Holding Company, Time Warner Acquisition
Corp., TW Acquisition Corp. and TBS.
b. Section 8.01(g)(ii) shall be amended to read as follows:
(ii) The amount payable by the Indemnity
Obligor to an Indemnified Party with respect to a Loss shall
be reduced by the amount of any insurance proceeds received by
the Indemnified Party with respect to the Loss, and each of
the parties hereby agrees to use its best efforts to collect
any and all insurance proceeds to which it may be entitled in
respect of any Loss. Any amount payable by Parent as an
Indemnity Obligor shall, at the option of Parent, be paid
either in cash or by delivering Holding Company Common Stock
of equal value calculated on the basis of the Current Market
Price as of the date such payment is made. If reasonably
required by Stockholder, any such payment by Parent shall be
made in shares of Holding Company Common Stock, valued as
provided in the preceding sentence. For purposes of this
section the definition of the term "Current Market Price"
shall be deemed to refer to Holding Company Common Stock,
rather than Parent Common Stock.
<PAGE> 6
6
c. The Holding Company shall become a party to the Merger
Agreement, and shall agree to be bound thereby, for the sole purpose of
ensuring that the obligations of Parent under Article X thereof are performed
as set forth in said Article X.
4. No Other Amendment. Except as expressly amended by this letter
agreement, the Stockholders Agreement and the Merger Agreement shall in all
respects be ratified and confirmed and the terms of each thereof (as so
expressly amended) shall remain in full force and effect in accordance with
their terms.
5. Governing Law; Counterparts; Entire Agreement. This letter agreement
shall be governed by and construed in accordance with the laws of the State of
New York applicable to contracts made and to be performed wholly within that
State (other than its rules of conflicts of laws to the extent that the
application of the laws of another jurisdiction would be required thereby).
This letter agreement may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which when so executed shall
be deemed to be an original and all of which taken together shall constitute
one and the same agreement. This letter agreement and the agreements expressly
referred to herein constitute the entire agreement between the parties hereto
pertaining to the subject matter hereof, and supersede all prior and
contemporaneous agreements and understandings between the parties with respect
to such subject matter.
Please indicate your agreement to the foregoing terms of this
letter agreement by executing it in the applicable space provided below and
returning it to us.
Sincerely,
TIME WARNER, INC.,
by /s/ Spencer B. Hays
------------------------------------
Name:
Title:
TIME WARNER COMPANIES INC.,
by /s/ Spencer B. Hays
------------------------------------
Name:
Title:
TW/KBLCOM INC.
(formerly named KBLCOM
INCORPORATED),
<PAGE> 7
7
by /s/ Spencer B. Hays
------------------------------------
Name:
Title:
Accepted and agreed to
as of the date first written
above:
HOUSTON INDUSTRIES INCORPORATED,
by /s/ Stephen W. Naeve
-----------------------------
Name:
Title:
<PAGE> 8
ANNEX I
FORM OF LETTER AGREEMENT
Time Warner Inc.
Time Warner Companies, Inc.
75 Rockefeller Plaza
New York, NY 10019
Houston Industries Incorporated
1111 Louisiana
Houston, TX 77002
Ladies and Gentlemen:
Reference is made to the Stockholder's Agreement dated as of
July 6, 1995, as amended (the "Stockholder's Agreement"), by and among Time
Warner Inc., formerly TW Inc., Time Warner Companies, Inc., and Houston
Industries Incorporated. Capitalized terms used but not defined herein are
used as defined in the Stockholder's Agreement.
In consideration of the assignment by
[Stockholder] to ________________________ ("Assignee") of _____________ shares
of Parent Common Stock and/or ____________ shares of Parent Preferred Stock on
_____________, 19___, Assignee hereby agrees to be bound by the provisions of
the Stockholder's Agreement applicable to Stockholder with respect to such
Parent Stock as fully as if it were the Stockholder signatory thereto.
Dated: ___________________
_______________________________________
By:
___________________________________
Name:
Title:
<PAGE> 1
EXHIBIT 10(bb)
CONSULTING AGREEMENT
THIS AGREEMENT, made effective as of January 14, 1997, by and between
Houston Industries Incorporated, a Texas corporation (the "Company"), and
Milton Carroll ("Mr. Carroll"),
W I T N E S S E T H:
WHEREAS, Mr. Carroll is a Director of the Company and a knowledgeable
and experienced businessman having significant background and qualifications in
public affairs and government; and
WHEREAS, the Company is engaged in a critical regulatory, legislative
and public issue debate concerning deregulation of the electric utility
industry as well as other issues; and
WHEREAS, the Company desires to retain the services of Mr. Carroll as
a Consultant to assist the Company in dealing with local, state and federal
governmental and communications issues affecting the Company, and Mr. Carroll
desires to serve the Company in such consulting capacity under the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties agree as follows:
1. Consulting Services. Pursuant to requests by relevant Company
executive officers, Mr. Carroll agrees to perform consulting services in
connection with deregulation issues, to include counseling with the Company and
its officers concerning same; and participating in such negotiations,
evaluations and personal contacts as may seem appropriate and advisable to
advance the Company's goals in connection with deregulation and other issues.
It is anticipated that such service will require extensive travel and
substantial allocation of time. The principal location of work will be in
Houston, Austin and Washington, D.C., but it is expected that work in other
locations will arise.
The parties agree that Mr. Carroll shall render consulting services
under this Agreement as an independent contractor and not as an employee of the
Company. The Company will not exercise supervision over Mr. Carroll as to the
details of the performance of his consulting services under this Agreement, or
the means by which he performs such services, but rather will agree upon plans
or projects as provided in this Agreement. Mr. Carroll agrees to avoid any
other substantial personal service engagement for any other corporation during
the term hereof, and shall at all times refrain from action or from
participation in any transaction which would create any conflict of interest
with the business or interests of the Company.
2. Fees for Consulting Services. In consideration of Mr. Carroll's
consulting services to be performed pursuant to this Agreement, the Company
hereby agrees to pay Mr. Carroll a flat fee of $20,000 per month.
<PAGE> 2
3. Term. This Agreement shall commence as of January 14, 1997, and
shall have an initial term of one year; provided, however, that either party
may terminate this Consulting Agreement by giving written notice of termination
to the other party at least thirty (30) days before the date upon which the
termination is to take place.
4. Expenses. The Company shall pay or reimburse Mr. Carroll, upon
his submission of appropriate expense vouchers or other documentation, for all
expenses for travel, meals, lodging accommodations and other expenses incurred
by him in the performance of his consulting services under this Agreement.
5. Lobby Registration. Mr. Carroll is not now and has no intention
of becoming a professional lobbyist. However, the Company has informed him
that his duties hereunder may require technical registration under the greatly
expanded state and federal lobby laws. If so required, Mr. Carroll agrees to
make such lobby filings as the law may require. The Company shall advise Mr.
Carroll as to relevant requirements, prepare all necessary paperwork and
provide legal advice as required to assure proper compliance with any lobby or
related laws as may be applicable. The Company will defend and indemnify Mr.
Carroll from any liability resulting from errors or claims thereunder to the
full extent of the Company's bylaws applicable to Directors. Mr. Carroll will
not be requested to nor shall he give, furnish or contribute monies, materials,
supplies or make loans to or in support of any candidate or to any political
committee, through or in the name of the Company, directly or indirectly.
6. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by first class mail,
postage prepaid, to 11 Greenway Plaza, Suite 1418, Houston, Texas 77046 in the
case of Mr. Carroll, and to P.O. Box 1700, Houston, Texas 77251 in the case of
the Company.
7. Prohibition Against Assignment. Mr. Carroll agrees on behalf of
himself, his heirs and personal representatives, that this Agreement and the
rights, interests, benefits and other obligations of Mr. Carroll hereunder
shall not be assigned, transferred, pledged, or hypothecated and shall not be
subject to execution, attachment or similar process. Any attempt at
assignment, pledge, hypothecation or other disposition of this Agreement or of
the rights, interests, benefits and obligations of Mr. Carroll hereunder
contrary to the foregoing provisions shall be null and void and without effect.
8. Waiver. The waiver by the Company or Mr. Carroll of a breach of
any of the provisions of this Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach.
9. Controlling Law. This Agreement shall be interpreted and
construed in accordance with the laws of the State of Texas.
10. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of any successor of the Company and any such successor shall be
deemed substituted for the Company
2
<PAGE> 3
under the terms of this Agreement. As used in this Agreement, the term
"successor" shall include any person, corporation, or other business entity
which at any time, whether by merger, purchase, or otherwise, acquires all or
substantially all of the assets or business of the Company or gains control of
the Company.
11. Entire Agreement. This instrument contains the entire agreement
of the parties. It may not be changed orally but may be changed only by
agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Houston Industries Incorporated
By /s/ Bruce Gibson
-------------------------------------------
Bruce Gibson
Senior Vice President, Governmental Affairs
/s/ Milton Carroll
-------------------------------------------
Milton Carroll
3
<PAGE> 1
EXHIBIT 10(cc)
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
"Agreement") by and between HOUSTON INDUSTRIES INCORPORATED, a Texas
corporation (said corporation, together with its successors and assigns
permitted under this Agreement, hereinafter referred to as the "Company"), and
DON D. JORDAN (the "Executive"), dated this 25th day of February, 1997.
W I T N E S S E T H:
WHEREAS, on June 4, 1994, the Company and the Executive
entered into an Amended and Restated Employment Agreement (the "Prior
Agreement") under which the Executive would receive certain employment rights
and benefits; and
WHEREAS, the parties to said Prior Agreement desire to
completely amend and restate said Prior Agreement to provide for the employment
of the Executive through June 1, 1999 and for the consulting services of the
Executive thereafter through June 1, 2000 on such terms and conditions as are
set forth herein; and
WHEREAS, Section 15(A) of the Prior Agreement contemplates the
amendment of the Prior Agreement with the mutual consent of the parties and the
parties desire to amend and restate the Prior Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto agree that the Prior Agreement
shall be amended and restated in its entirety to read as follows:
1. Certain Definitions:
"ACCRUED OBLIGATIONS" shall have the meaning set forth in
Section 5(A)(i).
"AFFILIATED COMPANIES" shall mean and include any company
controlled by, controlling or under common control with the Company within the
meaning of Section 414(o) of the Code.
"ANNUAL BASE SALARY" shall mean the salary of the Executive
provided for in Section 3(B)(i), as adjusted and in effect from time to time.
"BASE AMOUNT" shall mean the Executive's base amount, at the
time of a Change of Control, within the meaning of Code Section 280G.
"BENEFICIARY" shall mean the person or persons, trustee or
trustees of a trust, partnership, corporation, limited liability partnership,
limited liability company or other entity named,
<PAGE> 2
in a writing filed with the Company, to receive any compensation or benefit
payable hereunder following the Executive's death or, in the event no such
person or entity is named or survives the Executive, his estate. In the event
of the Executive's death or a judicial determination of his incompetence,
reference in this Agreement to the Executive shall be deemed, where
appropriate, to refer to his Beneficiary, estate or other legal representative.
"BOARD" shall mean the Board of Directors of the Company.
"CAUSE" shall mean (i) repeated violations by the Executive of
the Executive's obligations under Section 3(A) (other than as a result of
incapacity due to physical or mental illness) which are demonstrably willful
and deliberate on the Executive's part, which are committed in bad faith or
without reasonable belief that such violations are in the best interests of the
Company and which are not remedied in a reasonable period of time after receipt
of written notice from the Company specifying such violations or (ii) the
conviction of the Executive of a felony involving moral turpitude.
A "CHANGE OF CONTROL" shall be deemed to have occurred upon
the occurrence of any of the following events:
(a) Any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) (a "Person") becomes the
beneficial owner (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 30% or more of either (i) the then outstanding
shares of common stock of the Company (the "Outstanding Company Common
Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this paragraph (a), the
following shall not in and of themselves constitute a Change of
Control: (i) any acquisition of securities of the Company made
directly from the Company and approved by a majority of the directors
then comprising the Incumbent Board (as defined below), (ii) any
increase in the percentage of the Outstanding Company Common Stock or
the Outstanding Company Voting Securities beneficially owned by such
Person that results solely from the acquisition, purchase or
redemption of securities of the Company by the Company so long as such
action by the Company was approved by a majority of the directors then
comprising the Incumbent Board, unless and until such Person shall
thereafter otherwise acquire or become the beneficial owner of
additional shares of Outstanding Company Common Stock or Outstanding
Company Voting Securities, or (iii) any acquisition by any corporation
pursuant to a transaction that complies with clauses (i), (ii) and
(iii) of paragraph (c) hereof; or
(b) Individuals who, as of January 1, 1997,
constituted the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that
any individual becoming a director subsequent to January 1, 1997 whose
election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of the directors then
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<PAGE> 3
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board;
or
(c) Consummation of a reorganization, merger or
consolidation to which the Company is a party or sale or other
disposition of all or substantially all the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and
entities that were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
owned, directly or indirectly, more than 70% of, respectively, the
then outstanding shares of common stock and the combined voting power
of the then outstanding voting securities entitled to vote generally
in the election of directors, as the case may be, of the parent
corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all the Company's
assets either directly or through one or more subsidiaries) in
substantially the same relative proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the
case may be, (ii) no Person (excluding any corporation resulting from
such Business Combination) beneficially owns, directly or indirectly,
30% or more of, respectively, the then outstanding shares of common
stock of the parent corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially
all the Company's assets either directly or through one or more
subsidiaries) or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such
ownership existed prior to the Business Combination and (iii) at least
a majority of the members of the board of directors of the parent
corporation resulting from such Business Combination were members of
the Incumbent Board at the time of the execution of the initial
agreement, or of the initial action of the Board, providing for such
Business Combination; or
(d) Approval by the shareholders of the Company
of a complete liquidation or dissolution of the Company, unless such
liquidation or dissolution is approved as a part of a plan of
liquidation and dissolution involving a sale or other disposition of
all or substantially all the assets of the Company that complies with
clauses (i), (ii) and (iii) of paragraph (c) hereof.
"CODE" shall mean the Internal Revenue Code of 1986, as in
effect on the Effective Date and as thereafter amended.
"CONSULTING PERIOD" shall mean the period commencing on June
2, 1999 and ending on June 1, 2000.
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<PAGE> 4
"DATE OF TERMINATION" shall mean (i) if the Executive's
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the date on which
the Company notifies the Executive of such termination, and (iii) if the
Executive's employment is terminated by reason of death or Disability, the date
of death of the Executive or the Disability Effective Date, as the case may be.
"DISABILITY" shall mean the absence of the Executive from the
Executive's duties with the Company on a full-time basis for 180 consecutive
business days as a result of incapacity due to mental or physical illness which
is determined to be total and permanent by a physician selected by the Company
or its insurers and acceptable to the Executive or the Executive's legal
representative, such agreement as to acceptability by the Executive not to be
withheld unreasonably.
"DISABILITY EFFECTIVE DATE" shall mean the date so described
in Section 4(A).
"EFFECTIVE DATE" shall mean January 8, 1997.
"EICP" shall mean the Company's Executive Incentive
Compensation Plan, as in effect from time to time, or any similar successor
plan adopted by the Company.
"EMPLOYMENT PERIOD" shall mean the period commencing on the
Effective Date and ending on June 1, 1999.
"GOOD REASON" shall mean:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position (including
status, offices, titles and reporting requirements), authority, duties
or responsibilities as contemplated by Section 3(A), or any other
action by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith
and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(ii) any failure by the Company to comply with any
of the provisions of Section 3(B), other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(iii) the Company's requiring the Executive to be
based at any office or location other than that described in Section
3(A)(i) or the Company's failure to provide the residence required by
Section 3(A)(i);
(iv) any purported termination by the Company of
the Executive's employment otherwise than as expressly permitted by
this Agreement; or
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<PAGE> 5
(v) any failure by the Company to comply with and
satisfy Section 11(C), provided that the successor described in
Section 11(C) has received at least ten days' prior written notice
from the Company or the Executive of the requirements of Section
11(C).
"LICP" shall mean the Company's Long-Term Incentive
Compensation Plan, as in effect from time to time, or any similar successor
plan adopted by the Company.
"NOTICE OF TERMINATION" shall mean a written notice that (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of
Termination is other than the date of receipt of such notice, specifies the
termination date (which date shall be not more than 15 days after the giving of
such notice except in the case of a Disability Effective Date).
"OTHER BENEFITS" shall mean the amounts so described in
Section 5(A)(v).
"PERFORMANCE SHARES" shall mean the shares of Stock so
described in Section 3(B)(ii).
"SERP" shall mean the Benefit Restoration Plan of the Company.
"SPOUSE" shall mean the person who is legally married to the
Executive.
"STOCK AWARD" shall mean the award made to the Executive
pursuant to Section 3(B)(ii).
"SUPPLEMENTAL RETIREMENT BENEFIT" shall mean the benefit so
described in Section 5(A)(iii).
"VESTED SHARES" shall mean the shares of Stock so described in
Section 3(B)(ii).
"WELFARE BENEFIT CONTINUATION" shall mean the continuation of
benefits so described in Section 5(A)(iv).
2. Employment Period: The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the
employ of the Company, in accordance with the terms and provisions of this
Agreement, for the Employment Period.
3. Terms of Employment:
A. Position and Duties: During the Employment Period:
(i) The Executive shall be employed as the
Chairman of the Board and Chief Executive Officer of the Company and
shall be responsible for the general management of the affairs of the
Company. The Executive, in carrying out his duties
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<PAGE> 6
under this Agreement, shall report only to the Board. The Executive's
position (including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant
of those held by, exercised by or assigned to the Executive at the
Effective Date. The Executive's services shall be performed at the
location where the Executive was employed immediately preceding the
Effective Date or any office which is the headquarters of the Company
and is less than 50 miles from such location. It is hereby agreed and
understood that the Executive may be required by the Company to move
his business office (within the 50-mile limit set forth above) but not
his principle place of residence. In the event that the Company
requires the Executive to move his main office outside of Harris
County, the Company shall provide, at no expense to the Executive, an
apartment or townhome in the new location which is commensurate with
the Executive's standard of living.
(ii) Excluding any periods of vacation and sick
leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to
the business and affairs of the Company and, to the extent necessary
to discharge the responsibilities assigned to the Executive hereunder,
to use the Executive's reasonable best efforts to perform faithfully
and efficiently such responsibilities. It shall not be a violation of
this Agreement for the Executive to (a) serve on corporate, civic or
charitable boards or committees, (b) deliver lectures, fulfill
speaking engagements or teach at educational institutions and (c)
manage personal investments, so long as such activities do not
significantly interfere with the performance of the Executive's
responsibilities as an employee of the Company in accordance with this
Agreement. It is expressly understood and agreed that to the extent
that any such activities have been conducted by the Executive prior to
the Effective Date, the continued conduct of such activities (or the
conduct of activities similar in nature and scope thereto) subsequent
to the Effective Date shall not thereafter be deemed to interfere with
the performance of the Executive's responsibilities to the Company.
B. Compensation:
(i) Annual Base Salary: During the Employment
Period, the Executive shall receive an Annual Base Salary at a monthly
rate at least equal to the monthly base salary paid to the Executive
by the Company at the Effective Date. Annual Base Salary shall not be
reduced.
(ii) Stock Award: The Executive shall be granted,
subject to the terms and conditions herein set forth, an award (the
"Stock Award") with respect to 300,000 shares of Common Stock, without
par value, of the Company ("Stock"), effective as of the Effective
Date. The Stock Award shall be implemented by a credit to a
bookkeeping account maintained by the Company evidencing the accrual
in favor of the Executive of the unfunded right to receive shares of
Stock of the Company, subject to the following terms and conditions:
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<PAGE> 7
(a) Executive shall not have any rights
as a stockholder in respect of the Stock Award, and the rights
of Executive in respect of the shares of Stock deliverable
thereunder may not be sold, assigned, transferred, pledged or
otherwise encumbered, from the Effective Date unless and until
the Executive is registered as the holder of such Stock on the
records of the Company following the vesting of the
Executive's rights with respect to such Stock Award as
provided herein.
(b) The Executive's right to 150,000
shares of Stock (the "Vested Shares") shall vest on June 1,
1999, provided that the Executive has remained in the
continuous employment of the Company during the Employment
Period. If, during the Employment Period, the Company
terminates the Executive's employment for Cause or the
Executive voluntarily terminates employment without Good
Reason, the Executive shall forfeit all right to receive the
Vested Shares as of the Date of Termination. If, during the
Employment Period, the Company terminates the Executive's
employment without Cause, or the Executive terminates
employment for Good Reason, or the Executive's employment
terminates by reason of death, Disability or retirement
pursuant to Section 5(F), the Executive's right to receive the
Vested Shares shall vest as of the Date of Termination.
(c) The Executive's right to 150,000
shares of Stock (the "Performance Shares") shall generally be
subject to achievement of certain performance goals as
described in this paragraph (c); provided, however, that (1)
if, during the Employment Period, the Company terminates the
Executive's employment without Cause or the Executive
terminates employment for Good Reason, the Executive's right
to the Performance Shares shall vest as of the Date of
Termination, (2) if, during the Employment Period, the Company
terminates the Executive's employment for Cause or the
Executive voluntarily terminates employment without Good
Reason, the Executive shall forfeit all right to the
Performance Shares as of the Date of Termination, and (3) if,
prior to the end of the Employment Period and during calendar
year 1997, the Executive's employment terminates by reason of
death, Disability or retirement pursuant to Section 5(F), the
Executive shall forfeit all right to Performance Shares as of
the Date of Termination.
If, prior to the end of the Employment Period and during
calendar year 1998 or 1999, the Executive's employment
terminates by reason of death, Disability or retirement
pursuant to Section 5(F), (x) the Committee will determine the
degree to which the performance goals applicable to the
Executive for the LICP performance cycle
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<PAGE> 8
commencing in 1997 are expected to be achieved through the end
of the year of termination of employment and the number (if
any) of Performance Shares to which the Executive would be
entitled based upon that level of performance if the
Performance Shares had been the Executive's restricted stock
award under the LICP for the 1997 LICP performance cycle
(without regard to the potential for any award of "Opportunity
Shares" under the LICP), (y) effective as of the Date of
Termination, the Executive's right to receive a portion of the
number of Performance Shares determined under part (x) of this
sentence shall vest in the same proportion as the number of
days elapsed from and including January 1, 1997 through and
including the Date of Termination bears to 881 (the number of
days from and including January 1, 1997 through and including
May 31, 1999), and (z) effective as of the Date of
Termination, the Executive shall forfeit all right to receive
the remaining Performance Shares.
Upon Executive's completion of the Employment Period without
termination of employment, (1) the Committee (within the
meaning of the LICP) will determine the degree to which the
performance goals applicable to the Executive for the LICP
performance cycle commencing in 1997 are expected to be
achieved through the end of that performance cycle and (2)
effective as of June 1, 1999, the Executive shall have a
vested right to receive the number (if any) of Performance
Shares to which the Executive would be entitled, based upon
the level of performance determined under part (1) of this
sentence, if the Performance Shares had been the Executive's
restricted stock award for the 1997 LICP performance cycle
(without regard to the potential for any award of "Opportunity
Shares" under the LICP).
The determinations of the Committee under this Section
3(B)(ii)(c) shall be final and binding on all parties.
(d) Shares of Stock shall be registered
in the name of the Executive and certificates representing
such shares of Stock shall be delivered to the Executive as
soon as practicable following the date on which Executive's
right to receive such shares vests. Unless the Company
determines otherwise, shares of Stock delivered to the
Executive shall consist of shares of Stock theretofore held by
the Company in its treasury or by a subsidiary of the Company.
(e) Dividends shall not be paid to the
Executive with respect to any share of Stock prior to the
date that such share is registered in the name of the
Executive on the books of the Company; provided, however, that
an amount equal to the total amount of dividends payable with
respect to such share from the Effective Date
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<PAGE> 9
through the date that such share is delivered to the Executive
(taking into account any adjustments pursuant to the following
paragraph (f)) shall be paid to the Executive in cash on the
date that the share of Stock is registered in the name of the
Executive on the books of the Company.
(f) The issuance of Stock pursuant to
the Stock Award made hereunder shall be subject to the
provisions of Sections 13.1, 13.2 and 13.3 of the LICP as
though the Stock Award had been granted as a Stock Incentive
thereunder. The Company shall make all appropriate
adjustments with respect to the Stock Award under Section 13.3
of the LICP on a basis no less favorable to the Executive than
corresponding adjustments made with respect to any comparable
award or incentive under the LICP or any other incentive plan
of the Company in which peer executives participate.
Notwithstanding any provision of this Section 3(B)(ii), the
Performance Shares shall not in any respect be deemed an award
under the LICP.
(iii) Benefit and Bonus Plans: During the
Employment Period, except as otherwise set forth in this paragraph
(iii), the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices, policies and
programs applicable generally to other peer executives of the Company
and its Affiliated Companies. The Executive and/or the Executive's
family, as the case may be, shall be eligible for participation in and
shall receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company and its Affiliated
Companies (including, without limitation, medical, prescription,
dental, disability, the Executive salary continuance, employee life,
group life, accidental death and travel accident insurance plans and
programs) to the extent applicable generally to other peer executives
of the Company and its Affiliated Companies. Notwithstanding the
foregoing:
(a) The Executive shall not be granted
awards under the Company's Long-Term Incentive Compensation
Plan for performance cycles commencing in 1998 or 1999; and
(b) The Executive shall be entitled to
receive a separate monthly supplemental retirement benefit
from the Company equal to the excess, if any, of (1) the
benefit payable under the Retirement Plan and the SERP based
on the benefit accrual formulas and actuarial assumptions in
effect at the Effective Date over (2) the Executive's actual
benefit (paid or payable) under the Retirement Plan and the
SERP. Any such benefit shall commence at the same time and be
payable in the same form as the amounts paid under the
Retirement Plan and the SERP.
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<PAGE> 10
(iv) Expenses: During the Employment Period, the
Executive shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by the Executive in accordance with the
policies, practices and procedures of the Company and its Affiliated
Companies to the extent applicable generally to other peer executives
of the Company and its Affiliated Companies.
(v) Vacation and Fringe Benefits: During the
Employment Period, the Executive shall be entitled to paid vacation
and fringe benefits in accordance with the plans, practices, programs
and policies of the Company and its Affiliated Companies to the extent
applicable generally to other peer executives of the Company and its
Affiliated Companies.
(vi) Other Perquisites: During the Employment
Period, the Executive shall continue to be provided with such
perquisites as were provided to the Executive on the Effective Date of
this Agreement. Such perquisites shall be reviewed annually by the
Compensation Committee of the Board.
4. Termination of Employment:
A. Death or Disability: The Executive's employment
shall terminate automatically upon the Executive's death during the Employment
Period. If the Company determines in good faith that the Disability of the
Executive has occurred during the Employment Period, it may give to the
Executive written notice in accordance with Section 15(B) of its intention to
terminate the Executive's employment. In such event, the Executive's
employment with the Company shall terminate effective on the 30th day after
receipt of such notice by the Executive (the "Disability Effective Date"),
provided that, within the 30 days after such receipt, the Executive shall not
have returned to full-time performance of the Executive's duties.
B. Cause: The Company may terminate the Executive's
employment during the Employment Period for Cause.
C. Good Reason: The Executive's employment may be
terminated during the Employment Period by the Executive for Good Reason. For
purposes of this Section 4(C), any good faith determination of Good Reason made
by the Executive shall be conclusive.
D. Notice of Termination: Any termination by the
Company for Cause, or by the Executive for Good Reason, shall be communicated
by Notice of Termination to the other party hereto given in accordance with
Section 15(B). The failure by the Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing
of Good Reason or Cause shall not waive any right of the Executive or the
Company hereunder or preclude the Executive or the Company from asserting such
fact or circumstance in enforcing the Executive's or the Company's rights
hereunder.
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<PAGE> 11
5. Obligations of the Company Upon Termination during Employment
Period:
A. Good Reason, Other Than for Cause, Death or
Disability: If, during the Employment Period, the Executive shall terminate
employment for Good Reason or the Company shall terminate the Executive's
employment (excluding a termination for Cause, for Disability or following a
Change of Control as described in Section 5(E)), then:
(i) the Company shall pay to the Executive in a
lump sum in cash (or common stock of the Company with respect to
certain payments under the LICP), within 30 days after the Date of
Termination, determined without any reduction for the present value of
such lump-sum payment, the aggregate of:
(a) the Annual Base Salary payable to
the Executive for the remainder of the Employment Period as if
there had been no termination of employment;
(b) all bonuses payable to the Executive
for the remainder of the Employment Period as if there had
been no termination of employment (including, but not by way
of limitation, all bonuses awarded to the Executive under the
EICP and the LICP and all bonuses that would have been awarded
to the Executive under the EICP and LICP during the remainder
of the Employment Period), assuming, for purposes of
determining the amount of any bonus, (i) that bonus awards
continued to be granted at the levels most recently granted to
the Executive prior to the Date of Termination (unless a
reduction in the level of any bonus award was the basis for a
termination for Good Reason, in which case reference shall be
made to the level in effect prior to such reduction) and (ii)
that any applicable performance objectives were met at the
"target" level; and
(c) any accrued vacation pay;
in each case to the extent not theretofore paid (the sum of the
amounts described in clauses (a) - (c) above shall be hereinafter
referred to as the "Accrued Obligations");
(ii) the benefits accrued up to the Date of
Termination under the Retirement Plan and the SERP or any successor
plan thereto shall commence thereunder in such form and at such time
as elected by the Executive in accordance with the terms of said
Plans, subject to the requirements of Section 16;
(iii) the Company shall pay a separate monthly
supplemental retirement benefit equal to the difference between (1)
the benefit payable under the Retirement Plan and the SERP or any
other successor supplemental and/or excess retirement plan of the
Company and its Affiliated Companies providing benefits for the
Executive which the Executive would receive if the Executive's
employment continued at the compensation level provided for in Section
3(B) for the remainder
-11-
<PAGE> 12
of the Employment Period, assuming for this purpose that (a) all
accrued benefits are fully vested and (b) benefit accrual formulas and
actuarial assumptions are no less advantageous to the Executive than
those in effect at the Effective Date, and (2) the Executive's actual
benefit (paid or payable), if any, under the Retirement Plan and the
SERP (the amount of such benefit calculated under this Section
5(A)(iii), which shall commence at the same time and be payable in the
same form as the amounts described in Section 5(A)(ii), shall be
hereinafter referred to as the "Supplemental Retirement Benefit");
(iv) for the remainder of the Employment Period,
or such longer period as any plan, program, practice or policy may
provide, the Company shall continue benefits to the Executive and/or
the Executive's family at least equal to those which would have been
provided to them in accordance with the welfare benefit plans,
programs, practices and policies described in Section 3(B)(iii) if the
Executive's employment had not been terminated; provided, however,
that if the Executive becomes reemployed with another employer and is
eligible to receive medical or other welfare benefits under another
employer provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other
plan during such applicable period of eligibility (such continuation
of such benefits for the applicable period herein set forth shall be
hereinafter referred to as "Welfare Benefit Continuation");
(v) to the extent not theretofore paid or
provided, the Company shall timely pay or provide to the Executive
and/or the Executive's family any other amounts or benefits required
to be paid or provided or which the Executive and/or the Executive's
family is eligible to receive pursuant to this Agreement and under any
plan, program, policy or practice or contract or agreement of the
Company and its Affiliated Companies as in effect and applicable
generally to other peer executives and their families (such other
amounts and benefits, payable as described in this paragraph, shall be
hereinafter referred to as the "Other Benefits"); provided, however,
that the Company and the Board hereby agree to cause the Deferred
Compensation Plan to be administered or amended so that any and all
amounts of salary and/or bonus theretofore deferred by the Executive
and held under the Deferred Compensation Plan of the Company with
instructions from the Executive to pay in 15 annual installments shall
be paid in said 15 installments commencing on June 1, 2000,
notwithstanding any provision of the Deferred Compensation Plan to the
contrary; and
(vi) the Company shall pay to the Executive in a
lump sum in cash, within 30 days after the Date of Termination, the
amount it would have contributed as an employer contribution to the
tax-qualified Savings Plan of the Company for the remainder of the
Employment Period had the Executive contributed at the maximum rate
during said period and had the terms of said Savings Plan as in effect
on the Effective Date remained unchanged during said remainder of the
Employment Period;
(vii) the Company shall timely deliver to the
Executive all shares of Stock to which he has a vested right pursuant
to Section 3(B)(ii), together with a cash
-12-
<PAGE> 13
amount equal to all dividends that were payable with respect to such
shares of Stock from the Effective Date through the date of delivery
as provided in Section 3(B)(ii); and
(viii) the Company shall fulfill the requirements of
Section 3(B)(iii)(b), Section 5(G)-(I) and Section 16.
B. Death: If the Executive's employment is terminated
by reason of the Executive's death during the Employment Period, this Agreement
shall terminate without further obligations to the Executive's Beneficiary or
other legal representatives under this Agreement, other than for (i) payment of
Accrued Obligations (which shall be paid to the Executive's Beneficiary in a
lump sum in cash (or common stock of the Company with respect to certain
payments under the LICP) within 30 days of the Date of Termination), (ii) the
timely payment or provision of the Welfare Benefit Continuation and Other
Benefits in accordance with Section 5(A), (iii) the timely delivery of all
shares of Stock to which the Executive has a vested right pursuant to Section
3(B)(ii), together with a cash amount equal to all dividends that were payable
with respect to such shares of Stock from the Effective Date through the date
of delivery as provided in Section 3(B)(ii), and (iv) fulfillment of the
requirements of Section 3(B)(iii)(b), Section 5(H) and Section 16.
C. Disability: If the Executive's employment is
terminated by reason of the Executive's Disability during the Employment
Period, this Agreement shall terminate without further obligations to the
Executive under this Agreement, other than for (i) payment of Accrued
Obligations (which shall be paid to the Executive in a lump sum in cash (or
common stock of the Company with respect to certain payments under the LICP)
within 30 days of the Date of Termination), (ii) the timely payment or
provision of the Welfare Benefit Continuation and Other Benefits in accordance
with Section 5(A), (iii) the timely delivery of all shares of Stock to which
the Executive has a vested right pursuant to Section 3(B)(ii), together with a
cash amount equal to all dividends that were payable with respect to such
shares of Stock from the Effective Date through the date of delivery as
provided in Section 3(B)(ii), and (iv) fulfillment of the requirements of
Section 3(B)(iii)(b), Section 5(G)-(I) and Section 16.
D. Cause; Other than for Good Reason: If the
Executive's employment shall be terminated for Cause during the Employment
Period or if the Executive voluntarily terminates employment during the
Employment Period (excluding a termination for Good Reason, retirement pursuant
to Section 5(F) or termination by reason of death or Disability), this
Agreement shall terminate without further obligations to the Executive other
than (i) the obligation to pay to the Executive the Annual Base Salary through
the Date of Termination plus the amount of any compensation previously deferred
by the Executive, in each case to the extent theretofore unpaid, (ii) the
timely provision of Other Benefits without regard to the June 1, 2000
installment payment commencement date required by Section 5(A)(v), and (iii)
fulfillment of the requirements of Section 3(B)(iii)(b), Sections 5(G)-(I) and
Section 16. Accordingly, the Executive shall forfeit all right to the Stock in
accordance with Section 3(b)(ii) and the Executive shall have no right to
receive the dividend-related payment described in Section 3(B)(ii). Any unpaid
but due Annual Base Salary shall be paid to the Executive in a lump sum in cash
within 30 days of the Date of Termination under this paragraph.
-13-
<PAGE> 14
E. Change of Control: In the event that (i) the Company
terminates the employment of the Executive (excluding a termination for Cause
or for Disability), or (ii) the Executive terminates his employment for Good
Reason, during the Employment Period and after consummation of a Change of
Control, (a) the Company shall pay the Executive, within 30 days after the Date
of Termination, an amount equal to the Executive's Base Amount multiplied by
2.99 and (b) the Company shall timely deliver to the Executive all shares of
Stock to which he has a vested right pursuant to Section 3(B)(ii), together
with a cash amount equal to all dividends that were payable with respect to
such shares of Stock from the Effective Date through the date of delivery as
provided in Section 3(B)(ii). Upon such payment and delivery of Stock, this
Agreement shall terminate without further obligations to the Executive other
than (a) the obligation to pay to the Executive the Annual Base Salary through
the Date of Termination to the extent theretofore unpaid, (b) the timely
provision of Other Benefits in accordance with Section 5(A), and (c)
fulfillment of the requirements of Section 3(B)(iii)(b), Section 5(G)-(I) and
Section 16. Any unpaid but due Annual Base Salary shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination under
this paragraph.
F. Retirement: If the Executive terminates his
employment with the Company by reason of retirement with the consent of the
Company during the Employment Period, he shall be entitled to receive under
this Agreement, in addition to all other benefits otherwise due from the
Company upon retirement, the prompt payment of all benefits due under Section
5(A) had the Executive terminated employment for Good Reason; provided,
however, that Executive's rights with respect to the Performance Shares shall
be governed by the applicable provisions of Section 3(B)(ii). Furthermore, the
Executive shall be entitled until the end of the Employment Period to the
prompt reimbursement of all expenses incurred for civic or industry activities
undertaken on behalf of the Company which are of a similar nature and scope to
those expenses reimbursable by the Company to the Executive on the Effective
Date. In this connection, the Executive shall also be afforded reasonable use
of any Company aircraft.
G. Group Life Insurance: Upon a termination of
employment during or at the end of the Employment Period for any reason other
than death or for Cause, the Executive may elect to retain the group life
insurance coverage provided to the Executive and other employees of the Company
under the Group Life Insurance Plan of the Company, and, if the election is
made, the Executive shall pay, or reimburse the Company for the cost of, the
premiums for such insurance paid by the Company at the same rate charged active
employees of the Company for similar coverage utilizing the same method or
procedure for calculating the premium as in effect and applicable for the
Executive as of the date of execution hereof. Such right to maintain group
coverage shall be in the minimum amount of three times Annual Base Salary and
shall continue for the life of the Executive. It is hereby understood and
agreed that there shall be no increase in said premium because of any
reallocation due to age or risk that may occur after the date of execution
hereof.
H. Salary Continuation Plan: Upon a termination of
employment during the Employment Period for any reason, the Company hereby
agrees that the Executive shall be fully vested in the benefit provided under
the Salary Continuation Plan, as in effect on the Effective Date, and that the
benefit payable thereunder shall be based on his Annual Base Salary as provided
in Section 3(B)(i).
-14-
<PAGE> 15
I. Office: Upon a termination of employment during the
Employment Period for any reason other than death or for Cause, the Company
shall provide the Executive with suitable executive office space and
secretarial help at an acceptable location outside the premises of any Company
location. Such office and secretary shall be provided the Executive until such
time as mutually agreed by the parties to be no longer necessary.
6. Consulting Period and Duties: The Company and the Executive
agree that, upon completion of the Employment Period, the Company shall retain
the services of the Executive as a consultant during the Consulting Period in
accordance with the terms and provisions of this Agreement. During the
Consulting Period, the Executive shall provide such consultation and advice in
connection with the Company's business as the Company may reasonably request;
provided, however, that the Executive shall have no obligation to devote more
than 40 hours per month to such consultation. In consideration of the
Executive's agreement to make himself available to provide the consulting
services described herein, the Company and the Board hereby agree to cause the
Deferred Compensation Plan to be administered or amended so that any and all
amounts of salary and/or bonus theretofore deferred by the Executive and held
under the Deferred Compensation Plan of the Company with instructions from the
Executive to pay in 15 annual installments shall commence on June 1, 2000,
notwithstanding any provision of the Deferred Compensation Plan to the
contrary. Should the Executive refuse to provide such consulting services at
any time during the Consulting Period for any reason not beyond the control of
the Executive, such installments shall immediately commence upon the expiration
of 60 days following the Executive's receipt of written notice from the Company
of his failure to fulfill his obligations hereunder during which the Executive
does not cure such failure.
7. Non-Exclusivity of Rights: Except as provided in Section 5,
nothing in this Agreement shall prevent or limit the Executive's continuing or
further participation in any plan, program, policy or practice provided by the
Company or any of its Affiliated Companies and for which the Executive may
qualify, nor shall anything herein limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its Affiliated Companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of or any contract or agreement with the Company or any of its
Affiliated Companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract
or agreement except as explicitly modified by this Agreement.
8. Full Settlement; Resolution of Disputes:
A. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement and,
except as provided in Section 5(A)(iv), such amounts shall not be reduced
whether or not the Executive obtains other employment. The Company agrees to
pay promptly as incurred, to the full extent permitted by law, all legal fees
and expenses which the Executive may reasonably incur as a result of any
contest (regardless of the outcome
-15-
<PAGE> 16
thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Code. In addition and to the
extent not already provided by the terms of any insurance policy owned by the
Company, the Company hereby agrees to pay promptly as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any litigation or other legal action filed
against the Executive or his estate arising out of, or in any way connected
with or resulting from, actions taken or omitted to be taken by the Executive
during his employment with the Company.
B. If there shall be any dispute between the Company and
the Executive regarding (i) in the event of any termination of the Executive's
employment by the Company, whether such termination was for Cause, or (ii) in
the event of any termination of employment by the Executive, whether Good
Reason existed, then, unless and until there is a final, nonappealable judgment
by a court of competent jurisdiction declaring that such termination was for
Cause or that the determination by the Executive of the existence of Good
Reason was not made in good faith, the Company shall pay all amounts, and
provide all benefits, to the Executive and/or the Executive's family or other
beneficiaries, as the case may be, that the Company would be required to pay or
provide pursuant to Section 5(A) as though such termination were by the Company
without Cause or by the Executive with Good Reason; provided, however, that the
Company shall not be required to pay any disputed amounts pursuant to this
paragraph except upon receipt of an undertaking by or on behalf of the
Executive to repay all such amounts to which the Executive is ultimately
adjudged by such court not to be entitled.
9. Certain Reduction of Payments by the Company:
A. Notwithstanding anything to the contrary in this
Agreement, in the event it shall be determined that any payment or distribution
by the Company to or for the benefit of the Executive (whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any reduction required under this
Section 9) (a "Payment") would be non-deductible by the Company for Federal
income tax purposes because of Section 280G of the Code, then the aggregate
present value of all Payments shall be reduced (but not below zero) such that
such aggregate present value of Payments equals the Reduced Amount. The
"Reduced Amount" shall be an amount expressed in present value which maximizes
the aggregate present value of Payments without causing any Payment to be
non-deductible by the Company because of Section 280G of the Code. For
purposes of this Section 9, present value shall be determined in accordance
with Section 280G(d)(4) of the Code.
B. All determinations required to be made under this
Section 9 (excluding determinations of any legal issues relevant to this
Section 9, which shall be made by regular outside counsel to the Company) shall
be made by Deloitte &Touche (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Company and the Executive within
15 business days of the Date of Termination. In the event that the Accounting
Firm is serving as accountant or auditor for any individual, entity or group
(other than the Company) effecting the Change of Control, the Executive shall
appoint another nationally recognized accounting firm to make the
determinations
-16-
<PAGE> 17
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). Any such determination by the Accounting Firm (and
any such legal determination by regular outside counsel to the Company) shall
be binding upon the Company and the Executive. All fees and expenses of the
Accounting Firm and regular outside counsel to the Company shall be borne by
the Company. The Executive shall determine which and how much of the Payments
shall be eliminated or reduced consistent with the requirements of this Section
9, provided that, if the Executive does not make such determination within 10
business days of the receipt of the calculations made by the Accounting Firm,
the Company shall elect which and how much of the Payments shall be eliminated
or reduced consistent with the requirements of this Section 9 and shall notify
the Executive promptly of such election. Within five business days thereafter,
the Company shall pay to or distribute to or for the benefit of the Executive
such Payments as are then due to the Executive and shall promptly pay to or
distribute to or for the benefit of the Executive such Payments as become due
to the Executive.
C. As a result of the uncertainty in the application of
Section 280G of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Payments will have been made by
the Company that should not have been made ("Overpayment") or that additional
Payments which will have not have been made by the Company could have been made
("Underpayment"), in each case, consistent with the calculations required to be
made hereunder. In the event that the Accounting Firm determines that an
Overpayment has been made, any such Overpayment shall be treated for all
purposes as a loan to the Executive which the Executive shall repay to the
Company together with interest at the applicable Federal rate provided for in
Section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Executive to the Company (or if paid by the Executive to the
Company shall be returned to the Executive) if and to the extent such payment
would not reduce the amount which is subject to taxation under Section 4999 of
the Code. In the event that the Accounting Firm determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive together with interest at the
applicable Federal rate provided for in Section 7872(f)(2) of the Code.
10. Confidential Information: The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or any of its Affiliated
Companies, and their respective businesses, which shall have been obtained by
the Executive during the Executive's employment by the Company or any of its
Affiliated Companies and which shall not be or become public knowledge (other
than by acts by the Executive or representatives of the Executive in violation
of this Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the
Company and those designated by it. In no event shall an asserted violation of
the provisions of this Section 10 constitute a basis for deferring or
withholding any amounts otherwise payable to the Executive under this
Agreement.
11. Successors:
A. This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws
-17-
<PAGE> 18
of descent and distribution. This Agreement shall inure to the benefit of and
be enforceable by the Executive's legal representatives.
B. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
C. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
12. Source of Payments: All payments provided in this Agreement
shall, unless the plan or program pursuant to which they are made provide
otherwise, be paid in cash from the general funds of the Company, and no
special or separate funds shall be established and no other segregation of
assets shall be made to assure payment. The Executive shall have no right,
title or interest whatever in or to any investments which the Company may make
to aid the Company in meeting its obligations hereunder. Nothing contained in
this Agreement, and no action taken pursuant to this provision, shall create or
be construed to create a trust of any kind, or a fiduciary relationship,
between the Company and the Executive or any other person. To the extent that
any person acquires a right to receive payments from the Company hereunder,
such right shall be no greater than the right of an unsecured creditor of the
Company.
13. Effect of Prior Agreements: This Agreement contains the
entire understanding between the parties hereto and supersedes any prior
employment agreement between the Company or any predecessor of the Company and
the Executive, except that this Agreement shall not affect or operate to reduce
(a) any benefit or compensation inuring to the Executive of a kind elsewhere
provided and not expressly provided or modified in this Agreement or (b) the
agreements of the Company set forth in that certain letter to the Executive
from John T. Cater, as Chairman of the Compensation Committee of the Board,
dated November 28, 1995, regarding the Executive's service with the World
Energy Council. Specifically, but not by way of limitation, this Agreement
supersedes and replaces that certain amended and restated Employment Agreement
between the parties, dated June 4, 1994.
14. Consolidation, Merger or Sale of Assets: Nothing in this
Agreement shall preclude the Company from consolidating or merging into or
with, or transferring all or substantially all of its assets to, another
corporation which assumes this Agreement and all obligations and undertakings
of the Company hereunder; provided that no such action shall diminish the
Executive's rights hereunder, including, without limitation, rights under
Section 4(C). Upon such a consolidation, merger or transfer of assets in
assumption, the term "Company" as used herein shall mean such other
corporation.
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<PAGE> 19
15. Miscellaneous:
A. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without reference to principles
of conflict of laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement may not be
amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
B. All notices and other communications hereunder shall
be in writing and shall be given by hand delivery to the other party or by
registered or certified-mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: Don D. Jordan
5 Stayton Circle
Houston, Texas 77024
If to the Company: Houston Industries Incorporated
P.O. Box 4567
Houston, Texas 77210
ATTENTION: Mr. Hugh Rice Kelly
Vice President, General Counsel
and Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
C. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
D. The Company may withhold from any amounts payable
under this Agreement such Federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
E. The Executive's or the Company's failure to insist
upon strict compliance with any provision hereof or any other provision of this
Agreement or the failure to assert any right the Executive or the Company may
have hereunder, including, without limitation, the right of the Executive to
terminate employment for Good Reason pursuant to Section 4(C), shall not be
deemed to be a waiver of such provision or right or any other provision or
right of this Agreement.
F. The headings of paragraphs herein are included solely
for convenience and reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
-19-
<PAGE> 20
G. Contemporaneously with execution of this Agreement,
the Executive shall be furnished a certified copy of a resolution of the Board
of Directors authorizing the execution and delivery of this Agreement.
16. Deferred Compensation Plan and SERP Payments: Notwithstanding
any provision herein or any provision of the Deferred Compensation Plan of the
Company to the contrary, the Company and the Board hereby agree to cause the
Deferred Compensation Plan to be administered so that any and all amounts of
salary and/or bonus theretofore deferred by the Executive and held under the
Deferred Compensation Plan with instructions from the Executive to pay in 15
annual installments (a) shall be paid in said 15 installments, (b) shall remain
in said Plan earning interest at the rate prescribed therein until installment
distributions commence, (c) shall commence at the time provided herein (or, if
not provided for herein, at the time provided in said Plan) and (d) shall not
be commuted and paid in a lump sum. Notwithstanding any provision of this
Agreement or any provision of the SERP to the contrary, the Company and the
Board hereby agree to cause the SERP to be administered so that no benefit
payable to or on behalf of the Executive under the SERP may be commuted and
paid in a lump sum.
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization from its Board of
Directors, the Company has caused these presents to be executed in its name and
on its behalf, all as of the day and year first above written.
HOUSTON INDUSTRIES INCORPORATED
By /s/ John T. Cater
------------------------------------------------
John T. Cater, Chairman of Compensation
Committee of the Board of Directors
EXECUTIVE
/s/ Don D. Jordan
--------------------------------------------------
Don D. Jordan
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<PAGE> 1
EXHIBIT 11
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Primary Earnings Per Share:
(1) Weighted average shares of common stock
outstanding................................................. 244,443,110 247,706,457 245,706,746
(2) Effect of issuance of shares from
assumed exercise of stock options
(treasury stock method)..................................... 23,878 47,098 (79,048)
----------- ------------ ------------
(3) Weighted average shares........................................ 244,466,988 247,753,555 245,627,698
=========== ============ ============
(4) Net income..................................................... $ 404,944 $ 1,105,524 $ 399,261
(5) Primary earnings per share
(line 4/line 3)............................................. $ 1.66 $ 4.46 $ 1.62
Fully Diluted Earnings Per Share:
(6) Weighted average shares per computation
on line 3 above............................................. 244,466,988 247,753,555 245,627,698
(7) Shares applicable to options included
on line 2 above............................................. (23,878) (47,098) 79,048
(8) Dilutive effect of stock options (treasury stock method)
based on higher of the average price for the year or
year-end price of $22.88, $24.25 and $18.00 for 1996,
1995 and 1994, respectively.................................... 23,878 52,730 (79,048)
----------- ------------ ------------
(9) Weighted average shares........................................ 244,466,988 247,759,187 245,627,698
=========== ============ ============
(10) Net income..................................................... $ 404,944 $ 1,105,524 $ 399,261
(11) Fully diluted earnings per share
(line 10/line 9)............................................ $ 1.66 $ 4.46 $ 1.62
</TABLE>
Notes:
These calculations are submitted in accordance with Regulation S-K item
601(b)(11) although submission is not required for financial presentation
disclosure as provided in footnote 2 to paragraph 14 of Accounting Principles
Board (APB) Opinion No. 15 because the 3 percent dilutive test is not met.
The calculations for year ended December 31, 1994 are submitted in accordance
with Regulation S-K item 601(b)(11) although they are contrary to paragraphs 30
and 40 of APB No. 15 because they produce anti-dilutive results.
All share amounts reflect the two-for-one stock split, effective December 1995.
<PAGE> 1
EXHIBIT 12
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Fixed Charges as Defined:
(1) Interest on Long-Term Debt .................. $276,242 $279,491 $ 265,494 $ 304,462 $338,771
(2) Other Interest .............................. 33,738 21,586 25,076 15,145 23,323
(3) Preferred Dividends Factor of Subsidiary
(line 12) ................................ 33,619 44,933 51,718 52,399 58,204
(4) Interest Component of Rentals Charged to
Operating Expense ........................ 942 3,102 3,951 4,449 5,116
-------- -------- ---------- ---------- --------
(5) Total Fixed Charges ......................... $344,541 $349,112 $ 346,239 $ 376,455 $425,414
======== ======== ========== ========== ========
Earnings as Defined:
(6) Income from Continuing Operations
Before Cumulative Effect of
Change in Accounting ..................... $404,944 $397,400 $ 423,985 $ 440,531 $370,031
(7) Income Taxes for Continuing Operations
Before Cumulative Effect of
Change in Accounting ..................... 200,165 199,555 230,424 228,863 177,276
(8) Fixed Charges (line 5) ...................... 344,541 349,112 346,239 376,455 425,414
-------- -------- ---------- ---------- --------
(9) Earnings from Continuing Operations
Before Cumulative Effect of Change
in Accounting, Income Taxes and Fixed
Charges .................................. $949,650 $946,067 $1,000,648 $1,045,849 $972,721
Preferred Dividends Factor of Subsidiary:
(10) Preferred Stock Dividends of Subsidiary ..... $ 22,563 $ 29,955 $ 33,583 $ 34,473 $ 39,327
(11) Ratio of Pre-Tax Income from Continuing
Operations to Income from Continuing
Operations(line 6 plus line 7 divided
by line 6) ............................... 1.49 1.50 1.54 1.52 1.48
-------- -------- ---------- ---------- --------
(12) Preferred Dividends Factor of Subsidiary
(line 10 times line 11) .................. $ 33,619 $ 44,933 $ 51,718 $ 52,399 $ 58,204
======== ======== ========== ========== ========
Ratio of Earnings from Continuing Operations
to Fixed Charges Before Cumulative
Effect of Change in Accounting
(line 9 divided by line 5) ..................... 2.76 2.71 2.89 2.78 2.29
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE COMPANY*
(as of December 31, 1996)
NAME JURISDICTION
---- ------------
Houston Lighting & Power Company Texas
Houston Industries (Delaware) Incorporated Delaware
- --------------------
*The names of certain subsidiaries of the Company are omitted pursuant to Item
601(b)(21)(ii) of Regulation S-K.
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
HOUSTON INDUSTRIES INCORPORATED:
We consent to the incorporation by reference in Houston Industries
Incorporated's (i) Registration Statement on Form S-4 No. 333-11329, (ii)
Registration Statements on Form S-3 Nos. 33-39921, 33-60756, 33-51431, 33-52207
and 33-55445 and (iii) Registration Statements on Form S-8 Nos. 33-37493,
33-50629, 33-52279, 33-55391, 33-56855 and 333-04411 of our report dated
February 21, 1997, appearing in this Annual Report on Form 10-K of Houston
Industries Incorporated for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
HOUSTON, TEXAS
MARCH 20, 1997
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AND HL&P'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000202131
<NAME> HOUSTON INDUSTRIES INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 8,675,759
<OTHER-PROPERTY-AND-INVEST> 1,610,155
<TOTAL-CURRENT-ASSETS> 343,920
<TOTAL-DEFERRED-CHARGES> 1,141,890
<OTHER-ASSETS> 516,133
<TOTAL-ASSETS> 12,287,857
<COMMON> 1,834,208
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 1,997,490
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,827,961
0
135,179
<LONG-TERM-DEBT-NET> 3,024,865
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 5,561
<COMMERCIAL-PAPER-OBLIGATIONS> 1,332,311
<LONG-TERM-DEBT-CURRENT-PORT> 225,130
25,700
<CAPITAL-LEASE-OBLIGATIONS> 785
<LEASES-CURRENT> 3,633
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,706,732
<TOT-CAPITALIZATION-AND-LIAB> 12,287,857
<GROSS-OPERATING-REVENUE> 4,095,277
<INCOME-TAX-EXPENSE> 200,165
<OTHER-OPERATING-EXPENSES> 3,104,811
<TOTAL-OPERATING-EXPENSES> 3,104,811
<OPERATING-INCOME-LOSS> 990,466
<OTHER-INCOME-NET> (55,412)
<INCOME-BEFORE-INTEREST-EXPEN> 935,054
<TOTAL-INTEREST-EXPENSE> 307,382
<NET-INCOME> 427,507
22,563
<EARNINGS-AVAILABLE-FOR-COMM> 404,944
<COMMON-STOCK-DIVIDENDS> 361,126
<TOTAL-INTEREST-ON-BONDS> 221,814
<CASH-FLOW-OPERATIONS> 914,320
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.66
</TABLE>
<PAGE> 1
EXHIBIT 3(c)
ARTICLES OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF
HOUSTON LIGHTING & POWER COMPANY
Pursuant to and in accordance with the provisions of Article
4.04 of the Texas Business Corporation Act (the "TBCA"), Houston Lighting &
Power Company, a Texas corporation (the "Corporation"), hereby adopts the
following Articles of Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the Corporation is Houston Lighting & Power
Company.
ARTICLE TWO
The following amendments to the articles of incorporation were
adopted (i) by the sole holder of Class A Common Stock of the Corporation on
November 22, 1996 and (ii) by the sole holder of Class B Common Stock of the
Corporation on November 22, 1996 in order to create a class of Preference Stock
ranking junior to the Preferred Stock of the Corporation and, pursuant to
Article 2.28(D) of the TBCA, to provide that the vote of holders of Common
Stock and Preference Stock required for approval of certain matters shall be
the affirmative vote of the holders of a majority of the outstanding shares of
Common Stock and Preference Stock entitled to vote on such matters.
ARTICLE THREE
The first amendment alters or changes the first paragraph of
ARTICLE VI of the Restated Articles of Incorporation and the full text of such
altered paragraph is as follows:
"The number of shares of the total authorized capital stock of
the Company is 20,001,100 shares, of which 10,000,000 shares are classified as
Preferred Stock, without par value, 10,000,000 shares are classified as
Preference Stock, without par value, 1,000 shares are classified as Class A
Common Stock, without par value ("Class A Common Stock"), and 100 shares are
classified as Class B Common Stock, without par value ("Class B Common Stock"
and, together with the Class A Common Stock, "Common Stock")."
1
<PAGE> 2
ARTICLE FOUR
The second amendment alters or changes "Division C -- The
Common Stock" and "Division D -- Provisions Applicable to All Classes of Stock"
and creates a new "Division C -- Preference Stock" of ARTICLE VI of the
Restated Articles of Incorporation and the full text of such altered or created
divisions are as follows:
"DIVISION C -- PREFERENCE STOCK
The shares of Preference Stock may be divided into and issued
in one or more series, the relative rights and preferences of which series may
vary in any and all respects. The Board of Directors of the Company is hereby
vested with the authority to establish series of Preference Stock by fixing and
determining all the relative rights and preferences of the shares of any series
so established, to the extent not provided for in these Articles of
Incorporation or any amendment hereto, and with the authority to increase or
decrease the number of shares within each such series; provided, however, that
the relative rights and preferences of any series of Preference Stock must rank
junior to the relative rights and preferences of the Preferred Stock; and,
provided further, that the Board of Directors may not decrease the number of
shares within a series of Preference Stock below the number of shares within
such series that is then issued. The authority of the Board of Directors with
respect to such series of Preference Stock shall include, but not be limited
to, determination of the following:
(1) the distinctive designation and number of shares of
that series;
(2) the rate of dividend (or the method of calculation
thereof) payable with respect to shares of that series, the dates, terms and
other conditions upon which such dividends shall be payable, and the relative
rights of priority of such dividends to dividends payable on any other class or
series of capital stock of the Company; provided, however, that the relative
rights of priority of that series must rank junior to the relative rights of
priority of Preferred Stock;
(3) the nature of the dividend payable with respect to
shares of that series as cumulative, noncumulative or partially cumulative, and
if cumulative or partially cumulative, from which date or dates and under what
circumstances;
(4) whether shares of that series shall be subject to
redemption, and, if made subject to redemption, the times, prices, rates,
adjustments and other terms and conditions of such redemption (including the
manner of selecting shares of that series for redemption if fewer than all
shares of such series are to be redeemed);
(5) the rights of the holders of shares of that series in
the event of voluntary or involuntary liquidation, dissolution or winding up of
the Company (which rights may be different if such action is voluntary than if
it is involuntary), including the relative rights of priority in such event as
to the rights of the holders of any other class or series of capital stock of
the Company; provided,
2
<PAGE> 3
however, that the relative rights of priority of that series must rank junior
to the relative rights of priority of Preferred Stock;
(6) the terms, amounts and other conditions of any
sinking or similar purchase or other fund provided for the purchase or
redemption of shares of that series;
(7) whether shares of that series shall be convertible
into or exchangeable for shares of capital stock or other securities of the
Company or of any other corporation or entity, and, if provision be made for
conversion or exchange, the times, prices, rates, adjustments, and other terms
and conditions of such conversion or exchange;
(8) the extent, if any, to which the holders of shares of
that series shall be entitled (in addition to any voting rights provided by
law) to vote as a class or otherwise with respect to the election of directors
or otherwise;
(9) the restrictions and conditions, if any, upon the
issue or reissue of any additional Preference Stock ranking on a parity with or
prior to shares of that series as to dividends or upon liquidation, dissolution
or winding up;
(10) any other repurchase obligations of the Company,
subject to any limitations of applicable law; and
(11) any other designations, preferences, limitations or
relative rights of shares of that series.
Any of the designations, preferences, limitations or relative rights (including
the voting rights) of any series of Preference Stock may be dependent on facts
ascertainable outside these Articles of Incorporation.
Shares of any series of Preference Stock shall have no voting
rights except as required by law or as provided in the relative rights and
preferences of such series.
DIVISION D -- COMMON STOCK
1. Dividends. Dividends may be paid on either or both
classes of Common Stock, as the Board of Directors shall from time to time
determine, out of any assets of the Company available for such dividends after
full cumulative dividends on all outstanding shares of capital stock of all
series ranking senior to the Common Stock in respect of dividends and
liquidation rights (referred to in this Division D as "stock ranking senior to
the Common Stock") have been paid, or declared and a sum sufficient for the
payment thereof set apart, for all past quarterly dividend periods, and after
or concurrently with making payment of or provision for dividends on the stock
ranking senior to the Common Stock for the then current quarterly dividend
period.
3
<PAGE> 4
2. Distribution of Assets. In the event of any liquidation,
dissolution or winding up of the Company, or any reduction or decrease of its
capital stock resulting in a distribution of assets to the holders of its
Common Stock, after there shall have been paid to or set aside for the holders
of the stock ranking senior to the Common Stock the full preferential amounts
to which they are respectively entitled, the holders of the Common Stock shall
be entitled to receive, pro rata, all of the remaining assets of the Company
available for distribution to its stockholders. The Board of Directors, by
vote of a majority of the members thereof, may distribute in kind to the
holders of the Common Stock such remaining assets of the Company, or may sell,
transfer or otherwise dispose of all or any of the remaining property and
assets of the Company to any other corporation or other purchaser and receive
payment thereof wholly or partly in cash or property, and/or in stock of any
such corporation, and/or in obligations of such corporation or other purchaser,
and may sell all or any part of the consideration received therefor and
distribute the same or the proceeds thereof to the holders of the Common Stock.
3. Voting Rights. Subject to the voting rights expressly
conferred under prescribed conditions upon the stock ranking senior to the
Common Stock, the holders of the Class A Common Stock shall exclusively possess
full voting power for the election of directors and for all other purposes.
The holders of the Class B Common Stock shall not be entitled to vote except as
may from time to time be mandatorily provided by the laws of the State of
Texas.
DIVISION E -- PROVISIONS APPLICABLE TO ALL CLASSES OF STOCK
1. Preemptive Rights. No holder of any stock of the Company
shall be entitled as of right to purchase or subscribe for any part of any
unissued or treasury stock of the Company, or of any additional stock of any
class, to be issued by reason of any increase of the authorized capital stock
of the Company, or to be issued from any unissued or additionally authorized
stock, or of bonds, certificates of indebtedness, debentures or other
securities convertible into stock of the Company, but any such unissued or
treasury stock, or any such additional authorized issue of new stock or
securities convertible into stock, may be issued and disposed of by the Board
of Directors to such persons, firms, corporations or associations, and upon
such terms as the Board of Directors may, in its discretion, determine, without
offering to the stockholders then of record, or any class of stockholders, any
thereof, on the same terms or any terms.
2. Votes Per Share. Any stockholder of the Company having
the right to vote at any meeting of the stockholders or of any class or series
thereof, shall be entitled to one vote for each share of stock held by him,
provided that no holder of Common Stock of the Company shall be entitled to
cumulate his votes for the election of one or more directors or for any other
purpose."
ARTICLE FIVE
The third amendment creates a new ARTICLE X of the Restated
Articles of Incorporation and the full text of such new Article is as follows:
4
<PAGE> 5
"ARTICLE X
To the extent permitted by applicable law and except as
expressly provided in the relative rights and preferences of any series of
Preference Stock, the vote of stockholders required for approval of any action
that is recommended to stockholders by the Board of Directors and for which
applicable law requires a stockholder vote, including without limitation (1)
any such plan of merger, consolidation or exchange, (2) any such disposition of
assets, (3) any such dissolution of the Company, and (4) any such amendment of
these Articles of Incorporation, shall, if a greater vote of stockholders is
provided for by the Texas Business Corporation Act or other applicable law,
instead be the affirmative vote of the holders of a majority of the outstanding
shares entitled to vote thereon, unless any class or series of shares is
entitled to vote as a class thereon, in which event the vote required shall be
the affirmative vote of the holders of a majority of the outstanding shares
within each class or series of shares entitled to vote thereon as a class and
at least a majority of the outstanding shares otherwise entitled to vote
thereon; provided, however, that the voting rights of the holders of Preferred
Stock are not affected by this ARTICLE X. The foregoing shall not apply to any
action or stockholder vote authorized or required by any addition, amendment or
modification to applicable law that becomes effective after November 30, 1996
if and to the extent a bylaw adopted by the Board of Directors or the
stockholders so provides. Any repeal, amendment or modification of any such
bylaw so adopted shall require the same vote of stockholders as would be
required to approve the action or vote subject to such bylaw had the first
sentence of this Article X not applied to such action or vote."
ARTICLE SIX
The number of shares of the Corporation outstanding at the
time of such adoption was 3,805,497 (3,804,397 shares of Preferred Stock, 1,000
shares of Class A Common Stock and 100 shares of Class B Common Stock); and the
number of shares entitled to vote thereon was 1,100 (Class A Common Stock and
Class B Common Stock).
The holders of all of the shares outstanding and entitled to
vote on said amendment have signed a consent(s) in writing pursuant to Article
9.10 of the TBCA adopting said amendment and any written notice required by
Article 9.10 of the TBCA has been given.
IN WITNESS WHEREOF, the Corporation has caused these Articles
of Amendment to the Articles of Incorporation to be duly executed as of the 3rd
day of December, 1996.
HOUSTON LIGHTING & POWER COMPANY
By: /s/ Hugh Rice Kelly
------------------------------------
Title: Senior Vice President and
Secretary
5
<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>
Twelve Months Ended December 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Fixed Charges as Defined:
(1) Interest on Long-Term Debt...................... $ 221,865 $ 244,384 $ 246,533 $ 276,049 $ 311,208
(2) Other Interest.................................. 12,764 8,117 8,493 12,317 19,548
(3) Amortization of (Premium) Discount 9,059 8,762 8,484 7,234 5,346
(4) Interest Component of Rentals Charged
to Operating Expense.......................... 942 3,102 3,951 4,449 5,116
--------- ---------- ---------- ---------- ----------
(5) Total Fixed Charges............................. $ 244,630 $ 264,365 $ 267,461 $ 300,049 $ 341,218
========= ========== ========== ========== ==========
Earnings as Defined:
(6) Net Income ..................................... $ 429,418 $ 480,932 $ 486,764 $ 484,223 $ 509,462
(7) Cumulative Effect of Change in Accounting....... 8,200 (94,180)
--------- ---------- ---------- ---------- ----------
(8) Income Before Cumulative Effect of Change
in Accounting................................. $ 429,418 480,932 494,964 484,223 415,282
--------- ---------- ---------- ---------- ----------
Income Taxes:
(9) Current......................................... $ 207,296 186,010 181,109 113,394 129,611
(10) Deferred (Net).................................. 25,113 58,946 68,633 123,077 92,575
(11) Cumulative Effect of Change in Accounting....... 4,415 (48,517)
--------- ---------- ---------- ---------- ----------
(12) Total Income Taxes Before Cumulative
Effect of Change in Accounting ............... 232,409 244,956 254,157 236,471 173,669
--------- ---------- ---------- ---------- ----------
(13) Total Fixed Charges (line 5).................... 244,630 264,365 267,461 300,049 341,218
--------- ---------- ---------- ---------- ----------
(14) Earnings Before Income Taxes and Fixed
Charges (line 8 plus line 12 plus line 13) $ 906,457 $ 990,253 $1,016,582 $1,020,743 $ 930,169
========= ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges
(line 14 divided by line 5)......................... 3.71 3.75 3.80 3.40 2.73
Preferred Dividend Requirements:
(15) Preferred Dividends............................. $ 22,563 $ 29,955 $ 33,583 $ 34,473 $ 39,327
(16) Less Tax Deduction for Preferred Dividends 54 54 54 54 56
--------- ---------- ---------- ---------- ----------
(17) Total........................................... 22,509 29,901 33,529 34,419 39,271
(18) Ratio of Pre-Tax Income to Net Income
(line 8 plus line 12 divided by line 8) 1.54 1.51 1.51 1.49 1.42
--------- ---------- ---------- ---------- ----------
(19) Line 17 times line 18........................... 34,664 45,151 50,629 51,284 55,765
(20) Add Back Tax Deduction (line 16)................ 54 54 54 54 56
--------- ---------- ---------- ---------- ----------
(21) Preferred Dividends Factor ..................... $ 34,718 $ 45,205 $ 50,683 $ 51,338 $ 55,821
========= ========== ========== ========== ==========
(22) Total Fixed Charges (line 5).................... 244,630 $ 264,365 $ 267,461 $ 300,049 $ 341,218
(23) Preferred Dividends Factor (line 21) $ 34,718 45,205 50,683 51,338 55,821
--------- ---------- ---------- ---------- ----------
(24) Total........................................... $ 279,348 $ 309,570 $ 318,144 $ 351,387 $ 397,039
========= ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges and
Preferred Dividends Requirements
(line 14 divided by line 24)................. 3.24 3.20 3.20 2.90 2.34
</TABLE>
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
HOUSTON LIGHTING & POWER COMPANY:
We consent to the incorporation by reference in Houston Lighting &
Power Company's (i) Registration Statement on Form S-4 No. 333-11329, (ii)
Registration Statements on Form S-3 Nos. 33-46368, 33-54228, 333-20069,
333-20069-01, 333-20069-02, 333-20069-03, 333-20069-04 and (iii) Post-Effective
Amendment No. 1 to Registration Statement No. 33-51417 on Form S-3 of our
report dated February 21, 1997, appearing in this Annual Report on Form 10-K of
Houston Lighting & Power Company for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
HOUSTON, TEXAS
MARCH 20, 1997
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HL&P'S
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000048732
<NAME> HOUSTON LIGHTING & POWER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 8,675,759
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 299,841
<TOTAL-DEFERRED-CHARGES> 1,105,798
<OTHER-ASSETS> 514,834
<TOTAL-ASSETS> 10,596,232
<COMMON> 1,675,927
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 2,227,941
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,903,868
0
135,179
<LONG-TERM-DEBT-NET> 2,675,767
<SHORT-TERM-NOTES> 19,600
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 234,665
<LONG-TERM-DEBT-CURRENT-PORT> 225,130
25,700
<CAPITAL-LEASE-OBLIGATIONS> 785
<LEASES-CURRENT> 3,633
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,371,905
<TOT-CAPITALIZATION-AND-LIAB> 10,596,232
<GROSS-OPERATING-REVENUE> 4,025,027
<INCOME-TAX-EXPENSE> 264,819
<OTHER-OPERATING-EXPENSES> 3,027,880
<TOTAL-OPERATING-EXPENSES> 3,292,699
<OPERATING-INCOME-LOSS> 732,328
<OTHER-INCOME-NET> (70,879)
<INCOME-BEFORE-INTEREST-EXPEN> 661,449
<TOTAL-INTEREST-EXPENSE> 232,031
<NET-INCOME> 429,418
22,563
<EARNINGS-AVAILABLE-FOR-COMM> 406,855
<COMMON-STOCK-DIVIDENDS> 329,000
<TOTAL-INTEREST-ON-BONDS> 221,814
<CASH-FLOW-OPERATIONS> 916,646
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
