-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A5k8Xk8iVrLAgU7SHT+tBwFVxUjtrC4b7ZxhV7UjEgnnPmK7pckxtL93LHMdHLN4 4LFjTqc2ghfBkMzn1jYyjg== 0000950129-96-002955.txt : 19961118 0000950129-96-002955.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950129-96-002955 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOUSTON INDUSTRIES INC CENTRAL INDEX KEY: 0000202131 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 741885573 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07629 FILM NUMBER: 96663122 BUSINESS ADDRESS: STREET 1: 4400 POST OAK PKWY STREET 2: 5 POST OAK PK CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7136293000 MAIL ADDRESS: STREET 1: P O BOX 4567 CITY: HOUSTON STATE: TX ZIP: 77210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOUSTON LIGHTING & POWER CO CENTRAL INDEX KEY: 0000048732 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 740694415 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03187 FILM NUMBER: 96663123 BUSINESS ADDRESS: STREET 1: 611 WALKER AVE CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7132289211 MAIL ADDRESS: STREET 1: 611 WALKER CITY: HOUSTON STATE: TX ZIP: 77002 10-Q 1 HOUSTON INDUSTRIES INCORPORATED - 09/30/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _______________ ______________________________ Commission file number 1-7629 HOUSTON INDUSTRIES INCORPORATED (Exact name of registrant as specified in its charter) Texas 74-1885573 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1111 Louisiana Houston, Texas 77002 (Address of principal executive offices) (Zip Code)
(713) 207-3000 (Registrant's telephone number, including area code) ______________________________ Commission file number 1-3187 HOUSTON LIGHTING & POWER COMPANY (Exact name of registrant as specified in its charter) Texas 74-0694415 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1111 Louisiana Houston, Texas 77002 (Address of principal executive offices) (Zip Code)
(713) 207-1111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No . --- --- As of October 31, 1996, Houston Industries Incorporated had 234,408,647 shares of common stock outstanding, including 13,463,173 ESOP shares not deemed outstanding for financial statement purposes and excluding 15,643,527 shares held as treasury stock. As of October 31, 1996, all 1,100 shares of Houston Lighting & Power Company's common stock were held, directly or indirectly, by Houston Industries Incorporated. 2 HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 This combined Form 10-Q is separately filed by Houston Industries Incorporated and Houston Lighting & Power Company. Information contained herein relating to Houston Lighting & Power Company is filed by Houston Industries Incorporated and separately by Houston Lighting & Power Company on its own behalf. Houston Lighting & Power Company makes no representation as to information relating to Houston Industries Incorporated (except as it may relate to Houston Lighting & Power Company) or to any other affiliate or subsidiary of Houston Industries Incorporated. TABLE OF CONTENTS
Part I. Financial Information Page No. - ------ --------------------- -------- Item 1. Financial Statements Houston Industries Incorporated and Subsidiaries Statements of Consolidated Income Three Months and Nine Months Ended September 30, 1996 and 1995 3 Consolidated Balance Sheets September 30, 1996 and December 31, 1995 5 Statements of Consolidated Cash Flows Nine Months Ended September 30, 1996 and 1995 7 Statements of Consolidated Retained Earnings Three Months and Nine Months Ended September 30, 1996 and 1995 8 Notes to Consolidated Financial Statements 14 Houston Lighting & Power Company Statements of Income Three Months and Nine Months Ended September 30, 1996 and 1995 9 Balance Sheets September 30, 1996 and December 31, 1995 10 Statements of Cash Flows Nine Months Ended September 30, 1996 and 1995 12 Statements of Retained Earnings Three Months and Nine Months Ended September 30, 1996 and 1995 13 Notes to Financial Statements 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Part II. Other Information - ------- ----------------- Item 1. Legal Proceedings 23 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 26
-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- -------------------------- 1996 1995 1996 1995 ---------- ---------- ---------- --------- REVENUES: Electric utility . . . . . . . . . . . . . . . . . . $1,230,298 $1,171,789 $3,142,234 $2,896,180 Other . . . . . . . . . . . . . . . . . . . . . . . . 15,521 13,149 41,769 33,839 ---------- ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . 1,245,819 1,184,938 3,184,003 2,930,019 ---------- ---------- ---------- ---------- EXPENSES: Electric utility: Fuel . . . . . . . . . . . . . . . . . . . . . . . 319,548 269,159 817,835 691,226 Purchased power . . . . . . . . . . . . . . . . . . 71,762 50,160 224,078 166,570 Operation and maintenance . . . . . . . . . . . . . 206,747 228,913 637,561 645,092 Taxes other than income taxes . . . . . . . . . . . 63,280 62,227 191,148 197,793 Depreciation and amortization . . . . . . . . . . . . 130,909 127,148 389,767 343,630 Other operating expenses . . . . . . . . . . . . . . 18,769 25,428 65,063 64,858 ---------- ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . 811,015 763,035 2,325,452 2,109,169 ---------- ---------- ---------- ---------- OPERATING INCOME . . . . . . . . . . . . . . . . . . . . 434,804 421,903 858,551 820,850 ---------- ---------- ---------- ---------- OTHER INCOME (EXPENSE): Litigation settlements . . . . . . . . . . . . . . . (95,000) Time Warner dividend income . . . . . . . . . . . . . 10,403 9,730 31,208 9,730 Allowance for other funds used during construction . . . . . . . . . . . . . . . . 911 1,676 3,093 6,319 Other - net . . . . . . . . . . . . . . . . . . . . . 8,561 4,176 7,899 (4,737) ---------- ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . 19,875 15,582 (52,800) 11,312 INTEREST AND OTHER CHARGES: Interest on long-term debt . . . . . . . . . . . . . 68,610 75,178 208,861 204,436 Other interest . . . . . . . . . . . . . . . . . . . 11,048 2,777 22,096 21,454 Allowance for borrowed funds used during construction . . . . . . . . . . . . . . . . (583) (943) ( 1,939) (3,881) Preferred dividends of subsidiary . . . . . . . . . . 5,372 6,772 17,318 23,207 ---------- ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . 84,447 83,784 246,336 245,216 ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 370,232 353,701 559,415 586,946 INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . 130,208 117,840 190,797 193,976 ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . 240,024 235,861 368,618 392,970 DISCONTINUED OPERATIONS (NET OF INCOME TAXES): Gain on sale of cable television subsidiary . . . . . . . . . . . . . . . . . . . . 618,088 708,695 ---------- ---------- ---------- ---------- NET INCOME . . . . . . . . . . . . . . . . . . . . . . . $ 240,024 $ 853,949 $ 368,618 $1,101,665 ========== ========== ========== ==========
(continued) -3- 4 HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (CONTINUED)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ------------------------- 1996 1995 1996 1995 ---------- --------- ---------- -------- EARNINGS PER COMMON SHARE: CONTINUING OPERATIONS . . . . . . . . . . . . . . . $ 0.98 $ 0.95 $ 1.49 $ 1.59 DISCONTINUED OPERATIONS - Gain on sale of cable television subsidiary . . . . . . . . . 2.49 2.86 --------- --------- --------- -------- EARNINGS PER COMMON SHARE . . . . . . . . . . . . . $ 0.98 $ 3.44 $ 1.49 $ 4.45 ========= ========= ========= ======== DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . $ 0.375 $ 0.375 $ 1.125 $ 1.125 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (000) . . . . . . . . . . . . . . . 245,889 247,894 247,664 247,546
See Notes to Consolidated Financial Statements. -4- 5 HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS) ASSETS
September 30, December 31, 1996 1995 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT - AT COST: Electric plant: Plant in service . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,349,687 $ 12,089,490 Construction work in progress . . . . . . . . . . . . . . . . . . . . 239,034 320,040 Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,351 217,604 Plant held for future use . . . . . . . . . . . . . . . . . . . . . . 48,631 48,631 Other property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,121 105,624 ------------- ------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,998,824 12,781,389 Less accumulated depreciation and amortization . . . . . . . . . . . . . 4,237,624 3,916,540 ------------- ------------- Property, plant and equipment - net . . . . . . . . . . . . . . . 8,761,200 8,864,849 ------------- ------------- CURRENT ASSETS: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 7,698 11,779 Special deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 433 Accounts receivable - net . . . . . . . . . . . . . . . . . . . . . . . . 33,675 39,635 Accrued unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . 45,373 59,017 Time Warner dividends receivable . . . . . . . . . . . . . . . . . . . . 10,313 10,313 Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,592 59,699 Materials and supplies, at average cost . . . . . . . . . . . . . . . . . 134,053 138,007 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,651 18,562 ------------- ------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . 303,371 337,445 ------------- ------------- OTHER ASSETS: Investment in Time Warner securities . . . . . . . . . . . . . . . . . . 1,028,500 1,027,875 Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . . 593,797 613,134 Equity investments in and advances to foreign and non-regulated affiliates - net . . . . . . . . . . . . . . . . . . . . 487,995 41,395 Deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382,243 311,758 Regulatory asset - net . . . . . . . . . . . . . . . . . . . . . . . . . 220,700 228,587 Recoverable project costs - net . . . . . . . . . . . . . . . . . . . . . 202,010 232,775 Unamortized debt expense and premium on reacquired debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,026 161,788 ------------- ------------- Total other assets . . . . . . . . . . . . . . . . . . . . . . . 3,071,271 2,617,312 ------------- ------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,135,842 $ 11,819,606 ============= =============
See Notes to Consolidated Financial Statements. -5- 6 HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS) CAPITALIZATION AND LIABILITIES
September 30, December 31, 1996 1995 ------------- ------------ CAPITALIZATION: Common Stock Equity: Common stock, no par value . . . . . . . . . . . . . . . . . . . . . . $ 2,446,003 $ 2,441,790 Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . (205,901) Unearned ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . (255,627) (268,405) Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 2,046,237 1,953,672 Unrealized loss on investment in Time Warner common securities . . . . . . . . . . . . . . . . . . . . . . . . . (3,087) (3,494) ------------- ------------ Total common stock equity . . . . . . . . . . . . . . . . . . . 4,027,625 4,123,563 ------------- ------------ Preference Stock, no par value, authorized 10,000,000 shares; none outstanding Cumulative Preferred Stock of Subsidiary, no par value: Not subject to mandatory redemption . . . . . . . . . . . . . . . . 351,345 351,345 Subject to mandatory redemption . . . . . . . . . . . . . . . . . . 51,055 ------------- ------------- Total cumulative preferred stock . . . . . . . . . . . . . . . . 351,345 402,400 ------------- ------------- Long-Term Debt: Debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,051 348,913 Long-term debt of subsidiaries: First mortgage bonds . . . . . . . . . . . . . . . . . . . . . . . 2,704,848 2,979,293 Pollution control revenue bonds . . . . . . . . . . . . . . . . . . 5,000 4,426 Other . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,756 5,790 ------------- ------------- Total long-term debt . . . . . . . . . . . . . . . . . . . . . . 3,061,655 3,338,422 ------------- ------------- Total capitalization . . . . . . . . . . . . . . . . . . . . 7,440,625 7,864,385 ------------- ------------- CURRENT LIABILITIES: Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697,831 6,300 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,862 136,008 Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,031 174,925 Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,020 79,380 Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,057 98,502 Accrued liabilities to municipalities . . . . . . . . . . . . . . . . . . 30,279 20,773 Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,258 61,582 Current portion of long-term debt and preferred stock . . . . . . . . . . 419,460 379,451 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,409 58,664 ------------- ------------- Total current liabilities . . . . . . . . . . . . . . . . . . . 1,834,207 1,015,585 ------------- ------------- DEFERRED CREDITS: Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . 2,062,338 2,067,246 Unamortized investment tax credit . . . . . . . . . . . . . . . . . . . . 377,561 392,153 Fuel-related credits . . . . . . . . . . . . . . . . . . . . . . . . . . 86,655 122,063 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334,456 358,174 ------------- ------------- Total deferred credits . . . . . . . . . . . . . . . . . . . . . 2,861,010 2,939,636 ------------- ------------- COMMITMENTS AND CONTINGENCIES Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,135,842 $ 11,819,606 ============= =============
See Notes to Consolidated Financial Statements. -6- 7 HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (THOUSANDS OF DOLLARS)
Nine Months Ended September 30, ----------------------------- 1996 1995 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . $ 368,618 $ 392,970 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 389,767 343,630 Amortization of nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . 24,261 21,892 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,127) 53,855 Investment tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,592) (14,573) Allowance for other funds used during construction . . . . . . . . . . . . . (3,093) (6,319) Fuel cost (refund) and over/(under) recovery - net . . . . . . . . . . . . . (119,442) (133,484) Net cash provided by discontinued cable television operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,391 Changes in other assets and liabilities: Accounts receivable and accrued unbilled revenues . . . . . . . . . . . . 19,604 (96,091) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,061 11,248 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,328 (17,347) Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,146) (43,774) Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . 105,746 75,645 Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . (73) 10,569 Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,774 31,058 ---------- ---------- Net cash provided by operating activities . . . . . . . . . . . . . . 778,686 645,670 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Electric capital and nuclear fuel expenditures (including allowance for borrowed funds used during construction) . . . . . . . . . . . (226,783) (206,474) Non-regulated electric power project expenditures . . . . . . . . . . . . . . . (446,600) (12,388) Corporate headquarters expenditures (including capitalized interest) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,185) (78,828) Settlement of subsidiary debt in connection with sale of cable television subsidiary . . . . . . . . . . . . . . . . . . . . . . . 621,954 Net cash used in discontinued cable television operations . . . . . . . . . . . (47,601) Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,799) (9,807) ---------- ---------- Net cash provided by(used in)investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 711,367) 266,856 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (205,901) Proceeds from sale of first mortgage bonds . . . . . . . . . . . . . . . . . . . 142,988 Payment of matured bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . (150,000) Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . (51,400) (91,400) Payment of common stock dividends . . . . . . . . . . . . . . . . . . . . . . . (279,498) (278,611) Increase/(decrease)in notes payable - net . . . . . . . . . . . . . . . . . . . 691,531 (423,291) Extinguishment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . (85,263) (174,140) Net cash used in discontinued cable television operations . . . . . . . . . . . (40,798) Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,131 6,810 ---------- ---------- Net cash used in financing activities . . . . . . . . . . . . . . . . (71,400) (858,442) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . (4,081) 54,084 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 11,779 10,443 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $ 7,698 $ 64,527 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - ------------------------------------------------ Cash Payments: Interest (net of amounts capitalized) . . . . . . . . . . . . . . . . . $ 221,641 $ 261,292 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,867 61,691
See Notes to Consolidated Financial Statements. -7- 8 HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (THOUSANDS OF DOLLARS)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Balance at Beginning of Period . . . . . . . . $1,896,173 $1,283,326 $1,953,672 $1,221,221 Net Income for the Period . . . . . . . . . . . 240,024 853,949 368,618 1,101,665 ---------- ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . 2,136,197 2,137,275 2,322,290 2,322,886 Common Stock Dividends . . . . . . . . . . . . (89,960) (93,030) (276,053) (278,641) ---------- ---------- ---------- ---------- Balance at End of Period . . . . . . . . . . . $2,046,237 $2,044,245 $2,046,237 $2,044,245 ========== ========== ========== ==========
See Notes to Consolidated Financial Statements. -8- 9 HOUSTON LIGHTING & POWER COMPANY STATEMENTS OF INCOME (THOUSANDS OF DOLLARS)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ----------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- OPERATING REVENUES . . . . . . . . . . . . $ 1,230,298 $ 1,171,789 $ 3,142,234 $ 2,896,180 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Fuel . . . . . . . . . . . . . . . . . . 319,548 269,159 817,835 691,226 Purchased power . . . . . . . . . . . . 71,762 50,160 224,078 166,570 Operation . . . . . . . . . . . . . . . 153,433 169,248 453,944 464,174 Maintenance . . . . . . . . . . . . . . 53,314 59,665 183,617 180,918 Depreciation and amortization . . . . . 130,099 126,849 387,910 342,723 Income taxes . . . . . . . . . . . . . . 134,462 126,223 248,767 222,533 Other taxes . . . . . . . . . . . . . . 63,280 62,227 191,148 197,793 ----------- ----------- ----------- ----------- Total . . . . . . . . . . . . . . . 925,898 863,531 2,507,299 2,265,937 ----------- ----------- ----------- ----------- OPERATING INCOME . . . . . . . . . . . . . 304,400 308,258 634,935 630,243 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE): Litigation settlements (net of tax) . . (61,750) Allowance for other funds used during construction . . . . . . . . . 911 1,676 3,093 6,319 Other - net . . . . . . . . . . . . . . (2,787) 1,807 (8,797) (8,701) ----------- ----------- ----------- ----------- Total . . . . . . . . . . . . . . . (1,876) 3,483 (67,454) (2,382) ----------- ----------- ----------- ----------- INCOME BEFORE INTEREST CHARGES . . . . . . 302,524 311,741 567,481 627,861 ----------- ----------- ----------- ----------- INTEREST CHARGES: Interest on long-term debt . . . . . . . 54,704 62,038 167,162 184,955 Other interest . . . . . . . . . . . . . 3,042 2,715 10,811 6,639 Allowance for borrowed funds used during construction . . . . . . . . . (583) (943) (1,939) (3,881) ----------- ----------- ----------- ------------ Total . . . . . . . . . . . . . . . 57,163 63,810 176,034 187,713 ----------- ----------- ----------- ------------ NET INCOME . . . . . . . . . . . . . . . . 245,361 247,931 391,447 440,148 DIVIDENDS ON PREFERRED STOCK . . . . . . . 5,372 6,772 17,318 23,207 ----------- ----------- ----------- ------------ INCOME AFTER PREFERRED DIVIDENDS . . . . . $ 239,989 $ 241,159 $ 374,129 $ 416,941 =========== =========== =========== ============
See Notes to Financial Statements. -9- 10 HOUSTON LIGHTING & POWER COMPANY BALANCE SHEETS (THOUSANDS OF DOLLARS) ASSETS
September 30, December 31, 1996 1995 ------------- -------------- PROPERTY, PLANT AND EQUIPMENT - AT COST: Electric plant in service . . . . . . . . . . . . . . . . . . . . . . . . $ 12,349,687 $ 12,089,490 Construction work in progress . . . . . . . . . . . . . . . . . . . . . . 239,034 320,040 Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,351 217,604 Plant held for future use . . . . . . . . . . . . . . . . . . . . . . . . 48,631 48,631 ------------- ------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,866,703 12,675,765 Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,231,116 3,906,139 ------------- ------------- Property, plant and equipment - net . . . . . . . . . . . . . . . . 8,635,587 8,769,626 ------------- ------------- CURRENT ASSETS: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 73,389 75,851 Special deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 433 Accounts receivable: Affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . 2,053 2,845 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,064 23,858 Accrued unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . 45,373 59,017 Inventory: Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,592 59,699 Materials and supplies, at average cost . . . . . . . . . . . . . . . 133,599 137,584 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,480 11,876 ------------- ------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . 335,566 371,163 ------------- ------------- OTHER ASSETS: Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . . 593,797 613,134 Deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344,675 290,012 Unamortized debt expense and premium on reacquired debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,612 159,962 Regulatory asset - net . . . . . . . . . . . . . . . . . . . . . . . . . 220,700 228,587 Recoverable project costs - net . . . . . . . . . . . . . . . . . . . . . 202,010 232,775 ------------- ------------- Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,515,794 1,524,470 ------------- ------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,486,947 $ 10,665,259 ============= =============
See Notes to Financial Statements. -10- 11 HOUSTON LIGHTING & POWER COMPANY BALANCE SHEETS (THOUSANDS OF DOLLARS) CAPITALIZATION AND LIABILITIES
September 30, December 31, 1996 1995 ------------- ------------- CAPITALIZATION: Common Stock Equity: Common stock, class A; no par value . . . . . . . . . . . . . . $ 1,524,949 $ 1,524,949 Common stock, class B; no par value . . . . . . . . . . . . . . 150,978 150,978 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 2,277,465 2,150,086 ------------- ------------- Total common stock equity . . . . . . . . . . . . . . . . 3,953,392 3,826,013 ------------- ------------- Cumulative Preferred Stock: Not subject to mandatory redemption . . . . . . . . . . . . . . 351,345 351,345 Subject to mandatory redemption . . . . . . . . . . . . . . . . 51,055 ------------- ------------- Total cumulative preferred stock . . . . . . . . . . . . . 351,345 402,400 ------------- ------------- Long-Term Debt: First mortgage bonds . . . . . . . . . . . . . . . . . . . . . . 2,704,848 2,979,293 Pollution control revenue bonds . . . . . . . . . . . . . . . . 5,000 4,426 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,756 5,790 ------------- ------------- Total long-term debt . . . . . . . . . . . . . . . . . . . 2,712,604 2,989,509 ------------- ------------- Total capitalization . . . . . . . . . . . . . . . . . . . 7,017,341 7,217,922 ------------- ------------- CURRENT LIABILITIES: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 103,545 119,032 Accounts payable to affiliated companies . . . . . . . . . . . . . 5,594 6,982 Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . 266,169 192,673 Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . 65,692 70,823 Accrued liabilities to municipalities . . . . . . . . . . . . . . . 30,279 20,773 Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . 58,258 61,582 Current portion of long-term debt and preferred stock . . . . . . . 219,460 179,451 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,505 54,149 ------------- ------------- Total current liabilities . . . . . . . . . . . . . . . . 795,502 705,465 ------------- ------------- DEFERRED CREDITS: Accumulated deferred federal income taxes . . . . . . . . . . . . . 1,958,891 1,947,488 Unamortized investment tax credit . . . . . . . . . . . . . . . . . 377,561 392,153 Fuel-related credits . . . . . . . . . . . . . . . . . . . . . . . 86,655 122,063 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,997 280,168 ------------- ------------- Total deferred credits . . . . . . . . . . . . . . . . . . 2,674,104 2,741,872 ------------- ------------- COMMITMENTS AND CONTINGENCIES Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,486,947 $ 10,665,259 ============= =============
See Notes to Financial Statements. -11- 12 HOUSTON LIGHTING & POWER COMPANY STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (THOUSANDS OF DOLLARS)
Nine Months Ended September 30, --------------------------------- 1996 1995 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 391,447 $ 440,148 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 387,910 342,723 Amortization of nuclear fuel . . . . . . . . . . . . . . . . . . . . . 24,261 21,892 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 11,403 50,187 Investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . (14,592) (14,573) Allowance for other funds used during construction . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,093) (6,319) Fuel cost (refund) and over/(under) recovery - net . . . . . . . . . . (119,442) (133,484) Changes in other assets and liabilities: Accounts receivable - net . . . . . . . . . . . . . . . . . . . . . 25,230 (74,652) Materials and supplies . . . . . . . . . . . . . . . . . . . . . . 3,985 4,298 Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,107 7,281 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (16,875) (53,241) Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . 68,365 85,696 Other current liabilities . . . . . . . . . . . . . . . . . . . . . (26) 12,869 Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,885 36,884 ------------ ----------- Net cash provided by operating activities . . . . . . . . . . . 776,565 719,709 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital and nuclear fuel expenditures (including allowance for borrowed funds used during construction) . . . . . . . . . . . . . . . . . . . . . . (226,783) (291,474) Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,688) (6,906) ------------ ----------- Net cash used in investing activities . . . . . . . . . . . . . (233,471) (298,380) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from first mortgage bonds . . . . . . . . . . . . . . . . . . . 142,988 Payment of matured bonds . . . . . . . . . . . . . . . . . . . . . . . . (150,000) Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . (265,504) (271,979) Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . (51,400) (91,400) Extinguishment of long-term debt . . . . . . . . . . . . . . . . . . . . (85,263) (174,140) Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,611 6,327 ------------ ----------- Net cash used in financing activities . . . . . . . . . . . . . (545,556) (388,204) ------------ ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . (2,462) 33,125 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . 75,851 235,867 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . $ 73,389 $ 268,992 ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Payments: Interest (net of amounts capitalized) . . . . . . . . . . . . . . . . $ 172,362 $ 184,485 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,060 67,743
See Notes to Financial Statements. -12- 13 HOUSTON LIGHTING & POWER COMPANY STATEMENTS OF RETAINED EARNINGS (THOUSANDS OF DOLLARS)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- ------------------------------ 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Balance at Beginning of Period . . . . . . . . . . . . . . . $ 2,119,726 $ 2,164,391 $ 2,150,086 $ 2,153,109 Net Income for the Period . . . . . . . . 245,361 247,931 391,447 440,148 ----------- ----------- ----------- ----------- Total . . . . . . . . . . . . . . . 2,365,087 2,412,322 2,541,533 2,593,257 ----------- ----------- ----------- ----------- Deductions - Cash Dividends: Preferred . . . . . . . . . . . . . 5,372 6,772 17,318 23,207 Common . . . . . . . . . . . . . . . 82,250 82,250 246,750 246,750 ----------- ----------- ----------- ----------- Total . . . . . . . . . . . . . 87,622 89,022 264,068 269,957 ----------- ----------- ----------- ----------- Balance at End of Period . . . . . . . . $ 2,277,465 $ 2,323,300 $ 2,277,465 $ 2,323,300 =========== =========== =========== ===========
See Notes to Financial Statements. -13- 14 HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND HOUSTON LIGHTING & POWER COMPANY NOTES TO FINANCIAL STATEMENTS (1) GENERAL The interim financial statements and notes (Interim Financial Statements) contained in this Form 10-Q for the period ended September 30, 1996 (Form 10-Q) are unaudited and condensed. Certain notes and other information contained in the Combined Annual Report on Form 10-K (File Nos. 1-7629 and 1-3187) for the year ended December 31, 1995 (Form 10-K) of Houston Industries Incorporated (Company) and Houston Lighting & Power Company (HL&P) have been omitted in accordance with Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934. The information presented in the Interim Financial Statements should be read in combination with the information presented in the Form 10-K and the Combined Quarterly Reports on Form 10-Q of the Company and HL&P for the quarters ended March 31, 1996 (First Quarter 10-Q) and June 30, 1996 (Second Quarter 10-Q). On August 11, 1996, the Company, HL&P and a newly formed Delaware subsidiary of the Company (HI Merger, Inc.) entered into an Agreement and Plan of Merger (Merger Agreement) with NorAm Energy Corp. (NorAm). Subject to the satisfaction or waiver of the conditions precedent in the Merger Agreement, including receipt of all required regulatory and shareholder approvals, the Company will merge with and into HL&P, which will be renamed "Houston Industries Incorporated" (Houston). NorAm will merge with and into HI Merger, Inc. and will become a wholly owned subsidiary of Houston. Consideration for the purchase of NorAm shares will be a combination of cash and shares of Houston common stock. The transaction is valued at $3.9 billion, consisting of $2.5 billion for NorAm's common stock and equivalents and $1.4 billion of NorAm debt. For information regarding the merger, reference is made to the Combined Report on Form 8-K of the Company and HL&P dated August 11, 1996, which report is incorporated herein by reference, and the joint registration statement on Form S-4 (including unaudited pro forma financial statements giving effect to the mergers) filed by the Company and HL&P with the Securities and Exchange Commission (Reg. No. 333-11329). The Merger Agreement provides for alternative merger structures should existing administrative positions or legislative changes adversely affect the structure described above or permit structures not currently authorized by the Public Utility Holding Company Act of 1935, as amended. One of the alternative structures contemplates a non-holding company structure in which all domestic utility operations would be conducted within one publicly-held company. (2) CERTAIN CONTINGENCIES The following notes to the financial statements in the Form 10-K (as updated by the notes contained in this Form 10-Q and the notes from the First Quarter 10-Q and the Second Quarter 10-Q described below) are incorporated herein by reference: Note 1(b) (System of Accounts and Effects of Regulation), Note 1(n) (Use of Estimates), Note 2 (Jointly-Owned Nuclear Plant), Note 3 (Rate Matters), Note 4 (Investments in Foreign and Non-Regulated Entities) and Note 11 (Commitments and Contingencies). For information regarding a $62 million (after-tax) charge to earnings recorded in the first quarter of 1996 in connection with the settlement of litigation relating to the South Texas Project Electric Generating Station (South Texas Project), see Notes 3 and 7(a) to the First Quarter 10-Q and Note 3 to the Second Quarter 10-Q, which notes are incorporated herein by reference. -14- 15 For information regarding the appeal of Docket No. 6668 (an inquiry into the prudence of the planning and construction of the South Texas Project), see Note 3(b) to the Form 10-K, which note is incorporated herein by reference. For information regarding Docket No. 8425 (HL&P's 1988 rate case), see Note 5 to the Second Quarter 10-Q, which note is incorporated herein by reference. (3) DEPRECIATION The Company and HL&P compute depreciation using the straight-line method. The Company's depreciation expense for the third quarter and first nine months of 1996 was $91 million and $269 million, respectively, compared to $85 million and $258 million for the same periods in 1995. HL&P's depreciation expense for the third quarter and first nine months of 1996 was $90 million and $267 million, respectively, compared to $85 million and $257 million for the same periods in 1995. (4) HI ENERGY Certain investments of Houston Industries Energy, Inc., a wholly-owned subsidiary of the Company (HI Energy), are recorded under the equity method of accounting. The Company records HI Energy's proportionate share (based on stock ownership) of the operating results of these entities as "Other - Net" on the Company's Statements of Consolidated Income. For additional information regarding these investments, see Note 4 to the Second Quarter 10-Q, which note is incorporated herein by reference. (5) CAPITAL STOCK Company. At September 30, 1996 and December 31, 1995, the Company had 400,000,000 authorized shares of common stock, of which 240,022,296 and 248,316,710 shares, respectively, were outstanding. Earnings per common share for the Company are computed by dividing net income by the weighted average number of shares outstanding during the respective period. Outstanding common shares exclude (i) shares pledged to secure a loan to the Company's Employee Stock Ownership Plan (13,463,173 and 14,355,758 at September 30, 1996 and December 31, 1995, respectively) and (ii) shares repurchased by the Company under its common stock repurchase program and held as treasury shares (9,262,978 at September 30, 1996 and none at December 31, 1995). In September 1996, the Company announced that its board of directors had expanded from $150 million to $450 million its previous authorization to repurchase common stock. Subject to market conditions, applicable legal requirements, available cash and other factors, the additional purchases will be made in the open market or in privately negotiated transactions over a period of time to be determined by management. At the close of business on October 30, 1996, the Company announced that it had temporarily suspended all repurchases of common stock under its repurchase program, pending the Company's special shareholders meeting (currently scheduled for December 17, 1996). It is anticipated that repurchases of common stock would also be suspended during at least (i) the 45-day period prior to the closing of the mergers contemplated by the Merger Agreement and (ii) two business days prior to the period during which record holders of NorAm common stock are able to make an election between the cash or common stock consideration being offered in the merger. Future repurchases of common stock, which may not be preceded by public announcement, are subject to the discretion of management, market conditions, applicable legal requirements, available cash and other factors. As of the date of the suspension of the buyback program, the Company had repurchased a total of 15,643,527 shares of common stock for an aggregate purchase price of $352,322,274. The Company and HL&P have registered 315 million shares of Houston common stock and associated preference stock purchase rights for issuance upon consumation of the transactions contemplated under the Merger Agreement. HL&P. All issued and outstanding shares of Class A voting common stock of HL&P are held by the Company, and all issued and outstanding shares of Class B non-voting -15- 16 common stock of HL&P are held by Houston Industries (Delaware) Incorporated (HI Delaware), a wholly owned subsidiary of the Company. Earnings per share data for HL&P are not computed because all of its common stock is held by the Company and HI Delaware. On September 30, 1996 and December 31, 1995, HL&P had 10,000,000 authorized shares of preferred stock, of which 3,804,397 and 4,318,397 shares, respectively, were outstanding. For information regarding HL&P's redemption of 514,000 shares of its $9.375 cumulative preferred stock in April 1996, see Note 6 to the Second Quarter 10-Q, which note is incorporated herein by reference. (6) LONG-TERM DEBT For information regarding payment of matured HL&P bonds in January and April 1996 and the extinguishment of certain long-term debt in May 1996, see Note 7 to the Second Quarter 10-Q, which note is incorporated herein by reference. (7) SUBSEQUENT EVENT On November 7, 1996, HL&P called for redemption in the fourth quarter of 1996 all issued and outstanding shares of its variable term cumulative preferred stock, Series A, B, C and D, at the aggregate fixed liquidation value of $220 million plus accrued dividends. (8) INTERIM PERIOD RESULTS: RECLASSIFICATIONS The results of interim periods are not necessarily indicative of results expected for the year due to the seasonal nature of HL&P's business. In the opinion of management, the interim information reflects all adjustments (consisting only of normal recurring adjustments) necessary for a full presentation of the results for the interim periods. Certain amounts from the previous year have been reclassified to conform to the 1996 presentation of financial statements. Such reclassifications do not affect earnings. -16- 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in combination with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of the Form 10-K, the financial statements and notes contained in Item 8 of the Form 10-K, the First Quarter 10-Q, the Second Quarter 10-Q and the Interim Financial Statements. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements are expectations as to future economic performance and are not statements of fact. Actual results may differ materially from those projected in these statements. Important factors that could cause future results to differ include the effects of competition in the power industry, legislative and regulatory changes affecting electric utilities, fluctuations in the weather and changes in the economy as well as other factors discussed in this and the Company's and HL&P's other filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS COMPANY A summary of selected financial data for the Company and its subsidiaries is set forth below:
Three Months Ended September 30, Percent 1996 1995 Change ----------- ----------- ------ (Thousands of Dollars) Revenues . . . . . . . . . . . . . . . . . . . . . $1,245,819 $1,184,938 5 Operating Expenses . . . . . . . . . . . . . . . . 811,015 763,035 6 Operating Income . . . . . . . . . . . . . . . . . 434,804 421,903 3 Other Income (Expense) . . . . . . . . . . . . . . 19,875 15,582 28 Interest and Other Charges . . . . . . . . . . . . 84,447 83,784 1 Income Taxes . . . . . . . . . . . . . . . . . . . 130,208 117,840 10 Income from Continuing Operations . . . . . . . . 240,024 235,861 2 Gain from Discontinued Operations . . . . . . . . 618,088 --- Net Income . . . . . . . . . . . . . . . . . . . 240,024 853,949 (72)
Nine Months Ended September 30, Percent 1996 1995 Change ----------- ----------- ------ (Thousands of Dollars) Revenues . . . . . . . . . . . . . . . . . . . . . $3,184,003 $2,930,019 9 Operating Expenses . . . . . . . . . . . . . . . . 2,325,452 2,109,169 10 Operating Income . . . . . . . . . . . . . . . . . 858,551 820,850 5 Other Income (Expense) . . . . . . . . . . . . . . (52,800) 11,312 --- Interest and Other Charges . . . . . . . . . . . . 246,336 245,216 --- Income Taxes . . . . . . . . . . . . . . . . . . . 190,797 193,976 (2) Income from Continuing Operations . . . . . . . . 368,618 392,970 (6) Gain from Discontinued Operations . . . . . . . . 708,695 --- Net Income . . . . . . . . . . . . . . . . . . . 368,618 1,101,665 (67)
The Company had consolidated earnings per share of $.98 for the third quarter of 1996 compared to consolidated earnings per share of $3.44 for the third quarter of 1995. The decline in 1996 third quarter earnings was the result of a one-time $618 million, or $2.49 per share, gain in the third quarter of 1995 from the sale of the Company's cable television subsidiary. Excluding this one-time gain, consolidated earnings from continuing operations for the third quarter of 1995 were $236 million, or $.95 per share, compared to $240 million, or $.98 per share, in the third quarter of 1996. - 17 - 18 The Company's consolidated earnings for the nine months ended September 30, 1996 were $369 million, or $1.49 per share, compared to $1.1 billion, or $4.45 per share, for the comparable period in 1995. The decline in 1996 nine months earnings reflects the impact of (i) a $62 million, or $.25 per share, after-tax charge in the first quarter of 1996 relating to the settlement of South Texas Project litigation claims and (ii) a $709 million, or $2.86 per share, gain recorded in 1995 upon the sale of the Company's cable television subsidiary. Excluding the effects of these items, a $5 million, or $.02 per share, after-tax charge to earnings in the first quarter of 1996 with respect to HI Energy operations and a $6 million, or $.02 per share, after-tax charge to earnings in the second quarter of 1995 related to HL&P's rate case settlement, the Company's consolidated income from continuing operations for the first nine months of 1996 would have been $1.76 per share, and its consolidated income from continuing operations for the first nine months of 1995 would have been $1.61 per share. This increase in earnings for these periods, after adjusting for one-time items, is due primarily to increased sales at HL&P and dividend income from Time Warner Inc. (Time Warner) securities acquired by the Company as part of the sale of its cable television subsidiary. For information regarding the proposed acquisition of NorAm, see Note 1 to the Interim Financial Statements and "--Liquidity and Capital Resources" below. HL&P A summary of selected financial data for HL&P is set forth below:
Three Months Ended September 30, Percent 1996 1995 Change ------------ ---------- ------ (Thousands of Dollars) Base Revenues (1) . . . . . . . . . . . . . . $ 855,003 $ 869,949 (2) Reconcilable Fuel Revenues (2) . . . . . . . 375,295 301,840 24 Operating Expenses (3) . . . . . . . . . . . . 925,898 863,531 7 Operating Income (3) . . . . . . . . . . . . . 304,400 308,258 (1) Other Income (Expense) . . . . . . . . . . . . (1,876) 3,483 -- Interest Charges . . . . . . . . . . . . . . . 57,163 63,810 (10) Income After Preferred Dividends . . . . . . . 239,989 241,159 --
Nine Months Ended September 30, Percent 1996 1995 Change --------- ---------- ------ (Thousands of Dollars) Base Revenues (1) . . . . . . . . . . . . . $2,149,649 $2,099,961 2 Reconcilable Fuel Revenues (2) . . . . . . . 992,585 796,219 25 Operating Expenses (3) . . . . . . . . . . . 2,507,299 2,265,937 11 Operating Income (3) . . . . . . . . . . . . 634,935 630,243 1 Other Income (Expense) . . . . . . . . . . . (67,454) (2,382) -- Interest Charges . . . . . . . . . . . . . . 176,034 187,713 (6) Income After Preferred Dividends . . . . . . 374,129 416,941 (10)
____________ (1) Includes miscellaneous revenues, certain non-reconcilable fuel revenues and certain purchased power related revenues. (2) Includes revenues collected through a fixed fuel factor net of adjustment for over/under recovery. See "Operating Revenues and Sales" below. (3) Includes income taxes. In the third quarter of 1996, HL&P's income after preferred dividends was $240 million compared to $241 million in the third quarter of 1995. Income after preferred dividends for the first nine months of 1996 was $374 million compared to $417 million for the same period in 1995. The $43 million decrease in 1996 was primarily due to a $62 million after-tax charge in the first quarter of 1996 relating to the settlement of South Texas Project litigation claims. Excluding the $62 million charge, HL&P's income for the first nine months of 1996 would have been $436 million compared to $417 million. This increase primarily reflects increased kilowatt-hour (KWH) sales, as described below. - 18 - 19 OPERATING REVENUES AND SALES HL&P's third quarter 1996 base revenues decreased 2 percent from 1995 third quarter base revenues primarily due to the effects of mild weather in August and September of 1996. During this period, industrial KWH sales increased 6 percent over the third quarter of 1995, while residential KWH sales decreased 2 percent due to the weather factors described above. Residential and commercial KWH sales for the first nine months of 1996 increased 5 percent and 3 percent, respectively, compared to the same period in 1995 due to the positive effects of weather, customer growth and increased electricity usage per customer. Reconcilable fuel revenues are revenues that are collected through a fixed fuel factor. These revenues are adjusted monthly to equal certain related fuel and purchased power expenses; therefore, such revenues and expenses have no effect on earnings unless such fuel costs are determined not to be recoverable. For information regarding the recovery of fuel costs, see "Business of HL&P -- Fuel -- Recovery of Fuel Costs" in Item 1 of the Form 10-K. FUEL AND PURCHASED POWER EXPENSES HL&P's fuel expense for the third quarter and first nine months of 1996 increased $50 million and $127 million, respectively, compared to the same periods in 1995. The average cost of fuel for the third quarter and first nine months of 1996 was $1.81 and $1.85 per million British Thermal Unit (MMBtu), respectively, compared to $1.52 and $1.59 per MMBtu for the comparable 1995 periods. The fuel cost increase relates primarily to an increase in the unit cost of gas (the average cost was $2.38 and $2.29 per MMBtu for the third quarter and nine months ended 1996, respectively, compared to $1.58 and $1.65 for the comparative periods in 1995). In October 1996, HL&P filed with the Public Utility Commission of Texas for an approximately $70 million temporary fuel surcharge to reduce its cumulative fuel under-recovery balance through August 31, 1996. HL&P proposes to implement the temporary fuel surcharge, which will have no effect on earnings, over a six-month period beginning in January 1997. Purchased power expense increased $22 million and $58 million, respectively, for the third quarter and first nine months of 1996 compared to the same periods in 1995. These increases were due mainly to higher prices per KWH and an increase in electricity purchases by HL&P (reflecting, in part, higher electric sales) for the first nine months of 1996. The increase in purchased power expense for the first nine months of 1996 was partially offset by a decrease in firm capacity costs resulting from the renegotiation of a purchased power contract in April 1995. OTHER OPERATING EXPENSES Operation expense for the third quarter and the first nine months of 1996 decreased $16 million and $10 million, respectively, compared to the same periods in 1995, primarily due to decreased pension accruals resulting from a change in actuarial assumptions and a decrease in employee benefits costs. The decrease in operation expense for the first nine months of 1996 was partially offset by an increase in municipal franchise payments, which were lower during the first nine months of 1995 because of the effects of a $112 million refund of reconcilable fuel revenues in April 1995. Maintenance expense for the third quarter of 1996 decreased $6 million compared to the third quarter of 1995 primarily due to the timing of maintenance work performed. Maintenance expense for the first nine months of 1996 increased $3 million compared to the same period in 1995 primarily as the result of scheduled outages at the W. A. Parish and P. H. Robinson generation stations. Depreciation and amortization expense increased $3 million and $45 million during the third quarter and first nine months of 1996, respectively, compared to the same periods in 1995. These increases reflect HL&P's decision to write down a portion of its investment in the South Texas Project ($12.5 million for the third quarter of 1996 and $37.5 million for the first nine months of 1996 compared to $21.4 million and $28.5 million, respectively, for the same period in 1995) as permitted under the settlement of HL&P's 1995 rate case (Docket No. 12065). In addition, HL&P began amortization in January 1996 of its investment in certain lignite reserves at a rate of approximately $22 million a year (amounting to $5.5 million in the third quarter of 1996 and $16.4 million for the first nine months of 1996). The increase in depreciation and amortization expense also included amortization of HL&P's 1995 early retirement program and increased plant depreciation. - 19 - 20 For information regarding the settlement of HL&P's most recent rate case and its ongoing effects on HL&P's results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Factors Affecting Future Earnings of the Company and HL&P - Rate Matters and Other Contingencies" in Item 7 of the Form 10-K and Note 3(a) to the financial statements in the Form 10-K. Taxes other than income taxes decreased $7 million for the first nine months of 1996 compared to the same period in 1995 primarily due to lower accruals of estimated property tax assessments. LIQUIDITY AND CAPITAL RESOURCES COMPANY GENERAL The Company's net cash provided by operating activities for the first nine months of 1996 totaled $779 million. Net cash used in the Company's investing activities for the first nine months of 1996 totaled $711 million, primarily due to the Company's equity investments in foreign utilities as well as electric capital and nuclear fuel expenditures. The Company's financing activities for the first nine months of 1996 resulted in a net cash outflow of $71 million. The Company's primary financing activities were the payment of matured HL&P bonds, the payment of dividends on the Company's common stock, the redemption of HL&P preferred stock, the purchase of common stock under the Company's repurchase program and the extinguishment of long-term debt funded by an increase in commercial paper. SOURCES OF CAPITAL RESOURCES AND LIQUIDITY As of September 30, 1996, the Company had approximately $697 million of commercial paper outstanding, which is supported by bank credit facilities of $1.5 billion (exclusive of bank credit facilities of subsidiaries). Prior to the end of the quarter, the Company increased its aggregate borrowing capacity under existing facilities from $750 million to $1.5 billion primarily to support purchases of common stock under the Company's repurchase program, as described below, and to fund in the fourth quarter of 1996 the retirement of $200 million of the Company's debentures. During the third quarter of 1996, the Company purchased 8,067,078 shares of its common stock for an aggregate purchase price (including commissions) of $179 million. During the first nine months of 1996, the Company purchased a total of 9,262,978 shares of common stock for an aggregate purchase price (including commissions) of $206 million. The purchases were financed with short-term borrowings. For additional information on the Company's common stock repurchase program (including purchases of common stock subsequent to September 30, 1996, and the temporary suspension of the repurchase program), see Note 5 to the Interim Financial Statements. In the fourth quarter of 1996, $200 million of the Company's outstanding debentures will mature. Based on current market conditions, the Company intends to repay the debentures using short-term borrowings under its existing credit facilities. The $200 million in debentures is recorded as current portion of long-term debt and preferred stock on the Company's Consolidated Balance Sheet. After giving effect to the retirement, a total of $350 million in debentures will remain outstanding. On August 11, 1996, the Company, HL&P and HI Merger, Inc., a newly formed Delaware subsidiary of the Company, entered into an Agreement and Plan of Merger with NorAm. Subject to the satisfaction or waiver of the conditions precedent in the Merger Agreement, including receipt of all required regulatory and shareholder approvals, the Company will merge with and into HL&P, which will be renamed "Houston Industries Incorporated" (Houston). NorAm will merge with and into HI Merger, Inc. and will become a wholly owned subsidiary of Houston. Consideration for the purchase of the NorAm shares will be a combination of cash and shares of Houston common stock. The transaction is valued at $3.9 billion, consisting of $2.5 billion for NorAm's common stock and equivalents and $1.4 billion of NorAm debt. For additional information regarding the merger, see Note 1 to the Interim Financial Statements. The Company currently contemplates that the cash portion of the consideration for the NorAm merger (approximately $1.25 billion) will be funded through bank borrowings under new bank credit - 20 - 21 facilities (Bank Facilities) to be arranged by Houston or by a newly formed finance subsidiary of Houston (Borrower) with a group of commercial banks. As of the date hereof, the structure, terms and provisions of the Bank Facilities are being negotiated with prospective lenders and have not yet been finalized. Thus, depending on the outcome of such negotiations, the structure, terms and provisions of the Bank Facilities as described below may change. The Bank Facilities are expected to bear interest at a rate based upon either the London Interbank Offered Rate plus a margin, a base rate plus a margin or at a rate determined through a bidding process. The borrowings may be secured by liens on or first priority security interests in assets, which may include (i) the shares of common stock of NorAm held by Houston or its affiliates, (ii) the shares of common and preferred stock of Time Warner currently owned by the Company, (iii) the capital stock of subsidiaries of the Borrower, to the extent permitted by legal and contractual limitations and (iv) intercompany notes evidencing any loans made by the Borrower to Houston or its direct or indirect subsidiaries. The obligations under the Bank Facilities are not expected to be secured by the utility properties of HL&P or NorAm. In connection with the Bank Facilities, Houston may issue preference stock to, or enter into support arrangements for the benefit of, the Borrower (with calculations, definitions and payment mechanics to be agreed upon). Houston may also agree to certain covenants, including certain limitations on the payment of dividends on or the repurchase of Houston's common stock. The net proceeds of any disposition of the Time Warner stock may be used to prepay borrowings under the Bank Facilities, subject to a corresponding release by the banks of their security interest in the Time Warner stock to the extent of any such prepayment. The Bank Facilities will also contain customary covenants and default provisions applicable to the Borrower and its subsidiaries, including the ability of the Borrower and its subsidiaries to, among other things, incur additional indebtedness (other than certain permitted indebtedness), create liens and make investments or loans. RATIOS OF EARNINGS TO FIXED CHARGES The Company's ratios of earnings to fixed charges for the nine and twelve months ended September 30, 1996 were 3.17 and 2.65, respectively. The Company believes that the ratio for the nine-month period is not necessarily indicative of the ratio for a twelve-month period due to the seasonal nature of HL&P's business. LIQUIDITY AND CAPITAL RESOURCES HL&P GENERAL HL&P's net cash provided by operating activities for the first nine months of 1996 totaled $777 million. Net cash used in HL&P's investing activities for the first nine months of 1996 totaled $233 million. HL&P's capital and nuclear fuel expenditures (excluding allowance for funds used during construction) for the first nine months of 1996 totaled $225 million out of the $387 million annual budget. HL&P's financing activities for the first nine months of 1996 resulted in a net cash outflow of approximately $546 million attributable to the payment of dividends, the extinguishment of long-term debt, the repayment of matured long-term debt and the redemption of preferred stock. SOURCES OF CAPITAL RESOURCES AND LIQUIDITY As of September 30, 1996, HL&P had no commercial paper outstanding. HL&P's commercial paper borrowings are supported by a bank credit facility of $400 million. On November 7, 1996, HL&P called for redemption in the fourth quarter of 1996 all four series of its variable term preferred stock having an aggregate liquidation price of $220 million. HL&P intends to (i) repay at maturity $40 million aggregate principal amount of its 5 1/4% series first mortgage bonds and $150 million of its 7 5/8% series first mortgage bonds in the first quarter of 1997 and (ii) make a $25.7 million sinking fund payment applicable to its $9.375 series preferred stock in April 1997. During the fourth quarter of 1996, HL&P intends to increase its borrowing capacity under - 21 - 22 its bank facility to, among other things, anticipate these obligations. RATIOS OF EARNINGS TO FIXED CHARGES HL&P's ratios of earnings to fixed charges for the nine and twelve months ended September 30, 1996 were 4.27 and 3.69, respectively. HL&P's ratios of earnings to fixed charges and preferred dividends for the nine and twelve months ended September 30, 1996 were 3.73 and 3.21, respectively. HL&P believes that the ratios for the nine-month period are not necessarily indicative of the ratios for a twelve-month period due to the seasonal nature of HL&P's business. - 22 - 23 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. For a description of legal proceedings affecting the Company and its subsidiaries, including HL&P and HI Energy, reference is made to the information set forth in Item 3 of the Form 10-K and Notes 2(b), 3 and 4(c) to the financial statements in the Form 10-K, which information, as qualified and updated by the description of developments in regulatory and litigation matters contained in Note 7(a) to the financial statements in the First Quarter 10-Q and Note 3 of the Notes to the Second Quarter 10-Q is incorporated herein by reference. On October 17, 1996, the Court of Appeals for the First District of Texas affirmed a district court ruling that certified a lawsuit filed by the Cities of Wharton, Galveston and Pasadena on behalf of certain incorporated municipalities as a class action. The lawsuit seeks payment of additional unpaid franchise fees allegedly owed by HL&P to various municipalities pursuant to municipal franchise agreements. For additional information regarding the lawsuit, reference is made to Item 1, Part II of the Second Quarter 10-Q, which information is incorporated herein by reference. The plaintiffs have not specified damages in their pleadings; however, the plaintiffs' testimony alleges that their damages could be as high as $220 million. Although the Company and HL&P believe that the plaintiffs' claims are without merit and intend to vigorously contest the lawsuit, no assurance can be given at this time as to the ultimate outcome of this matter. On August 14, 1996, an action styled Shaw v. NorAm Energy Corp., et al. was filed in the District Court of Harris County, Texas by a purported NorAm stockholder against NorAm, certain of its officers and directors and the Company to enjoin the merger or to rescind the merger and/or to recover damages in the event that the NorAm merger is consummated. The complaint alleges, among other things, that the merger consideration is inadequate, that NorAm's Board of Directors breached its fiduciary duties and that the Company aided and abetted such breaches of fiduciary duties. In addition, the plaintiff seeks certification as a class action. The Company believes that the claims are without merit and intends to vigorously defend against the lawsuit. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. (Exhibits designated by an asterisk (*) are incorporated herein by reference to a separate filing as indicated.) Houston Industries Incorporated: *Exhibit 2(a) - Agreement and Plan of Merger among the Company, HL&P, HI Merger, Inc. and NorAm dated August 11, 1996 (incorporated by reference to Exhibit 2 to the Company and HL&P's Report on Form 8-K dated August 11, 1996). *Exhibit 2(b) - Amendment to Agreement and Plan of Merger among the Company, HL&P, HI Merger, Inc. and NorAm dated August 11, 1996 (incorporated by reference to Exhibit 2(c) to the Company's Registration Statement on Form S-4 (Reg. No. 333-11329)). - 23 - 24 *Exhibit 10(a) - Form of Severance Agreements dated December 22, 1994, between the Company and the following directors of HL&P: Jack D. Greenwade, Lee W. Hogan, Stephen W. Naeve, Stephen C. Schaeffer and Robert L. Waldrop (incorporated by reference to Exhibit 10(u) to Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-7629). *Exhibit 10(b) - Supplemental Pension Agreement dated July 17, 1996, between the Company and Lee W. Hogan (incorporated by reference to Exhibit 10(aa) to the Company's Registration Statement on Form S-4 (Reg. No. 333-11329). Exhibit 11 - Computation of Earnings per Common Share and Common Equivalent Share. Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges. Exhibit 27 - Financial Data Schedule. Exhibit 99(a) - Notes 1(b), 2, 3, 4 and 11 to the Financial Statements included on pages 57, 59 through 64 and 73 through 74 of the Form 10-K. Exhibit 99(b) - Notes 3 and 7(a) to the Financial Statements included on pages 13, 14 and 15 of the First Quarter Form 10-Q. Exhibit 99(c) - Notes 3, 4, 5, 6 and 7 to the Financial Statements included on pages 14 through 16 of the Second Quarter Form 10-Q. Houston Lighting & Power Company: *Exhibit 3(a) - Articles of Amendment to the Articles of Incorporation of HL&P dated August 9, 1996 (incorporated by reference to Exhibit 3(b) to HL&P's Registration Statement on Form S-4 (Reg. No. 333-11329)). *Exhibit 3(b) - Form of Articles of Amendment to the Articles of Incorporation of HL&P (incorporated by reference to Exhibit 3(c) to HL&P's Registration Statement on Form S-4 (Reg. No. 333-11329)). Exhibit 10 - Employment Agreement dated September 16, 1996 between HL&P and Charles R. Crisp. Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Fixed Charges and Preferred Dividends. Exhibit 27 - Financial Data Schedule. Exhibit 99(a) - Notes 1(b), 2, 3, 4 and 11 to the Financial Statements included on pages 57, 59 through 64 and 73 through 74 of the Form 10-K. Exhibit 99(b) - Notes 3 and 7(a) to the Financial Statements included on pages 13, 14 and 15 of the First Quarter Form 10-Q. - 24 - 25 Exhibit 99(c) - Notes 3, 5, 6 and 7 to the Financial Statements included on pages 14, 15 and 16 of the Second Quarter Form 10-Q. (b) Reports on Form 8-K. Report on Form 8-K of the Company and HL&P dated August 11, 1996. - 25 - 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOUSTON INDUSTRIES INCORPORATED (Registrant) /s/ Mary P. Ricciardello ------------------------------------- Mary P. Ricciardello Vice President and Comptroller (Principal Accounting Officer) Date: November 13, 1996 27 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOUSTON LIGHTING & POWER COMPANY (Registrant) /s/ Mary P. Ricciardello ------------------------------------ Mary P. Ricciardello Vice President and Comptroller (Principal Accounting Officer) Date: November 13, 1996 28 INDEX TO EXHIBITS Houston Industries Incorporated: *Exhibit 2(a) - Agreement and Plan of Merger among the Company, HL&P, HI Merger, Inc. and NorAm dated August 11, 1996 (incorporated by reference to Exhibit 2 to the Company and HL&P's Report on Form 8-K dated August 11, 1996). *Exhibit 2(b) - Amendment to Agreement and Plan of Merger among the Company, HL&P, HI Merger, Inc. and NorAm dated August 11, 1996 (incorporated by reference to Exhibit 2(c) to the Company's Registration Statement on Form S-4 (Reg. No. 333-11329)). *Exhibit 10(a) - Form of Severance Agreements dated December 22, 1994, between the Company and the following directors of HL&P: Jack D. Greenwade, Lee W. Hogan, Stephen W. Naeve, Stephen C. Schaeffer and Robert L. Waldrop (incorporated by reference to Exhibit 10(u) to Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-7629). *Exhibit 10(b) - Supplemental Pension Agreement dated July 17, 1996, between the Company and Lee W. Hogan (incorporated by reference to Exhibit 10(aa) to the Company's Registration Statement on Form S-4 (Reg. No. 333-11329). Exhibit 11 - Computation of Earnings per Common Share and Common Equivalent Share. Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges. Exhibit 27 - Financial Data Schedule. Exhibit 99(a) - Notes 1(b), 2, 3, 4 and 11 to the Financial Statements included on pages 57, 59 through 64 and 73 through 74 of the Form 10-K. Exhibit 99(b) - Notes 3 and 7(a) to the Financial Statements included on pages 13, 14 and 15 of the First Quarter Form 10-Q. Exhibit 99(c) - Notes 3, 4, 5, 6 and 7 to the Financial Statements included on pages 14 through 16 of the Second Quarter Form 10-Q. Houston Lighting & Power Company: *Exhibit 3(a) - Articles of Amendment to the Articles of Incorporation of HL&P dated August 9, 1996 (incorporated by reference to Exhibit 3(b) to HL&P's Registration Statement on Form S-4 (Reg. No. 333-11329)). *Exhibit 3(b) - Form of Articles of Amendment to the Articles of Incorporation of HL&P (incorporated by reference to Exhibit 3(c) to HL&P's Registration Statement on Form S-4 (Reg. No. 333-11329)). Exhibit 10 - Employment Agreement dated September 16, 1996 between HL&P and Charles R. Crisp. Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Fixed Charges and Preferred Dividends. Exhibit 27 - Financial Data Schedule. Exhibit 99(a) - Notes 1(b), 2, 3, 4 and 11 to the Financial Statements included on pages 57, 59 through 64 and 73 through 74 of the Form 10-K. Exhibit 99(b) - Notes 3 and 7(a) to the Financial Statements included on pages 13, 14 and 15 of the First Quarter Form 10-Q. Exhibit 99(c) - Notes 3, 5, 6 and 7 to the Financial Statements included on pages 14, 15 and 16 of the Second Quarter Form 10-Q. EX-11 2 COMPUTATION OF EARNINGS PER SHARE 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)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- -------------------------------- 1996 1995 1996 1995 -------------- -------------- -------------- -------------- Primary Earnings Per Share: (1) Weighted average shares of common stock outstanding . . . . 245,888,549 247,894,174 247,663,731 247,545,698 (2) Effect of issuance of shares from assumed exercise of stock options (treasury stock method) . . . . . 18,884 11,142 24,186 (10,400) -------------- -------------- -------------- -------------- (3) Weighted average shares . . . . . 245,907,433 247,905,316 247,687,917 247,535,298 ============== ============== ============== ============== (4) Net income . . . . . . . . . . . $ 240,024 $ 853,949 $ 368,618 $ 1,101,665 (5) Primary earnings per share (line 4/line 3) . . . . . . . . . $ 0.98 $ 3.44 $ 1.49 $ 4.45 Fully Diluted Earnings Per Share: (6) Weighted average shares per computation on line 3 above . . . 245,907,433 247,905,316 247,687,917 247,535,298 (7) Shares applicable to options included on line 2 above . . . . (18,884) (11,142) (24,186) 10,400 (8) Dilutive effect of stock options based on the average price for the period or quarter- end price, whichever is higher, of $22.63 and $22.06 for the third quarter of 1996 and 1995, respectively, and $22.88 and $22.06 for the first nine months of 1996 and 1995, respectively (treasury stock method) . . . . . 18,884 17,220 24,186 17,220 -------------- -------------- -------------- -------------- (9) Weighted average shares . . . . . 245,907,433 247,911,394 247,687,917 247,562,918 ============== ============== ============== ============== (10) Net income . . . . . . . . . . . $ 240,024 $ 853,949 $ 368,618 $ 1,101,665 (11) Fully diluted earnings per share (line 10/line 9) . . . . . $ 0.98 $ 3.44 $ 1.49 $ 4.45
Notes: These calculations are submitted in accordance with Regulation S-K item 601(b) (11) although it is not required for financial presentation disclosure per footnote 2 to paragraph 14 of Accounting Principles Board (APB) Opinion No. 15 because it does not meet the 3% dilutive test. EX-12.I 3 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 1 Exhibit 12 HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (THOUSANDS OF DOLLARS)
Nine Twelve Months Ended Months Ended September 30, 1996 September 30, 1996 ------------------ ------------------ Fixed Charges as Defined: (1) Interest on Long-Term Debt . . . . . . . . . . . $ 208,861 $ 283,917 (2) Other Interest . . . . . . . . . . . . . . . . . 22,096 22,227 (3) Preferred Dividends Factor of Subsidiary . . . . . . . . . . . . . . . 26,323 36,821 (4) Interest Component of Rentals Charged to Operating Expense . . . . . . . . 779 1,196 ------------------ ------------------ (5) Total Fixed Charges . . . . . . . . . . . . . . $ 258,059 $ 344,161 ================== ================== Earnings as Defined: (6) Income from Continuing Operations Before Cumulative Effect of Change in Accounting . . . . . . . . . . . . $ 368,618 $ 373,048 (7) Income Taxes for Continuing Operations Before Cumulative Effect of Change in Accounting . . . . . . . 190,797 196,376 (8) Total Fixed Charges (line 5) . . . . . . . . . . 258,059 344,161 ------------------ ------------------ (9) Income from Continuing Operations Before Cumulative Effect of Change in Accounting, Income Taxes and Fixed Charges . . . . . . . . . . $ 817,474 $ 913,585 ================== ================== Preferred Dividends Factor of Subsidiary: (10) Preferred Stock Dividends of Subsidiary . . . . . . . . . . . . . . . . . $ 17,318 $ 24,066 (11) Ratio of Pre-Tax Income from Continuing Operations to Income from Continuing Operations (line 6 plus line 7 divided by line 6) . . . . . . . . . . . . . . . . . 1.52 1.53 ------------------ ------------------ (12) Preferred Dividends Factor of Subsidiary (line 10 times line 11) . . . . . . . . . . . . . . . . . . $ 26,323 $ 36,821 ================== ================== Ratio of Earnings to Fixed Charges (line 9 divided by line 5) . . . . . . . . . . . . . . 3.17 2.65
EX-27.A 4 FINANCIAL DATA SCHEDULE
UT 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. 0000202131 HOUSTON INDUSTRIES INCORPORATED 1,000 9-MOS DEC-31-1996 SEP-30-1996 PER-BOOK 8,635,587 1,642,108 303,371 1,554,776 0 12,135,842 1,981,388 0 2,046,237 4,027,625 0 351,345 3,059,620 0 1,128 696,703 390,130 25,700 2,035 3,630 3,577,926 12,135,842 3,184,003 190,797 2,325,452 2,325,452 858,551 (52,800) 805,751 229,018 385,936 17,318 368,618 276,053 167,122 778,686 1.49 1.49 Total annual interest charges on all bonds for year-to-date 9/30/96.
EX-99.A.I 5 NOTES 1(B), 2, 3, 4 AND 11 TO FINANCIAL STATEMENTS 1 Exhibit 99(a) HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Certain investments in joint ventures or other entities in which the Company or its subsidiaries have a 50 percent or less interest are recorded using the equity method or the cost method. For additional information regarding investments and advances, see Notes 1(j) and 4. All significant intercompany transactions and balances are eliminated in consolidation. (B) SYSTEM OF ACCOUNTS AND EFFECTS OF REGULATION. HL&P, the principal subsidiary of the Company, maintains its accounting records in accordance with the FERC Uniform System of Accounts. HL&P's accounting practices are subject to regulation by the Utility Commission, which has adopted the FERC Uniform System of Accounts. As a result of its regulated status, HL&P follows the accounting policies set forth in SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," which allows a utility with cost-based rates to defer certain costs in concert with rate recovery that would otherwise be expensed. In accordance with this statement, HL&P has deferred certain costs pursuant to rate actions of the Utility Commission and is recovering or expects to recover such costs in electric rates charged to customers. The regulatory assets are included in other assets on the Company's Consolidated and HL&P's Balance Sheets. The regulatory liabilities are included in deferred credits on the Company's Consolidated and HL&P's Balance Sheets. The following is a list of significant regulatory assets and liabilities reflected on the Company's Consolidated and HL&P's Balance Sheets:
December 31, 1995 ----------------- (Millions of Dollars) Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . . $613 Malakoff investment . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Regulatory tax asset - net . . . . . . . . . . . . . . . . . . . . . . . 229 Unamortized loss on reacquired debt . . . . . . . . . . . . . . . . . . 121 Deferred debits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Unamortized investment tax credit. . . . . . . . . . . . . . . . . . . . (392) Accumulated deferred income taxes - regulatory tax asset . . . . . . . . (80)
If as a result of changes in regulation or competition, HL&P's ability to recover these assets and/or liabilities would not be assured, then pursuant to SFAS No. 71 and to the extent that such regulatory assets or liabilities ultimately were determined not to be recoverable, HL&P would be required to write off or write down such assets or liabilities. (C) ELECTRIC PLANT. HL&P capitalizes at cost all additions to electric plant, betterments to existing property and replacements of units of property. Cost includes the original cost of contracted services, direct labor and material, indirect charges for engineering supervision and similar overhead items and AFUDC. Customer payments for construction reduce additions to electric 57 2 preferred stock. The Company has recorded its investment in these securities at a combined fair value of approximately $1 billion on the Company's Consolidated Balance Sheet. Investment in the Time Warner common stock is considered an "available-for-sale" equity security under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Consequently, the Company excludes unrealized net changes in the fair value of Time Warner common stock (exclusive of dividends and write downs) from earnings and, until realized, reports such changes as a net amount in the shareholders' equity section of the balance sheet. Investment in the Time Warner convertible preferred stock (which is not subject to the requirements of SFAS No. 115, since it is a non-publicly traded equity security) is accounted for under the cost method. The securities held in the Company's nuclear decommissioning trust are classified as "available-for-sale" and, in accordance with SFAS No. 115, are reported at fair value which at December 31, 1995 approximates cost ($44.5 million as of December 31, 1995) on the Company's Consolidated and HL&P's Balance Sheets under deferred debits and deferred credits. Any unrealized gains or losses are accounted for in accordance with SFAS No. 71 as a regulatory asset/liability and reported on the Company's Consolidated and HL&P's Balance Sheets as a deferred debit. (K) FUEL STOCK. Gas inventory (at average cost) was $12.1 million at December 31, 1995. Coal, lignite, and oil inventory balances recorded at last-in, first-out, were $22.2 million, $12.1 million, and $13.3 million, respectively. (L) RECLASSIFICATION. Certain amounts from the previous years have been reclassified to conform to the 1995 presentation of financial statements. Such reclassifications do not affect earnings. (M) NATURE OF OPERATIONS. The Company is a holding company operating principally in the electric utility business. HL&P is engaged in the generation, transmission, distribution and sale of electric energy. HL&P's service area covers a 5,000 square mile area in the Texas Gulf Coast, including Houston. Another subsidiary of the Company, HI Energy, participates in domestic and foreign power generation projects and invests in the privatization of foreign electric utilities. The business and operations of HL&P account for substantially all of the Company's income from continuing operations and common stock equity. (N) USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) JOINTLY-OWNED NUCLEAR PLANT (A) HL&P INVESTMENT. HL&P is the project manager (and one of four co-owners) of the South Texas Project, which consists of two 1,250 megawatt nuclear generating units. HL&P has a 30.8 percent interest in the project and bears a corresponding share of capital and operating costs associated with the project. As of December 31, 1995, HL&P's investment in the South Texas Project and in nuclear fuel, including AFUDC, was $2.0 billion (net of $439 million plant accumulated depreciation) and $75.1 million (net of $142 million nuclear fuel amortization), respectively. (B) REGULATORY PROCEEDINGS AND LITIGATION. Between June 1993 and February 1995, the South Texas Project was listed on the United States Nuclear Regulatory Commission's (NRC) "watch list" of plants with weaknesses that warrant increased NRC regulatory attention. In February 1995, the NRC removed the South Texas Project from its "watch list." 59 3 In February 1994, the City of Austin (Austin), one of the four co-owners of the South Texas Project, filed suit against HL&P (Austin Litigation). Trial of that suit, which began in March 1996 is pending in the 11th District Court of Harris County, Texas. Austin alleges that the outages at the South Texas Project from early 1993 to early 1994 were due to HL&P's failure to perform obligations it owed to Austin under the Participation Agreement among the four co-owners of the South Texas Project (Participation Agreement). Austin also asserts that HL&P breached certain undertakings voluntarily assumed by HL&P on behalf of the co- owners under the terms of the NRC Operating Licenses and Technical Specifications relating to the South Texas Project. Under amended pleadings in the Austin Litigation, Austin claims it suffered damages of at least $120 million due to increased operating and maintenance costs, the cost of replacement power and lost profits on wholesale transactions that did not occur. Although HL&P and the Company do not believe there is merit to Austin's claims, no assurance can be given as to the ultimate outcome of this matter. In May 1994, the City of San Antonio (San Antonio), another co-owner of the South Texas Project, intervened in the litigation filed by Austin against HL&P and asserted claims similar to those asserted by Austin. Although San Antonio has not specified the damages sought in its complaint, expert reports filed in the litigation have indicated that San Antonio's claims may be in excess of $228 million. On February 29,1996, San Antonio announced that it was taking a nonsuit on its claims in the Austin Litigation in order to pursue settlement discussions with HL&P concerning those claims, as well as separate claims for unspecified damages previously asserted by San Antonio against HL&P with respect to the construction of the South Texas Project, which construction claims are the subject of a request for arbitration under the Participation Agreement. In order to preserve its litigation claims pending the outcome of settlement negotiations, San Antonio refiled its lawsuit in the 152nd District Court of Harris County, Texas. While neither the Company nor HL&P believes there is merit to San Antonio's claims either in the pending litigation or in the arbitration proceeding, there can be no assurance as to the ultimate outcome of those matters, nor can there be an assurance as to the ultimate outcome of the settlement discussions. If a settlement is reached, it is possible, among other things, that such resolution could require in the near term a charge to earnings from continuing operations, but it is not anticipated that any such resolution would be material to the Company's or HL&P's financial position, liquidity or ability to meet their respective cash requirements stemming from operating, capital expenditures and financing activities. (C) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas Project maintain nuclear property and nuclear liability insurance coverage as required by law and periodically review available limits and coverage for additional protection. The owners of the South Texas Project currently maintain $2.75 billion in property damage insurance coverage which is above the legally required minimum, but is less than the total amount of insurance currently available for such losses. This coverage consists of $500 million in primary property damage insurance and excess property insurance in the amount of $2.25 billion. Under the excess property insurance (which became effective in November 1995), HL&P and the other owners of the South Texas Project are subject to assessments, the maximum aggregate assessment under current policies being $25.8 million during any one policy year. The application of the proceeds of such property insurance is subject to the priorities established by the NRC regulations relating to the safety of licensed reactors and decontamination operations. Pursuant to the Price Anderson Act (Act), the maximum liability to the public for owners of nuclear power plants, such as the South Texas Project, was $8.92 billion as of December 1995. Owners are required under the Act to insure their liability for nuclear incidents and protective evacuations by maintaining the maximum amount of financial protection available from private sources and by maintaining secondary financial protection through an industry retrospective rating plan. The 60 4 assessment of deferred premiums provided by the plan for each nuclear incident is up to $75.5 million per reactor subject to indexing for inflation, a possible 5 percent surcharge (but no more than $10 million per reactor per incident in any one year) and a 3 percent state premium tax. HL&P and the other owners of the South Texas Project currently maintain the required nuclear liability insurance and participate in the industry retrospective rating plan. There can be no assurance that all potential losses or liabilities will be insurable, or that the amount of insurance will be sufficient to cover them. Any substantial losses not covered by insurance would have a material effect on HL&P's and the Company's financial condition and results of operations. (D) NUCLEAR DECOMMISSIONING. In accordance with the Rate Case Settlement, HL&P contributes $14.8 million per year to a trust established to fund HL&P's share of the decommissioning costs for the South Texas Project. For a discussion of securities held in the Company's nuclear decommissioning trust, see Note 1(j). In May 1994, an outside consultant estimated HL&P's portion of decommissioning costs to be approximately $318 million (1994 dollars). The consultant's calculation of decommissioning costs for financial planning purposes used the DECON methodology (prompt removal/dismantling), one of the three alternatives acceptable to the NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration of their 40-year operating licenses. While the current and projected funding levels presently exceed minimum NRC requirements, no assurance can be given that the amounts held in trust will be adequate to cover the actual decommissioning costs of the South Texas Project. Such costs may vary because of changes in the assumed date of decommissioning, changes in regulatory and accounting requirements, changes in technology and changes in costs of labor, materials and equipment. (3) RATE MATTERS The Utility Commission has original (or in some cases appellate) jurisdiction over HL&P's electric rates and services. In Texas, Utility Commission orders may be appealed to a District Court in Travis County, and from that Court's decision an appeal may be taken to the Court of Appeals for the 3rd District at Austin (Austin Court of Appeals). Discretionary review by the Supreme Court of Texas may be sought from decisions of the Austin Court of Appeals. In the event that the courts ultimately reverse actions of the Utility Commission, such matters are remanded to the Utility Commission for action in light of the courts' orders. On remand, the Utility Commission's action could range from granting rate relief substantially equal to the rates previously approved to reducing the revenues to which HL&P was entitled during the time the applicable rates were in effect, which could require a refund to customers of amounts collected pursuant to such rates. (A) 1995 RATE CASE. In August 1995, the Utility Commission unanimously approved the Rate Case Settlement, which resolved HL&P's 1995 rate case (Docket No. 12065) as well as a separate proceeding (Docket No. 13126) regarding the prudence of operation of the South Texas Project. Subject to certain changes in existing regulation or legislation, the Rate Case Settlement precludes HL&P from seeking rate increases until after December 31, 1997. HL&P began recording the effects of the Rate Case Settlement in the first quarter of 1995. The Rate Case Settlement reduced HL&P's earnings for 1995 by approximately $100 million. 61 5 The after-tax effects in 1995 of the Rate Case Settlement are as follows:
Year Ended December 31, 1995 ----------------- (Millions of Dollars) Reduction in base revenues . . . . . . . . . . . . . . . . . . . $ 52 South Texas Project write-down . . . . . . . . . . . . . . . . . 33 One-time write-off of mine-related costs . . . . . . . . . . . . 6 Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . 9 ---- Total Rate Case Settlement effect on net income . . . . $100 ====
The Rate Case Settlement gives HL&P the option to write down up to $50 million ($33 million after-tax) per year of its investment in the South Texas Project through December 31, 1999. The parties to the Rate Case Settlement agreed that any such write-down will be treated as a reasonable and necessary expense during routine reviews of HL&P's earnings and any rate review proceeding initiated against HL&P. In accordance with the Rate Case Settlement, HL&P recorded a $50 million pre-tax write-down in 1995 of its investment in the South Texas Project which is included in the Company's Statements of Consolidated Income and HL&P's Statements of Income in depreciation and amortization expense. In 1995, HL&P also began accruing its share of decommissioning expense for the South Texas Project at an annual rate of $14.8 million (a $9 million per year increase over 1994). As required by the Rate Case Settlement, HL&P will begin in 1996 to amortize its $153 million investment in certain lignite reserves associated with the canceled Malakoff project. These amortizations will equal approximately $22 million per year. As a result of this additional amortization, HL&P's remaining investment in Malakoff ($233 million at December 31, 1995) will be fully amortized no later than December 31, 2002. During the second quarter of 1995, HL&P recorded a one-time pre-tax charge of $9 million incurred in connection with certain Malakoff mine-related costs that were not previously recorded and were not recoverable under the terms of the Rate Case Settlement. Issues concerning the prudence of expenditures related to Malakoff were deferred until a subsequent rate case. In Docket No. 8425, the Utility Commission allowed recovery of certain costs associated with Malakoff by allowing HL&P to amortize these costs over ten years. Such recoverable costs are not included in rate base and, as a result, no return on investment is being earned during the recovery period. The $28 million unamortized balance of these costs at December 31, 1995 is included in the $233 million discussed above and is to be amortized over the following 54 months. In anticipation of the Rate Case Settlement, the Company and HL&P recorded in the fourth quarter of 1994 a one-time, pre-tax charge of approximately $70 million to reconcilable fuel revenues, an amount which HL&P agreed as a part of the Rate Case Settlement was not recoverable from ratepayers. (B) RATE CASE APPEALS. Pursuant to the Rate Case Settlement, HL&P and the other parties to that settlement have dismissed their pending appeals of previous Utility Commission orders. As a result of that action or subsequent judicial action, the Utility Commission's orders have become final in Docket No. 9850 (involving HL&P's 1991 rate case) and in Docket Nos. 8230 and 9010 (involving deferred accounting). Two appeals of other orders, by parties who did not join in the Rate Case Settlement, remain pending: review of Docket No. 8425 (HL&P's 1988 rate case), and review of Docket No. 6668 (the Utility Commission's inquiry into the prudence of the planning and construction of the South Texas Project). The appeal from the order in Docket No. 8425 concerns (i) the treatment as "plant held for future use" of certain costs associated with the Malakoff 62 6 generating station and (ii) the treatment by HL&P of certain tax savings associated with federal income tax deductions for expenses not included in cost of service for ratemaking purposes. The appeal is currently pending before the Texas Supreme Court. Review of the Utility Commission's order in Docket No. 6668 is pending before a Travis County district court. In that order the Utility Commission determined that $375.5 million of HL&P's $2.8 billion investment in the South Texas Project had been imprudently incurred. That ruling was incorporated into HL&P's 1988 and 1991 rate cases. Unless the order is modified or reversed on appeal, the amount found imprudent by the Utility Commission will be sustained. (4) INVESTMENTS IN FOREIGN AND NON-REGULATED ENTITIES (A) GENERAL. HI Energy sustained net losses of $33 million, $6 million and $2 million in 1995, 1994 and 1993, respectively. Development costs for 1995 were approximately $14 million. The majority of costs in 1994 and 1993 were related to project development activities. (B) FOREIGN INVESTMENTS. Houston Argentina S.A. (Houston Argentina), a subsidiary of HI Energy, owns a 32.5 percent interest in Compania de Inversiones en Electricidad S.A. (COINELEC), an Argentine holding company which acquired a 51 percent interest in Empresa Distribuidora de La Plata S.A. (EDELAP), an electric utility company operating in La Plata, Argentina and surrounding regions. Houston Argentina's share of the purchase price was approximately $37.4 million. Such investment was in the form of (i) a capital contribution of $27.6 million to COINELEC and (ii) a loan to COINELEC in the aggregate principal amount of $9.8 million. HI Energy has also entered into support agreements with two financial institutions pursuant to which HI Energy has agreed to make additional cash contributions or subordinated loans to COINELEC or pay COINELEC's lenders up to a maximum aggregate of $6.6 million in the event of a default by COINELEC of its commitments to such financial institutions. Subsequent to the acquisition, the generating assets of EDELAP were transferred to Central Dique S.A., an Argentine Corporation, 51 percent of the stock of which is owned by COINELEC. HI Energy's portion of EDELAP and Central Dique S.A. earnings was approximately $1 million in both 1995 and 1994. In January 1995, HI Energy acquired for $15.7 million a 90 percent ownership interest in an electric utility operating company located in a rural province in the north central part of Argentina. The utility system serves approximately 116,000 customers in an area of 136,000 square kilometers. HI Energy's share of net losses from this investment for 1995 was $3.6 million substantially all of which was due to non-recurring severance costs. In 1995, HI Energy invested approximately $7 million in a cogeneration project being developed in San Nicolas, Argentina and approximately $5 million in a coke calcining project being developed in the state of Andhra Pradesh, India. These projects had no earnings impact in 1995. HI Energy estimates that its commitment in 1996 for the Argentine cogeneration project will be approximately $31 million and that its share of the 1996 commitment for the coke calcining project will be approximately $3 million. HI Energy has entered into a support agreement in favor of the International Finance Corporation (IFC) under the terms of which HI Energy has agreed to provide one of its subsidiaries (HIE Rain), which is an investor in the coke calcining project, with sufficient funds to meet certain funding obligations of HIE Rain under agreements with the IFC. The maximum aggregate funding commitment of HI Energy under this support agreement is approximately $18 million, of which approximately $16 million is to support contingent obligations of HIE Rain and the balance of which is additional equity to be contributed to the coke calcining project. 63 7 (C) ILLINOIS WASTE TIRE-TO-ENERGY PROJECTS. HI Energy is a subordinated lender to two waste tire-to-energy projects being developed by Ford Heights and Fulton, respectively, located in the state of Illinois. HI Energy also owns a $400,000 equity interest (20 percent) in Ford Heights. Both projects were being developed in reliance on the terms of the Illinois Retail Rate Law, enacted in 1987, to encourage development of energy production facilities for the disposal of solid waste by providing an operating subsidy to qualifying projects. In March 1996, the Governor of Illinois signed into law legislation which purports to repeal the subsidy provided to most of such energy production facilities, including the two waste tire-to-energy projects in which HI Energy has invested. A lawsuit has been filed on behalf of the Ford Heights and Fulton projects challenging, among other things, the constitutionality of the repeal and its retroactive application to the two waste tire-to-energy projects. On March 26, 1996, the Ford Heights project filed a voluntary petition seeking protection under the federal bankruptcy laws. The ability of the two waste tire-to-energy projects to meet their debt obligations is dependent upon the projects continuing to receive the operating subsidy under the Retail Rate Law. The terms of the public bonds issued by the Ford Heights and Fulton projects are non-recourse to the Company and HI Energy. In response to the actions taken by the state of Illinois, the Company has established a valuation allowance of $28 million ($18 million after-tax), which amount reflects the combined amounts lent on a subordinated basis to the Ford Heights and Fulton projects. In addition to amounts funded through March 26, 1996, HI Energy also is party to two separate Note Purchase Agreements committing it, under certain circumstances, to acquire up to (i) $3 million in aggregate principal amount of additional subordinated notes from the Ford Heights project and (ii) $17 million in aggregate principal amount of additional subordinated notes from the Fulton project. The Company has entered into a support agreement under which it has agreed to provide additional funds to HI Energy to enable it to honor its obligations under the two Note Purchase Agreements. The Company is unable to predict the ultimate effect of these developments on HI Energy's remaining funding commitments under these Note Purchase Agreements; however, in the Company's opinion it is unlikely that the majority of the additional unfunded subordinated debt provided for in the Fulton Note Purchase Agreement would be required to be funded unless construction activities with respect to the Fulton project are recommenced at some future date. If HI Energy becomes obligated to advance additional funds under the Note Purchase Agreements, the Company could be required to increase the amount of the valuation allowance, which would result in additional charges to earnings. (5) COMMON STOCK (A) STOCK DISTRIBUTION. The Company effected a two-for-one stock split in the form of a common stock distribution on December 9, 1995. All prior periods have been restated for consistency to reflect the stock distribution in terms of number of common shares outstanding and the per share amounts for earnings, dividends and market price. The nominal consideration established by the Board of Directors for the common stock distributed ($.01 per share) is reflected as a deduction from retained earnings in the Company's Statements of Consolidated Retained Earnings. (B) DIVIDENDS. The timing of the Company's Board of Directors' declaration of dividends changed resulting in five quarterly dividend declarations in 1993. All dividends declared in 1993 have been included in 1993 common stock dividends on the Company's Statements of Consolidated Retained Earnings. The Company paid four regular quarterly dividends in 1993 aggregating $1.50 per share, after restatement for the two-for-one stock split, on its common stock shares. (C) LONG-TERM INCENTIVE COMPENSATION PLANS. The Company has Long-Term Incentive Compensation Plans (LICP) providing for the issuance of stock incentives (including performance-based restricted shares and stock options) to key employees of the Company, including officers. As of December 31, 1995, 29 current and former employees participated in the plans. A maximum of five million shares of common stock may be issued under the LICP. Beginning one 64 8 Following are the Company's tax effects of temporary differences attributable to continuing operations resulting in deferred tax assets and liabilities:
December 31, --------------------------------- 1995 1994 -------------- ------------- (Thousands of Dollars) Deferred Tax Assets: Alternative minimum tax . . . . . . . . . . . . . . . . . . . . . . . $ 46,516 $ 66,707 IRS audit assessment . . . . . . . . . . . . . . . . . . . . . . . . . 74,966 74,966 Disallowed plant cost - net . . . . . . . . . . . . . . . . . . . . . 22,687 23,496 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,628 83,740 ---------- ---------- Total deferred tax assets - net . . . . . . . . . . . . . . . . . 240,797 248,909 ---------- ---------- Deferred Tax Liabilities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,391,573 1,336,035 Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . 200,028 207,746 Regulatory assets - net . . . . . . . . . . . . . . . . . . . . . . . 228,587 235,463 Capitalized taxes, employee benefits and removal costs . . . . . . . . 110,065 111,660 Gain on sale of cable television subsidiary . . . . . . . . . . . . . 227,515 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,275 121,235 ---------- ---------- Total deferred tax liabilities . . . . . . . . . . . . . . . . . . 2,308,043 2,012,139 ---------- ---------- Accumulated deferred income taxes - net . . . . . . . . . . $2,067,246 $1,763,230 ========== ==========
See Note 13 for income taxes related to discontinued operations. (11) COMMITMENTS AND CONTINGENCIES (a) HL&P COMMITMENTS. HL&P has various commitments for capital expenditures, fuel, purchased power, cooling water and operating leases. Commitments in connection with HL&P's capital program are generally revocable by HL&P subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties. HL&P's other commitments have various quantity requirements and durations. However, if these requirements could not be met, various alternatives are available to mitigate the cost associated with the contracts' commitments. (b) FUEL AND PURCHASED POWER. HL&P is a party to several long-term coal, lignite and natural gas contracts which have various quantity requirements and durations. Minimum payment obligations for coal and transportation agreements are approximately $175 million in 1996, $178 million in 1997 and $184 million in 1998. Additionally, minimum payment obligations for lignite mining and lease agreements are approximately $5 million for 1996, $8 million for 1997 and $9 million for 1998. Collectively, the fixed price gas supply contracts, which expire in 1997, could amount to 11 percent of HL&P's annual natural gas requirements for 1996 and 7 percent for 1997. Minimum payment obligations for both natural gas purchase and storage contracts are approximately $57 million in 1996, $38 million in 1997 and $9 million in 1998. HL&P also has commitments to purchase firm capacity from cogenerators of approximately $22 million in each of the years 1996 through 1998. Utility Commission rules currently allow recovery of these costs through HL&P's base rates for electric service and additionally authorize HL&P to charge or credit customers through a purchased power cost recovery factor for any variation in actual purchased power costs from the cost utilized to determine its base rates. In the event that the Utility Commission, at some future date, does not allow recovery through rates of any amount of purchased power payments, the two principal firm capacity contracts contain provisions allowing HL&P to suspend or reduce payments and seek repayment for amounts disallowed. 73 9 (c) OTHER. HL&P's service area is heavily dependent on oil, gas, refined products, petrochemicals and related businesses. Significant adverse events affecting these industries would negatively affect the revenues of the Company and HL&P. For information regarding contingencies relating to the South Texas Project, see Note 2 above. The Company and HL&P are involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business, some of which involve substantial amounts. (12) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair value of the Company's financial instruments are as follows:
December 31, ---------------------------------------------------------- 1995 1994 ---------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------- ----------- ------------- (Thousands of Dollars) Financial assets: Cash and short-term investments . . . . . . . $ 11,779 $ 11,779 $ 10,443 $ 10,443 Investment in Time Warner securities . . . . 1,027,875 1,027,875 Financial liabilities: Short-term notes payable . . . . . . . . . . 6,300 6,300 423,291 423,291 Cumulative preferred stock of subsidiary (subject to mandatory redemption) . . . . . . . . . . . . . . . . 76,755 79,250 167,610 173,355 Debentures . . . . . . . . . . . . . . . . . 348,914 396,903 548,729 549,532 Long-term debt of subsidiaries: Electric: First mortgage bonds . . . . . . . . . 2,979,293 3,247,139 3,020,400 2,980,028 Pollution control revenue bonds . . . 4,426 5,000 155,247 163,736 Other notes payable 981 981 1,129 1,129 Discontinued operations: Senior bank debt . . . . . . . . . . . 364,000 364,000 Senior and senior subordinated notes . . . . . . . . . . . . . . . 140,580 154,654
The fair values of cash and short-term investments, investment in equity securities, short-term and other notes payable and bank debt are estimated to be equivalent to the carrying amounts. The fair values of the Company's debentures, HL&P's cumulative preferred stock subject to mandatory redemption, HL&P's first mortgage bonds, pollution control revenue bonds issued on behalf of HL&P and senior subordinated notes are estimated using rates currently available for securities with similar terms and remaining maturities. (13) CABLE TELEVISION--DISCONTINUED OPERATIONS In July 1995, the Company completed the sale of KBLCOM, its cable television subsidiary, to Time Warner. The Company's 1995 earnings include a one-time, after-tax gain on the sale of $708 million. Effective January 1, 1995, the operations of KBLCOM were accounted for as discontinued and prior periods were restated for consistency in reflecting KBLCOM as a discontinued operation. 74 EX-99.B.I 6 NOTES 3 AND 7(A) TO FIRST QUARTER 10-Q 1 EXHIBIT 99(b) HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND HOUSTON LIGHTING & POWER COMPANY NOTES TO FINANCIAL STATEMENTS (1) GENERAL The interim financial statements and notes (Interim Financial Statements) contained in this Form 10-Q for the period ended March 31, 1996 (Form 10-Q) are unaudited and condensed. Certain notes and other information contained in the Combined Annual Report on Form 10-K (File Nos. 1-7629 and 1-3187) for the year ended December 31, 1995 (Form 10-K), of Houston Industries Incorporated (Company) and Houston Lighting & Power Company (HL&P) have been omitted in accordance with Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934. The information presented in the Interim Financial Statements should be read in combination with the information presented in the Form 10-K, including the financial statements and notes contained therein. For information regarding the Company's discontinued cable television operations, see Note 13 to the financial statements contained in the Form 10-K. (2) CERTAIN CONTINGENCIES The following notes to the financial statements of the Form 10-K (as updated by the notes contained in this Form 10-Q) are incorporated herein by reference: Note 1(b) (System of Accounts and Effects of Regulation), Note 2 (Jointly-Owned Nuclear Plant), Note 3 (Rate Matters), Note 4 (Investments in Foreign and Non-Regulated Entities) and Note 11 (Commitments and Contingencies). (3) JOINTLY-OWNED NUCLEAR PLANT HL&P is the project manager (and one of four co-owners) of the South Texas Project Electric Generating Station (South Texas Project), which consists of two 1,250 megawatt nuclear generating units. HL&P has a 30.8 percent interest in the project. On April 30, 1996, HL&P and the City of Austin (Austin), one of the four co-owners of the South Texas Project, agreed to settle a lawsuit in which Austin had alleged that outages occurring at the South Texas Project between early 1993 and early 1994 were due to HL&P's failure to perform certain obligations it owed Austin under a Participation Agreement relating to the project. For information regarding this settlement and a $13 million (after-tax) charge to first quarter earnings resulting from the settlement, see Note 7(a) to the Interim Financial Statements. For information concerning a similar lawsuit filed against HL&P by the City of San Antonio (San Antonio), another co-owner of the South Texas Project, and San Antonio's pending arbitration claims against HL&P with respect to the construction of the South Texas Project, see Note 2(b) to the financial statements contained in the Form 10-K. HL&P and San Antonio (acting through the City Public Service Board of San Antonio (CPS)) have agreed on the principles under which they would settle all claims with respect to the South Texas Project. For information regarding the proposed settlement and a $49 million (after-tax) charge to first quarter earnings relating thereto, see Note 7(a) to the Interim Financial Statements. -13- 2 (4) RATE CASE PROCEEDINGS For information concerning the settlement of HL&P's most recent rate case (Docket No. 12065) and the continuing impact of that settlement on HL&P's results of operations, see Note 3(a) to the financial statements contained in the Form 10-K. The two Public Utility Commission of Texas (Utility Commission) orders concerning HL&P that are still subject to appellate review are: Docket No. 8425 (HL&P's 1988 rate case) and Docket No. 6668 (an inquiry into the prudence of the planning and construction of the South Texas Project). For information regarding these appeals, see Note 3(b) to the financial statements contained in the Form 10-K. (5) CAPITAL STOCK Company. At March 31, 1996 and December 31, 1995, the Company had 400,000,000 authorized shares of common stock, of which 248,556,370 and 248,316,710 shares, respectively, were outstanding as of such dates. Outstanding shares exclude the unallocated shares of the Company's Employee Stock Ownership Plan, which as of March 31, 1996 and December 31, 1995 totaled 14,186,577 and 14,355,758, respectively. Earnings per common share for the Company are computed by dividing net income by the weighted average number of shares outstanding during the respective period. HL&P. All issued and outstanding shares of Class A voting common stock of HL&P are held by the Company, and all issued and outstanding shares of Class B non-voting common stock of HL&P are held by Houston Industries (Delaware) Incorporated (HI Delaware), a wholly owned subsidiary of the Company. Earnings per share data for HL&P are not computed because all of its common stock is held by the Company and HI Delaware. On March 31, 1996 and December 31, 1995, HL&P had 10,000,000 authorized shares of preferred stock, of which 4,318,397 shares were outstanding. (6) LONG-TERM DEBT HL&P. In January 1996, HL&P repaid upon maturity $100 million principal amount of its Collateralized Medium-Term Notes Series B and $10 million principal amount of its Collateralized Medium-Term Notes Series A plus accrued interest on the two issues. In March 1996, HL&P deposited approximately $86 million in a trust and irrevocably directed the trustee to redeem on May 8, 1996 all issued and outstanding principal amounts of HL&P's 7 1/4% first mortgage bonds due February 1, 2001 (at a redemption price of 100.42% plus accrued interest) and 6 3/4% first mortgage bonds due April 1, 1998 (at a redemption price of 100.15% plus accrued interest). (7) SUBSEQUENT EVENTS (a) South Texas Project Litigation. On April 30, 1996, Houston Lighting & Power Company entered into a settlement with Austin regarding City of Austin v. Houston Lighting & Power Company, Cause No. 94-07946, in the 11th Judicial District Court, Harris County, Texas. In that suit, filed by Austin in May 1994, Austin asserted that HL&P had mismanaged its responsibilities as Project Manager of the South Texas Project. Austin contended that, because of HL&P's mismanagement and negligence, the outage at the South Texas Project during 1993-94 had caused Austin damages of approximately $120 million. Trial of Austin's suit began in March 1996, and the settlement was reached in April 1996. Under the settlement, HL&P agreed to pay Austin $20 million in cash to resolve all pending disputes between HL&P and Austin, and Austin agreed to -14- 3 support the formation of a new operating company to assume HL&P's role as project manager for the South Texas Project. The Company and HL&P have recorded the $20 million ($13 million net of tax) payment to Austin on the Company's Statements of Consolidated Income and HL&P's Statements of Income as litigation settlements expense. HL&P and CPS have agreed on the principles under which they would settle all claims with respect to the South Texas Project. Under the proposed settlement, HL&P and CPS would enter into definitive agreements providing, among other things, for (i) a cash payment by HL&P to CPS of $75 million ($25 million of which has already been paid), (ii) an agreement to support formation of a new operating company to replace HL&P as project manager of the South Texas Project and (iii) the execution of a 10-year joint operations agreement under which HL&P and CPS will share savings resulting from the joint dispatching of their respective generating assets in order to take advantage of each system's lower cost resources. Under the terms of the joint operations agreement, CPS will be guaranteed minimum annual savings of $10 million with a minimum cumulative savings of $150 million over the ten year term of the agreement. Based on current forecasts and other assumptions regarding the combined operation of the two generating systems, HL&P anticipates that the savings resulting from joint operations will equal or exceed the minimum savings guaranteed under the joint operations agreement. Although no assurance can be given as to the ultimate resolution of negotiations, the proposed settlement will resolve all claims, litigation and matters in arbitration between the two parties with respect to the South Texas Project. The proposed settlement has been reviewed by San Antonio's city council but is still subject to approval by CPS. In anticipation of the settlement, the Company and HL&P have recorded a $49 million expense (net of tax) on the Company's Statement of Consolidated Income and HL&P's Statements of Income (reflected as litigation settlement expense). The unpaid portion of the cash payment contemplated by the settlement is shown in other deferred credits on the Company's Consolidated and HL&P's Balance Sheets. (b) HI Energy. In May 1996, a subsidiary of Houston Industries Energy, Inc. (HI Energy) purchased for approximately $55 million an additional 39 percent of the capital stock of Empresa Distribuidora la Plata (EDELAP), an electric utility company operating in La Plata, Argentina and surrounding regions. HI Energy also indirectly owns 16.6 percent of the capital stock of EDELAP, which shares were acquired in December 1992 for $37 million. For additional information regarding HI Energy's investments in foreign and non-regulated entities, see Note 4 to the financial statements contained in the Form 10-K. Beginning in the second quarter of 1996, EDELAP will be reflected in the Company's financial statements on a consolidated basis. (c) Redemption of HL&P Preferred Stock. In March 1996, HL&P provided notice to the holders of its $9.375 preferred stock that it would redeem 514,000 shares of such stock at a cost of approximately $53 million ($102.34375 per share including accrued dividends). On April 1, 1996, HL&P redeemed 257,000 of such shares pursuant to a sinking fund requirement and 257,000 shares pursuant to optional redemption provisions. HL&P will record the redemptions in the second quarter of 1996. (8) INTERIM PERIOD RESULTS: RECLASSIFICATIONS The results of interim periods are not necessarily indicative of results expected for the year due to the seasonal nature of HL&P's business. In the opinion of management, the interim information reflects all adjustments (consisting only of normal recurring adjustments) necessary for a full presentation of the results for the interim periods. Certain amounts from the previous year have been reclassified to conform to the 1996 presentation of financial statements. Such reclassifications do not affect earnings. -15- EX-99.C.I 7 NOTES 3, 4, 5, 6 AND 7 TO 2ND QUARTER 10-Q 1 EXHIBIT 99(c) HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND HOUSTON LIGHTING & POWER COMPANY NOTES TO FINANCIAL STATEMENTS (1) GENERAL The interim financial statements and notes (Interim Financial Statements) contained in this Form 10-Q for the period ended June 30, 1996 (Form 10-Q) are unaudited and condensed. Certain notes and other information contained in the Combined Annual Report on Form 10-K (File Nos. 1-7629 and 1-3187) for the year ended December 31, 1995 (Form 10-K), of Houston Industries Incorporated (Company) and Houston Lighting & Power Company (HL&P) have been omitted in accordance with Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934. The information presented in the Interim Financial Statements should be read in combination with the information presented in the Form 10-K and the Combined Quarterly Report on Form 10-Q of the Company and HL&P for the quarter ended March 31, 1996 (First Quarter 10-Q). (2) CERTAIN CONTINGENCIES The following notes to the financial statements in the Form 10-K (as updated by the notes contained in this Form 10-Q and the First Quarter 10-Q ) are incorporated herein by reference: Note 1(b) (System of Accounts and Effects of Regulation), Note 2 (Jointly-Owned Nuclear Plant), Note 3 (Rate Matters), Note 4 (Investments in Foreign and Non-Regulated Entities) and Note 11 (Commitments and Contingencies). (3) JOINTLY-OWNED NUCLEAR PLANT In July 1996, HL&P and City Public Service Board of San Antonio (CPS) entered into a settlement agreement providing, among other things, for (i) the dismissal with prejudice of all pending arbitration claims and lawsuits between HL&P and CPS relating to the South Texas Project Electric Generating Station (South Texas Project), (ii) a cash payment by HL&P to CPS of $75 million (accrued in the quarter ended March 31, 1996), (iii) an agreement to support formation of a new operating company to replace HL&P as project manager for the South Texas Project and (iv) the execution of a 10-year joint operations agreement under which HL&P and CPS will share savings resulting from the joint dispatching of their respective generating assets in order to take advantage of each system's lower cost resources. Under the terms of the joint operations agreement entered into between CPS and HL&P, HL&P will guarantee CPS minimum annual savings of $10 million and a minimum cumulative savings of $150 million over the ten-year term of the agreement. Based on current forecasts and other assumptions regarding the combined operation of the two generating systems, HL&P anticipates that the savings resulting from joint operations will equal or exceed the minimum savings guaranteed under the joint operations agreement. For information regarding the settlement in April 1996 of a similar lawsuit filed by the City of Austin (Austin) against HL&P and a $13 million (after-tax) charge to earnings recorded in the first quarter of 1996 in connection with this settlement, see Notes 3 and 7(a) to the First Quarter 10-Q, which notes are incorporated herein by reference. -14- 2 As a result of the settlements of the CPS and Austin litigation, all litigation and arbitration claims formerly pending between HL&P and the other co-owners of the South Texas Project have been settled and dismissed with prejudice. (4) HI ENERGY Acquisition of Interest in Brazilian Electric Utility. In May 1996, a subsidiary of Houston Industries Energy, Inc. (HI Energy) acquired 11.35 percent of the common shares of Light - Servicos de Eletricidade S.A. (Light), a publicly-held Brazilian corporation, for $392 million. Light is the operator under a 30-year concession agreement of an approximately 3,888 megawatt electric power generation, transmission and distribution system serving 28 municipalities in the state of Rio de Janeiro, Brazil. HI Energy acquired the shares as a bidder in the government-sponsored auction of 60 percent of Light's outstanding shares. Subsequent to the auction, the winning bidders, including a subsidiary of HI Energy, formed a consortium whose aggregate ownership interest of 50.44 percent represents a controlling interest in Light. The consortium, organized pursuant to a shareholders agreement dated as of May 27, 1996, is comprised of the direct share ownership interests held in Light by subsidiaries or affiliates of The AES Corporation (11.35 percent), Electricite de France (11.35 percent), HI Energy (11.35 percent), Companhia Sidercgica Nacional (7.25 percent), and Banco Nacional de Desenvolvimento Economico E Social (BNDES) (9.14 percent). Pursuant to the shareholders agreement, principal responsibilities for the various aspects of Light's business will be allocated among the parties. The HI Energy subsidiary will have the principal responsibility for all matters relating to Light's financial affairs. The Company has accounted for this transaction under purchase accounting and has recorded its investment and its interest in Light's operations since June 1, 1996, using the equity method. The effect of Light's income on the Company's net income is immaterial for the second quarter of 1996 and the six months ended June 30, 1996. Class B Shares of Edelap. On May 2, 1996, Houston Argentina S.A. (Houston Argentina), a subsidiary of HI Energy, purchased for approximately $55 million the Class B Shares of Empresa Distribuidora de la Plata S.A. (Edelap), an electric utility company operating in La Plata, Argentina, and surrounding regions. The Class B Shares of Edelap were sold by the Argentine government in a public auction. On May 28, 1996, Houston Argentina sold a portion of its Class B Shares to a third party for approximately $10 million. The remaining Class B Shares held by Houston Argentina constitute 32 percent of the capital stock of Edelap. Houston Argentina also owns indirectly through a holding company an additional 16.6 percent of the capital stock of Edelap, which shares were acquired in 1992 for $37 million. The Company has recorded its investment in Edelap using the equity method. (5) RATE CASE PROCEEDINGS In June 1996, the Supreme Court of Texas unanimously upheld the decision of the Public Utility Commission of Texas (Utility Commission) in Docket No. 8425 (HL&P's 1988 rate case) to include in HL&P's rate base $93 million in construction costs relating to the Malakoff project (a canceled lignite generation project). The Supreme Court also affirmed the Utility Commission's decision granting deferred accounting treatment for Unit No. 2 of the South Texas Project and the calculation of HL&P's federal income tax expenses without taking into account deductions for expenses paid by the Company's shareholders. As a result of this decision, HL&P's 1988 rate case has now become final. For information regarding the appeal of Docket No. 6668 (an inquiry into the prudence of the planning and construction of the South Texas Project), see Note 3(b) to the Form 10-K. -15- 3 (6) CAPITAL STOCK Company. At June 30, 1996 and December 31, 1995, the Company had 400,000,000 authorized shares of common stock, of which 247,690,618 and 248,316,710 shares, respectively, were outstanding as of such dates. Outstanding shares exclude (i) the unallocated shares of the Company's Employee Stock Ownership Plan (which as of June 30, 1996 and December 31, 1995 totaled 13,861,929 and 14,355,758, respectively) and (ii) 1,195,900 shares purchased by the Company as of June 30, 1996, under the common stock repurchase program described below. Earnings per common share for the Company are computed by dividing net income by the weighted average number of shares outstanding during the respective period. In June 1996, the Company announced that its Board of Directors had authorized the purchase of up to $150 million of the Company's common stock. It is anticipated that any purchases of common stock under the program would be effected over the next 12 months, subject to market conditions, available cash and alternative investment opportunities. The Company began repurchasing shares in mid-June 1996. HL&P. All issued and outstanding shares of Class A voting common stock of HL&P are held by the Company, and all issued and outstanding shares of Class B non-voting common stock of HL&P are held by Houston Industries (Delaware) Incorporated (HI Delaware), a wholly owned subsidiary of the Company. Earnings per share data for HL&P are not computed because all of its common stock is held by the Company and HI Delaware. On June 30, 1996 and December 31, 1995, HL&P had 10,000,000 authorized shares of preferred stock, of which 3,804,397 and 4,318,397 shares, respectively, were outstanding. In April 1996, HL&P redeemed 514,000 shares of its $9.375 cumulative preferred stock at a cost of approximately $53 million ($102.34375 per share, including accrued dividends). The redemption included 257,000 shares in satisfaction of mandatory sinking fund requirements and an additional 257,000 shares as an optional redemption. (7) LONG-TERM DEBT In January 1996, HL&P repaid upon maturity $100 million principal amount of its Collateralized Medium-Term Notes Series B and $10 million principal amount of its Collateralized Medium-Term Notes Series A, plus accrued interest on the two issues. In April 1996, HL&P repaid upon maturity $40 million principal amount of its 5 1/4% first mortgage bonds. In May 1996, HL&P redeemed all outstanding principal amounts of its 7 1/4% first mortgage bonds ($50,000,000) due February 1, 2001, at a redemption price of 100.42% (plus accrued interest) and 6 3/4% first mortgage bonds ($35,000,000) due April 1, 1998, at a redemption price of 100.15% (plus accrued interest). (8) SUBSEQUENT EVENT On August 11, 1996, the Company, HL&P and a newly formed Delaware subsidiary of the Company (HI Merger, Inc.) entered into an Agreement and Plan of Merger with NorAm Energy Corp. (NorAm). Under the merger agreement and assuming all necessary regulatory and shareholder approvals, the Company would merge with and into HL&P and the currently outstanding stock of the Company would become the common stock of HL&P, which would be renamed "Houston Industries Incorporated" (HII). NorAm would merge with and into HI Merger, Inc. and would become a wholly owned subsidiary of HII. Consideration for the purchase of NorAm shares will be a combination of cash and shares of HII common stock. The transaction is valued at $3.8 billion, consisting of $2.4 billion for NorAm's common stock and equivalents and $1.4 billion of NorAm debt. For information regarding the Agreement and Plan of Merger, see the Company and HL&P's current report on Form 8-K dated August 11, 1996, which report is incorporated herein by reference. (9) INTERIM PERIOD RESULTS: RECLASSIFICATIONS The results of interim periods are not necessarily indicative of results expected for the year due to the seasonal nature of HL&P's business. In the opinion of management, the interim information reflects all adjustments (consisting only of normal recurring adjustments) necessary for a full presentation of the results for the interim periods. Certain amounts from the previous year have been reclassified to conform to the 1996 presentation of financial statements. Such reclassifications do not affect earnings. -16- EX-10 8 EMPLOYMENT AGREEMENT - CHARLES R. CRISP 1 Exhibit 10 August 9, 1996 Mr. Charles R. Crisp 124 Melrose Drive Montgomery, Texas 77356 Dear Charlie: It has been a pleasure to meet and become better acquainted with you during our several meetings. We are confident that you are an extraordinary executive who will become a tremendous asset to our executive management team. On my behalf and that of Houston Industries, it is my pleasure to make the following offer of employment to you. The following briefly summarizes the terms of our offer: 1. Title. You will join our Houston Lighting and Power Company subsidiary as head of our generating assets Strategic Business Unit currently referred to as "Genco." Your title will be Executive Vice President and General Manager of this business unit. You will report to me in my present capacity as President and Chief Operating Officer of HL&P. 2. Duties and Responsibilities. You will be responsible for managing all of HL&P's generating and related assets. Your focus will be domestic physical assets with an objective of rationalizing assets and positioning this business unit to be successful in an evolving deregulated environment. You also will be responsible at this time for the wholesale marketing of electricity. Currently your primary customer is HL&P's transmission and distribution Strategic Business Unit known as "Wiresco." 3. Organizational Structure. The Company is currently in a transitional stage from its historical regulated utility perspective moving toward becoming market-focused and capable of superior performance in a deregulated environment. This transition may result in changes in your initial duties, responsibilities, and title. 4. Compensation. a) Base Salary. Your starting base salary will be $325,000 per annum with appropriate adjustments in the future. 2 Mr. Charles R. Crisp August 9, 1996 Page 2 b) Short-Term Incentive Compensation. HL&P's existing short-term Executive Incentive Compensation Plan (EICP) calls for incentive compensation to be paid in cash annually at a rate between zero and 60% of base compensation at your level. The plan year runs from January through December. For plan year 1996, we have agreed that your qualifying bonus will be determined according to goals to be decided between us, prorated according to your term of service during 1996. c) Long-Term Incentive Compensation (LICP). You are eligible for stock grants under the LICP, for amounts ranging from zero to 60% of base salary, which are determined as to amount on three-year cycles. d) Stock Options. Stock options for 40% of base salary are also issued under the LICP, with values dependent on increases in stock value as in other stock option plans. e) Sign-On Bonus. You will receive a $300,000 bonus payable to you as soon as possible upon your joining the company. As we discussed, this bonus will offset any bonus forgone by leaving your present employer. This bonus will be structured as an interest-free loan, one-half of which will be forgiven six months after your initial employment date, the other half after twelve months. The loan will be forgiven on these dates under all circumstances other than your voluntary termination from the company. f) Benefits. You will be entitled to such other benefits as are currently offered to newly hired or promoted senior executives. This includes life, disability, hospitalization, dental, automobile, and vacation. You will qualify for 4 weeks of vacation, commencing in January of 1997, with one week of vacation agreed during 1996. g) Anticipated Start Date: September 1996 or other mutually agreeable date. The foregoing covers the principal features of our employment offer. The attachment to this letter sets the matters forth in more detail. As to the incentive compensation and benefit plans, my description of their terms is included for discussion purposes and is not intended to alter the written plans, whose terms and conditions govern. Similarly, your service and tenure, as with all senior HII executives, is subject to the discretion of the Board of Directors. This is an exciting but challenging time for Houston Industries. We are committed to maintain HL&P as a major force in energy generation and marketing, and your decision to join our senior management team will substantially enhance our ability to fulfill that commitment. I look forward to your positive response to this offer of employment and ask that you sign in the space provided below. Of course, this offer is subject to routine pre-employment physical examination and other inprocessing requirements as are required of all Company employees. 3 Mr. Charles R. Crisp August 9, 1996 Page 3 We look forward to working with you. Sincerely, /s/ R. Steve Letbetter ACCEPTED AND AGREED to this 16th day of September, 1996 By /s/ Charles R. Crisp Charles R. Crisp 4 ADDENDUM TO LETTER TO CHARLES CRISP DATED AUGUST 9, 1996 1. EMPLOYMENT. The Company will employ Charles R. Crisp from and after the effective date of this Agreement as Executive Vice President and General Manager of the energy production Strategic Business Unit and in such other executive capacities as may be determined from time to time by the Company. As used in this Agreement, "employment with the Company" shall mean employment with Houston Lighting & Power Company or with Houston Industries Incorporated or with any wholly-owned subsidiary of either of said companies. Employment shall be subject to completion of routine employment physical examination and other inprocessing requirements as are required of all Company employees. 2. EXTENT OF SERVICES. Mr. Crisp will devote his services full time to the business of the Company and to perform to the best of his ability and with reasonable diligence the duties and responsibilities assigned to him by appropriate management of the Company. 3. TERM. The term of this Agreement shall commence in September 1996 and shall continue indefinitely thereafter, subject to termination by the Company or by Mr. Crisp at any time, with or without cause, on thirty days notice to the other. 4. COMPENSATION. As compensation for the services to be rendered by Mr. Crisp under this Agreement, the Company agrees to pay Mr. Crisp an initial annual salary of $325,000, payable in accordance with the general practices of the Company. The provisions of this paragraph 4 shall not operate as a limitation upon, or as a direction against, the exercise by the Board of Directors of the Company of its power and discretion to make salary increases or decreases, or to grant or withhold bonuses or other additional direct or indirect compensation or benefits to or on behalf of Mr. Crisp if, in the judgment of the Board of Directors, such action is in the best interest of the Company. 5. EMPLOYEE BENEFITS. Throughout the term of Mr. Crisp's employment with the Company, he shall be eligible to participate on the same basis as other eligible employees in the Retirement Plan, the Savings Plan and any other qualified plan of the Company, and he shall be eligible to participate in any long-term disability, life insurance, medical, dental and vision 5 plans, and any other employee benefit plan maintained by the Company for its employees. For purposes of participation in these employee benefit plans, Mr. Crisp's service with the Company shall commence in September 1996. Mr. Crisp shall be eligible for four weeks of vacation and 120 days sick pay per year. Additional annual vacation and sick pay entitlement will be in accordance with the Company's vacation and sick pay policies for employees generally. Mr. Crisp shall be furnished an automobile and home security system in accordance with the Company's policy covering officers of equal position or rank, and Mr. Crisp shall be furnished a luncheon club membership to be used for business purposes of the Company. 6. EXECUTIVE BENEFITS. Mr. Crisp shall be eligible to participate in the Company's Executive Incentive Compensation Plan and Long-Term Incentive Compensation Plan. Participation in the Executive Incentive Compensation Plan shall commence as provided in the employment letter agreement dated August 9, 1996, and the Long-Term Incentive Compensation Plan shall commence in the 1997 calendar year. Mr. Crisp shall also be eligible to participate in the Company's Deferred Compensation Plan, Benefit and Savings Restoration Plans, Executive Life Insurance Plan and shall be eligible to participate on the same basis as other executive vice presidents of the Company in any other executive compensation plan or program of the Company which may from time to time cover such officers of the Company, with the exception of the formerly applicable salary continuation and death benefit plan known as the "Executive Benefits Plan," which is no longer being offered. 7. EMPLOYMENT BONUS. The Company shall pay Mr. Crisp $300,000 in lieu of forgone benefits with his prior employer as provided in the employment letter agreement dated August 9, 1996. 8. WITHHOLDING OF TAXES. The Company shall deduct from any payments hereunder any taxes required to be withheld by the federal or any state or local government. 9. PROHIBITION AGAINST ASSIGNMENT. Mr. Crisp agrees on behalf of himself and his executors and administrators, heirs, legatees, distributees, and any other person or persons -6- 6 claiming any benefits under him by virtue of this Agreement, that this Agreement and the rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way. Any attempted assignment, transfer, pledge or hypothecation or other disposition of this Agreement or of such rights, interests and benefits, or the levy of any attachment or similar process thereupon, shall be null and void and without effect. 10. CONTROLLING LAW. This Agreement shall be interpreted and construed in accordance with the laws of the State of Texas. 11. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of any successor of this Company and any such successor shall be deemed substituted for the Company under the terms of this Agreement. As used in this Agreement, the term "successor" shall include any person, firm, corporation or other business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or business of the Company or gains control of the Company. 12. ENTIRE AGREEMENT. This Agreement consists of (1) the employment letter agreement dated August 9, 1996, and (2) this Addendum, which together constitute the entire agreement of the parties with respect to the subject matter hereof, and may be modified only by a written instrument executed by both parties. -7- EX-12.II 9 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 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)
Nine Twelve Months Ended Months Ended September 30, 1996 September 30, 1996 ------------------ ------------------ Fixed Charges as Defined: (1) Interest on Long-Term Debt . . . . . . . . . . . . $ 167,162 $ 226,590 (2) Other Interest . . . . . . . . . . . . . . . . . . 10,811 12,289 (3) Amortization of (Premium) Discount . . . . . . . . . . . . . . . . . . . 6,789 9,077 (4) Interest Component of Rentals Charged to Operating Expense . . . . . . . . . . . 779 1,196 ------------------ ------------------ (5) Total Fixed Charges . . . . . . . . . . . $ 185,541 $ 249,152 ================== ================== Earnings as Defined: (6) Net Income . . . . . . . . . . . . . . . . . . . . $ 391,447 $ 432,231 ------------------ ------------------ Federal Income Taxes: (7) Current . . . . . . . . . . . . . . . . . . . . . 210,181 214,869 (8) Deferred (Net) . . . . . . . . . . . . . . . . . . 4,698 23,071 ------------------ ------------------ (9) Total Federal Income Taxes . . . . . . . . . . . . 214,879 237,940 ------------------ ------------------ (10) Total Fixed Charges (line 5) . . . . . . . . . . . 185,541 249,152 ------------------ ------------------ (11) Earnings Before Income Taxes and Fixed Charges (line 6 plus line 9 plus line 10) . . . . . . . . . . . . . $ 791,867 $ 919,323 ================== ================== Ratio of Earnings to Fixed Charges (line 11 divided by line 5) . . . . . . . . . . . . . . 4.27 3.69 Preferred Dividends Requirements: (12) Preferred Dividends . . . . . . . . . . . . . . . $ 17,318 $ 24,066 (13) Less Tax Deduction for Preferred Dividends . . . . . . . . . . . . . 41 54 ------------------ ------------------ (14) Total . . . . . . . . . . . . . . . . . . 17,277 24,012 (15) Ratio of Pre-Tax Income to Net Income (line 6 plus line 9 divided by line 6) . . . . . . . . . . . . . . 1.55 1.55 ------------------ ------------------ (16) Line 14 times line 15 . . . . . . . . . . . . . . 26,779 37,219 (17) Add Back Tax Deduction (line 13) . . . . . . . . . . . . . . . . . . 41 54 ------------------ ------------------ (18) Preferred Dividends Factor . . . . . . . . . . . . $ 26,820 $ 37,273 ================== ================== (19) Total Fixed Charges (line 5) . . . . . . . . . . . $ 185,541 $ 249,152 (20) Preferred Dividends Factor (line 18) . . . . . . . . . . . . . . . . . . 26,820 37,273 ------------------ ------------------ (21) Total . . . . . . . . . . . . . . . . . . $ 212,361 $ 286,425 ================== ================== Ratio of Earnings to Fixed Charges and Preferred Dividends Requirements (line 11 divided by line 21) . . . . . . . . . . . . . . 3.73 3.21
EX-27.B 10 FINANCIAL DATA SCHEDULE
UT 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. 0000048732 HOUSTON LIGHTING & POWER COMPANY 1,000 9-MOS DEC-31-1996 SEP-30-1996 PER-BOOK 8,635,587 0 335,566 1,515,794 0 10,486,947 1,675,927 0 2,277,465 3,953,392 0 351,345 2,710,569 0 0 0 190,130 25,700 2,035 3,630 3,250,146 10,486,947 3,142,234 248,767 2,258,532 2,507,299 634,935 (67,454) 567,481 176,034 391,447 17,318 374,129 246,750 167,122 776,565 0 0 Total annual interest charges on all bonds for year-to-date 9/30/96.
EX-99.A.II 11 NOTES 1(B), 2, 3, 4 AND 11 TO FINANCIAL STATEMENTS 1 Exhibit 99(a) HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Certain investments in joint ventures or other entities in which the Company or its subsidiaries have a 50 percent or less interest are recorded using the equity method or the cost method. For additional information regarding investments and advances, see Notes 1(j) and 4. All significant intercompany transactions and balances are eliminated in consolidation. (B) SYSTEM OF ACCOUNTS AND EFFECTS OF REGULATION. HL&P, the principal subsidiary of the Company, maintains its accounting records in accordance with the FERC Uniform System of Accounts. HL&P's accounting practices are subject to regulation by the Utility Commission, which has adopted the FERC Uniform System of Accounts. As a result of its regulated status, HL&P follows the accounting policies set forth in SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," which allows a utility with cost-based rates to defer certain costs in concert with rate recovery that would otherwise be expensed. In accordance with this statement, HL&P has deferred certain costs pursuant to rate actions of the Utility Commission and is recovering or expects to recover such costs in electric rates charged to customers. The regulatory assets are included in other assets on the Company's Consolidated and HL&P's Balance Sheets. The regulatory liabilities are included in deferred credits on the Company's Consolidated and HL&P's Balance Sheets. The following is a list of significant regulatory assets and liabilities reflected on the Company's Consolidated and HL&P's Balance Sheets:
December 31, 1995 ----------------- (Millions of Dollars) Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . . $613 Malakoff investment . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Regulatory tax asset - net . . . . . . . . . . . . . . . . . . . . . . . 229 Unamortized loss on reacquired debt . . . . . . . . . . . . . . . . . . 121 Deferred debits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Unamortized investment tax credit. . . . . . . . . . . . . . . . . . . . (392) Accumulated deferred income taxes - regulatory tax asset . . . . . . . . (80)
If as a result of changes in regulation or competition, HL&P's ability to recover these assets and/or liabilities would not be assured, then pursuant to SFAS No. 71 and to the extent that such regulatory assets or liabilities ultimately were determined not to be recoverable, HL&P would be required to write off or write down such assets or liabilities. (C) ELECTRIC PLANT. HL&P capitalizes at cost all additions to electric plant, betterments to existing property and replacements of units of property. Cost includes the original cost of contracted services, direct labor and material, indirect charges for engineering supervision and similar overhead items and AFUDC. Customer payments for construction reduce additions to electric 57 2 preferred stock. The Company has recorded its investment in these securities at a combined fair value of approximately $1 billion on the Company's Consolidated Balance Sheet. Investment in the Time Warner common stock is considered an "available-for-sale" equity security under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Consequently, the Company excludes unrealized net changes in the fair value of Time Warner common stock (exclusive of dividends and write downs) from earnings and, until realized, reports such changes as a net amount in the shareholders' equity section of the balance sheet. Investment in the Time Warner convertible preferred stock (which is not subject to the requirements of SFAS No. 115, since it is a non-publicly traded equity security) is accounted for under the cost method. The securities held in the Company's nuclear decommissioning trust are classified as "available-for-sale" and, in accordance with SFAS No. 115, are reported at fair value which at December 31, 1995 approximates cost ($44.5 million as of December 31, 1995) on the Company's Consolidated and HL&P's Balance Sheets under deferred debits and deferred credits. Any unrealized gains or losses are accounted for in accordance with SFAS No. 71 as a regulatory asset/liability and reported on the Company's Consolidated and HL&P's Balance Sheets as a deferred debit. (K) FUEL STOCK. Gas inventory (at average cost) was $12.1 million at December 31, 1995. Coal, lignite, and oil inventory balances recorded at last-in, first-out, were $22.2 million, $12.1 million, and $13.3 million, respectively. (L) RECLASSIFICATION. Certain amounts from the previous years have been reclassified to conform to the 1995 presentation of financial statements. Such reclassifications do not affect earnings. (M) NATURE OF OPERATIONS. The Company is a holding company operating principally in the electric utility business. HL&P is engaged in the generation, transmission, distribution and sale of electric energy. HL&P's service area covers a 5,000 square mile area in the Texas Gulf Coast, including Houston. Another subsidiary of the Company, HI Energy, participates in domestic and foreign power generation projects and invests in the privatization of foreign electric utilities. The business and operations of HL&P account for substantially all of the Company's income from continuing operations and common stock equity. (N) USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) JOINTLY-OWNED NUCLEAR PLANT (A) HL&P INVESTMENT. HL&P is the project manager (and one of four co-owners) of the South Texas Project, which consists of two 1,250 megawatt nuclear generating units. HL&P has a 30.8 percent interest in the project and bears a corresponding share of capital and operating costs associated with the project. As of December 31, 1995, HL&P's investment in the South Texas Project and in nuclear fuel, including AFUDC, was $2.0 billion (net of $439 million plant accumulated depreciation) and $75.1 million (net of $142 million nuclear fuel amortization), respectively. (B) REGULATORY PROCEEDINGS AND LITIGATION. Between June 1993 and February 1995, the South Texas Project was listed on the United States Nuclear Regulatory Commission's (NRC) "watch list" of plants with weaknesses that warrant increased NRC regulatory attention. In February 1995, the NRC removed the South Texas Project from its "watch list." 59 3 In February 1994, the City of Austin (Austin), one of the four co-owners of the South Texas Project, filed suit against HL&P (Austin Litigation). Trial of that suit, which began in March 1996 is pending in the 11th District Court of Harris County, Texas. Austin alleges that the outages at the South Texas Project from early 1993 to early 1994 were due to HL&P's failure to perform obligations it owed to Austin under the Participation Agreement among the four co-owners of the South Texas Project (Participation Agreement). Austin also asserts that HL&P breached certain undertakings voluntarily assumed by HL&P on behalf of the co- owners under the terms of the NRC Operating Licenses and Technical Specifications relating to the South Texas Project. Under amended pleadings in the Austin Litigation, Austin claims it suffered damages of at least $120 million due to increased operating and maintenance costs, the cost of replacement power and lost profits on wholesale transactions that did not occur. Although HL&P and the Company do not believe there is merit to Austin's claims, no assurance can be given as to the ultimate outcome of this matter. In May 1994, the City of San Antonio (San Antonio), another co-owner of the South Texas Project, intervened in the litigation filed by Austin against HL&P and asserted claims similar to those asserted by Austin. Although San Antonio has not specified the damages sought in its complaint, expert reports filed in the litigation have indicated that San Antonio's claims may be in excess of $228 million. On February 29,1996, San Antonio announced that it was taking a nonsuit on its claims in the Austin Litigation in order to pursue settlement discussions with HL&P concerning those claims, as well as separate claims for unspecified damages previously asserted by San Antonio against HL&P with respect to the construction of the South Texas Project, which construction claims are the subject of a request for arbitration under the Participation Agreement. In order to preserve its litigation claims pending the outcome of settlement negotiations, San Antonio refiled its lawsuit in the 152nd District Court of Harris County, Texas. While neither the Company nor HL&P believes there is merit to San Antonio's claims either in the pending litigation or in the arbitration proceeding, there can be no assurance as to the ultimate outcome of those matters, nor can there be an assurance as to the ultimate outcome of the settlement discussions. If a settlement is reached, it is possible, among other things, that such resolution could require in the near term a charge to earnings from continuing operations, but it is not anticipated that any such resolution would be material to the Company's or HL&P's financial position, liquidity or ability to meet their respective cash requirements stemming from operating, capital expenditures and financing activities. (C) NUCLEAR INSURANCE. HL&P and the other owners of the South Texas Project maintain nuclear property and nuclear liability insurance coverage as required by law and periodically review available limits and coverage for additional protection. The owners of the South Texas Project currently maintain $2.75 billion in property damage insurance coverage which is above the legally required minimum, but is less than the total amount of insurance currently available for such losses. This coverage consists of $500 million in primary property damage insurance and excess property insurance in the amount of $2.25 billion. Under the excess property insurance (which became effective in November 1995), HL&P and the other owners of the South Texas Project are subject to assessments, the maximum aggregate assessment under current policies being $25.8 million during any one policy year. The application of the proceeds of such property insurance is subject to the priorities established by the NRC regulations relating to the safety of licensed reactors and decontamination operations. Pursuant to the Price Anderson Act (Act), the maximum liability to the public for owners of nuclear power plants, such as the South Texas Project, was $8.92 billion as of December 1995. Owners are required under the Act to insure their liability for nuclear incidents and protective evacuations by maintaining the maximum amount of financial protection available from private sources and by maintaining secondary financial protection through an industry retrospective rating plan. The 60 4 assessment of deferred premiums provided by the plan for each nuclear incident is up to $75.5 million per reactor subject to indexing for inflation, a possible 5 percent surcharge (but no more than $10 million per reactor per incident in any one year) and a 3 percent state premium tax. HL&P and the other owners of the South Texas Project currently maintain the required nuclear liability insurance and participate in the industry retrospective rating plan. There can be no assurance that all potential losses or liabilities will be insurable, or that the amount of insurance will be sufficient to cover them. Any substantial losses not covered by insurance would have a material effect on HL&P's and the Company's financial condition and results of operations. (D) NUCLEAR DECOMMISSIONING. In accordance with the Rate Case Settlement, HL&P contributes $14.8 million per year to a trust established to fund HL&P's share of the decommissioning costs for the South Texas Project. For a discussion of securities held in the Company's nuclear decommissioning trust, see Note 1(j). In May 1994, an outside consultant estimated HL&P's portion of decommissioning costs to be approximately $318 million (1994 dollars). The consultant's calculation of decommissioning costs for financial planning purposes used the DECON methodology (prompt removal/dismantling), one of the three alternatives acceptable to the NRC, and assumed deactivation of Unit Nos. 1 and 2 upon the expiration of their 40-year operating licenses. While the current and projected funding levels presently exceed minimum NRC requirements, no assurance can be given that the amounts held in trust will be adequate to cover the actual decommissioning costs of the South Texas Project. Such costs may vary because of changes in the assumed date of decommissioning, changes in regulatory and accounting requirements, changes in technology and changes in costs of labor, materials and equipment. (3) RATE MATTERS The Utility Commission has original (or in some cases appellate) jurisdiction over HL&P's electric rates and services. In Texas, Utility Commission orders may be appealed to a District Court in Travis County, and from that Court's decision an appeal may be taken to the Court of Appeals for the 3rd District at Austin (Austin Court of Appeals). Discretionary review by the Supreme Court of Texas may be sought from decisions of the Austin Court of Appeals. In the event that the courts ultimately reverse actions of the Utility Commission, such matters are remanded to the Utility Commission for action in light of the courts' orders. On remand, the Utility Commission's action could range from granting rate relief substantially equal to the rates previously approved to reducing the revenues to which HL&P was entitled during the time the applicable rates were in effect, which could require a refund to customers of amounts collected pursuant to such rates. (A) 1995 RATE CASE. In August 1995, the Utility Commission unanimously approved the Rate Case Settlement, which resolved HL&P's 1995 rate case (Docket No. 12065) as well as a separate proceeding (Docket No. 13126) regarding the prudence of operation of the South Texas Project. Subject to certain changes in existing regulation or legislation, the Rate Case Settlement precludes HL&P from seeking rate increases until after December 31, 1997. HL&P began recording the effects of the Rate Case Settlement in the first quarter of 1995. The Rate Case Settlement reduced HL&P's earnings for 1995 by approximately $100 million. 61 5 The after-tax effects in 1995 of the Rate Case Settlement are as follows:
Year Ended December 31, 1995 ----------------- (Millions of Dollars) Reduction in base revenues . . . . . . . . . . . . . . . . . . . $ 52 South Texas Project write-down . . . . . . . . . . . . . . . . . 33 One-time write-off of mine-related costs . . . . . . . . . . . . 6 Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . 9 ---- Total Rate Case Settlement effect on net income . . . . $100 ====
The Rate Case Settlement gives HL&P the option to write down up to $50 million ($33 million after-tax) per year of its investment in the South Texas Project through December 31, 1999. The parties to the Rate Case Settlement agreed that any such write-down will be treated as a reasonable and necessary expense during routine reviews of HL&P's earnings and any rate review proceeding initiated against HL&P. In accordance with the Rate Case Settlement, HL&P recorded a $50 million pre-tax write-down in 1995 of its investment in the South Texas Project which is included in the Company's Statements of Consolidated Income and HL&P's Statements of Income in depreciation and amortization expense. In 1995, HL&P also began accruing its share of decommissioning expense for the South Texas Project at an annual rate of $14.8 million (a $9 million per year increase over 1994). As required by the Rate Case Settlement, HL&P will begin in 1996 to amortize its $153 million investment in certain lignite reserves associated with the canceled Malakoff project. These amortizations will equal approximately $22 million per year. As a result of this additional amortization, HL&P's remaining investment in Malakoff ($233 million at December 31, 1995) will be fully amortized no later than December 31, 2002. During the second quarter of 1995, HL&P recorded a one-time pre-tax charge of $9 million incurred in connection with certain Malakoff mine-related costs that were not previously recorded and were not recoverable under the terms of the Rate Case Settlement. Issues concerning the prudence of expenditures related to Malakoff were deferred until a subsequent rate case. In Docket No. 8425, the Utility Commission allowed recovery of certain costs associated with Malakoff by allowing HL&P to amortize these costs over ten years. Such recoverable costs are not included in rate base and, as a result, no return on investment is being earned during the recovery period. The $28 million unamortized balance of these costs at December 31, 1995 is included in the $233 million discussed above and is to be amortized over the following 54 months. In anticipation of the Rate Case Settlement, the Company and HL&P recorded in the fourth quarter of 1994 a one-time, pre-tax charge of approximately $70 million to reconcilable fuel revenues, an amount which HL&P agreed as a part of the Rate Case Settlement was not recoverable from ratepayers. (B) RATE CASE APPEALS. Pursuant to the Rate Case Settlement, HL&P and the other parties to that settlement have dismissed their pending appeals of previous Utility Commission orders. As a result of that action or subsequent judicial action, the Utility Commission's orders have become final in Docket No. 9850 (involving HL&P's 1991 rate case) and in Docket Nos. 8230 and 9010 (involving deferred accounting). Two appeals of other orders, by parties who did not join in the Rate Case Settlement, remain pending: review of Docket No. 8425 (HL&P's 1988 rate case), and review of Docket No. 6668 (the Utility Commission's inquiry into the prudence of the planning and construction of the South Texas Project). The appeal from the order in Docket No. 8425 concerns (i) the treatment as "plant held for future use" of certain costs associated with the Malakoff 62 6 generating station and (ii) the treatment by HL&P of certain tax savings associated with federal income tax deductions for expenses not included in cost of service for ratemaking purposes. The appeal is currently pending before the Texas Supreme Court. Review of the Utility Commission's order in Docket No. 6668 is pending before a Travis County district court. In that order the Utility Commission determined that $375.5 million of HL&P's $2.8 billion investment in the South Texas Project had been imprudently incurred. That ruling was incorporated into HL&P's 1988 and 1991 rate cases. Unless the order is modified or reversed on appeal, the amount found imprudent by the Utility Commission will be sustained. (4) INVESTMENTS IN FOREIGN AND NON-REGULATED ENTITIES (A) GENERAL. HI Energy sustained net losses of $33 million, $6 million and $2 million in 1995, 1994 and 1993, respectively. Development costs for 1995 were approximately $14 million. The majority of costs in 1994 and 1993 were related to project development activities. (B) FOREIGN INVESTMENTS. Houston Argentina S.A. (Houston Argentina), a subsidiary of HI Energy, owns a 32.5 percent interest in Compania de Inversiones en Electricidad S.A. (COINELEC), an Argentine holding company which acquired a 51 percent interest in Empresa Distribuidora de La Plata S.A. (EDELAP), an electric utility company operating in La Plata, Argentina and surrounding regions. Houston Argentina's share of the purchase price was approximately $37.4 million. Such investment was in the form of (i) a capital contribution of $27.6 million to COINELEC and (ii) a loan to COINELEC in the aggregate principal amount of $9.8 million. HI Energy has also entered into support agreements with two financial institutions pursuant to which HI Energy has agreed to make additional cash contributions or subordinated loans to COINELEC or pay COINELEC's lenders up to a maximum aggregate of $6.6 million in the event of a default by COINELEC of its commitments to such financial institutions. Subsequent to the acquisition, the generating assets of EDELAP were transferred to Central Dique S.A., an Argentine Corporation, 51 percent of the stock of which is owned by COINELEC. HI Energy's portion of EDELAP and Central Dique S.A. earnings was approximately $1 million in both 1995 and 1994. In January 1995, HI Energy acquired for $15.7 million a 90 percent ownership interest in an electric utility operating company located in a rural province in the north central part of Argentina. The utility system serves approximately 116,000 customers in an area of 136,000 square kilometers. HI Energy's share of net losses from this investment for 1995 was $3.6 million substantially all of which was due to non-recurring severance costs. In 1995, HI Energy invested approximately $7 million in a cogeneration project being developed in San Nicolas, Argentina and approximately $5 million in a coke calcining project being developed in the state of Andhra Pradesh, India. These projects had no earnings impact in 1995. HI Energy estimates that its commitment in 1996 for the Argentine cogeneration project will be approximately $31 million and that its share of the 1996 commitment for the coke calcining project will be approximately $3 million. HI Energy has entered into a support agreement in favor of the International Finance Corporation (IFC) under the terms of which HI Energy has agreed to provide one of its subsidiaries (HIE Rain), which is an investor in the coke calcining project, with sufficient funds to meet certain funding obligations of HIE Rain under agreements with the IFC. The maximum aggregate funding commitment of HI Energy under this support agreement is approximately $18 million, of which approximately $16 million is to support contingent obligations of HIE Rain and the balance of which is additional equity to be contributed to the coke calcining project. 63 7 (C) ILLINOIS WASTE TIRE-TO-ENERGY PROJECTS. HI Energy is a subordinated lender to two waste tire-to-energy projects being developed by Ford Heights and Fulton, respectively, located in the state of Illinois. HI Energy also owns a $400,000 equity interest (20 percent) in Ford Heights. Both projects were being developed in reliance on the terms of the Illinois Retail Rate Law, enacted in 1987, to encourage development of energy production facilities for the disposal of solid waste by providing an operating subsidy to qualifying projects. In March 1996, the Governor of Illinois signed into law legislation which purports to repeal the subsidy provided to most of such energy production facilities, including the two waste tire-to-energy projects in which HI Energy has invested. A lawsuit has been filed on behalf of the Ford Heights and Fulton projects challenging, among other things, the constitutionality of the repeal and its retroactive application to the two waste tire-to-energy projects. On March 26, 1996, the Ford Heights project filed a voluntary petition seeking protection under the federal bankruptcy laws. The ability of the two waste tire-to-energy projects to meet their debt obligations is dependent upon the projects continuing to receive the operating subsidy under the Retail Rate Law. The terms of the public bonds issued by the Ford Heights and Fulton projects are non-recourse to the Company and HI Energy. In response to the actions taken by the state of Illinois, the Company has established a valuation allowance of $28 million ($18 million after-tax), which amount reflects the combined amounts lent on a subordinated basis to the Ford Heights and Fulton projects. In addition to amounts funded through March 26, 1996, HI Energy also is party to two separate Note Purchase Agreements committing it, under certain circumstances, to acquire up to (i) $3 million in aggregate principal amount of additional subordinated notes from the Ford Heights project and (ii) $17 million in aggregate principal amount of additional subordinated notes from the Fulton project. The Company has entered into a support agreement under which it has agreed to provide additional funds to HI Energy to enable it to honor its obligations under the two Note Purchase Agreements. The Company is unable to predict the ultimate effect of these developments on HI Energy's remaining funding commitments under these Note Purchase Agreements; however, in the Company's opinion it is unlikely that the majority of the additional unfunded subordinated debt provided for in the Fulton Note Purchase Agreement would be required to be funded unless construction activities with respect to the Fulton project are recommenced at some future date. If HI Energy becomes obligated to advance additional funds under the Note Purchase Agreements, the Company could be required to increase the amount of the valuation allowance, which would result in additional charges to earnings. (5) COMMON STOCK (A) STOCK DISTRIBUTION. The Company effected a two-for-one stock split in the form of a common stock distribution on December 9, 1995. All prior periods have been restated for consistency to reflect the stock distribution in terms of number of common shares outstanding and the per share amounts for earnings, dividends and market price. The nominal consideration established by the Board of Directors for the common stock distributed ($.01 per share) is reflected as a deduction from retained earnings in the Company's Statements of Consolidated Retained Earnings. (B) DIVIDENDS. The timing of the Company's Board of Directors' declaration of dividends changed resulting in five quarterly dividend declarations in 1993. All dividends declared in 1993 have been included in 1993 common stock dividends on the Company's Statements of Consolidated Retained Earnings. The Company paid four regular quarterly dividends in 1993 aggregating $1.50 per share, after restatement for the two-for-one stock split, on its common stock shares. (C) LONG-TERM INCENTIVE COMPENSATION PLANS. The Company has Long-Term Incentive Compensation Plans (LICP) providing for the issuance of stock incentives (including performance-based restricted shares and stock options) to key employees of the Company, including officers. As of December 31, 1995, 29 current and former employees participated in the plans. A maximum of five million shares of common stock may be issued under the LICP. Beginning one 64 8 Following are the Company's tax effects of temporary differences attributable to continuing operations resulting in deferred tax assets and liabilities:
December 31, --------------------------------- 1995 1994 -------------- ------------- (Thousands of Dollars) Deferred Tax Assets: Alternative minimum tax . . . . . . . . . . . . . . . . . . . . . . . $ 46,516 $ 66,707 IRS audit assessment . . . . . . . . . . . . . . . . . . . . . . . . . 74,966 74,966 Disallowed plant cost - net . . . . . . . . . . . . . . . . . . . . . 22,687 23,496 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,628 83,740 ---------- ---------- Total deferred tax assets - net . . . . . . . . . . . . . . . . . 240,797 248,909 ---------- ---------- Deferred Tax Liabilities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,391,573 1,336,035 Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . 200,028 207,746 Regulatory assets - net . . . . . . . . . . . . . . . . . . . . . . . 228,587 235,463 Capitalized taxes, employee benefits and removal costs . . . . . . . . 110,065 111,660 Gain on sale of cable television subsidiary . . . . . . . . . . . . . 227,515 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,275 121,235 ---------- ---------- Total deferred tax liabilities . . . . . . . . . . . . . . . . . . 2,308,043 2,012,139 ---------- ---------- Accumulated deferred income taxes - net . . . . . . . . . . $2,067,246 $1,763,230 ========== ==========
See Note 13 for income taxes related to discontinued operations. (11) COMMITMENTS AND CONTINGENCIES (a) HL&P COMMITMENTS. HL&P has various commitments for capital expenditures, fuel, purchased power, cooling water and operating leases. Commitments in connection with HL&P's capital program are generally revocable by HL&P subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties. HL&P's other commitments have various quantity requirements and durations. However, if these requirements could not be met, various alternatives are available to mitigate the cost associated with the contracts' commitments. (b) FUEL AND PURCHASED POWER. HL&P is a party to several long-term coal, lignite and natural gas contracts which have various quantity requirements and durations. Minimum payment obligations for coal and transportation agreements are approximately $175 million in 1996, $178 million in 1997 and $184 million in 1998. Additionally, minimum payment obligations for lignite mining and lease agreements are approximately $5 million for 1996, $8 million for 1997 and $9 million for 1998. Collectively, the fixed price gas supply contracts, which expire in 1997, could amount to 11 percent of HL&P's annual natural gas requirements for 1996 and 7 percent for 1997. Minimum payment obligations for both natural gas purchase and storage contracts are approximately $57 million in 1996, $38 million in 1997 and $9 million in 1998. HL&P also has commitments to purchase firm capacity from cogenerators of approximately $22 million in each of the years 1996 through 1998. Utility Commission rules currently allow recovery of these costs through HL&P's base rates for electric service and additionally authorize HL&P to charge or credit customers through a purchased power cost recovery factor for any variation in actual purchased power costs from the cost utilized to determine its base rates. In the event that the Utility Commission, at some future date, does not allow recovery through rates of any amount of purchased power payments, the two principal firm capacity contracts contain provisions allowing HL&P to suspend or reduce payments and seek repayment for amounts disallowed. 73 9 (c) OTHER. HL&P's service area is heavily dependent on oil, gas, refined products, petrochemicals and related businesses. Significant adverse events affecting these industries would negatively affect the revenues of the Company and HL&P. For information regarding contingencies relating to the South Texas Project, see Note 2 above. The Company and HL&P are involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business, some of which involve substantial amounts. (12) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair value of the Company's financial instruments are as follows:
December 31, ---------------------------------------------------------- 1995 1994 ---------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------- ----------- ------------- (Thousands of Dollars) Financial assets: Cash and short-term investments . . . . . . . $ 11,779 $ 11,779 $ 10,443 $ 10,443 Investment in Time Warner securities . . . . 1,027,875 1,027,875 Financial liabilities: Short-term notes payable . . . . . . . . . . 6,300 6,300 423,291 423,291 Cumulative preferred stock of subsidiary (subject to mandatory redemption) . . . . . . . . . . . . . . . . 76,755 79,250 167,610 173,355 Debentures . . . . . . . . . . . . . . . . . 348,914 396,903 548,729 549,532 Long-term debt of subsidiaries: Electric: First mortgage bonds . . . . . . . . . 2,979,293 3,247,139 3,020,400 2,980,028 Pollution control revenue bonds . . . 4,426 5,000 155,247 163,736 Other notes payable 981 981 1,129 1,129 Discontinued operations: Senior bank debt . . . . . . . . . . . 364,000 364,000 Senior and senior subordinated notes . . . . . . . . . . . . . . . 140,580 154,654
The fair values of cash and short-term investments, investment in equity securities, short-term and other notes payable and bank debt are estimated to be equivalent to the carrying amounts. The fair values of the Company's debentures, HL&P's cumulative preferred stock subject to mandatory redemption, HL&P's first mortgage bonds, pollution control revenue bonds issued on behalf of HL&P and senior subordinated notes are estimated using rates currently available for securities with similar terms and remaining maturities. (13) CABLE TELEVISION--DISCONTINUED OPERATIONS In July 1995, the Company completed the sale of KBLCOM, its cable television subsidiary, to Time Warner. The Company's 1995 earnings include a one-time, after-tax gain on the sale of $708 million. Effective January 1, 1995, the operations of KBLCOM were accounted for as discontinued and prior periods were restated for consistency in reflecting KBLCOM as a discontinued operation. 74 EX-99.B.II 12 NOTES 3 AND 7(A) TO FIRST QUARTER 10-Q 1 EXHIBIT 99(b) HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND HOUSTON LIGHTING & POWER COMPANY NOTES TO FINANCIAL STATEMENTS (1) GENERAL The interim financial statements and notes (Interim Financial Statements) contained in this Form 10-Q for the period ended March 31, 1996 (Form 10-Q) are unaudited and condensed. Certain notes and other information contained in the Combined Annual Report on Form 10-K (File Nos. 1-7629 and 1-3187) for the year ended December 31, 1995 (Form 10-K), of Houston Industries Incorporated (Company) and Houston Lighting & Power Company (HL&P) have been omitted in accordance with Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934. The information presented in the Interim Financial Statements should be read in combination with the information presented in the Form 10-K, including the financial statements and notes contained therein. For information regarding the Company's discontinued cable television operations, see Note 13 to the financial statements contained in the Form 10-K. (2) CERTAIN CONTINGENCIES The following notes to the financial statements of the Form 10-K (as updated by the notes contained in this Form 10-Q) are incorporated herein by reference: Note 1(b) (System of Accounts and Effects of Regulation), Note 2 (Jointly-Owned Nuclear Plant), Note 3 (Rate Matters), Note 4 (Investments in Foreign and Non-Regulated Entities) and Note 11 (Commitments and Contingencies). (3) JOINTLY-OWNED NUCLEAR PLANT HL&P is the project manager (and one of four co-owners) of the South Texas Project Electric Generating Station (South Texas Project), which consists of two 1,250 megawatt nuclear generating units. HL&P has a 30.8 percent interest in the project. On April 30, 1996, HL&P and the City of Austin (Austin), one of the four co-owners of the South Texas Project, agreed to settle a lawsuit in which Austin had alleged that outages occurring at the South Texas Project between early 1993 and early 1994 were due to HL&P's failure to perform certain obligations it owed Austin under a Participation Agreement relating to the project. For information regarding this settlement and a $13 million (after-tax) charge to first quarter earnings resulting from the settlement, see Note 7(a) to the Interim Financial Statements. For information concerning a similar lawsuit filed against HL&P by the City of San Antonio (San Antonio), another co-owner of the South Texas Project, and San Antonio's pending arbitration claims against HL&P with respect to the construction of the South Texas Project, see Note 2(b) to the financial statements contained in the Form 10-K. HL&P and San Antonio (acting through the City Public Service Board of San Antonio (CPS)) have agreed on the principles under which they would settle all claims with respect to the South Texas Project. For information regarding the proposed settlement and a $49 million (after-tax) charge to first quarter earnings relating thereto, see Note 7(a) to the Interim Financial Statements. -13- 2 (4) RATE CASE PROCEEDINGS For information concerning the settlement of HL&P's most recent rate case (Docket No. 12065) and the continuing impact of that settlement on HL&P's results of operations, see Note 3(a) to the financial statements contained in the Form 10-K. The two Public Utility Commission of Texas (Utility Commission) orders concerning HL&P that are still subject to appellate review are: Docket No. 8425 (HL&P's 1988 rate case) and Docket No. 6668 (an inquiry into the prudence of the planning and construction of the South Texas Project). For information regarding these appeals, see Note 3(b) to the financial statements contained in the Form 10-K. (5) CAPITAL STOCK Company. At March 31, 1996 and December 31, 1995, the Company had 400,000,000 authorized shares of common stock, of which 248,556,370 and 248,316,710 shares, respectively, were outstanding as of such dates. Outstanding shares exclude the unallocated shares of the Company's Employee Stock Ownership Plan, which as of March 31, 1996 and December 31, 1995 totaled 14,186,577 and 14,355,758, respectively. Earnings per common share for the Company are computed by dividing net income by the weighted average number of shares outstanding during the respective period. HL&P. All issued and outstanding shares of Class A voting common stock of HL&P are held by the Company, and all issued and outstanding shares of Class B non-voting common stock of HL&P are held by Houston Industries (Delaware) Incorporated (HI Delaware), a wholly owned subsidiary of the Company. Earnings per share data for HL&P are not computed because all of its common stock is held by the Company and HI Delaware. On March 31, 1996 and December 31, 1995, HL&P had 10,000,000 authorized shares of preferred stock, of which 4,318,397 shares were outstanding. (6) LONG-TERM DEBT HL&P. In January 1996, HL&P repaid upon maturity $100 million principal amount of its Collateralized Medium-Term Notes Series B and $10 million principal amount of its Collateralized Medium-Term Notes Series A plus accrued interest on the two issues. In March 1996, HL&P deposited approximately $86 million in a trust and irrevocably directed the trustee to redeem on May 8, 1996 all issued and outstanding principal amounts of HL&P's 7 1/4% first mortgage bonds due February 1, 2001 (at a redemption price of 100.42% plus accrued interest) and 6 3/4% first mortgage bonds due April 1, 1998 (at a redemption price of 100.15% plus accrued interest). (7) SUBSEQUENT EVENTS (a) South Texas Project Litigation. On April 30, 1996, Houston Lighting & Power Company entered into a settlement with Austin regarding City of Austin v. Houston Lighting & Power Company, Cause No. 94-07946, in the 11th Judicial District Court, Harris County, Texas. In that suit, filed by Austin in May 1994, Austin asserted that HL&P had mismanaged its responsibilities as Project Manager of the South Texas Project. Austin contended that, because of HL&P's mismanagement and negligence, the outage at the South Texas Project during 1993-94 had caused Austin damages of approximately $120 million. Trial of Austin's suit began in March 1996, and the settlement was reached in April 1996. Under the settlement, HL&P agreed to pay Austin $20 million in cash to resolve all pending disputes between HL&P and Austin, and Austin agreed to -14- 3 support the formation of a new operating company to assume HL&P's role as project manager for the South Texas Project. The Company and HL&P have recorded the $20 million ($13 million net of tax) payment to Austin on the Company's Statements of Consolidated Income and HL&P's Statements of Income as litigation settlements expense. HL&P and CPS have agreed on the principles under which they would settle all claims with respect to the South Texas Project. Under the proposed settlement, HL&P and CPS would enter into definitive agreements providing, among other things, for (i) a cash payment by HL&P to CPS of $75 million ($25 million of which has already been paid), (ii) an agreement to support formation of a new operating company to replace HL&P as project manager of the South Texas Project and (iii) the execution of a 10-year joint operations agreement under which HL&P and CPS will share savings resulting from the joint dispatching of their respective generating assets in order to take advantage of each system's lower cost resources. Under the terms of the joint operations agreement, CPS will be guaranteed minimum annual savings of $10 million with a minimum cumulative savings of $150 million over the ten year term of the agreement. Based on current forecasts and other assumptions regarding the combined operation of the two generating systems, HL&P anticipates that the savings resulting from joint operations will equal or exceed the minimum savings guaranteed under the joint operations agreement. Although no assurance can be given as to the ultimate resolution of negotiations, the proposed settlement will resolve all claims, litigation and matters in arbitration between the two parties with respect to the South Texas Project. The proposed settlement has been reviewed by San Antonio's city council but is still subject to approval by CPS. In anticipation of the settlement, the Company and HL&P have recorded a $49 million expense (net of tax) on the Company's Statement of Consolidated Income and HL&P's Statements of Income (reflected as litigation settlement expense). The unpaid portion of the cash payment contemplated by the settlement is shown in other deferred credits on the Company's Consolidated and HL&P's Balance Sheets. (b) HI Energy. In May 1996, a subsidiary of Houston Industries Energy, Inc. (HI Energy) purchased for approximately $55 million an additional 39 percent of the capital stock of Empresa Distribuidora la Plata (EDELAP), an electric utility company operating in La Plata, Argentina and surrounding regions. HI Energy also indirectly owns 16.6 percent of the capital stock of EDELAP, which shares were acquired in December 1992 for $37 million. For additional information regarding HI Energy's investments in foreign and non-regulated entities, see Note 4 to the financial statements contained in the Form 10-K. Beginning in the second quarter of 1996, EDELAP will be reflected in the Company's financial statements on a consolidated basis. (c) Redemption of HL&P Preferred Stock. In March 1996, HL&P provided notice to the holders of its $9.375 preferred stock that it would redeem 514,000 shares of such stock at a cost of approximately $53 million ($102.34375 per share including accrued dividends). On April 1, 1996, HL&P redeemed 257,000 of such shares pursuant to a sinking fund requirement and 257,000 shares pursuant to optional redemption provisions. HL&P will record the redemptions in the second quarter of 1996. (8) INTERIM PERIOD RESULTS: RECLASSIFICATIONS The results of interim periods are not necessarily indicative of results expected for the year due to the seasonal nature of HL&P's business. In the opinion of management, the interim information reflects all adjustments (consisting only of normal recurring adjustments) necessary for a full presentation of the results for the interim periods. Certain amounts from the previous year have been reclassified to conform to the 1996 presentation of financial statements. Such reclassifications do not affect earnings. -15- EX-99.C.II 13 NOTES 3, 4, 5, 6 AND 7 TO 2ND QUARTER 10-Q 1 EXHIBIT 99(c) HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND HOUSTON LIGHTING & POWER COMPANY NOTES TO FINANCIAL STATEMENTS (1) GENERAL The interim financial statements and notes (Interim Financial Statements) contained in this Form 10-Q for the period ended June 30, 1996 (Form 10-Q) are unaudited and condensed. Certain notes and other information contained in the Combined Annual Report on Form 10-K (File Nos. 1-7629 and 1-3187) for the year ended December 31, 1995 (Form 10-K), of Houston Industries Incorporated (Company) and Houston Lighting & Power Company (HL&P) have been omitted in accordance with Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934. The information presented in the Interim Financial Statements should be read in combination with the information presented in the Form 10-K and the Combined Quarterly Report on Form 10-Q of the Company and HL&P for the quarter ended March 31, 1996 (First Quarter 10-Q). (2) CERTAIN CONTINGENCIES The following notes to the financial statements in the Form 10-K (as updated by the notes contained in this Form 10-Q and the First Quarter 10-Q ) are incorporated herein by reference: Note 1(b) (System of Accounts and Effects of Regulation), Note 2 (Jointly-Owned Nuclear Plant), Note 3 (Rate Matters), Note 4 (Investments in Foreign and Non-Regulated Entities) and Note 11 (Commitments and Contingencies). (3) JOINTLY-OWNED NUCLEAR PLANT In July 1996, HL&P and City Public Service Board of San Antonio (CPS) entered into a settlement agreement providing, among other things, for (i) the dismissal with prejudice of all pending arbitration claims and lawsuits between HL&P and CPS relating to the South Texas Project Electric Generating Station (South Texas Project), (ii) a cash payment by HL&P to CPS of $75 million (accrued in the quarter ended March 31, 1996), (iii) an agreement to support formation of a new operating company to replace HL&P as project manager for the South Texas Project and (iv) the execution of a 10-year joint operations agreement under which HL&P and CPS will share savings resulting from the joint dispatching of their respective generating assets in order to take advantage of each system's lower cost resources. Under the terms of the joint operations agreement entered into between CPS and HL&P, HL&P will guarantee CPS minimum annual savings of $10 million and a minimum cumulative savings of $150 million over the ten-year term of the agreement. Based on current forecasts and other assumptions regarding the combined operation of the two generating systems, HL&P anticipates that the savings resulting from joint operations will equal or exceed the minimum savings guaranteed under the joint operations agreement. For information regarding the settlement in April 1996 of a similar lawsuit filed by the City of Austin (Austin) against HL&P and a $13 million (after-tax) charge to earnings recorded in the first quarter of 1996 in connection with this settlement, see Notes 3 and 7(a) to the First Quarter 10-Q, which notes are incorporated herein by reference. -14- 2 As a result of the settlements of the CPS and Austin litigation, all litigation and arbitration claims formerly pending between HL&P and the other co-owners of the South Texas Project have been settled and dismissed with prejudice. (4) HI ENERGY Acquisition of Interest in Brazilian Electric Utility. In May 1996, a subsidiary of Houston Industries Energy, Inc. (HI Energy) acquired 11.35 percent of the common shares of Light - Servicos de Eletricidade S.A. (Light), a publicly-held Brazilian corporation, for $392 million. Light is the operator under a 30-year concession agreement of an approximately 3,888 megawatt electric power generation, transmission and distribution system serving 28 municipalities in the state of Rio de Janeiro, Brazil. HI Energy acquired the shares as a bidder in the government-sponsored auction of 60 percent of Light's outstanding shares. Subsequent to the auction, the winning bidders, including a subsidiary of HI Energy, formed a consortium whose aggregate ownership interest of 50.44 percent represents a controlling interest in Light. The consortium, organized pursuant to a shareholders agreement dated as of May 27, 1996, is comprised of the direct share ownership interests held in Light by subsidiaries or affiliates of The AES Corporation (11.35 percent), Electricite de France (11.35 percent), HI Energy (11.35 percent), Companhia Sidercgica Nacional (7.25 percent), and Banco Nacional de Desenvolvimento Economico E Social (BNDES) (9.14 percent). Pursuant to the shareholders agreement, principal responsibilities for the various aspects of Light's business will be allocated among the parties. The HI Energy subsidiary will have the principal responsibility for all matters relating to Light's financial affairs. The Company has accounted for this transaction under purchase accounting and has recorded its investment and its interest in Light's operations since June 1, 1996, using the equity method. The effect of Light's income on the Company's net income is immaterial for the second quarter of 1996 and the six months ended June 30, 1996. Class B Shares of Edelap. On May 2, 1996, Houston Argentina S.A. (Houston Argentina), a subsidiary of HI Energy, purchased for approximately $55 million the Class B Shares of Empresa Distribuidora de la Plata S.A. (Edelap), an electric utility company operating in La Plata, Argentina, and surrounding regions. The Class B Shares of Edelap were sold by the Argentine government in a public auction. On May 28, 1996, Houston Argentina sold a portion of its Class B Shares to a third party for approximately $10 million. The remaining Class B Shares held by Houston Argentina constitute 32 percent of the capital stock of Edelap. Houston Argentina also owns indirectly through a holding company an additional 16.6 percent of the capital stock of Edelap, which shares were acquired in 1992 for $37 million. The Company has recorded its investment in Edelap using the equity method. (5) RATE CASE PROCEEDINGS In June 1996, the Supreme Court of Texas unanimously upheld the decision of the Public Utility Commission of Texas (Utility Commission) in Docket No. 8425 (HL&P's 1988 rate case) to include in HL&P's rate base $93 million in construction costs relating to the Malakoff project (a canceled lignite generation project). The Supreme Court also affirmed the Utility Commission's decision granting deferred accounting treatment for Unit No. 2 of the South Texas Project and the calculation of HL&P's federal income tax expenses without taking into account deductions for expenses paid by the Company's shareholders. As a result of this decision, HL&P's 1988 rate case has now become final. For information regarding the appeal of Docket No. 6668 (an inquiry into the prudence of the planning and construction of the South Texas Project), see Note 3(b) to the Form 10-K. -15- 3 (6) CAPITAL STOCK Company. At June 30, 1996 and December 31, 1995, the Company had 400,000,000 authorized shares of common stock, of which 247,690,618 and 248,316,710 shares, respectively, were outstanding as of such dates. Outstanding shares exclude (i) the unallocated shares of the Company's Employee Stock Ownership Plan (which as of June 30, 1996 and December 31, 1995 totaled 13,861,929 and 14,355,758, respectively) and (ii) 1,195,900 shares purchased by the Company as of June 30, 1996, under the common stock repurchase program described below. Earnings per common share for the Company are computed by dividing net income by the weighted average number of shares outstanding during the respective period. In June 1996, the Company announced that its Board of Directors had authorized the purchase of up to $150 million of the Company's common stock. It is anticipated that any purchases of common stock under the program would be effected over the next 12 months, subject to market conditions, available cash and alternative investment opportunities. The Company began repurchasing shares in mid-June 1996. HL&P. All issued and outstanding shares of Class A voting common stock of HL&P are held by the Company, and all issued and outstanding shares of Class B non-voting common stock of HL&P are held by Houston Industries (Delaware) Incorporated (HI Delaware), a wholly owned subsidiary of the Company. Earnings per share data for HL&P are not computed because all of its common stock is held by the Company and HI Delaware. On June 30, 1996 and December 31, 1995, HL&P had 10,000,000 authorized shares of preferred stock, of which 3,804,397 and 4,318,397 shares, respectively, were outstanding. In April 1996, HL&P redeemed 514,000 shares of its $9.375 cumulative preferred stock at a cost of approximately $53 million ($102.34375 per share, including accrued dividends). The redemption included 257,000 shares in satisfaction of mandatory sinking fund requirements and an additional 257,000 shares as an optional redemption. (7) LONG-TERM DEBT In January 1996, HL&P repaid upon maturity $100 million principal amount of its Collateralized Medium-Term Notes Series B and $10 million principal amount of its Collateralized Medium-Term Notes Series A, plus accrued interest on the two issues. In April 1996, HL&P repaid upon maturity $40 million principal amount of its 5 1/4% first mortgage bonds. In May 1996, HL&P redeemed all outstanding principal amounts of its 7 1/4% first mortgage bonds ($50,000,000) due February 1, 2001, at a redemption price of 100.42% (plus accrued interest) and 6 3/4% first mortgage bonds ($35,000,000) due April 1, 1998, at a redemption price of 100.15% (plus accrued interest). (8) SUBSEQUENT EVENT On August 11, 1996, the Company, HL&P and a newly formed Delaware subsidiary of the Company (HI Merger, Inc.) entered into an Agreement and Plan of Merger with NorAm Energy Corp. (NorAm). Under the merger agreement and assuming all necessary regulatory and shareholder approvals, the Company would merge with and into HL&P and the currently outstanding stock of the Company would become the common stock of HL&P, which would be renamed "Houston Industries Incorporated" (HII). NorAm would merge with and into HI Merger, Inc. and would become a wholly owned subsidiary of HII. Consideration for the purchase of NorAm shares will be a combination of cash and shares of HII common stock. The transaction is valued at $3.8 billion, consisting of $2.4 billion for NorAm's common stock and equivalents and $1.4 billion of NorAm debt. For information regarding the Agreement and Plan of Merger, see the Company and HL&P's current report on Form 8-K dated August 11, 1996, which report is incorporated herein by reference. (9) INTERIM PERIOD RESULTS: RECLASSIFICATIONS The results of interim periods are not necessarily indicative of results expected for the year due to the seasonal nature of HL&P's business. In the opinion of management, the interim information reflects all adjustments (consisting only of normal recurring adjustments) necessary for a full presentation of the results for the interim periods. Certain amounts from the previous year have been reclassified to conform to the 1996 presentation of financial statements. Such reclassifications do not affect earnings. -16- -----END PRIVACY-ENHANCED MESSAGE-----