SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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HOUSTON INDUSTRIES INCORPORATED
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[LOGO OF HOUSTON INDUSTRIES APPEARS HERE]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 22, 1996
AND PROXY STATEMENT
TABLE OF CONTENTS
PAGE
----
Notice of Annual Meeting
Proxy Statement
Voting of Shares......................................................... 1
Election of Directors.................................................... 2
Nominees................................................................. 2
Continuing Directors..................................................... 4
Organization of the Board of Directors................................... 5
Compensation of Directors................................................ 6
Securities Ownership of Certain Beneficial Owners........................ 6
Securities Ownership of Management....................................... 7
Executive Compensation................................................... 8
Retirement Plans, Related Benefits and Other Agreements.................. 11
Report of the Personnel Committee on Executive Compensation.............. 16
Shareholder Return Performance Graph..................................... 21
Proposal to Adopt Stock Plan for Outside Directors....................... 22
Ratification of Appointment of Independent Accountants and Auditors...... 23
Other Matters............................................................ 23
Shareholder Proposals for 1997 Annual Meeting of Shareholders............ 23
Director Nominations for 1997 Annual Meeting of Shareholders............. 23
Annual Report to Shareholders............................................ 24
Exhibit A--Stock Plan for Outside Directors.............................. A-1
Appendix A--1995 Financial Statements
[LOGO OF HOUSTON INDUSTRIES APPEARS HERE]
1111 Louisiana, Houston, Texas 77002
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 22, 1996
AND PROXY STATEMENT
To the Shareholders:
The Annual Meeting of Shareholders of Houston Industries Incorporated will
be held in the AUDITORIUM OF HOUSTON INDUSTRIES PLAZA, 1111 LOUISIANA,
HOUSTON, TEXAS, at 9:00 a.m., Central Daylight Time, on Wednesday, May 22,
1996, for the following purposes:
1. To elect five directors to hold office in accordance with the Amended
and Restated Bylaws of the Company;
2. To adopt the Houston Industries Incorporated Stock Plan for Outside
Directors;
3. To ratify the appointment of Deloitte & Touche LLP as independent
accountants and auditors for the Company for 1996; and
4. To transact such other business that may properly come before the
meeting, or any adjournments thereof.
Only shareholders of record at the close of business on April 3, 1996 are
entitled to notice of, and to vote at, the meeting.
All shareholders are cordially invited and urged to attend the meeting. EVEN
IF YOU PLAN TO ATTEND THE MEETING, YOU ARE STILL REQUESTED TO SIGN, DATE AND
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED ADDRESSED ENVELOPE. If you
attend, you may vote in person if you wish, even though you have sent in your
proxy.
By order of the Board of Directors,
[Signature of Hugh Rice Kelly
appears here]
Hugh Rice Kelly
Corporate Secretary
April 10, 1996
HOUSTON INDUSTRIES INCORPORATED
1111 Louisiana, Houston, Texas 77002
(713) 207-3000
PROXY STATEMENT
On or about April 10, 1996, Houston Industries Incorporated (Company) began
mailing this proxy statement and the accompanying proxy card to shareholders
entitled to vote at the Company's annual meeting of shareholders to be held on
May 22, 1996 (Annual Meeting). The proxy statement and proxy card are being
furnished in connection with the solicitation of proxies by the Company's
Board of Directors for the Annual Meeting.
The expense of this solicitation will be borne by the Company. The Company
has engaged Morrow & Co. to assist in the solicitation of proxies at a fee of
approximately $9,500, plus expenses. The Company will also reimburse brokerage
firms, nominees, fiduciaries, custodians and other agents for their expenses
in distributing proxy material to the beneficial owners of the Company's
common stock, without par value (Common Stock), in accordance with Securities
and Exchange Commission (SEC) and New York Stock Exchange requirements. In
addition, certain of the Company's directors, officers and employees may
solicit proxies by telephone and personal contact.
VOTING OF SHARES
As of April 3, 1996, the record date fixed by the Board of Directors for the
determination of shareholders entitled to vote at the Annual Meeting, the
Company had outstanding 262,742,947 shares of Common Stock, which is the only
class of the Company's securities outstanding and entitled to vote at the
Annual Meeting. Each share of Common Stock is entitled to one vote.
Shares represented by properly executed proxies received prior to the Annual
Meeting will be voted as specified by the shareholders. If no specifications
have been given in a proxy, the shares represented thereby will be voted at
the Annual Meeting or any adjournments thereof FOR Item 1 (election of the
nominees for director), FOR Item 2 (approval of stock plan for outside
directors), FOR Item 3 (ratification of the appointment of Deloitte & Touche
LLP as independent accountants and auditors of the Company for 1996) and, in
the discretion of the persons named in the proxy, on any other business that
may properly come before the meeting.
A proxy may be revoked by a shareholder at any time before it is voted at
the Annual Meeting by delivering written revocation to Mr. Robert E. Smith,
Assistant Corporate Secretary, at the Company's address shown above, by
submitting a subsequent proxy or by voting in person at the meeting.
Under Texas law and the Company's Amended and Restated Bylaws (Bylaws), the
vote required for Item 1 (election of the nominees for director) is a
plurality of the votes cast and the vote required for each of Items 2 and 3
(approval of stock plan for outside directors and ratification of independent
accountants and auditors, respectively) is the affirmative vote of a majority
of shares of Common Stock entitled to vote and represented in person or by
proxy at the meeting. Abstentions and non-votes (shares held by brokers and
other nominees or fiduciaries that are present at the meeting but not voted on
a particular matter) have the same effect as a vote "against" the matter
presented for shareholder action for purposes of determining whether
sufficient affirmative votes have been cast.
1
ELECTION OF DIRECTORS
The Company's Bylaws provide for a Board of Directors divided into three
classes having staggered terms with each class as nearly equal in size as
possible. Pursuant to the Company's Bylaws, the Board of Directors has set its
size at fourteen members as of the date of the Annual Meeting. The current
term of office of the directors in Class III expires at the Annual Meeting.
The terms of office of directors in Class I and Class II will expire at the
annual meetings of shareholders to be held in 1997 and 1998, respectively. At
each annual meeting of shareholders, directors will be elected to succeed
those whose terms then expire, with each newly elected director to serve for a
three-year term. All members of the Board of Directors also currently serve as
directors of the Company's principal subsidiary, Houston Lighting & Power
Company (HL&P).
The Bylaws currently provide that no person is eligible to stand for re-
election to the Board of Directors at the annual meeting of shareholders on or
immediately following the tenth anniversary of such person's initial election
or appointment to the Board of Directors unless such person was serving as a
director of the Company as of April 1, 1992 or is an employee of the Company
or any of its corporate affiliates. The Bylaws also provide that no person is
eligible to serve as a director after the annual meeting of shareholders
occurring on or after the first day of the month immediately following such
person's seventieth birthday, except in the case of a director having special
technical expertise in the nuclear power field who, under certain
circumstances, may be authorized by the Board to be eligible to serve for one
additional year. The Bylaws specify that any vacancies created by such term
limitations are to be filled by the shareholders at the appropriate annual
meeting. In any case, each director will serve until his or her successor is
duly elected and qualified unless he or she resigns, becomes disqualified or
disabled or is removed. Dr. Hendrie will retire from the Board at the Annual
Meeting, having served as a director of the Company and HL&P since 1985.
NOMINEES
The nominees for Class III directors to serve three-year terms ending at the
annual meeting in 1999 are Mr. James A. Baker, III and Dr. Richard E.
Balzhiser, who have not previously served as directors of the Company, and
current directors Messrs. Horne, Jordan and Schnitzer. It is intended that the
persons named in the accompanying proxy will vote shares represented by
properly executed proxies for the election of the listed nominees as directors
unless authority to vote is withheld. If any nominee should become unavailable
to serve on the Board of Directors, the persons named in the proxy may act
with discretionary authority to vote the proxy for such other person, if any,
as may be designated by the Board of Directors.
The following sets forth certain information with respect to the business
experience of each nominee during the past five years and certain other
directorships held by each nominee. Unless otherwise indicated, each person
has had the same principal occupation for at least five years.
CLASS III DIRECTORS--TERM EXPIRING 1999
JAMES A. BAKER, III, age 65, has not previously served as a director. Mr.
Baker is currently a senior partner in the law firm of Baker & Botts, L.L.P.
in Houston, Texas and Senior Counselor to The Carlyle Group, a merchant
banking firm in Washington, D. C. He served as the U.S. Secretary of State
from January 1989 through August 1992 and as White House Chief of Staff and
Senior Counselor to President Bush from August 1992 to January 1993. From 1985
to 1988, Mr. Baker was the U.S. Secretary of the Treasury and Chairman of the
President's Economic Policy Council in the administration of President Reagan,
having previously served as President Reagan's White House Chief of Staff from
1981 to 1985 and as President Ford's Under Secretary of Commerce in 1975. (1)
- --------
(1) Baker & Botts, L.L.P. provided legal services to the Company and its
subsidiaries during 1995, for which it received approximately $10.9
million in legal fees, and it is also expected to provide legal services
during 1996.
2
CLASS III DIRECTORS--TERM EXPIRING 1999--(CONTINUED)
RICHARD E. BALZHISER, PH.D., age 63, has not previously served as a
director. Dr. Balzhiser is President and Chief Executive Officer of the
Electric Power Research Institute (EPRI) in Palo Alto, California, a
collaborative research and development organization funded by member electric
utilities. Dr. Balzhiser joined EPRI in 1973 as Director of the Fossil Fuel
Advanced Systems Division. He became Vice President of Research and
Development in 1979 and Executive Vice President in 1987 before assuming his
present position in 1988. (2)
HOWARD W. HORNE, age 69, has been a director since 1978. Mr. Horne is Vice-
Chairman of Cushman & Wakefield of Texas, Inc., a subsidiary of a national
real estate brokerage firm. Until 1990, he was Chairman of the Board of The
Horne Company, a Houston realty firm. (3)
DON D. JORDAN, age 63, has been a director of the Company since 1977 and of
HL&P since 1974. Mr. Jordan is Chairman and Chief Executive Officer of the
Company and Chairman and Chief Executive Officer of HL&P. He also serves as a
director of Texas Commerce Bancshares, Inc. and BJ Services Company, Inc.
KENNETH L. SCHNITZER, SR., age 66, has been a director since 1983. Mr.
Schnitzer is Chairman of the Board of Schnitzer Enterprises Inc., a Houston
commercial real estate development company, having previously served as a
director of American Building Maintenance Industries Incorporated and
Weingarten Realty, Inc. (4)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES FOR DIRECTOR.
- --------
(2) During 1995, the Company and HL&P paid a total of approximately $15.5
million in membership dues to EPRI. HL&P expects to pay approximately $9
million in dues to EPRI during 1996.
(3) In accordance with the director retirement provisions of the Company's
Bylaws, Mr. Horne is expected to retire at the date of the Company's 1997
annual meeting of shareholders, which is prior to the end of the Class III
term.
(4) During 1995, certain of the Company's subsidiaries leased office space in
buildings owned or controlled by affiliates of Mr. Schnitzer. The
Company's subsidiaries paid a total of approximately $283,000 to
affiliates of Mr. Schnitzer during 1995. The Company believes such
payments are comparable to those that would have been made to other non-
affiliated firms for comparable facilities and services. In 1994, Mr.
Schnitzer consented to the entry of an order by the Office of Thrift
Supervision (OTS) whereunder he may not hold office in, or participate in
the conduct of the affairs of, any federally regulated depository
institution without the prior approval of the OTS and, if applicable, any
other appropriate federal banking agency. The order arose out of Mr.
Schnitzer's prior service as a director of BancPLUS Savings and Loan
Association (BancPLUS), a Houston, Texas-based thrift that was taken over
by federal regulators in 1989. Mr. Schnitzer consented to the order to
avoid the time and expense of defending an OTS administrative proceeding,
without admitting whether there were any grounds for such a proceeding. In
August 1995, Mr. Schnitzer and three other individuals were named as
defendants in a criminal proceeding based on two 1986 real estate
transactions involving BancPLUS. The matter is pending in the United
States District Court for the Southern District of Texas. The federal
government has alleged that the four defendants caused BancPLUS to enter
into a land swap and to falsely report the swap as two separate and
independent transactions. In 1987, following a default on notes secured by
the parcel that BancPLUS had sold and discovery that the person who
controlled the defaulting party had misrepresented his relationship with
the seller of the other parcel, BancPLUS reported the transaction as a
possible land swap to federal regulators and reversed a previously
reported profit from the sale transaction in its financial statements.
There is no allegation that Mr. Schnitzer (or any other director or
officer of BancPLUS) profited or attempted to profit personally from the
transaction. Mr. Schnitzer and his counsel have advised the Company that
the charges against him are without any basis in fact and will be
vigorously defended. The case has been scheduled for trial in July 1996.
3
CONTINUING DIRECTORS
The following sets forth certain information with respect to the members of
the Company's Board of Directors whose current terms will continue after the
Annual Meeting. Information is provided concerning the business experience of
each continuing director during the past five years and certain other
directorships held by each continuing director. Unless otherwise indicated,
each person has had the same principal occupation for at least five years.
CLASS I DIRECTORS--TERM EXPIRING 1997
ROBERT J. CRUIKSHANK, age 65, has been a director since 1993. Mr. Cruikshank
is primarily engaged in managing his personal investments in Houston, Texas.
Prior to his retirement in 1993, he was a Senior Partner in the accounting
firm of Deloitte & Touche. Mr. Cruikshank serves as a director of MAXXAM Inc.,
Kaiser Aluminum Corporation, Compass Bank--Houston and Texas Biotechnology
Corporation.
LINNET F. DEILY, age 50, has been a director since 1993. Ms. Deily served as
Chairman, Chief Executive Officer and President of First Interstate Bank of
Texas, N.A. until March 31, 1996, having been Chairman since 1992, Chief
Executive Officer since 1991 and President of First Interstate Bank of Texas
since 1988. (1)
LEE W. HOGAN, age 51, has been a director since 1995. Mr. Hogan is President
and Chief Operating Officer of Houston Industries Energy, Inc., the
nonregulated power business subsidiary of the Company, having served in that
capacity since 1993. From 1990 to 1993 he served as Group Vice President--
External Affairs for HL&P. Mr. Hogan is also a Senior Vice President of the
Company.
ALEXANDER F. SCHILT, Ph.D., age 55, has been a director since 1992. Dr.
Schilt served as Chancellor of the University of Houston System through August
1995. Prior to 1990, he was President of Eastern Washington University in
Cheney and Spokane, Washington.
JACK T. TROTTER, age 69, has been a director since 1985. Mr. Trotter is
primarily engaged in managing his personal investments in Houston, Texas. He
also serves as a director of First Interstate Bank of Texas, N.A. and Howell
Corporation and as a director and Trust Manager of Weingarten Realty
Investors.
CLASS II DIRECTORS--TERM EXPIRING 1998
MILTON CARROLL, age 45, has been a director since 1992. Mr. Carroll is
Chairman, President and Chief Executive Officer of Instrument Products Inc.,
an oil field supply manufacturing company, in Houston, Texas. He is a director
of PanEnergy Corp., the Federal Reserve Bank of Dallas and Blue Cross and Blue
Shield of Texas, Inc.
JOHN T. CATER, age 60, has been a director since 1983. Mr. Cater is
Chairman, Chief Executive Officer and a director of River Oaks Trust Company
in Houston, Texas. He also serves as President and a director of Compass Bank-
Houston. Until his retirement in 1990, Mr. Cater served as President, Chief
Operating Officer and a director of MCorp, a Texas bank holding company. He
served as a director of MCorp until July 1994.
R. STEVE LETBETTER, age 48, has been a director since 1995. Mr. Letbetter is
President and Chief Operating Officer of HL&P, having served in that capacity
since 1993. He has served in various positions as an officer of HL&P since
1978, most recently as Group Vice President--Finance and Regulatory Relations
since 1988. He is also a Senior Vice President of the Company. Mr. Letbetter
is a director of Charter Bancshares Inc., a Texas bank holding company.
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(1) First Interstate Bank of Texas, N.A., and certain of its affiliates
participate in various credit facilities with the Company, certain of its
subsidiaries and other entities in which the Company has an ownership
interest. Under these agreements, First Interstate and certain of its
affiliates have maximum aggregate loans and loan commitments of
approximately $35.5 million as of December 31, 1995.
4
CLASS II DIRECTORS--TERM EXPIRING 1998--(CONTINUED)
BERTRAM WOLFE, Ph.D., age 68, has been a director since 1993. Prior to his
retirement in 1992, Dr. Wolfe was Vice President and General Manager of
General Electric Company's nuclear energy business in San Jose, California.
From 1992 to 1995, he was on the nuclear advisory committee of Pennsylvania
Power & Light and was a member of the international advisory committee of
Concord Industries. Dr. Wolfe serves on the boards of directors of URENCO Inc.
and URENCO Investments, Inc.
ORGANIZATION OF THE BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Board of
Directors. The Board of Directors has established several committees to
oversee specific matters affecting the Company, including an Executive and
Nominating Committee, an Audit Committee, a Finance Committee, a Personnel
Committee, a Nuclear Committee and other committees.
The Executive and Nominating Committee, currently composed of Messrs. Cater,
Horne, Jordan, Schnitzer, Trotter and Dr. Hendrie, reviews management
recommendations for organizational changes, provides consultation regarding
duties of executive officers and recommends potential candidates for election
to the Board of Directors. See "Director Nominations for 1997 Annual Meeting
of Shareholders."
The Audit Committee is composed entirely of non-employee directors,
currently Messrs. Carroll, Cruikshank, Schnitzer and Dr. Schilt. The Audit
Committee reviews the Company's accounting and financial practices and advises
the Board of Directors of any needed changes in such practices, recommends to
the Board of Directors the firm of independent public accountants to be
engaged to examine the financial statements of the Company and its
subsidiaries, reviews and approves the plan and scope of the independent
public accountants' audit and non-audit services and related fees, reviews the
Company's internal accounting controls, and has general responsibility for
related matters.
The Finance Committee, currently composed of Messrs. Cater, Hogan, Horne,
Jordan, Trotter and Ms. Deily, reviews management forecasts of the Company's
financial needs and policies, acts on management recommendations concerning
the Company's capital structure, amounts and sources of permanent financing,
lines of credit, loan agreements and dividend policies and approves terms
relevant to specific debt and equity offerings of the Company.
The Personnel Committee is composed entirely of non-employee directors,
currently Messrs. Carroll, Cater, Cruikshank and Horne. The Personnel
Committee makes recommendations to the Board of Directors concerning
compensation and benefits for officers of the Company and reviews human
resource programs regarding manpower forecasts and training. The Personnel
Committee also monitors and, in certain cases, administers employee benefit
plans.
The Nuclear Committee is currently composed entirely of non-employee
directors, Drs. Hendrie, Schilt and Wolfe and Mr. Schnitzer. The Nuclear
Committee reviews the activities of the Company and HL&P in all areas of
nuclear development and operations, and reports to and makes recommendations
to the Board of Directors on such matters as nuclear regulatory reports and
licensing requirements, management evaluations of nuclear engineering,
construction and operations progress and performance and monitoring of
budgetary requirements.
The Board of Directors of the Company and HL&P held sixteen and twelve
meetings, respectively, during 1995. During 1995 the Executive and Nominating
Committee met one time, the Audit Committee met three times, the Finance
Committee met four times, the Personnel Committee met four times and the
Nuclear Committee met nine times. Other committees met an aggregate of nine
times. Each director attended at least seventy-five percent of the aggregate
number of meetings of the Boards of Directors and of committees of such boards
on which he or she served.
5
COMPENSATION OF DIRECTORS
Each non-employee director receives an annual retainer fee of $20,000, a fee
of $1,000 for each board meeting attended and a fee of $700 for each committee
meeting attended. Directors may defer all or part of their annual retainer
fees and meeting fees under the Company's deferred compensation plan. The
deferred compensation plan currently provides for accrual of interest on
deferred director compensation at a rate equal to the average annual yield on
Moody's Long-Term Corporate Bond Index plus two percentage points.
Non-employee directors participate in a director benefits plan pursuant to
which a director who serves at least one full year will receive an annual
benefit in cash equal to the annual retainer payable in the year the director
terminates service. Benefits under this plan will be payable to a director,
commencing the January following the later of the director's termination of
service or attainment of age 65, for a period equal to the number of full
years of service of the director.
Non-employee directors may also participate in the Company's executive life
insurance plan described under "Retirement Plans, Related Benefits and Other
Agreements," providing split-dollar life insurance with a death benefit equal
to six times the director's annual retainer with coverage continuing after
termination of service as a director. This plan also permits the Company to
provide for a tax reimbursement payment to make the directors whole for any
imputed income recognized with respect to the term portion of the annual
insurance premiums. Upon death, the Company will receive the balance of the
insurance proceeds payable in excess of the specified death benefit which, by
design, is expected to be at least sufficient to cover the Company's
cumulative outlays to pay premiums and the after-tax cost to the Company of
the tax reimbursement payments. Mr. Trotter, who does not participate in this
plan, has a separate agreement with the Company providing for payment in the
event of his death of a lump sum equal to eight times his final annual
retainer, which, because it is subject to taxation at distribution,
approximates on an after-tax basis the amount of the death benefit that would
have been payable had he participated in the executive life insurance plan.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth certain information regarding each person
(including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934) who is known by the Company (based on
February 1996 Schedule 13G filings made with the SEC) to beneficially own more
than 5% of the Company's Common Stock.
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ------------------------------------ ---------- -------
The Northern Trust Corporation........................... 33,770,247(1) 12.86%
50 South LaSalle Street
Chicago, Illinois 60675
- --------
(1) Northern Trust Corporation as parent holding company, and its subsidiaries
The Northern Trust Company, Northern Trust Bank of Florida N.A. and
Northern Trust Bank of Arizona (together, Northern Trust), have reported
that Northern Trust has sole voting power for 501,066 shares, shared
voting power for 33,264,383 shares, sole dispositive power for 437,284
shares and shared dispositive power for 79,769 shares. The Company
understands that the shares reported include 33,167,662 shares held by The
Northern Trust Company in its capacity as trustee under the Company's
savings plan.
6
SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth information as of March 1, 1996 (except as to
Messrs. Baker and Balzhiser, whose share ownership is shown as of March 22,
1996), with respect to the beneficial ownership of the Company's Common Stock
by each current director and nominee, the chief executive officer and the
other six most highly compensated executive officers of the Company and, as a
group, by such persons and other executive officers. No person or member of
the group listed owns any equity securities of HL&P or any other subsidiary of
the Company. Unless otherwise indicated, each person or member of the group
listed has sole voting and sole investment power with respect to the shares of
Common Stock listed. No ownership shown in the table represents 1% or more of
the outstanding shares of Common Stock.
SHARES OF
COMMON STOCK
NAME BENEFICIALLY OWNED
- ---- ------------------
James A. Baker, III..................................... 1,000
Richard E. Balzhiser.................................... 100
Milton Carroll.......................................... 2,400
John T. Cater........................................... 2,000 (1)
William T. Cottle....................................... 11,790 (2)(3)
Robert J. Cruikshank.................................... 2,000
Linnet F. Deily......................................... 2,000 (4)
Joseph M. Hendrie....................................... 967 (4)(5)
Lee W. Hogan............................................ 26,513 (2)(3)(5)
Howard W. Horne......................................... 12,871 (5)
Don D. Jordan........................................... 222,969 (2)(3)(6)
Hugh Rice Kelly......................................... 61,975 (2)(3)(5)
R. Steve Letbetter...................................... 51,707 (2)(3)(5)
David M. McClanahan..................................... 24,242 (2)(3)(5)
Alexander F. Schilt..................................... 800
Kenneth L. Schnitzer, Sr................................ 9,300
Don D. Sykora........................................... 107,303 (2)(3)(5)
Jack T. Trotter......................................... 2,000
Bertram Wolfe........................................... 220
All of the above and other executive officers as a group
(24 persons)............................................ 678,610 (2)(3)(5)
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(1) Mr. Cater disclaims beneficial ownership of these shares, which are owned
by his adult children.
(2) Includes shares held under the Company's savings plan, as to which the
participant has sole voting power (subject to such power being exercised
by the plan's trustee in the same proportion as directed shares in the
savings plan are voted in the event the participant does not exercise
voting power). The shares held under the plan are reported as of December
31, 1995.
(3) The ownership shown in the table includes shares which may be acquired
within 60 days on exercise of outstanding stock options granted under the
Company's long-term incentive compensation plan by each of the persons and
group, as follows: Mr. Cottle--4,552 shares; Mr. Hogan--7,668 shares; Mr.
Jordan--82,900 shares; Mr. Kelly--16,694 shares; Mr. Letbetter--16,070
shares; Mr. McClanahan--8,038 shares; Mr. Sykora--45,116 shares; and the
group--213,054 shares.
(4) Voting power and investment power with respect to the shares listed for
Ms. Deily and for Dr. Hendrie are shared with the individual's spouse.
(5) Includes shares held under the Company's dividend reinvestment and stock
purchase plan as of December 31, 1995.
(6) Voting power and investment power with respect to 1,152 of the shares
listed are shared with Mr. Jordan's spouse.
7
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, for the years ended December 31, 1993, 1994 and
1995, the annual, long-term and certain other compensation of the chief
executive officer and each of the other six most highly compensated executive
officers of the Company who served as executive officers during 1995,
including Mr. Sykora who retired from his executive officer position during
1995 (Named Officers).
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- ---------- ---------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY(1) BONUS(1) COMPENSATION OPTIONS(#)(2) PAYOUTS(3) COMPENSATION(4)
------------------ ---- -------- -------- ------------ ---------- --------- --------------
Don D. Jordan........... 1995 $884,500 $907,226 $ 3,969 36,316 $407,437 $734,023
Chairman and Chief 1994 859,500 734,873 114,648 27,726 550,567 717,261
Executive Officer of 1993 829,500 386,775 0 25,930 762,962 647,491
the Company and HL&P
Don D. Sykora........... 1995 635,000 497,681 16,678 21,464 262,388 496,166
Office of the Chairman 1994 601,667 497,681 89,200 15,096 371,716 468,302
of the Company (5) 1993 559,000 241,313 0 13,830 510,000 410,061
R. Steve Letbetter...... 1995 363,500 285,750 190 9,746 84,201 47,242
President and Chief 1994 321,000 246,525 31,133 6,366 117,607 43,818
Operating Officer of 1993 271,000 109,335 0 4,256 212,362 42,562
HL&P and Senior Vice
President of the
Company
Hugh Rice Kelly......... 1995 334,000 195,773 637 7,414 100,925 44,245
Senior Vice President, 1994 323,500 190,820 42,147 5,470 145,107 50,546
General Counsel and 1993 310,500 94,446 0 5,242 285,078 58,218
Corporate Secretary of
the Company and HL&P
Lee W. Hogan............ 1995 262,500 123,750 965 0 52,142 18,711
President and Chief 1994 239,400 311,250 21,104 0 102,074 14,434
Operating Officer of 1993 224,400 85,800 0 3,806 139,702 14,165
Houston Industries
Energy, Inc. and
Senior Vice President
of the Company
William T. Cottle (6)... 1995 254,500 157,200 401 5,566 0 16,711
Executive Vice 1994 241,000 129,675 337 4,044 0 13,126
President and General 1993 174,470 60,000 0 0 0 0
Manager-- Nuclear of
HL&P
David M. McClanahan..... 1995 238,100 151,860 317 5,028 35,806 23,162
Executive Vice 1994 208,100 129,398 12,195 3,322 41,512 23,376
President and General 1993 178,100 57,351 0 2,010 82,025 18,254
Manager--Energy
Delivery and Customer
Services of HL&P
- --------
(1) The amounts shown include salary and bonus earned as well as earned but
deferred by the Named Officers.
(2) The amounts shown have been adjusted to reflect the Company's two-for-one
stock split effected by a stock distribution on December 9, 1995 (1995
Stock Split).
(3) The amounts shown for 1995 represent the dollar value of shares of the
Company's Common Stock paid out in 1995 under the Company's long-term
incentive compensation plan based on the achievement of certain
performance goals for the 1992-1994 performance cycle, plus dividend
equivalent accruals during the performance period.
8
(4) The amounts shown include (i) Company contributions to the Company's
savings plan and accruals under its savings restoration plan for the years
shown on behalf of the Named Officers, as follows: Mr. Jordan 1993--
$57,152; 1994--$52,344; and 1995--$33,610; Mr. Sykora 1993--$38,284;
1994--$35,405; and 1995--$34,553; Mr. Letbetter 1993--$16,672; 1994--
$18,074; and 1995--$25,621; Mr. Kelly 1993--$19,569; 1994--$17,554; and
1995--$18,892; Mr. Hogan 1993--$14,165; 1994--$12,938; and 1995--$17,325;
Mr. Cottle 1994--$12,642; 1995--$16,135; and Mr. McClanahan 1993--$7,724;
1994--$10,547; and 1995--$14,076; (ii) the term portion of the premiums
paid by the Company under split-dollar life insurance policies purchased
in 1994 in connection with the Company's executive life insurance plan, as
follows: Mr. Jordan 1994--$4,800 and 1995--$5,700; Mr. Sykora 1994--
$21,250 and 1995--$23,950; Mr. Letbetter 1994--$218 and 1995--$272; Mr.
Kelly 1994--$801 and 1995--$915; Mr. Hogan 1994--$1,038 and 1995--$1,386;
Mr. Cottle 1994--$484 and 1995--$576; and Mr. McClanahan 1994--$328 and
1995--$456; and (iii) the portion of accrued interest on amounts of
compensation deferred under the Company's deferred compensation plan and
executive incentive compensation plan that exceeds 120% of the applicable
federal long-term rate provided under Section 1274(d) of the Internal
Revenue Code, as follows: Mr. Jordan 1993 --$590,339; 1994--$660,117; and
1995--$694,713; Mr. Sykora 1993--$371,777; 1994--$411,647; and 1995--
$437,663; Mr. Letbetter 1993--$25,890; 1994--$25,526; and 1995--$21,349;
Mr. Kelly 1993--$38,649; 1994--$32,191; and 1995--$24,438; Mr. Hogan
1994--$458 (none for 1993 and 1995); Mr. Cottle (none for 1993, 1994 and
1995); and Mr. McClanahan 1993--$10,530; 1994--$12,501; and 1995--$8,630.
The Company owns and is the beneficiary under certain life insurance
policies which are currently anticipated to provide benefits sufficient to
cover the accrued interest on deferred amounts referenced in (iii) of this
footnote.
(5) Mr. Sykora served as President and Chief Operating Officer of the Company
until September 1, 1995. He presently serves in an executive advisory
capacity in the Office of the Chairman.
(6) Mr. Cottle commenced employment with HL&P in April 1993.
STOCK OPTION GRANTS
The following table contains information concerning grants of stock options
during 1995 under the Company's long-term incentive compensation plan to the
Named Officers, except for Mr. Hogan, who participates in a different
incentive compensation plan which does not provide for option grants. The
information has been adjusted to reflect the Company's 1995 Stock Split.
OPTION GRANTS IN 1995
INDIVIDUAL GRANTS VALUE
----------------------------------------- -------
% OF
TOTAL
OPTIONS
NUMBER OF GRANTED EXERCISE
SECURITIES TO OR BASE GRANT
UNDERLYING EMPLOYEES PRICE DATE
OPTIONS IN FISCAL PER EXPIRATION PRESENT
NAME GRANTED (1) YEAR SHARE DATE VALUE(2)
- ---- ---------- --------- -------- ---------- -------
Don D. Jordan................ 36,316 27.2% $17.75 01/02/05 $69,000
Don D. Sykora................ 21,464 16.1% 17.75 01/02/05 40,782
R. Steve Letbetter........... 9,746 7.3% 17.75 01/02/05 18,517
Hugh Rice Kelly.............. 7,414 5.6% 17.75 01/02/05 14,087
William T. Cottle............ 5,566 4.2% 17.75 01/02/05 10,575
David M. McClanahan.......... 5,028 3.8% 17.75 01/02/05 9,553
- --------
(1) The nonstatutory options for shares of Common Stock included in the table
were granted on January 3, 1995, have a ten-year term and generally become
exercisable annually in one-third
9
increments commencing one year after date of grant, so long as employment
with the Company or its subsidiaries continues. A change in control of the
Company would result in all options becoming immediately exercisable. For
the purposes of the Company's long-term incentive compensation plan, a
"change in control" generally is deemed to have occurred if (i) any person
or group becomes the direct or indirect beneficial owner of 30% or more of
the Company's outstanding voting securities; (ii) the majority of the Board
changes as a result of, or in connection with, certain transactions; (iii)
as a result of the Company merging or consolidating with another
corporation, less than 70% of the surviving corporation's outstanding voting
securities is owned by the former shareholders of the Company (excluding any
party to such a transaction or any affiliates of any such party); (iv) a
tender offer or exchange offer is made and consummated for the ownership of
30% or more of the Company's outstanding voting securities; or (v) the
Company transfers all or substantially all of its assets to another
corporation that is not wholly-owned by the Company.
(2) The values are based on the Black-Scholes option pricing model adjusted
for the payment of dividends. The calculations were made based on the
following assumptions: volatility of 19.65% (based on daily closing prices
of the Common Stock for the one-year period prior to grant date); risk-
free interest rate of 7.78% (interest rate on a U.S. Treasury security
with a maturity date corresponding to that of the option term); option
price of $17.75 (fair market value of the underlying stock on the date of
grant); current dividend rate of $1.50 per share per year; and option term
equal to the full ten-year period until the stated expiration date. No
reduction has been made in the valuations on account of non-
transferability of the options or vesting or forfeiture provisions.
Valuations would change if different assumptions were made. Option values
are dependent on general market conditions and the performance of the
Common Stock. There can be no assurance that the values in this table will
be realized.
STOCK OPTION VALUES
The following table sets forth information on the unexercised options to
purchase Common Stock held by the Named Officers as of December 31, 1995. No
options were exercised by the Named Officers during 1995.
1995 YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS THE-MONEY OPTIONS AT
AT DECEMBER 31, 1995 DECEMBER 31, 1995(1)
---------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
Don D. Jordan............... 52,908/63,444 $97,946/$268,228
Don D. Sykora............... 28,320/36,138 52,345/ 157,025
R. Steve Letbetter.......... 9,282/15,408 16,700/ 70,151
Hugh Rice Kelly............. 10,652/12,808 19,755/ 54,604
Lee W. Hogan................ 6,400/ 1,268 12,910/ 1,506
William T. Cottle........... 1,348/ 8,262 1,432/ 39,392
David M. McClanahan......... 4,586/ 7,912 8,247/ 36,144
- --------
(1) Based on the average of the high and low sales prices of the Common Stock
on the New York Stock Exchange Composite Tape, as reported in The Wall
Street Journal for December 29, 1995.
10
LONG-TERM INCENTIVE COMPENSATION
The following table sets forth, for the Named Officers other than Mr. Hogan,
information concerning awards made during 1995 for the 1995--1997 performance
cycle under the Company's long-term incentive compensation plan, as adjusted
for the 1995 Stock Split. The amounts shown represent potential payouts of
awards of shares of Common Stock based on the achievement of performance goals
over a three year performance cycle. The performance goals include a Company
consolidated goal and subsidiary or business unit goals, weighted 25% on
consolidated performance and 75% on subsidiary or business unit performance.
The Company consolidated goal is achieving a certain level of total
shareholder return in relation to a group of other companies. The subsidiary
or business unit goals are achieving certain cash flow performance in relation
to a group of other companies and achieving a competitive price target for
electric utility services by the year 2000 while maintaining an adequate
return on equity. An additional goal applicable to Messrs. Jordan, Sykora and
Kelly is based on the success of the Company's nonregulated power business,
Houston Industries Energy, Inc. (HI Energy) in closing certain transactions
and its achievement of specified internal rates of return. If a change in
control of the Company occurs before the end of a performance cycle, the
payout of awards for performance shares will occur without regard to
achievement of the performance goals. See Note 1 to the Option Grants in 1995
table for information regarding the definition of a change in control under
the Company's long-term incentive compensation plan.
Information in the table for Mr. Hogan covers long-term incentive awards
made under an incentive compensation plan established for HI Energy. The
awards made under that plan during 1995 for the 1994--1998 performance cycle
are based on goals that are measured with respect to the closing of certain
transactions and the achievement of specified internal rates of return. The
awards for Mr. Hogan are denominated in shares of Common Stock, but may be
paid out, at the discretion of the Personnel Committee, in the form of cash,
or shares of Common Stock, or a combination thereof.
LONG-TERM INCENTIVE PLAN AWARDS IN 1995
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-
BASED PLANS(1)
------------------------
PERFORMANCE
OR OTHER
PERIOD TARGET MAXIMUM
NUMBER UNTIL THRESHOLD NUMBER NUMBER
OF MATURATION NUMBER OF OF OF
NAME SHARES OR PAYOUT SHARES SHARES SHARES
- ---- ------ ----------- --------- ------ -------
Don D. Jordan....................... 32,812 12/31/97 16,406 32,812 49,218
Don D. Sykora....................... 22,376 12/31/97 11,188 22,376 33,564
R. Steve Letbetter.................. 10,160 12/31/97 5,080 10,160 15,240
Hugh Rice Kelly..................... 7,730 12/31/97 3,866 7,730 11,596
Lee W. Hogan........................ 6,623 12/31/98 0 3,312 6,623
William T. Cottle................... 5,802 12/31/97 2,902 5,802 8,704
David M. McClanahan................. 5,242 12/31/97 2,622 5,242 7,864
- --------
(1) The table does not reflect dividend equivalent accruals during the
performance period.
RETIREMENT PLANS, RELATED BENEFITS AND OTHER AGREEMENTS
The following table shows the estimated annual benefit payable under the
Company's retirement plan, benefit restoration plan and, in certain cases,
supplemental agreements, to officers in various compensation classifications
upon retirement at age 65 after the indicated periods of service, determined
on a single-life annuity basis. The benefits listed in the table are not
subject to any deduction for Social Security or other offsetting amounts.
11
PENSION PLAN TABLE
FINAL
AVERAGE ESTIMATED ANNUAL PENSION BASED ON SERVICE (1)
ANNUAL ----------------------------------------------------------------
COMPENSATION 35 OR MORE
AT AGE 65 15 YEARS 20 YEARS 25 YEARS 30 YEARS YEARS
- ------------ -------- -------- -------- -------- ----------
$ 400,000 $115,001 $153,335 $191,669 $ 230,003 $ 268,336
500,000 144,101 192,135 240,169 288,203 336,236
600,000 173,201 230,935 288,669 346,403 404,136
700,000 202,301 269,735 337,169 404,603 472,036
800,000 231,401 308,535 385,669 462,803 539,936
900,000 260,501 347,335 434,169 521,003 607,836
1,000,000 289,601 386,135 482,669 579,203 675,736
1,200,000 347,801 463,735 579,669 695,603 811,536
1,400,000 406,001 541,335 676,669 812,003 947,336
1,600,000 464,201 618,935 773,669 928,403 1,083,136
1,800,000 522,401 695,535 870,669 1,044,803 1,218,936
2,000,000 580,601 774,135 967,669 1,161,203 1,354,736
- --------
(1) The qualified pension plan limits compensation in accordance with Section
401(a)(17) of the Internal Revenue Code and also limits benefits in
accordance with Section 415 of the Internal Revenue Code. Pension benefits
based on compensation above the qualified plan limit or in excess of the
limit on annual benefits are provided through the benefit restoration
plan.
For the purpose of the pension table above, final average annual
compensation means the average of covered compensation for 36 consecutive
months out of the 120 consecutive months immediately preceding retirement in
which the participant's covered compensation was the highest. Covered
compensation includes only the amounts shown in the "Salary" and "Bonus"
columns of the Summary Compensation Table. At December 31, 1995, the credited
years of service for the following persons are: 35 years for each of Messrs.
Jordan and Sykora; 22 years for Mr. Letbetter; 21 years for Mr. Kelly, 10 of
which result from a supplemental agreement; 5 years for Mr. Hogan; 3 years for
Mr. Cottle and 21 years for Mr. McClanahan.
The Company maintains an executive benefits plan that provides certain
salary continuation, disability and death benefits to key officers of the
Company and certain of its subsidiaries. The Named Officers participate in
this plan pursuant to individual agreements that generally provide for (i) a
salary continuation benefit of 100% of the officer's current salary for twelve
months after death during active employment and then 50% of salary for nine
years or until the deceased officer would have attained age 65, if later, and
(ii) if the officer retires after attainment of age 65, an annual post-
retirement death benefit of 50% of the officer's preretirement annual salary
payable for six years.
The Company has established an executive life insurance plan providing
split-dollar life insurance in the form of a death benefit for officers and
members of the Board of Directors. The death benefit coverage varies but in
each case is based on coverage (either single life or second to die) that is
available for the same amount of premium that could purchase coverage equal to
four times current salary for Messrs. Letbetter and Hogan; two times current
salary for Messrs. Kelly, Cottle and McClanahan; five million dollars for Mr.
Sykora; ten million dollars for Mr. Jordan; and six times the annual retainer
for the Company's non-employee directors (except in the case of Mr. Trotter
who has a separate agreement providing for similar coverage, as described
under "Compensation of Directors"). The plan also provides that the Company
may make payments to the covered individuals designed to compensate for tax
consequences with respect to imputed income that they must recognize for
federal income tax purposes based on the term portion of the annual premiums.
If a covered executive retires at age 65 or at an earlier age under
circumstances approved for this
12
purpose by the Board of Directors, rights under the plan vest so that coverage
is continued based on the same death benefit in effect at the time of
retirement. Upon death, the Company will receive the balance of the insurance
proceeds payable in excess of the specified death benefit which by design is
expected to be at least sufficient to cover the Company's cumulative outlays
to pay premiums and the after-tax cost to the Company of the tax reimbursement
payments. There is no arrangement or understanding under which any covered
individuals will receive or be allocated any interest in any cash surrender
value under the policy.
The Company and its subsidiaries HL&P and HI Energy have entered into a
trust agreement with an independent trustee establishing a "rabbi trust" for
the purpose of funding benefits payable to participants (which include each of
the Named Officers) under the Company's deferred compensation plans, executive
incentive compensation plans, benefits restoration plan and savings
restoration plan (Designated Plans). The trust is a grantor trust, irrevocable
except in the event of an unfavorable ruling by the Internal Revenue Service
as to the tax status of the trust or certain changes in tax law. It is
currently funded with a nominal amount of cash. The Company, HL&P and HI
Energy are required to make future contributions to the grantor trust when
required by the provisions of the Designated Plans or when required by the
Company's benefits committee. The benefits committee consists of officers of
the Company designated by the Board of Directors and has general
responsibility for funding decisions and selection of investment managers for
the Company's retirement plans and other administrative matters in connection
with other employee benefit plans of the Company. If there is a change in
control (defined in a manner generally the same as the comparable definition
in the Company's long-term incentive compensation plan), the Company, HL&P and
HI Energy are required to fully fund the grantor trust, within 15 days
following the change in control, with an amount equal to the entire benefit to
which each participant would be entitled under the Designated Plans as of the
date of the change in control (calculated on the basis of the present value of
the projected future benefits payable under the Designated Plans). The assets
of the grantor trust are required to be held separate and apart from the other
funds of the Company and its subsidiaries, but remain subject to claims of
general creditors under applicable state and federal law.
In accordance with the indemnification provisions of the Company's Bylaws
and Texas law, the Company paid approximately $805 in 1995 to cover legal fees
and expenses incurred on behalf of the Company's directors in connection with
the defense of a shareholder derivative suit and class action filed in April
1994 by two former employees of HL&P.
The Company entered into employment agreements in 1994 with each of Mr.
Jordan and Mr. Sykora which provide for benefits in the event of termination
of employment following a change in control of the Company. For the purposes
of these agreements, the meaning of a change in control is generally the same
as provided in the Company's long-term incentive compensation plan as
described in Note 1 to the Option Grants in 1995 table. The agreements provide
for employment of Mr. Jordan and Mr. Sykora in substantially their present
positions with the Company during a period commencing upon a change in control
of the Company and ending after five years in the case of Mr. Jordan or after
three years in the case of Mr. Sykora or, if earlier, the date on which the
executive reaches age 67 (Employment Period). During the Employment Period,
each executive would receive benefits including (i) base salary at a level
based on that in effect prior to the change in control with 5% annual
increases; (ii) annual bonus awards based on amounts payable under the
Company's executive incentive compensation plan and long-term incentive
compensation plan as administered prior to the change in control assuming
performance objectives are met at "target" level; and (iii) participation in
other employee benefit plans and programs. Each agreement provides that if the
executive's employment is terminated during the Employment Period by the
Company, other than for cause, or by the executive following certain changes
in job responsibilities, job location or compensation and benefits (or
otherwise with the consent of the Company), then the Company will provide
benefits including (i) a lump sum payment equal to salary and bonuses payable
with respect to the remainder of the Employment Period; (ii) additional
payments to compensate for loss of
13
benefits under the retirement plan, benefit restoration plan and savings plan
resulting from termination prior to the end of the Employment Period; and
(iii) continued deferral of payments under the Company's deferred compensation
plan until the end of the Employment Period, with payments made over a fifteen
year period if the executive so elected. The employment agreements provide for
additional payments to make the executive whole, on an after-tax basis, in
case any payments by the Company to the executive are subject to the federal
excise tax applicable to "excess parachute payments" as defined in Section
280G in the Internal Revenue Code. The benefits (excluding tax reimbursement
payments) that would have been payable under the change in control provisions
of the employment agreements with respect to salary, bonus, retirement plan,
benefit restoration plan and savings plan benefits, assuming a covered
termination of employment had occurred as of May 22, 1996, would be
approximately $7.5 million for Mr. Jordan and $2.7 million for Mr. Sykora. If
a covered termination of employment were to occur later during the respective
Employment Periods, these benefit amounts would decrease ratably (assuming
salary and bonus remain constant) to zero at June 1, 1999 in the case of Mr.
Jordan and September 1, 1997 in the case of Mr. Sykora.
Absent a change in control, each executive's employment with the Company is
terminable at will by either party until the executive attains age 65. The
employment agreements with Mr. Jordan and Mr. Sykora further provide that if a
change in control does not occur and the executive is employed by the Company
on the date that such executive reaches age 65, the executive's employment
will be extended until the executive reaches age 67 with the base salary
during the extended employment period determined by the Board of Directors. In
accordance with the terms of his employment agreement, upon attaining age 65,
Mr. Sykora resigned his office as President of the Company effective September
1, 1995 and currently serves in an executive advisory capacity in the Office
of the Chairman. If the Company terminates the employment of the executive
during this two-year term of extended employment, other than for cause or
disability, the agreements provide that the Company will (i) pay to the
executive a lump sum equal to salary and any bonuses payable with respect to
the remainder of the extended employment term and (ii) provide a supplemental
retirement payment similar to that applicable under the change in control
provisions described above. Certain of the supplemental retirement, death,
disability and life insurance benefits under the extended employment provision
are to be calculable or made available based on compensation levels in effect
prior to the commencement of the extended employment period. The agreements
also provide that the salary and bonus deferred under the Company's deferred
compensation plan will commence as provided in the plan and shall, if the
executive had previously elected, be paid out in fifteen annual installments
rather than in a lump sum. Similarly, the agreements provide that benefits
under the Company's benefit restoration plan will be paid in installments
rather than a lump sum.
HL&P and Mr. Cottle entered into an employment agreement in 1993 that
continues indefinitely, subject to termination by either party on 30 days'
notice (Employment Period). The agreement generally provides for employment of
Mr. Cottle as a group vice president--nuclear or in such other executive
capacities as may be determined from time to time, a minimum annual base
salary ($235,000), bonuses and participation in those employee benefit plans
and programs available to similarly situated employees during the Employment
Period. In addition, if the Employment Period terminates after April 5, 2003,
Mr. Cottle will be eligible for supplemental pension, disability or death
benefits determined as if his employment had commenced ten years prior to the
initial date of the Employment Period.
The Company and Mr. McClanahan entered into a benefits agreement in 1991
which provided for the treatment of his employee benefits while he served from
1991 to 1993 as an officer of the Company's cable television subsidiary (sold
in July 1995). The agreement provided that Mr. McClanahan would be compensated
for the difference between the cable television subsidiary benefits and the
Company benefits he would have received if he had been an employee of the
Company during his period of employment with the subsidiary. Such amounts will
be paid to Mr.
14
McClanahan at such time benefits are due to him under the terms of the
Company's pension and savings plans.
The Company entered into severance agreements in 1994 with certain of its
executive officers, including Messrs. Letbetter, Kelly, Hogan, Cottle and
McClanahan. Each of the severance agreements provides for the payment of
certain benefits if, within three years following a change in control of the
Company, the officer's employment is terminated for reasons other than cause
or disability or by the officer following certain changes in job
responsibilities, job location or compensation and benefits. For the purpose
of these agreements, the meaning of a change in control is generally the same
as provided in the Company's long-term incentive compensation plan as
described in Note 1 to the Option Grants in 1995 table. In the event of a
covered termination following a change in control, the officer would be
entitled to receive a payment equal to 2.99 times his average annual gross
compensation from the Company and its affiliates included in gross income for
the five taxable years preceding the date on which the change in control
occurs. Any payment to such officer is subject, however, to the limitation
that payments under his severance agreement will be reduced to the extent
necessary to avoid an excise tax on such officer's income or the disallowance
of a deduction to the Company for such payments under the provisions of
Section 280G of the Internal Revenue Code. The severance agreements also
provide for the continuation of certain medical benefits following the
termination of employment. The amounts that would have been payable under the
agreements if a covered termination of employment had occurred as of May 22,
1996, would be approximately $1.8 million for Mr. Letbetter, $2.2 million for
Mr. Kelly, $1.2 million for Mr. Hogan, $1.0 million for Mr. Cottle and $0.9
million for Mr. McClanahan.
15
REPORT OF THE PERSONNEL COMMITTEE
ON EXECUTIVE COMPENSATION
The Personnel Committee (Committee) is composed entirely of directors who
are not officers or employees of the Company and who are not eligible to
participate in any of the compensation programs that the Committee
administers. The Committee reviews and makes recommendations to the Board
concerning all executive officer salary arrangements, other non-incentive
based compensation for executives, and the design of the Company's incentive
compensation plans for executives. The Committee also oversees and administers
the Company's incentive compensation programs including the determination of
the annual and long-term incentive awards to the Company's executive officers.
COMPENSATION POLICY
The Company's executive compensation policy is to have compensation programs
that
.strengthen the relationship between pay and performance;
.attract, retain, and encourage the development of highly qualified and
experienced executives;
.promote overall corporate performance; and
.provide compensation that is competitive externally and equitable
internally.
The Company retains independent consulting firms to provide, at least
biennially, data on the executive compensation practices of a peer group of
companies considered comparable to the Company in terms of size, performance,
position and compensation philosophy (Reference Group). Data concerning the
Reference Group is used primarily for establishing ranges for base salary and
target and opportunity levels for annual and long-term incentive awards. (The
Reference Group is not identical to the group of companies included in the Dow
Jones Utilities Average used in the Performance Graph included in this proxy
statement because the Committee believes that the Company's most direct
competitors for executive talent are not in all cases the same as the
companies included in the index chosen for comparing shareholder returns.)
The Committee also obtains peer group data regarding the performance of
groups of companies in the utility industry, the nonregulated power industry
and other industries. This industry-specific data is used primarily in the
formulation of performance measurements related to the Company's individual
subsidiaries or business units.
In addition to considering comparative data for the Reference Group and
other peer groups, the Committee makes its own subjective determination of
executive officer performance. In making such determinations, the Committee
also takes into account the chief executive officer's evaluations of other
executive officers' performance.
The Committee has reviewed the Company's executive compensation programs in
light of the provisions of the Internal Revenue Code relating to the
disallowance of deductions for compensation in excess of $1 million for
certain executive officers. The Committee does not anticipate any payment of
compensation in 1996 or 1997 in excess of that which is deductible under those
rules, taking into account expected deferrals of compensation by affected
executive officers. The Committee will continue to evaluate the effect of the
tax provisions and the exception to the deductibility limit for certain
shareholder-approved, performance-based compensation. The Committee may
consider in the future whether or not to submit for shareholder approval the
performance goals applicable to the annual incentive awards or the long-term
incentive awards established for the Company's nonregulated power business, or
make any adjustments to the performance goals for those incentive
16
awards that would be necessary in order to qualify for the performance-based
exception of the tax provisions. Except for the long-term performance
incentive awards established for the Company's nonregulated power business,
the performance goals for awards under the Company's long-term incentive
awards program meet the requirements of the tax provisions.
COMPONENTS OF COMPENSATION
The key elements of the Company's executive compensation program are base
salary, annual incentive awards, and long-term incentive awards. The Committee
evaluates each element of compensation separately and in relation to the other
elements of an executive's total compensation package, taking into
consideration relevant comparative data for compensation at the 50th
percentile and 75th percentile for companies in the Reference Group. Compared
to companies in the Reference Group, total targeted compensation may vary from
below the 50th percentile to above the 75th percentile depending on an
executive officer's tenure, experience, leadership and level of
responsibility. Because a significant portion of an executive officer's
compensation includes at-risk components based on business performance, if the
performance exceeds that of the relevant peer group, compensation should be
above the targeted levels; likewise, if performance falls below that of the
peer group, compensation should be below the targeted level.
BASE SALARIES
The Committee's annual recommendations to the Board concerning each
executive officer's base salary are based on the Committee's analysis of
salary levels for comparable executive officer positions at companies in the
Reference Group, its subjective evaluation and, except in the case of Mr.
Jordan, management's evaluation of each executive officer's individual
performance and level of responsibility.
ANNUAL INCENTIVE COMPENSATION
The annual incentive awards program provides executive officers with annual
bonuses based on the achievement of Committee-approved performance goals.
Those annually determined performance goals generally are based upon financial
objectives of the Company and its subsidiaries or business units and are
designed to encourage improved operating results and foster achievement of
particular strategic objectives. The performance goals for 1995 included, for
the electric utility operations, achieving certain levels of cash flow,
certain ratings in a customer value index and positive movement as compared to
a benchmark for a competitive performance index; for the cable television
operations (sold in July 1995), increasing operating profits and subscribers
and achieving certain quality-of-service standards; and for the nonregulated
power business, conducting new business in accordance with a specified
business plan and/or closing transactions for particular projects or acquiring
properties in the nonregulated power business that result in achievement of
specified internal rates of return. Certain executive officers also had
individual goals related to improvements in productivity and the quality of
work within particular departments and included for 1995 such matters as
maximizing cash flow after investment activities, increasing annual base
revenues, controlling various categories of costs and expenses, promoting
safety and reliability and otherwise optimizing department operations. For
1995, annual bonuses for executive officers were based on the achievement of
relevant subsidiary or business unit goals, except that for certain executive
officers, from 25% to 100% of the bonus was based on individual goals. Annual
bonus payments are made in cash, except in the case of one executive officer
whose participation is through a separate plan established for the
nonregulated power business, to whom award payments may be made in cash or
shares of Common Stock.
Annual incentive awards for executive officers in 1995 had target award
levels that ranged from 30% to 70% of base salary depending on the executive
officer's level of responsibility. A threshold
17
level of performance results in an award that is 50% of target, and a maximum
level of performance results in an award that is 50% over the target level,
except in the case of the nonregulated power business where a maximum level of
performance results in an award that is 100% over the target level. However,
an executive officer's subsidiary or business unit goals must be met at least
at an aggregate threshold level in order for that officer to receive an annual
incentive award. The aggregate amount of the awards paid out with respect to
any year (excluding those for the nonregulated power business) cannot exceed
2.5% of the Company's net income for that year. For 1995, the composite goals
for the Company's executive officers were achieved at levels that resulted in
bonuses ranging from 25% below target to 50% over target.
LONG-TERM INCENTIVE COMPENSATION
The long-term incentive awards program provides stock-based incentive
compensation for executive officers in the form of grants of performance
shares, stock options, stock appreciation rights and, in some instances, share
equivalent or contingent share units. In addition, the Committee has adopted a
stock ownership guideline applicable to all of the Company's officers that
establishes a goal of ownership of the Company's Common Stock representing a
value of at least two times the officer's base salary.
Annual grants of performance shares are based on long-term performance goals
that include both Company consolidated and subsidiary or business unit goals,
weighted 25% and 75% of the total, respectively. Those goals are generally
based on financial objectives measurable over a three-year performance cycle.
For the performance cycle that ended in 1994, under which payments were made
in 1995, the Company's consolidated goal was to achieve a specified level of
total shareholder return as compared to a group of approximately 75 other
electric utilities and utility holding companies. The same Company
consolidated goal applies to the new performance cycle that commenced in 1995.
The subsidiary or business unit goals for the performance cycle that ended
in 1994 were based on the following financial objectives: for the electric
utility operations, maintaining certain base electric rates and achieving
certain cash flow performance in relation to a group of 20 other electric
utility companies; and for the cable television operations (sold in 1995),
achieving certain increases in operating profit. For the performance cycle
that commenced in 1995, the subsidiary or business unit goals are, for the
electric utility operations, to improve electric utility cash flow performance
and achieve a competitive price target for electric utility services by the
year 2000 and, for the nonregulated power business, to achieve specified
internal rates of return based on particular projects.
The target number of performance shares granted is based on a percentage of
base salary divided by the average market price of Common Stock over a
prescribed period prior to the beginning of the performance cycle. In
determining the size of the grant, the Committee reviews comparative data for
the companies in the Reference Group, considers the level of responsibility of
each of the Company's executive officers and the recommendations of the chief
executive officer with respect to other executive officers, and then makes a
subjective determination that targets the award within a range of 30% to 70%
of base salary.
Achievement of the performance goals at the target level results in a payout
level of 100% of the performance shares for both the performance cycle that
paid out in 1995 and the performance cycle that commenced in 1995. For both of
these performance cycles, attainment of the threshold level of performance
results in payouts of 50% of the target number of shares and the attainment of
the maximum level results in payouts of up to 50% over the target number of
shares.
18
For the performance cycle concluding in 1994 that paid out in 1995, the
composite goals for the Company's executive officers were achieved at levels
that resulted in payouts ranging from 59% to 83% of target.
Annual grants of stock options are made at an option price not less than the
fair market value of the Common Stock on the date of grant. This design is
intended to focus executive officers on the creation of shareholder value over
the long-term and encourage equity ownership in the Company.
In determining the size of stock option grants to executive officers, the
Committee reviews comparative data for the companies in the Reference Group.
Because the policies of Reference Group companies with respect to stock
options vary widely, the Committee's objective of delivering a competitive
award opportunity based on the dollar value of the award granted necessarily
involves a subjective determination by the Committee. In making its
determination, however, the Committee does consider the recommendations of the
chief executive officer with respect to the awards for other executive
officers. For 1995 grants, the percentages of grant date option value to base
salary ranged from 30% to 75% depending on the executive officer's position.
The Committee also grants long-term awards under a long-term incentive plan
established for the Company's nonregulated power business. One executive
officer of the Company participates in this plan in lieu of receipt of
performance shares and stock options as described above. Awards under this
plan may be allocated initially in the form of cash or contingent share units
which are valued based on the market price of the Company's Common Stock.
Those awards have a four-year performance cycle and are based on performance
in relation to Committee-approved performance goals. For the cycle that
commenced in 1995, those goals are based on closing transactions for
particular projects or acquiring properties in the nonregulated power business
that result in achievement of specified internal rates of return.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Committee applies the executive compensation policies and programs
described above in determining Mr. Jordan's total compensation. At its July
1995 meeting to consider executive salaries effective in July 1995, the
Committee reviewed Mr. Jordan's base salary, comparing it to the base salary
of chief executive officers in the Reference Group of companies, and
determined that his relative position should be the upper end of the range
near the 75th percentile for those companies. The Committee recommended to the
Board that Mr. Jordan's base salary be increased to $909,500, a 5.8% increase.
In evaluating Mr. Jordan's total compensation, the Committee considered his
contributions to the overall success of the Company through his individual
performance and his experience level with the Company as well as his
significant leadership in the electric utility industry as a whole through his
service as a director of the Edison Electric Institute and the Electric
Reliability Council of Texas, as chairman of the United States Energy
Association and vice chairman of the World Energy Council. In the case of Mr.
Jordan's total compensation paid in 1995, the at-risk portion represented by
the annual incentive awards and long-term award payouts was 56%. Mr. Jordan's
target annual incentive award for 1995 was 70% of his base salary, with the
subsidiary or business unit goals for the electric utility operations, the
since-sold cable television operations and the nonregulated power business
operations (70%, 20% and 10%, respectively) comprising the award. The 1995
annual incentive award payment (reflected in the Summary Compensation Table in
this proxy statement) was based on achievement of his composite goal at 42.5%
over the target level. In the case of long-term incentive awards, the target
number of performance shares was valued at 65% of his base salary for both the
performance cycle that paid out in 1995 and the performance cycle that
commenced in 1995. Mr. Jordan's performance share awards for the cycle that
paid out in 1995 were based 25% on achievement of the Company's consolidated
goal and 75% on achievement of the subsidiary or business unit goals for the
electric utility operations and the since-sold cable
19
television operations (70% and 30%, respectively). For the cycle that
commenced in 1995, the relative weighting between the Company consolidated
goal and subsidiary or business unit goals was the same, but the subsidiary
goals cover the electric utility operations and the nonregulated power
business (85% and 15%, respectively). Long-term incentive awards paid out in
1995 are reported in the Summary Compensation Table in this proxy statement
and represent a composite achievement of 76% of the target level of
performance. Long-term incentive awards for the cycle begun in 1995 are
reflected in the table for Long-Term Incentive Plan Awards in 1995 in this
proxy statement. As shown in the table for Options Grants in 1995 in this
proxy statement, in 1995 Mr. Jordan was granted options to purchase 36,316
shares of the Company's Common Stock at an exercise price of $17.75 per share.
This represents a grant date option value of approximately 75% of Mr. Jordan's
1994 year-end base salary.
Milton Carroll
John T. Cater
Robert J. Cruikshank
Howard W. Horne
20
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on the Common Stock with the
cumulative total return of the Standard & Poor's (S&P) 500 Index and the Dow
Jones Utilities Average for the period commencing January 1, 1991 and ending
December 31, 1995.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG HOUSTON INDUSTRIES INCORPORATED, S&P 500 INDEX AND
DOW JONES UTILITIES AVERAGE(1)(2)
FOR FISCAL YEAR ENDED DECEMBER 31
[PERFORMANCE GRAPH APPEARS HERE]
DECEMBER 31,
- -------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995
- -------------------------------------------------------------------------------
Houston Industries Incorporated................ $100 $130 $144 $160 $130 $190
- -------------------------------------------------------------------------------
S&P 500 Index.................................. 100 130 140 155 157 215
- -------------------------------------------------------------------------------
Dow Jones Utilities Average.................... 100 115 120 131 111 147
(1) Assumes that the value of the investment in Common Stock and each index
was $100 on December 31, 1990 and that all dividends were reinvested.
(2) Historical stock price performance is not necessarily indicative of future
price performance.
21
PROPOSAL TO ADOPT STOCK PLAN FOR OUTSIDE DIRECTORS
The Board of Directors has adopted, subject to approval by holders of the
Common Stock at the Annual Meeting, the Houston Industries Incorporated Stock
Plan for Outside Directors (Director Stock Plan). The vote required for
approval of the Director Stock Plan is the affirmative vote of the holders of
a majority of the shares of Common Stock present, in person or by proxy, and
entitled to vote at the Annual Meeting. If the Director Stock Plan is not so
approved, it will not become effective.
The purpose of the Director Stock Plan is to provide for a method of
compensation for the members of the Board of Directors who are not employees
of the Company or any of its subsidiaries (Outside Directors) that will
strengthen the alignment of their financial interests with those of the
Company's shareholders. The Director Stock Plan is intended to (i) enhance the
Company's ability to maintain a competitive position in attracting and
retaining qualified Outside Directors who contribute, and are expected to
contribute, materially to the success of the Company and its subsidiaries;
(ii) provide a means of compensating Outside Directors whereby the
compensation received will have a value dependent on the price of the Common
Stock; and (iii) enhance the interest of the Outside Directors in the
Company's continued success and progress by further aligning each Outside
Director's interests with those of the Company's shareholders. Stock awards
under the Outside Director Plan shall be in addition to the annual retainer
fee and meeting fees paid in cash to Outside Directors.
The following is a summary of the principal provisions of the Director Stock
Plan, a copy of which is attached to this proxy statement as Exhibit A. This
summary is qualified in its entirety by express reference to the complete text
of the Director Stock Plan.
The Director Stock Plan provides for an annual grant of 500 shares of Common
Stock to each Outside Director. Each year's grants are to be made on the first
day of the month immediately following that year's Annual Meeting of
Shareholders. The first grant, assuming approval of the Director Stock Plan at
the Annual Meeting, will occur on June 1, 1996. Each Outside Director will
continue to receive such annual grants of Common Stock as long as the director
has the status of Outside Director on the applicable grant date, subject to
termination or amendment of the Director Stock Plan as described below.
Annual grants under the Director Stock Plan may be made out of the
authorized but unissued shares of Common Stock or by transfer of shares of
Common Stock previously reacquired by the Company. There will be no vesting or
similar conditions applicable to shares following the applicable grant.
The aggregate number of shares of Common Stock which may be granted during
the term of the Director Stock Plan is 100,000. However, the number of shares
issuable in connection with any annual grant and the aggregate number of
shares remaining available for issuance under the Director Stock Plan will be
proportionately adjusted to reflect any subdivision or combination of the
outstanding shares of Common Stock or dividend payable in shares of Common
Stock. As of April 3, 1996, the closing price of a share of Common Stock was
$22.25.
The Director Stock Plan will continue until the available number of shares
authorized under the Plan is exhausted unless and until it is terminated prior
to that time by action of the Board of Directors. The Board of Directors may
from time to time amend, modify, or suspend the Director Stock Plan for the
purpose of meeting or addressing any changes in legal requirements or for any
other purpose permitted by law except that (a) no amendment or alteration
shall be effective prior to approval by the Company's shareholders to the
extent such approval is then required by applicable legal requirements and (b)
the Plan shall not be amended more than once every six months to the extent
such limitation is required by Rule 16b-3(c)(2)(ii) (or any successor
provision) under the Securities Exchange Act of 1934 as then in effect.
22
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSAL TO
ADOPT THE HOUSTON INDUSTRIES INCORPORATED STOCK PLAN FOR OUTSIDE DIRECTORS.
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS AND AUDITORS
The Board of Directors, upon the recommendation of the Audit Committee, has
appointed Deloitte & Touche LLP as independent accountants and auditors to
conduct the annual audit of the Company's accounts for the year 1996. Deloitte
& Touche LLP (and their predecessors) have served as independent accountants
and auditors for the Company and HL&P since 1932. Approval of Item 3 requires
the affirmative vote of a majority of shares entitled to vote and represented
in person or by proxy at the Annual Meeting. If ratification of the
appointment is not approved, the Board will reconsider the appointment.
Representatives of Deloitte & Touche LLP will be present at the Annual
Meeting and will have an opportunity to make a statement if they desire. They
will be available to respond to appropriate questions from shareholders at the
Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT ACCOUNTANTS AND AUDITORS.
OTHER MATTERS
The Board of Directors does not intend to bring any other matters before the
Annual Meeting and has not been informed that any other matters are to be
properly presented to the Annual Meeting by others. In the event that other
matters properly come before the Annual Meeting or any adjournments thereof,
it is intended that the persons named in the accompanying proxy will vote
pursuant to the proxy in accordance with their best judgment on such matters.
SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING OF SHAREHOLDERS
Any shareholder who intends to present a proposal at the 1997 annual meeting
of shareholders must file such proposal with the Company by December 11, 1996
for possible inclusion in the Company's proxy statement and form of proxy
relating to that meeting.
DIRECTOR NOMINATIONS FOR 1997 ANNUAL MEETING OF SHAREHOLDERS
The Company's Bylaws provide for shareholder nominations for the election of
directors, subject to certain procedural requirements. The requirements
include, among other things, the timely delivery to the Company's Corporate
Secretary of (i) notice of the nomination; (ii) evidence of the shareholder's
status as such and the number of shares beneficially owned; and (iii) a list
of the persons (if any) with whom the shareholder is acting in concert and the
number of shares such persons beneficially own. The Bylaws also provide that
to be timely in connection with an annual meeting of shareholders, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Company not less than 90 days nor more than
180 days prior to the date on which the immediately preceding year's annual
meeting of shareholders was held. For the 1997 annual meeting, therefore,
nominations must be received no later than February 21, 1997 nor earlier than
November 23, 1996. The Bylaws further provide that when nominating directors,
the shareholder must also submit such information with respect to the nominee
as would be required by a proxy statement. The
23
Bylaws provide that failure to follow the required procedures renders the
person ineligible for nomination at the meeting at which such person is
proposed to be nominated. Compliance with the procedures does not require the
Company to include the proposed nominee in the Company's proxy solicitation
material. A copy of the Bylaws setting forth the requirements for the
nomination of director candidates by shareholders may be obtained by writing
Mr. Hugh Rice Kelly, Corporate Secretary, at the Company's address shown
above.
ANNUAL REPORT TO SHAREHOLDERS
The Summary Annual Report to Shareholders, together with the enclosed
Appendix A--1995 Financial Statements, which contains the Company's
consolidated financial statements for the year ended December 31, 1995,
accompany the proxy material being mailed to all shareholders. The Summary
Annual Report is not a part of the proxy solicitation material.
By Order of the Board of Directors,
[Sig of Don D. Jordan appears here]
DON D. JORDAN
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
April 10, 1996
24
EXHIBIT A
HOUSTON INDUSTRIES INCORPORATED
STOCK PLAN FOR OUTSIDE DIRECTORS
ARTICLE I
PURPOSE
The purpose of this Houston Industries Incorporated Stock Plan for Outside
Directors (the "Plan") is to provide for a method of compensation of Outside
Directors of Houston Industries Incorporated (the "Company") that will
strengthen the alignment of their financial interests with those of the
Company's shareholders through increased ownership of shares of the Company's
Common Stock by such Outside Directors. The Plan is intended to (i) enhance
the Company's ability to maintain a competitive position in attracting and
retaining qualified Outside Directors who contribute, and are expected to
contribute, materially to the success of the Company and its Subsidiaries;
(ii) provide a means of compensating such Outside Directors whereby the
compensation received will have a value dependent on the price of the Common
Stock; and (iii) enhance the interest of such Outside Directors in the
Company's continued success and progress by further aligning each Outside
Director's interests with those of the Company's shareholders. Stock Awards
under this Plan shall be in addition to the annual retainer fee and meeting
fees paid in cash to Outside Directors by the Company.
ARTICLE II
DEFINITIONS
For purposes of the Plan, the following terms shall have the meanings stated
below.
Annual Award Date means the first day of the month immediately following
each Annual Meeting of Shareholders, commencing with the June 1st following
the May 22, 1996 Annual Meeting of Shareholders of the Company.
Board means the Board of Directors of the Company.
Code means the Internal Revenue Code of 1986, as amended.
Common Stock means, subject to the provisions of Section 7.3, the presently
authorized common stock, without par value, of the Company.
Company means Houston Industries Incorporated, a Texas corporation.
Exchange Act means the Securities Exchange Act of 1934, as amended.
Outside Director means a person who is a member of the Board on an Annual
Award Date and who is not a current employee of the Company or a Subsidiary.
Plan means the Houston Industries Incorporated Stock Plan for Outside
Directors, as set forth herein and as from time to time amended.
Stock Award means an award of shares of Common Stock granted by the Company
to an Outside Director pursuant to Article V.
Subsidiary means a subsidiary corporation of the Company as defined in
Section 424(f) of the Code.
ARTICLE III
SHAREHOLDER APPROVAL AND RESERVATION OF SHARES
3.1 Shareholder Approval: This Plan shall become effective as of May 22,
1996, only if approved by the affirmative vote, in person or by proxy, of the
holders of a majority of the shares of Common Stock present and entitled to
vote at the May 22, 1996 Annual Meeting of Shareholders of the Company. This
Plan shall automatically terminate and be null and void ab initio should such
shareholder approval not be obtained.
A-1
3.2 Shares Reserved Under Plan: The aggregate number of shares of Common
Stock which may be issued or delivered under this Plan shall not exceed
100,000 shares, subject to adjustment as hereinafter provided. All or any part
of such 100,000 shares may be issued pursuant to Stock Awards. The shares of
Common Stock which may be granted pursuant to Stock Awards may consist of
either authorized but unissued shares of Common Stock or shares of Common
Stock which have been issued and which shall have been heretofore or are
hereafter reacquired by the Company. The total number of shares authorized
under this Plan shall be subject to increase or decrease in order to give
effect to the adjustment provision of Section 7.3 and to give effect to any
amendment adopted as provided in Section 6.1.
ARTICLE IV
PARTICIPATION IN PLAN
4.1 Eligibility to Receive Stock Awards: Stock Awards under this Plan shall
be granted only to persons who are Outside Directors on the applicable Annual
Award Date.
4.2 Participation Not a Guarantee of Continuing Service as a Member of the
Board: Nothing in this Plan shall in any manner be construed to (a) limit in
any way the right or power of the Company's stockholders to remove an Outside
Director, without regard to the effect of such removal on any rights such
Outside Director would otherwise have under this Plan, or (b) give any right
to such an Outside Director (i) to be nominated for reelection or to be
reelected as such and/or (ii) after ceasing to be an Outside Director, to
receive any shares of Common Stock of the Company under this Plan to which
such Outside Director is not entitled under the express provisions of this
Plan.
ARTICLE V
STOCK AWARDS
5.1 Annual Awards: As of each Annual Award Date, each Outside Director then
in office shall be granted 500 shares of Common Stock.
5.2 Form of Award: The grant of a Stock Award shall be implemented by
registration on the stock transfer records of the Company and (unless the
Company shall elect to use uncertificated shares) the delivery of certificates
for shares of Common Stock to the Outside Director. Each share issued in
respect of any Stock Award hereunder shall be registered in the name of the
Outside Director to whom it is granted and shall be immediately delivered to
such Outside Director as soon as practicable after the Annual Award Date.
ARTICLE VI
AMENDMENT AND TERMINATION OF PLAN
6.1 Amendment, Modification, Suspension or Termination: The Board may from
time to time amend, modify, suspend or terminate the Plan for the purpose of
meeting or addressing any changes in legal requirements or for any other
purpose permitted by law except that (a) no amendment or alteration shall be
effective prior to approval by the Company's shareholders to the extent such
approval is then required by applicable legal requirements and (b) the Plan
shall not be amended more than once every six months to the extent such
limitation is required by Rule 16b-3(c)(2)(ii) (or any successor provision)
under the Exchange Act as then in effect.
6.2 Termination: This Plan shall automatically terminate on May 22, 1996 if
the condition set forth in Section 3.1 is not satisfied. If not so terminated,
the Plan shall continue indefinitely except the Board may at any time
terminate this Plan as of any date specified in a resolution adopted by the
Board. No Stock Awards may be granted after this Plan has terminated. The
termination of the Plan shall not affect the applicability of any provision of
the Plan to Stock Awards made prior to such termination.
A-2
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Restrictions Upon Grant of Stock Awards: The listing on the New York
Stock Exchange or the registration or qualification under any federal or state
law of any shares of Common Stock to be granted pursuant to this Plan (whether
to permit the grant of Stock Awards or the resale or other disposition of any
such shares of Common Stock by or on behalf of the Outside Directors receiving
such shares) may be necessary or desirable and, in any such event, if the
Company so determines, issuance or delivery of such shares of Common Stock
shall not be made until such listing, registration or qualification shall have
been completed. In such connection, the Company agrees that it will use its
best efforts to effect any such listing, registration or qualification,
provided, however, that the Company shall not be required to use its best
efforts to effect such registration under the Securities Act of 1933, as
amended, other than on Form S-8, as presently in effect, or other such forms
as may be in effect from time to time calling for information comparable to
that presently required to be furnished under Form S-8.
7.2 Restrictions Upon Resale of Unregistered Stock: If the shares of Common
Stock that have been transferred to an Outside Director pursuant to the terms
of this Plan are not registered under the Securities Act of 1933, as amended,
pursuant to an effective registration statement, such Outside Director, if the
Company deems it advisable, may be required to represent and agree in writing
(i) that any shares of Common Stock acquired by such Outside Director pursuant
to this Plan will not be sold except pursuant to an effective registration
statement under the Securities Act of 1933, as amended, or pursuant to an
exemption from registration under said Act and (ii) that such Outside Director
is acquiring such shares of Common Stock for such Outside Director's own
account and not with a view to the distribution thereof.
7.3 Adjustments: In the event of any subdivision or combination of
outstanding shares of Common Stock or declaration of a dividend payable in
shares of Common Stock or other stock split, then (i) the number of shares of
Common Stock reserved under this Plan and (ii) the number of shares delivered
on any Annual Award Date occurring after the applicable record date or
effective date shall be proportionately adjusted to reflect such transaction.
7.4 Withholding of Taxes: Unless otherwise required by applicable federal or
state legislation or regulation, the Company shall not withhold or otherwise
pay on behalf of any Outside Director any federal, state, local or other taxes
arising in connection with a Stock Award under this Plan. The payment of any
such taxes shall be the sole responsibility of each Outside Director.
7.5 Governing Law: This Plan and all determinations made and actions taken
pursuant hereto shall be governed by the internal laws of the State of Texas,
except as federal law may apply.
7.6 Unfunded Status of Plan: This Plan shall be an unfunded plan. The
Company shall not be required to establish any special or separate fund or
reserve or to make any other segregation of assets to assure the issuance of
any shares of Common Stock granted under this Plan.
7.7 No Assignment or Transfer: No rights to receive Stock Awards under the
Plan shall be assignable or transferrable by an Outside Director except by
will or the laws of descent and distribution.
HOUSTON INDUSTRIES INCORPORATED
A-3
[LOGO OF HOUSTON INDUSTRIES APPEARS HERE]
[LOGO OF HOUSTON INDUSTRIES APPEARS HERE]
HOUSTON INDUSTRIES INCORPORATED
1995 FINANCIAL STATEMENTS
APPENDIX A
TABLE OF CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 1
STATEMENTS OF CONSOLIDATED INCOME.................. 16
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS....... 18
CONSOLIDATED BALANCE SHEETS........................ 19
CONSOLIDATED STATEMENTS OF CAPITALIZATION.......... 21
STATEMENTS OF CONSOLIDATED CASH FLOWS.............. 23
HL&P STATEMENTS OF INCOME.......................... 25
HL&P STATEMENTS OF RETAINED EARNINGS............... 26
HL&P BALANCE SHEETS................................ 27
HL&P STATEMENTS OF CAPITALIZATION.................. 29
HL&P STATEMENTS OF CASH FLOWS...................... 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......... 32
NOTES TO HL&P'S FINANCIAL STATEMENTS............... 53
INDEPENDENT AUDITOR'S REPORT - THE COMPANY......... 58
INDEPENDENT AUDITOR'S REPORT - HL&P................ 59
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
HOUSTON INDUSTRIES INCORPORATED (COMPANY)
A summary of selected consolidated financial data for the Company and its
subsidiaries is set forth below:
Year Ended December 31,
--------------------------- Percent
1995 1994 Change
------------ ------------- ---------
(Thousands of Dollars)
Revenues........................... $3,730,173 $3,754,136 (1)
Operating Expenses................. 2,825,240 2,785,521 1
Operating Income................... 904,933 968,615 (7)
Interest and Other Charges......... 326,340 318,599 2
Income Taxes....................... 199,555 230,424 (13)
Income from Continuing Operations.. 397,400 423,985 (6)
Gain/(Loss) from Discontinued
Operations........................ 708,124 (16,524) --
Net Income......................... 1,105,524 399,261 177
Year Ended December 31,
--------------------------- Percent
1994 1993 Change
------------ ------------- ---------
(Thousands of Dollars)
Revenues........................... $3,754,136 $4,083,655 (8)
Operating Expenses................. 2,785,521 3,102,509 (10)
Operating Income................... 968,615 981,146 (1)
Interest and Other Charges......... 318,599 350,299 (9)
Income Taxes....................... 230,424 228,863 1
Income from Continuing Operations.. 423,985 440,531 (4)
Loss from Discontinued
Operations........................ (16,524) (24,495) (33)
Net Income......................... 399,261 416,036 (4)
All common stock data included in this section reflect the two-for-one stock
split in the form of a stock distribution effected on December 9, 1995. See
Note 5(a) to the Company's Consolidated and Houston Lighting & Power Company's
(HL&P) Financial Statements in Item 8 of this Report (Financial Statements).
In July 1995, the Company sold KBLCOM Incorporated, its cable television
subsidiary (KBLCOM). The operations of KBLCOM are reflected as discontinued
operations. See Note 13 to the Financial Statements.
1
EARNINGS - THE COMPANY
1995 Compared to 1994. Consolidated earnings per share were $4.46 for
1995, an increase of $2.84 per share from 1994. The Company's 1995 earnings
were significantly affected by a one-time after-tax gain of $708 million or
$2.86 per share recorded upon the sale of the Company's cable television
subsidiary. The gain is reflected in discontinued operations on the Company's
Statements of Consolidated Income. The Company's 1995 consolidated earnings per
share from continuing operations were $1.60 per share, compared to $1.72 per
share in 1994.
HL&P contributed $1.82 per share in 1995 (reflecting net income of
$451 million after dividends on preferred stock). In 1995, Houston Industries
Energy, Inc. (HI Energy) sustained a net loss of $33 million or $.13 per share.
The net loss includes an $18 million after-tax charge to earnings resulting from
the establishment of a valuation allowance reflecting the impairment of the
ability of two waste tire-to-energy projects to repay $28 million in
subordinated debt advanced to the projects by HI Energy. This impairment is the
result of a repeal by the state of Illinois of an operating subsidy benefiting
the projects. For additional information regarding this charge and HI Energy's
commitments under certain circumstances to make additional subordinated loans to
these projects, see Note 4(c) to the Financial Statements. The remaining $.09
per share loss was primarily due to corporate overhead costs and financing
expenses at the parent company. Earnings for 1995 included after-tax dividend
income of approximately $18 million related to Time Warner Inc. (Time Warner)
securities received by the Company upon the sale of its cable television
subsidiary.
The Company had other revenues of $50 million in 1995 compared to $8
million in 1994. Other revenues are principally from electric sales and
operating revenues from HI Energy. The increase is primarily due to revenues
from a foreign electric utility operating company acquired in 1995 by HI Energy.
Other operating expenses for the Company were $123 million for 1995 compared to
$36 million in 1994. Other operating expenses primarily include HI Energy
operating expenses and corporate overhead costs at the parent company. The
increase is principally due to increased HI Energy operating expenses for the
foreign electric utility operating company, the $18 million after-tax charge to
earnings described above and increased project development costs. For additional
information regarding HI Energy's activities and investments, see Note 4 to the
Financial Statements.
1994 Compared to 1993. Consolidated earnings per share from
continuing operations were $1.72 for 1994, compared to $1.69 per share in 1993.
Effective January 1, 1994, the Company adopted Statement of Position (SOP) 93-6,
"Employers' Accounting for Employee Stock Ownership Plans," which had the effect
of reducing 1994 net income by $12.8 million while increasing earnings per share
by $.05. The increase in earnings per share occurred because SOP 93-6 required
a reduction in the number of weighted average common shares outstanding for the
period ended December 31, 1994 by the number of shares not yet allocated to plan
participants in the Company's Employee Stock Ownership Plan (ESOP). For a
further discussion of the effects of the adoption of SOP 93-6, see Notes 1(g)
and 9(b) to the Financial Statements.
HL&P contributed $1.88 per share in 1994 (reflecting income before
cumulative effect of a change in accounting and after dividends on preferred
stock of $461.4 million). In 1994, HI Energy sustained a net loss of $.03 per
share. The remaining net loss of $.13 per share was primarily due to corporate
overhead costs and financing expenses at the parent company partially offset by
the effects of the adoption of SOP 93-6, as discussed above.
2
HL&P contributed $1.73 to the 1993 consolidated earnings per share
from continuing operations on income of $449.8 million after preferred
dividends. The remaining loss of $.04 per share resulted from corporate
overhead costs and financing expenses at the parent company and a combined loss
of the Company's other subsidiaries.
HL&P
Summary of selected financial data for HL&P is set forth below:
Year Ended December 31,
----------------------- Percent
1995 1994 Change
----------- ---------- --------
(Thousands of Dollars)
Base Revenues (1)................. $2,645,303 $2,673,146 (1)
Reconcilable Fuel Revenues (2).... 1,034,994 1,072,939 (4)
Operating Expenses (3)............ 2,945,633 3,003,203 (2)
Operating Income (3).............. 734,664 742,882 (1)
Interest Charges.................. 247,809 249,472 (1)
Income After Preferred Dividends.. 450,977 453,181 -
Year Ended December 31,
---------------------- Percent
1994 1993 Change
---------- ---------- -------
(Thousands of Dollars)
Base Revenues (1)................. $2,673,146 $2,755,057 (3)
Reconcilable Fuel Revenues (2).... 1,072,939 1,324,806 (19)
Operating Expenses (3)............ 3,003,203 3,313,577 (9)
Operating Income (3).............. 742,882 766,286 (3)
Interest Charges.................. 249,472 284,585 (12)
Income After Preferred Dividends.. 453,181 449,750 1
---------- ---------- ---
- ----------
(1) Includes miscellaneous revenues, certain non-reconcilable fuel revenues
and certain purchased power related revenues.
(2) Includes revenues collected through a fixed fuel factor net of adjustment
for over/under recovery. See "Operating Revenues and Sales - HL&P" in this
section for further discussion.
(3) Includes income taxes.
EARNINGS - HL&P
1995 Compared to 1994. HL&P's 1995 earnings were $451 million, a decline
of $2.2 million from 1994. Earnings for 1995 benefited from 5% growth in
residential and 4% growth in commercial kilowatt-hour (KWH) sales resulting from
continued customer growth and hotter summer weather in 1995. However, the
revenue improvements were offset by (i) reduced electric rates stemming from the
settlement of Docket No. 12065, HL&P's 1995 rate case (Rate Case Settlement),
(ii) HL&P's decision to write down $50 million ($33 million after-tax) of its
investment in the South Texas Project Electric Generating Station (South Texas
Project) as permitted under the Rate Case Settlement, and (iii) increased non-
routine operating expenses in part associated with staff severance costs and
litigation. HL&P's earnings for 1994 reflect a one-time, after-tax charge of
$46 million in the fourth quarter also related to the Rate Case Settlement.
3
For additional information regarding the Rate Case Settlement, see "Certain
Factors Affecting Future Earnings of the Company and HL&P--Rate Matters and
Other Contingencies," below, and Note 3(a) to the Financial Statements.
1994 Compared to 1993. HL&P's 1994 earnings were $453.2 million, an
increase of $3.4 million from 1993. The increase in HL&P's 1994 earnings
resulted primarily from (i) increased residential and commercial KWH sales of 1
percent and 4 percent, respectively, (ii) lower operating costs associated with
reductions in production plant maintenance and employee benefits, and (iii)
reduced interest expenses. The increase in 1994 earnings was partially offset
by (i) the one-time after-tax charge of $46 million discussed above and (ii) the
recognition of an $8.2 million after-tax charge for postemployment benefit costs
incurred as a result of the adoption of Statement of Financial Accounting
Standards (SFAS) No. 112, "Employer's Accounting for Postemployment Benefits."
Earnings for 1993 included approximately $21 million (after-tax) in franchise
tax refunds.
OPERATING REVENUES AND SALES - HL&P
1995 Compared to 1994. The $27.8 million decline in 1995 base
revenues was primarily due to (i) decreased base rates resulting from the Rate
Case Settlement, (ii) decreased firm industrial KWH sales and (iii) a reduction
of revenues associated with recovery of certain firm capacity purchased power
costs included in base rates. See Note 11(b) to the Financial Statements for a
discussion of firm capacity costs.
Firm industrial KWH sales declined 3 percent in 1995. Contributing to
this decrease were a decline in sales to the chemical and refining industries,
primarily due to the loss of a large industrial customer to self-generation, and
the expiration of an economic development rate which caused some customers to
make greater use of interruptible service or switch to alternative rates. Firm
industrial sales exclude electricity sold at a reduced rate under agreements
which allow HL&P to interrupt service under some circumstances.
Reconcilable fuel revenues are revenues that are collected through a
fixed fuel factor. The Public Utility Commission of Texas (Utility Commission)
provides for recovery of certain fuel and purchased power costs through a fixed
fuel factor included in electric rates. The fixed fuel factor is established
during either a utility's general rate proceeding or fuel factor proceeding and
is generally effective for a minimum of six months. Revenues collected through
such factor are adjusted monthly to equal expenses; therefore, such revenues and
expenses have no effect on earnings unless fuel costs are determined not to be
recoverable. The adjusted over/under recovery of fuel costs is recorded on
HL&P's balance sheets as fuel-related credits. Fuel costs are reviewed during
periodic fuel reconciliation proceedings, which are required at least every
three years.
1994 Compared to 1993. 1994 operating revenues declined 8.2
percent, or $333 million, primarily due to a decrease in reconcilable fuel
revenues and the one-time, after-tax $46 million charge relating to the Rate
Case Settlement discussed above. 1994 residential and commercial KWH sales
increased by 1 percent and 4 percent, respectively, while firm industrial sales
remained relatively unchanged.
FUEL AND PURCHASED POWER EXPENSE - HL&P
Fuel costs constitute the single largest expense for HL&P. The mix of
fuel sources for generation of electricity is determined primarily by system
load and the unit cost of fuel consumed. The average cost of fuel used by HL&P
in 1995 was $1.59 per million British Thermal Unit (MMBtu)
4
($1.69 for natural gas, $2.03 for coal, $1.25 for lignite and $0.58 for
nuclear). In 1994, the average cost of fuel was $1.54 ($1.90 for natural gas,
$1.59 for coal, $1.11 for lignite and $0.57 for nuclear).
1995 Compared to 1994. 1995 fuel expense increased by 2 percent, or
$18.2 million, primarily due to the receipt in 1994 of $66.1 million from the
sale of receivables associated with a settlement resolving claims that HL&P had
been overcharged for the cost of coal transportation. For additional information
on this transaction, see Note 14 to the Financial Statements. Excluding the
effects of such transaction, 1995 fuel expense declined by 5.2 percent from
1994. This decline was attributable to (i) a general decline in the unit cost
of natural gas and (ii) the increased use of nuclear generation (which has a per
unit fuel cost that is substantially lower than HL&P's other fuel sources).
Purchased power expense decreased $175 million resulting primarily from the
expiration of certain purchased power contracts.
1994 Compared to 1993. The 19 percent, or $202 million, decrease in
1994 fuel expense was primarily due to (i) decreases in both the usage and per
unit cost of natural gas, and decreases in the unit cost of all other fuels used
in 1994 and (ii) the $66.1 million reduction discussed above. The $107 million
decrease in purchased power costs was due to the expiration in 1994 of a
purchased power agreement.
OPERATION AND MAINTENANCE EXPENSES, DEPRECIATION, AMORTIZATION, AND OTHER -
HL&P
1995 Compared to 1994. Operation and maintenance expenses for 1995
increased $35 million and $2.4 million, respectively, compared to 1994.
Substantially all of the increase in operation expense resulted from (i)
employee severance expenses, (ii) other employee benefits adjustments and (iii)
certain litigation expenses. Depreciation and amortization expense for 1995
increased $77 million compared to 1994, primarily due to amortization recorded
pursuant to the Rate Case Settlement, see Note 3(a) to the Financial Statements.
Other taxes decreased $5.5 million for 1995 compared to 1994, primarily due to
decreased state gross receipts obligations attributable to base and fuel
refunds. Other-net expense for 1995 increased $13.3 million compared to 1994
primarily as a result of a one-time, pre-tax charge of $9 million incurred in
connection with mine-related costs which were not previously recorded and are
not recoverable under the Rate Case Settlement.
During 1995, HL&P incurred $15 million in work force severance costs
as a result of its efforts to streamline and improve certain business
activities. These severance costs reflect a staff reduction of approximately
570 employees. Although these costs have the short-term effect of putting
downward pressure on earnings, HL&P expects that these costs will be recovered
from future savings in employee-related costs. HL&P estimates that it saved
approximately $6 million in labor and benefit costs in 1995 as a result of these
work force reductions.
1994 Compared to 1993. Operation and maintenance expenses for 1994
decreased $28 million and $41.8 million, respectively, compared to 1993. These
decreases were due primarily to lower employee benefits expenses and production
plant maintenance costs. Depreciation and amortization expense in 1994
increased by $12.4 million compared to 1993, primarily due to an increase in
depreciable property and the commencement of the amortization of previously
deferred demand side management expenditures. Other taxes increased $40.1
million in 1994 primarily due to the effect of (i) franchise tax refunds of
$32.7 million received in 1993 and (ii) a $6.1 million increase in property
taxes in 1994.
5
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
OF THE COMPANY AND HL&P
Earnings for the past three years are not necessarily indicative of
future earnings and results of operations. The level of future earnings depends
on numerous factors ranging from growth in energy sales, weather, HI Energy's
future results of operations, competition, regulatory changes, the rate of
economic growth in HL&P's service area, and the ability of the Company and HL&P
to control costs and maintain a pricing structure that is both attractive to
customers and profitable to the Company and HL&P.
RATE MATTERS AND OTHER CONTINGENCIES
In August 1995, the Utility Commission unanimously approved the Rate
Case Settlement. Subject to certain changes in existing regulation or
legislation, the Rate Case Settlement precludes HL&P from seeking rate increases
through December 31, 1997.
Under the Rate Case Settlement, HL&P has the option to write down up
to $50 million per year of its investment in the South Texas Project through
December 31, 1999. In 1995, HL&P wrote down the maximum $50 million annual ($33
million after-tax) amount. Additionally, pursuant to the Rate Case Settlement,
HL&P was permitted, and in January 1996, commenced amortization of its
investment in certain lignite reserves (associated with the now canceled
Malakoff generation project) at a rate of approximately $22 million per year.
As a result of this additional amortization, all of HL&P's remaining investment
in the Malakoff project will be fully amortized no later than December 31, 2002.
In addition, accruals for nuclear decommissioning expenses increased by $9
million per year beginning in 1995. For details of the terms of the Rate Case
Settlement (as well as the status of pending litigation involving other Utility
Commission orders), see Note 3 to the Financial Statements.
HL&P is a party to litigation and an arbitration proceeding involving
certain of the owners of the South Texas Project. For information regarding
that litigation and such proceeding (including settlement discussions with the
City of San Antonio), see Note 2(b) to the Financial Statements.
The Company and HL&P are involved in other legal, tax and regulatory
proceedings before various courts, regulatory agencies and governmental
authorities, some of which may involve substantial amounts. For additional
information, see Notes 3 and 11 to the Financial Statements.
COMPETITION
Due to changing government regulations, technological developments and
the availability of alternative energy sources, the U.S. electric utility
industry has become increasingly competitive. Such competition affects HL&P's
business both in terms of source of power supply available to HL&P and
alternative choices for customers meeting their power needs.
Wholesale Competition. Under the Energy Policy Act of 1992 (Energy
Policy Act), exempt wholesale generators are permitted to produce and sell
electric energy at wholesale without becoming subject to regulation under the
Public Utility Holding Company Act of 1935 (1935 Act). In addition, the Energy
Policy Act expands the authority of the Federal Energy Regulatory Commission
(FERC) to grant exempt wholesale generators access to the transmission networks
of utilities in order to sell electricity to other utilities. Although HL&P's
wholesale sales traditionally have accounted for less than 1% of its total
revenues, HL&P believes that the Energy Policy Act could encourage the
development of additional independent power projects within its service area.
6
New Transmission Access Rule. In February 1996, the Utility
Commission adopted a new transmission access and pricing rule granting third-
party users of transmission systems open access to such systems at rates, terms
and conditions comparable to those available to the transmission-owning
utilities. The rule also implements a transmission pricing methodology by which
all transmission users will be assessed a facilities charge for transmission
usage. The Utility Commission is also requiring utilities (i) to operationally
separate or "functionally unbundle" their wholesale power marketing operations
from the operation of the transmission grid and (ii) to separately disclose
their costs of generation, transmission and distribution for purposes of
transmission pricing.
The facilities' charge to be paid by transmission users has two
components: a statewide "postage stamp" component and a distance sensitive
component. For the statewide postage stamp component, transmission users will
pay an amount based upon their share of the total peak demand on the Electric
Reliability Council of Texas, Inc. (ERCOT) system multiplied by 70% of the total
ERCOT transmission cost of service. For the distance sensitive component,
transmission users will pay to each affected transmission owner an amount based
upon the user's relative impact on all transmission owners' systems multiplied
by 30% of the total ERCOT transmission cost of service.
Statewide postage stamp revenues will be apportioned to each
transmission owner based on the ratio of its transmission cost of service to the
total ERCOT transmission cost of service. As noted above, transmission owners
will receive distance sensitive revenues based upon the relative impact on their
systems of all ERCOT transmission users. Since the method for apportioning
costs among transmission users is different from the method for apportioning
revenues among transmission owners, the impact on any particular utility that
both owns transmission facilities and uses the transmission systems of others
can vary. Generally speaking, the new transmission access rule is less
favorable to utilities with compact service areas and more favorable to
utilities with broader service areas.
Because HL&P has a compact service area and its transmission cost per
megawatt is less than the statewide average, HL&P estimates that it could incur
increased transmission costs of $35 million per year under the new rule. The
actual impact on HL&P, however, will not be known until the Utility Commission
approves total ERCOT transmission cost of service, which is not expected to
occur until late 1996. To mitigate any cost increases to utilities and/or their
customers, the Utility Commission will phase-in the increased transmission costs
in 10% increments during the three-year period beginning with the
implementation of the rule. At the end of the three-year period, the Utility
Commission expects that each transmission-owning utility will have either
adjusted its cost structures or requested a change in rates to account for such
increased transmission cost.
The new transmission access rule is one of several related regulatory
proceedings now underway at the Utility Commission. In one such proceeding the
Utility Commission is evaluating programs for Standard Terms and Conditions
which will govern transmission service provided under the new transmission
access rule when it is implemented. It is anticipated that the rule
establishing such Standard Terms and Conditions will be effective in April 1996.
The Utility Commission is specifying the components of a rate filing package,
which should be adopted in March 1996, and utilities will file specific
transmission and ancillary service tariffs in May 1996. Finally, the Utility
Commission intends to adopt in the third quarter of 1996 rules that would govern
the action of the independent system operator selected to assure non-
discriminatory operation of the transmission grid. Final implementation of the
various Utility Commission's rules is expected
7
to occur in January 1997. The Utility Commission is also expected to revisit
this rulemaking in order to ensure compliance with transmission rules to be
adopted by FERC.
Retail Wheeling and Stranded Costs. Although federal law currently
does not provide for transmission access to retail customers, retail wheeling
initiatives are evolving and becoming prominent issues in several states.
As the U.S. electric utility industry continues its transition to a
more competitive environment, a substantial amount of fixed costs previously
approved for recovery under traditional utility regulatory practices (including
regulatory assets and liabilities) may become "stranded," i.e., unrecoverable at
competitive market prices. The issue of stranded costs could be particularly
significant with respect to fixed costs incurred in connection with the past
construction of generation plants, such as nuclear power plants which, because
of their high fixed costs, would not command the same price for their output as
they have in a regulated environment. The Utility Commission has initiated
projects to consider issues relating to the scope of competition in the electric
utility industry and stranded investment in connection with the preparation of
their 1997 reports to the Texas legislature. For a description of HL&P's
principal regulatory assets and liabilities, see Note 1(b) to the Financial
Statements.
RESPONSE TO COMPETITION
In February 1996, the Company announced its intent to form two new
strategic business units (in addition to HI Energy) to focus on nonregulated
energy marketing and energy services nationwide. In 1996, HL&P took steps to
reorganize its operations into three strategic business units in order to better
position itself to respond to the deregulation of the electric utility industry.
The three strategic business units will consist of Energy Production (fossil-
fueled electric generation), Energy Delivery and Customer Services (transmission
and distribution of electricity and engineering, as well as marketing and other
customer services) and the South Texas Project.
HL&P has implemented flexible pricing to respond to the threat of
competition in situations where large industrial customers have a viable source
of alternative generation. Under a new tariff option approved by the Utility
Commission in 1995, HL&P may negotiate a competitive rate with industrial
customers who have an alternative to taking power from HL&P (as a result, for
example, of cogeneration). Under the approved tariff, HL&P can price its
industrial rate within a range between 6% above its marginal cost to its full
embedded cost rate. While flexible tariff structures may help HL&P increase or
retain sales to industrial customers (and reduces costs that would otherwise be
borne by other customers), such tariffs result in sales at lower margins over
cost.
HI ENERGY
The Company, through its subsidiary HI Energy, is focusing on
international and domestic cogeneration, the international power market and the
privatization of generating and distribution facilities in the international
market. At December 31, 1995, HI Energy's investments in these projects
amounted to approximately $93 million. Subject to HI Energy's ability to
identify other attractive investment opportunities, future capital expenditures
in connection with HI Energy's international and domestic operations could be
substantial. In October 1995, the Company and another Texas utility made an
offer to purchase an English regional electricity company for a total price
equal to approximately $2.7 billion. The offer was withdrawn after a competing
bidder made a higher bid for the target company.
8
During 1995, HI Energy had a consolidated loss of approximately $33
million or $.13 per share. The loss included an $18 million after-tax charge to
earnings as described in more detail below. Based on existing commitments
entered into by HI Energy, the Company estimates that HI Energy's capital
expenditures for 1996 will be approximately $34 million ($31 million to be
expended in connection with the construction of HI Energy's cogeneration project
in San Nicolas, Argentina, and $3 million in connection with HI Energy's
investment in a coke calcining project in the state of Andhra Pradesh, India).
Additional capital expenditures (which could be substantial) are dependent upon
the nature and extent of future project commitments entered into by HI Energy.
During 1995, HI Energy satisfied its cash requirements primarily through
intercompany borrowings from the Company. As of December 31, 1995, the balance
of such intercompany borrowings was $53.4 million. Although in the near term,
HI Energy's investments are unlikely to have a positive effect on earnings, the
Company believes that such investments (although subject to greater risks) may
offer long-term opportunities for growth greater than those that exist in HL&P's
regulated operations.
HI Energy is a subordinated lender to two waste tire-to-energy
projects being developed by CGE Ford Heights, L.L.C. (Ford Heights) and CGE
Fulton, L.L.C. (Fulton), respectively, located in the state of Illinois. HI
Energy also owns a $400,000 (20 percent) equity interest in Ford Heights. As of
March 26, 1996, HI Energy had lent on a subordinated basis approximately $17.5
million (including unpaid interest) to the Ford Heights project and $10.8
million to the Fulton project. These amounts are recorded on the Company's
Consolidated Balance Sheets in equity investments in and advances to foreign and
non-regulated affiliates-net. 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 two waste tire-to-energy 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 the state of Illinois signed legislation which purports to repeal
the Retail Rate Law. Following the action of the Governor, the projects filed a
lawsuit against the Illinois Commerce Commission and an Illinois utility
alleging, among other things, that the repeal of the Retail Rate Law violated
the Illinois Constitution. 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
provided under the Retail Rate Law. As a result, the Company has recorded a
valuation allowance of $28 million with respect to its advances to these two
projects, resulting in an after-tax charge to earnings of $18 million. The
Company is unable to predict the ultimate effect of these developments on HI
Energy's remaining funding commitments under the 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 may be required to increase the amount of the valuation
allowance, which would result in additional charges to earnings.
9
INVESTMENT IN TIME WARNER SECURITIES
In connection with the sale of the Company's cable television
subsidiary, the Company received 1 million shares of Time Warner common stock
and 11 million shares of non-publicly traded Time Warner convertible preferred
stock. The 11 million shares of Time Warner convertible preferred stock are
convertible by the Company into approximately 22.9 million shares of Time Warner
common stock. The Company has recorded these securities at a combined fair
value of approximately $1 billion on the Company's Consolidated Balance Sheets.
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 a separate component of
shareholders' equity. The Company's investment in the Time Warner convertible
preferred stock is accounted for under the cost method.
As with any investment, the value of the Company's investment will
fluctuate over time in response to general market conditions or economic and
regulatory developments affecting Time Warner.
Based on current dividend rates, the Company expects to receive
through July 1999 after-tax dividend income of approximately $37 million per
year from its Time Warner securities. While the Company has no specific plans to
dispose of these securities and is restricted in certain circumstances from
doing so, it does not expect to maintain its substantial investment in Time
Warner indefinitely. For a description of the Company's investment in Time
Warner (including a description of certain restrictions on the Company's ability
to sell its Time Warner securities), see Note 13 to the Financial Statements.
10
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The liquidity and capital requirements of the Company and its
subsidiaries are affected primarily by capital programs and debt service
requirements. The capital requirements for 1995 were, and as estimated for 1996
through 1998, are as follows:
Millions of Dollars
--------------------------
1995 1996 1997 1998
----- ----- ----- -----
Electric capital and nuclear fuel (excluding Allowance
for Funds Used During Construction) (AFUDC) (1)........ $ 297 $ 387 $ 301 $ 328
Corporate headquarters expenditures (excluding
capitalized interest) (1).............................. 90 5
Non-regulated electric power project expenditures
and advances (2)....................................... 38 34 55
Maturities of long-term debt, preferred stock
and minimum capital lease payments..................... 49 379 252 66
Discontinued operations:
Cable television additions and other cable-related
investments.......................................... 48
Maturities of long-term debt........................... 41
----- ----- ----- -----
Total................................................... $ 563 $ 805 $ 608 $ 394
===== ===== ===== =====
- --------------
(1) Renovation costs of new corporate headquarters building include costs of
structural improvements and renovations. During 1995, HL&P made a payment
toward the purchase of an ownership interest in the new corporate
headquarters building. Such payment is not reflected in the Company's
electric capital and nuclear fuel expenditures as it is an affiliate
transaction eliminated upon consolidation.
(2) Expenditures in table reflect only expenditures made or to be made under
existing commitments entered into by HI Energy. Additional capital
expenditures are dependent upon the nature and extent of future project
commitments (some of which may be substantial) entered into by HI Energy.
The foregoing estimates are based on numerous assumptions, some of which
may prove to be incorrect. Actual liquidity and capital requirements will also
vary because of changes in governmental regulations, the resolution of various
litigation and other contingencies and changes in economic conditions.
COMPANY CONSOLIDATED CAPITAL REQUIREMENTS
The cash requirements of the Company and its subsidiaries stem primarily
from operating expenses, capital expenditures, payment of dividends on its
common stock, payment of dividends on HL&P's preferred stock and interest and
principal payments on debt. In 1995, net cash provided by operating activities
totaled $839.4 million. Net cash provided by investing activities totaled
$124.9 million, primarily due to the settlement of subsidiary debt related to
the sale of KBLCOM of $619.3 million partially offset by electric capital
expenditures of $301.3 million (including allowance for borrowed funds used
during construction) and expenses associated with structural
11
improvements and renovation of a new corporate headquarters of $96.5 million
(including capitalized interest). Net cash used in discontinued cable
television investing activities for 1995 totaled approximately $48 million,
primarily due to property additions and other cable-related investments.
Financing activities for 1995 resulted in a net cash outflow of $963 million.
HL&P CAPITAL REQUIREMENTS
Cash Requirements. HL&P's cash requirements stem primarily from
operating expenses, capital expenditures, payment of dividends on its common
stock, payment of dividends on its preferred stock and interest and principal
payments on debt. In 1995, HL&P's net cash provided by operating activities
totaled approximately $867.7 million, and net cash used in HL&P's investing
activities totaled $406.9 million, including allowance for borrowed funds used
during construction. HL&P's financing activities for 1995 resulted in a net cash
outflow of $620.8 million. Included in these activities were the payment of
dividends, the extinguishment of long-term debt, the redemption of preferred
stock and the issuance of collateralizing first mortgage bonds. For information
with respect to these matters, see Notes 6 and 7(b) to the Financial Statements.
Capital Program. In 1995, HL&P's capital and nuclear fuel expenditures
(excluding AFUDC) totaled approximately $392 million with estimated expenditures
for 1996, 1997 and 1998 totaling $387 million, $301 million and $328 million,
respectively. HL&P's capital programs for the next three years, which are
expected to relate to costs for production, transmission, distribution and
general plant, are subject to periodic review and may be revised at any time due
to changes in load forecasts, regulatory and environmental standards and other
factors.
During the next three years, it is anticipated that HL&P will require
approximately $497 million for repayment of maturing long-term debt, preferred
stock subject to mandatory redemption and capital leases. These expenditures
are anticipated to be $179 million in 1996, $252 million in 1997 and $66 million
in 1998.
Environmental Expenditures. The Federal Clean Air Act (Clean Air Act)
has required, and will continue to require, HL&P to increase its environmental
expenditures. In 1995, modifying HL&P's existing facilities to reduce emissions
of nitrogen oxides (NOx) cost approximately $1 million. The date for
installation of additional controls has been delayed by the United States
Environmental Protection Agency (EPA) and the Texas Natural Resource
Conservation Commission until it becomes certain that additional expenditures
for NOx emission reductions will be required under the provisions of the Clean
Air Act. However, up to an additional $40 million may be incurred by HL&P in
order to fully comply with new NOx requirements through 1999. In addition, it
is anticipated that approximately $1 million in 1996 will be expended to install
continuous emission monitoring equipment; approximately $3 million was incurred
for this equipment in 1995.
The EPA identified HL&P as a potentially responsible party under the
Comprehensive Environmental Response, Compensation, and Liability Act for the
costs of cleaning up a site located adjacent to one of HL&P's transmission
lines. HL&P believes that the EPA took this action solely on the basis of
information indicating that HL&P in the 1950s acquired record title to a portion
of the land on which the site is located. HL&P does not believe that it now nor
previously has had any ownership interest in the land in question and has
obtained a judgment from a court in Galveston County, Texas, to that effect.
Accordingly, HL&P has not complied with this order, even though HL&P understands
that other responsible parties are proceeding with site remediation. To date,
neither the EPA nor any other potentially responsible party has instituted a
claim against HL&P for any share of the remediation costs, but under current law
if HL&P is determined to be a responsible party, HL&P could be found to be
jointly and severally liable for the remediation costs
12
(which HL&P estimates to be approximately $80 million) and could be subjected to
substantial fines and damage claims.
Compliance with possible additional legislation related to global climate
change, electromagnetic fields and other environmental and health issues could
significantly affect the Company and HL&P. The impact of the new legislation,
if any, will depend on the subsequent development and implementation of
applicable regulations.
COMPANY--SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
The Company has registered with the Securities and Exchange Commission (SEC)
ten million shares of its Common Stock and $250 million principal amount of its
debt securities, all of which securities remain unissued and, subject to market
conditions, could be sold to raise additional capital for the Company. Proceeds
from the sale of these securities can be used for general corporate purposes,
including, but not limited to, the redemption, repayment or retirement of
outstanding indebtedness of the Company or the advance or contribution of funds
to one or more of the Company's subsidiaries to be used for their general
corporate purposes, including, without limitation, the redemption, repayment or
retirement of indebtedness or preferred stock.
The Company has consolidated its financing activities in order to provide a
coordinated, cost-effective method of meeting short and long-term capital
requirements. As part of the consolidated financing program, the Company has
established a "money fund" through which its subsidiaries can borrow or invest
on a short-term basis. The funding requirements of individual subsidiaries are
aggregated and borrowing or investing is conducted by the Company based on the
net cash position.
In 1995, net funding requirements under the "money fund" were met with
borrowings under the Company's commercial paper program, except that HL&P's
short-term borrowing requirements were generally met with HL&P's commercial
paper program. In 1996, net funding requirements of the Company and HL&P are
expected to be met with a combination of commercial paper and bank borrowings.
As of December 31, 1995, the Company had a bank credit facility of $1.1 billion
(exclusive of bank credit facilities of subsidiaries), which was used to support
its commercial paper program. At December 31, 1995, the Company had
approximately $6.3 million of commercial paper outstanding. Rates paid by the
Company on its short-term borrowings are generally lower than the prime rate.
In the fourth quarter of 1996, the Company will be required to redeem $200
million of its 7-1/4% debentures. Based on current market conditions, the
Company expects to fund this redemption requirement using proceeds from short-
term borrowings or other external sources.
Subject to the nature and extent of future project commitments, it is
anticipated that HI Energy's 1996 capital requirements will be satisfied
primarily through intercompany borrowings from the Company. HI Energy intends
that any third party borrowings it incurs will be non-recourse to the Company,
HL&P or HI Energy.
HL&P--SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
HL&P expects to finance its 1996 through 1998 capital program with funds
generated internally from operations. HL&P has registered with the SEC $230
million aggregate liquidation value of its preferred stock and $580 million
aggregate principal amount of its debt securities that may be issued as first
mortgage bonds. Subject to market conditions, these securities could be
13
issued as another source of capital for HL&P. Proceeds from any sale of these
securities are expected to be used for general corporate purposes including the
purchase, redemption (to the extent permitted by the terms of the outstanding
securities), repayment or retirement of outstanding indebtedness or preferred
stock of HL&P.
In 1995, HL&P's interim financing requirements were met with commercial
paper. HL&P has a commercial paper program supported by a bank line of credit
of $400 million. HL&P had no commercial paper outstanding at December 31, 1995.
At December 31, 1995, HL&P had approximately $75.9 million in cash and cash
equivalents invested in short-term investments.
HL&P continued to reduce its financing costs by retiring higher-cost bonds in
1995. In addition, HL&P accelerated in 1995 the sinking fund requirements of
certain shares of its preferred stock. As a result of these efforts, the
composite interest rate on long-term debt decreased from 8.32 percent at
December 31, 1993 to 8.19 percent at December 31, 1995. During the same period,
the composite dividend rate on preferred stock increased from 6.23 percent to
6.43 percent. In 1996, HL&P will be required to redeem $150 million of its first
mortgage bonds and $26 million of its preferred stock. For additional
information, see Notes 6 and 7(b) to the Financial Statements. HL&P intends to
satisfy these redemption obligations using funds internally generated from
operations.
NEW ACCOUNTING ISSUES
In 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121,
("Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of "), which imposes stricter standards for assessing asset
impairments than previously imposed by generally accepted accounting principles.
SFAS No. 121 is effective for years beginning after December 15, 1995.
Beginning in 1996, the Company and HL&P (and other companies subject to SFAS No.
121) must review certain assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If an impairment is found to exist, the impairment loss to be
recognized is the amount by which the carrying amount exceeds the fair value.
The Company and HL&P believe that, based on current conditions, SFAS No. 121
will have no material effect on their respective results of operations when
adopted in 1996. This conclusion, however, may change in the future as
competition influences wholesale and retail pricing in the electric utility
industry.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Effective for fiscal years beginning after December 15, 1995,
SFAS No. 123 does not rescind the existing accounting for employee stock-based
arrangements but encourages (although it does not require) recognizing the fair
value based method of accounting for stock-based compensation. Companies that
choose not to adopt the new rules will continue to apply the existing accounting
rules contained in Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees"; however, SFAS No. 123 requires disclosure of pro
forma net income and earnings per share that would have been reported under the
"fair value" recognition provisions of SFAS No. 123. The Company and HL&P have
reviewed the provisions of SFAS No. 123, and based on current assumptions, the
calculated "fair value" does not result in a material difference in 1995
recorded compensation cost. The Company and HL&P will continue to account for
stock-based compensation under APB Opinion No. 25 and disclose the pro forma
information required under SFAS No. 123.
The staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry regarding the recognition,
measurement and classification of decommissioning costs
14
for nuclear generating facilities recorded on the financial statements of
electric utilities. In response to these questions, the FASB initiated a
project entitled "Accounting for Certain Liabilities Related to Closure or
Removal of Long-Lived Assets." Throughout 1995, the FASB reviewed the
accounting for closure or removal obligations, including decommissioning of
nuclear facilities. In February 1996, FASB issued an Exposure Draft
communicating the results of this project. The Exposure Draft outlines the
following: (i) the requirement of recognition of a liability based on the
present value of the estimated future cash outflows that will be required to
satisfy the closure or removal obligations, using a risk-free interest rate
(U.S. Treasury securities), (ii) an equal amount capitalized as part of the
costs of the related long-lived asset, depreciated over the life of the asset,
and (iii) recognition of a regulatory asset or liability under SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation", for differences in
expenses recognized under this statement and amounts charged to customers in
rate-regulated entities. HL&P believes that, while the proposed standard would
also significantly increase disclosure requirements, it would have minimal
impact on the Company's and HL&P's financial condition or results of operations.
The Company and HL&P's financial statements include additional disclosures
required as a result of the adoption of the SOP 94-6 "Disclosure of Certain
Significant Risks and Uncertainties". This SOP, which is effective for financial
statements issued for fiscal years ending after December 15, 1995, requires
financial statement disclosure for (i) the nature of operations, (ii) use of
estimates in the preparation of financial statements, and, if specified
disclosure criteria are met, (iii) certain significant estimates and (iv)
current vulnerability due to certain concentrations.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
Year Ended December 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
REVENUES:
Electric utility............................... $3,680,297 $3,746,085 $4,079,863
Other.......................................... 49,876 8,051 3,792
---------- ---------- ----------
Total......................................... 3,730,173 3,754,136 4,083,655
---------- ---------- ----------
EXPENSES:
Electric utility:
Fuel.......................................... 879,148 860,936 1,063,050
Purchased power............................... 233,494 408,963 515,502
Operation and maintenance..................... 866,170 828,748 898,535
Taxes other than income taxes................. 245,890 251,421 211,295
Depreciation and amortization.................. 478,034 399,341 386,893
Other operating expenses....................... 122,504 36,112 27,234
---------- ---------- ----------
Total 2,825,240 2,785,521 3,102,509
---------- ---------- ----------
OPERATING INCOME................................ 904,933 968,615 981,146
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Allowance for other funds used during
construction.................................. 7,760 4,115 3,512
Time Warner dividend income.................... 20,132
Interest income................................ 9,774 6,628 33,357
Other - net.................................... (19,304) (6,350) 1,678
---------- ---------- ----------
Total 18,362 4,393 38,547
---------- ---------- ----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt..................... 279,491 265,494 304,462
Other interest................................. 21,586 25,076 15,145
Allowance for borrowed funds used during
construction.................................. (4,692) (5,554) (3,781)
Preferred dividends of subsidiary.............. 29,955 33,583 34,473
---------- ---------- ----------
Total 326,340 318,599 350,299
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING........................... 596,955 654,409 669,394
INCOME TAXES.................................... 199,555 230,424 228,863
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING.................................. 397,400 423,985 440,531
DISCONTINUED OPERATIONS (NET OF INCOME TAXES):
Gain on sale of cable television subsidiary.... 708,124
Loss from discontinued cable television
operations.................................... (16,524) (24,495)
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING.................................. 1,105,524 407,461 416,036
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS (NET OF INCOME
TAXES OF $4,415)............................... (8,200)
---------- ---------- ----------
NET INCOME...................................... $1,105,524 $ 399,261 $ 416,036
========== ========== ==========
(continued on next page)
16
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(CONTINUED)
Year Ended December 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(Restated) (Restated)
EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING........... $ 1.60 $ 1.72 $ 1.69
DISCONTINUED OPERATIONS:
Gain on sale of cable television
subsidiary.............................. 2.86
Loss from discontinued cable television
operations.............................. (.07) (.09)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POSTEMPLOYMENT BENEFITS.............. (.03)
-------- -------- ---------
EARNINGS PER COMMON SHARE..................... $ 4.46 $ 1.62 $ 1.60
======== ======== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000)........................... 247,706 245,707 260,008
See Notes to Consolidated Financial Statements.
17
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
Balance at Beginning of Year.............. $1,221,221 $1,191,230 $1,254,584
Add - Net Income.......................... 1,105,524 399,261 416,036
---------- ---------- ----------
Total................................ 2,326,745 1,590,491 1,670,620
Common Stock Dividends:
1995, $1.50; 1994, $1.50; 1993, $1.875
(per share)............................. (371,760) (369,270) (487,927)
Stock Dividend Distribution............... (1,313)
Tax Benefit of ESOP Dividends............. 8,939
Redemption of HL&P Preferred Stock........ (402)
---------- ---------- ----------
Balance at End of Year.................... $1,953,672 $1,221,221 $1,191,230
========== ========== ==========
See Notes to Consolidated Financial Statements.
18
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
December 31,
------------------------
1995 1994
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Production............................................... $ 7,423,891 $ 7,221,142
Transmission............................................. 927,027 876,159
Distribution............................................. 2,711,482 2,628,450
General.................................................. 1,027,090 1,017,319
Construction work in progress............................ 320,040 333,180
Nuclear fuel............................................. 217,604 212,795
Plant held for future use................................ 48,631 201,741
Electric plant acquisition adjustments................... 3,166
Other property........................................... 105,624 85,529
----------- -----------
Total.................................................. 12,781,389 12,579,481
Less accumulated depreciation and amortization........... 3,916,540 3,527,598
----------- -----------
Property, plant and equipment - net...................... 8,864,849 9,051,883
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents................................ 11,779 10,443
Special deposits......................................... 433 10
Accounts receivable - net................................ 39,635 13,981
Accrued unbilled revenues................................ 59,017 38,372
Time Warner dividends receivable......................... 10,313
Fuel stock............................................... 59,699 56,711
Materials and supplies, at average cost.................. 138,007 148,007
Prepayments.............................................. 18,562 14,398
----------- -----------
Total current assets................................... 337,445 281,922
----------- -----------
OTHER ASSETS:
Investment in Time Warner securities..................... 1,027,875
Net assets of discontinued cable television operations... 618,982
Deferred plant costs - net............................... 613,134 638,917
Deferred debits.......................................... 317,215 271,454
Unamortized debt expense and premium on reacquired debt.. 161,788 161,885
Regulatory tax asset - net............................... 228,587 235,463
Recoverable project costs - net.......................... 232,775 98,954
Equity investments in and advances to foreign and
non-regulated affiliates - net.......................... 35,938 43,617
----------- -----------
Total other assets..................................... 2,617,312 2,069,272
----------- -----------
Total.................................................. $11,819,606 $11,403,077
=========== ===========
See Notes to Consolidated Financial Statements.
19
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
December 31,
------------------------
1995 1994
----------- -----------
CAPITALIZATION (STATEMENTS ON FOLLOWING PAGES):
Common stock equity....................................... $ 4,123,563 $ 3,369,248
----------- -----------
Preference stock, no par; authorized, 10,000,000 shares;
none outstanding
Cumulative preferred stock of subsidiary:
Not subject to mandatory redemption....................... 351,345 351,345
Subject to mandatory redemption........................... 51,055 121,910
----------- -----------
Total cumulative preferred stock........................ 402,400 473,255
----------- -----------
Long-term debt............................................ 3,338,422 3,734,133
----------- -----------
Total capitalization.................................... 7,864,385 7,576,636
----------- -----------
CURRENT LIABILITIES:
Notes payable............................................. 6,300 423,291
Accounts payable.......................................... 136,008 159,225
Taxes accrued............................................. 174,925 169,690
Interest accrued.......................................... 79,380 73,527
Dividends declared........................................ 98,502 98,469
Accrued liabilities to municipalities..................... 20,773 21,307
Customer deposits......................................... 61,582 64,905
Current portion of long-term debt and preferred stock..... 379,451 49,475
Other..................................................... 58,664 64,026
----------- -----------
Total current liabilities............................... 1,015,585 1,123,915
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes......................... 2,067,246 1,763,230
Unamortized investment tax credit......................... 392,153 411,580
Fuel-related credits...................................... 122,063 242,912
Other..................................................... 358,174 284,804
----------- -----------
Total deferred credits.................................. 2,939,636 2,702,526
----------- -----------
COMMITMENTS AND CONTINGENCIES
Total................................................... $11,819,606 $11,403,077
=========== ===========
See Notes to Consolidated Financial Statements.
20
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
December 31,
--------------------------
1995 1994
------------- -----------
COMMON STOCK EQUITY:
Common stock, no par; authorized, 400,000,000 shares;
issued, 262,672,468 and 262,593,326 shares at
December 31, 1995 and 1994, respectively.................. $2,441,790 $2,437,638
Unearned ESOP shares, 14,355,758 and 15,540,626 shares at
December 31, 1995 and 1994, respectively.................. (268,405) (289,611)
Retained earnings.......................................... 1,953,672 1,221,221
Unrealized loss on investment in Time Warner common
securities................................................ (3,494)
----------- -----------
Total common stock equity................................ 4,123,563 3,369,248
----------- -----------
CUMULATIVE PREFERRED STOCK, no par; authorized, 10,000,000
shares; outstanding, 4,318,397 and 5,232,397 shares at
December 31, 1995 and 1994, respectively (entitled upon
involuntary liquidation to $100 per share):
Houston Lighting & Power Company:
Not subject to mandatory redemption:
$4.00 series, 97,397 shares.......................... 9,740 9,740
$6.72 series, 250,000 shares.......................... 25,115 25,115
$7.52 series, 500,000 shares.......................... 50,226 50,226
$8.12 series, 500,000 shares.......................... 50,098 50,098
Series A - 1992, 500,000 shares.......................... 49,094 49,094
Series B - 1992, 500,000 shares.......................... 49,104 49,104
Series C - 1992, 600,000 shares.......................... 58,984 58,984
Series D - 1992, 600,000 shares.......................... 58,984 58,984
----------- -----------
Total................................................... 351,345 351,345
----------- -----------
Subject to mandatory redemption:
$8.50 series, 400,000 shares at December 31, 1994....... 39,799
$9.375 series, 771,000 and 1,285,000 shares at
December 31, 1995 and 1994, respectively................ 76,755 127,811
Current redemptions...................................... (25,700) (45,700)
----------- -----------
Total................................................... 51,055 121,910
----------- -----------
Total cumulative preferred stock....................... 402,400 473,255
----------- -----------
LONG-TERM DEBT:
Debentures:
7 1/4% series, due 1996.................................. 200,000 200,000
9 3/8% series, due 2001.................................. 250,000 250,000
7 7/8% series, due 2002.................................. 100,000 100,000
Unamortized discount..................................... (1,087) (1,271)
----------- -----------
Total debentures....................................... 548,913 548,729
----------- -----------
Houston Lighting & Power Company:
First mortgage bonds:
5 1/4% series, due 1996.................................. 40,000 40,000
5 1/4% series, due 1997.................................. 40,000 40,000
7 5/8% series, due 1997.................................. 150,000 150,000
6 3/4% series, due 1997.................................. 35,000 35,000
6 3/4% series, due 1998.................................. 35,000 35,000
7 1/4% series, due 2001.................................. 50,000 50,000
9.15 % series, due 2021.................................. 160,000 160,000
8 3/4% series, due 2022.................................. 62,275 100,000
7 3/4% series, due 2023.................................. 250,000 250,000
7 1/2% series, due 2023.................................. 200,000 200,000
(continued on next page)
21
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
(CONTINUED)
December 31,
------------------------
1995 1994
----------- -----------
4.90 % pollution control series, due 2003............... $ 16,600 $ 16,600
7 % pollution control series, due 2008............... 19,200 19,200
6 3/8% pollution control series, due 2012............... 33,470 33,470
6 3/8% pollution control series, due 2012............... 12,100 12,100
8 1/4% pollution control series, due 2015............... 90,000 90,000
5.80 % pollution control series, due 2015............... 91,945
7 3/4% pollution control series, due 2015............... 68,700 68,700
5.80 % pollution control series, due 2015............... 58,905
7 7/8% pollution control series, due 2016............... 68,000 68,000
6.70 % pollution control series, due 2017............... 43,820 43,820
5.60 % pollution control series, due 2017............... 83,565 83,565
7 7/8% pollution control series, due 2018............... 50,000 50,000
7.20 % pollution control series, due 2018............... 75,000 75,000
7.20 % pollution control series, due 2018............... 100,000 100,000
7 7/8% pollution control series, due 2019............... 29,685 29,685
7.70 % pollution control series, due 2019............... 75,000 75,000
8 1/4% pollution control series, due 2019............... 100,000 100,000
8.10 % pollution control series, due 2019............... 100,000 100,000
7 5/8% pollution control series, due 2019............... 100,000 100,000
7 1/8% pollution control series, due 2019............... 100,000 100,000
7.60 % pollution control series, due 2019............... 70,315 70,315
6.70 % pollution control series, due 2027............... 56,095 56,095
Medium-term notes series A, 9.80%-9.85%, due 1996-1999.... 180,500 180,500
Medium-term notes series B, 8 5/8%, due 1996.............. 100,000 100,000
Medium-term notes series C, 6.10%, due 2000............... 150,000 150,000
Medium-term notes series B, 8.15%, due 2002............... 100,000 100,000
Medium-term notes series C, 6.50%, due 2003............... 150,000 150,000
---------- ----------
Total first mortgage bonds............................ 3,145,175 3,032,050
---------- ----------
Pollution control revenue bonds:
Gulf Coast 1980-T series, floating rate, due 1998......... 5,000 5,000
Brazos River 1985 A2 series, 9 3/4%, due 2005............. 4,265
Brazos River 1985 A1 series, 9 7/8%, due 2015............. 87,680
Matagorda County 1985 series, 10%, due 2015............... 58,905
---------- ----------
Total pollution control revenue bonds................. 5,000 155,850
---------- ----------
Unamortized premium (discount) - net........................ (16,456) (12,253)
Capitalized lease obligations, discount rates of
5.2%-11.7%, due 1996-2018................................. 8,560 12,403
Notes payable............................................... 981 1,129
---------- ----------
Subtotal.............................................. (6,915) 1,279
---------- ----------
Total............................................... 3,143,260 3,189,179
---------- ----------
Total............................................. 3,692,173 3,737,908
---------- ----------
Current maturities................................ (353,751) (3,775)
---------- ----------
Total long-term debt.............................. 3,338,422 3,734,133
---------- ----------
Total capitalization............................ $7,864,385 $7,576,636
========== ==========
See Notes to Consolidated Financial Statements.
22
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
Year Ended December 31,
------------------------------------
1995 1994 1993
---------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations.................. $ 397,400 $ 423,985 $ 440,531
Adjustments to reconcile income from continuing
operations to net cash provided by
operating activities:
Depreciation and amortization..................... 478,034 399,341 386,893
Amortization of nuclear fuel...................... 28,545 21,561 2,101
Deferred income taxes............................. 78,382 85,547 194,711
Investment tax credits............................ (19,427) (19,416) (19,797)
Allowance for other funds used during
construction..................................... (7,760) (4,115) (3,512)
Fuel refund....................................... (189,571)
Fuel cost over (under) recovery................... 76,970 277,940 (91,863)
Regulatory tax asset - net........................ 6,876 11,300 (69,337)
Net cash provided by (used in) discontinued
cable television operations...................... 16,391 19,349 (1,073)
Changes in other assets and liabilities:
Accounts receivable - net........................ (46,299) (19,295) 302,268
Inventory........................................ 7,012 14,273 13,868
Other current assets............................. (14,900) 14,710 (15,138)
Accounts payable................................. (23,217) (45,081) (7,962)
Interest and taxes accrued....................... 11,088 (17,979) (16,689)
Other current liabilities........................ (9,215) (5,102) 41,430
Other - net...................................... 49,129 48,254 52,609
--------- ---------- ----------
Net cash provided by operating activities........ 839,438 1,205,272 1,209,040
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Electric capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction)......................... (301,327) (418,453) (332,797)
Non-regulated electric power project expenditures
and advances...................................... (38,278) (7,087) (35,796)
Settlement of subsidiary debt in connection with
sale of cable television subsidiary............... 619,345
Corporate headquarters expenditures (including
capitalized interest)............................. (96,469) (46,829) (26,034)
Net cash used in discontinued cable television
operations........................................ (47,601) (84,071) (61,856)
Other - net........................................ (10,743) (13,562) (5,295)
--------- ---------- ----------
Net cash provided by (used in) investing
activities 124,927 (570,002) (461,778)
--------- ---------- ----------
(continued on next page)
23
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(CONTINUED)
Year Ended December 31,
------------------------------------
1995 1994 1993
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock....................... $ 52,638
Proceeds from first mortgage bonds............... $ 142,972 840,427
Payment of matured first mortgage bonds.......... $ (19,500) (136,000)
Payment of common stock dividends................ (371,731) (368,790) (389,933)
Redemption of preferred stock.................... (91,400) (20,000) (40,000)
Increase (decrease) in notes payable............. (416,991) (168,094) 27,136
Extinguishment of long-term debt................. (195,224) (995,751)
Net cash used in discontinued cable television
operations..................................... (40,798) (68,184) (225,489)
Other - net...................................... 10,143 4,857 65,277
--------- --------- ---------
Net cash used in financing activities.......... (963,029) (639,711) (801,695)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 1,336 (4,441) (54,433)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 10,443 14,884 69,317
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 11,779 $ 10,443 $ 14,884
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized)............ $ 342,551 $ 366,548 $ 397,911
Income taxes..................................... 104,228 174,657 123,975
See Notes to Consolidated Financial Statements.
24
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
Year Ended December 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
OPERATING REVENUES............................. $3,680,297 $3,746,085 $4,079,863
---------- ---------- ----------
OPERATING EXPENSES:
Fuel.......................................... 879,148 860,936 1,063,050
Purchased power............................... 233,494 408,963 515,502
Operation..................................... 615,924 580,892 608,912
Maintenance................................... 250,246 247,856 289,623
Depreciation and amortization................. 475,124 398,142 385,731
Federal income taxes.......................... 245,807 254,993 239,464
Other taxes................................... 245,890 251,421 211,295
---------- ---------- ----------
Total....................................... 2,945,633 3,003,203 3,313,577
---------- ---------- ----------
OPERATING INCOME............................... 734,664 742,882 766,286
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Allowance for other funds used during
construction................................. 7,760 4,115 3,512
Interest income............................... 12,218 10,000 3,296
Other - net................................... (25,901) (12,561) (4,286)
---------- ---------- ----------
Total....................................... (5,923) 1,554 2,522
---------- ---------- ----------
INCOME BEFORE INTEREST CHARGES................. 728,741 744,436 768,808
---------- ---------- ----------
INTEREST CHARGES:
Interest on long-term debt.................... 244,384 246,533 276,049
Other interest................................ 8,117 8,493 12,317
Allowance for borrowed funds used during
construction................................. (4,692) (5,554) (3,781)
---------- ---------- ----------
Total....................................... 247,809 249,472 284,585
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING................................. 480,932 494,964 484,223
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS (NET OF INCOME
TAXES OF $4,415).............................. (8,200)
---------- ---------- ----------
NET INCOME..................................... 480,932 486,764 484,223
DIVIDENDS ON PREFERRED STOCK................... 29,955 33,583 34,473
---------- ---------- ----------
INCOME AFTER PREFERRED DIVIDENDS............... $ 450,977 $ 453,181 $ 449,750
========== ========== ==========
See Notes to Financial Statements.
25
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Year Ended December 31,
--------------------------------------
1995 1994 1993
----------- ----------- ------------
Balance at Beginning of Year... $2,153,109 $2,028,924 $1,922,558
Add - Net Income............... 480,932 486,764 484,223
Redemption of Preferred Stock.. (402)
---------- ---------- ----------
Total..................... 2,634,041 2,515,688 2,406,379
---------- ---------- ----------
Deduct - Cash Dividends:
Preferred:
$4.00 Series.............. 389 390 390
$6.72 Series.............. 1,680 1,680 1,680
$7.52 Series.............. 3,760 3,760 3,760
$8.12 Series.............. 4,060 4,060 4,060
Series A - 1992........... 2,324 1,740 1,366
Series B - 1992........... 2,322 1,683 1,366
Series C - 1992........... 2,823 2,040 1,672
Series D - 1992........... 2,747 2,075 1,615
$8.50 Series.............. 1,417 4,108 6,517
$9.375 Series............. 8,433 12,047 12,047
Common....................... 454,000 328,996 342,982
---------- ---------- ----------
Total..................... 483,955 362,579 377,455
---------- ---------- ----------
Balance at End of Year......... $2,150,086 $2,153,109 $2,028,924
========== ========== ==========
See Notes to Financial Statements.
26
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
December 31,
----------------------
1995 1994
---------- ----------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Production............................................... $ 7,423,891 $ 7,221,142
Transmission............................................. 927,027 876,159
Distribution............................................. 2,711,482 2,628,450
General.................................................. 1,027,090 1,017,319
Construction work in progress............................ 320,040 333,180
Nuclear fuel............................................. 217,604 212,795
Plant held for future use................................ 48,631 201,741
Electric plant acquisition adjustments..................... 3,166
----------- -----------
Total.................................................. 12,675,765 12,493,952
Less accumulated depreciation and amortization............. 3,906,139 3,517,923
----------- -----------
Property, plant and equipment - net.................... 8,769,626 8,976,029
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents.................................. 75,851 235,867
Special deposits........................................... 433 10
Accounts receivable:
Affiliated companies..................................... 2,845 4,213
Others................................................... 23,858 8,896
Accrued unbilled revenues.................................. 59,017 38,372
Fuel stock................................................. 59,699 56,711
Materials and supplies, at average cost.................... 137,584 147,922
Prepayments................................................ 11,876 9,665
----------- -----------
Total current assets................................... 371,163 501,656
----------- -----------
OTHER ASSETS:
Deferred plant costs - net................................. 613,134 638,917
Deferred debits............................................ 290,012 241,611
Unamortized debt expense and premium on reacquired debt.... 159,962 158,351
Regulatory tax asset - net................................. 228,587 235,463
Recoverable project costs - net............................ 232,775 98,954
----------- -----------
Total other assets..................................... 1,524,470 1,373,296
----------- -----------
Total................................................ $10,665,259 $10,850,981
=========== ===========
See Notes to Financial Statements.
27
HOUSTON LIGHTING & POWER COMPANY
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
December 31,
-----------------------
1995 1994
----------- -----------
CAPITALIZATION (STATEMENTS ON FOLLOWING PAGES):
Common stock equity.................................... $ 3,826,013 $ 3,829,036
Cumulative preferred stock:
Not subject to mandatory redemption.................. 351,345 351,345
Subject to mandatory redemption...................... 51,055 121,910
Long-term debt......................................... 2,989,509 3,185,404
----------- -----------
Total capitalization............................... 7,217,922 7,487,695
----------- -----------
CURRENT LIABILITIES:
Accounts payable....................................... 119,032 148,042
Accounts payable to affiliated companies............... 6,982 10,936
Taxes accrued.......................................... 192,673 181,043
Interest accrued....................................... 70,823 64,732
Accrued liabilities to municipalities.................. 20,773 21,307
Customer deposits...................................... 61,582 64,905
Current portion of long-term debt and preferred stock.. 179,451 49,475
Other.................................................. 54,149 59,912
----------- -----------
Total current liabilities............................ 705,465 600,352
----------- -----------
DEFERRED CREDITS:
Accumulated deferred federal income taxes.............. 1,947,488 1,876,300
Unamortized investment tax credit...................... 392,153 411,580
Fuel-related credits................................... 122,063 242,912
Other.................................................. 280,168 232,142
----------- -----------
Total deferred credits............................... 2,741,872 2,762,934
----------- -----------
COMMITMENTS AND CONTINGENCIES
Total............................................ $10,665,259 $10,850,981
=========== ===========
See Notes to Financial Statements.
28
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
December 31,
-------------------------
1995 1994
---------- -----------
COMMON STOCK EQUITY:
Common stock, Class A; no par; authorized and outstanding,
1,000 shares, voting.................................................. $1,524,949 $1,524,949
Common stock, Class B; no par; authorized and outstanding,
100 shares, non-voting................................................ 150,978 150,978
Retained earnings...................................................... 2,150,086 2,153,109
---------- ----------
Total common stock equity..................................... 3,826,013 3,829,036
---------- ----------
CUMULATIVE PREFERRED STOCK, no par; authorized, 10,000,000
shares; outstanding, 4,318,397 and 5,232,397 shares at
December 31, 1995 and 1994, respectively (entitled upon
involuntary liquidation to $100 per share):
Not subject to mandatory redemption:
$4.00 series, 97,397 shares................................... 9,740 9,740
$6.72 series, 250,000 shares................................... 25,115 25,115
$7.52 series, 500,000 shares................................... 50,226 50,226
$8.12 series, 500,000 shares................................... 50,098 50,098
Series A - 1992, 500,000 shares................................... 49,094 49,094
Series B - 1992, 500,000 shares................................... 49,104 49,104
Series C - 1992, 600,000 shares................................... 58,984 58,984
Series D - 1992, 600,000 shares................................... 58,984 58,984
---------- ----------
Total......................................................... 351,345 351,345
---------- ----------
Subject to mandatory redemption:
$8.50 series, 400,000 shares at December 31, 1994............... 39,799
$9.375 series, 771,000 and 1,285,000 shares at
December 31, 1995 and 1994, respectively......................... 76,755 127,811
Current redemptions............................................... (25,700) (45,700)
---------- ----------
Total......................................................... 51,055 121,910
---------- ----------
Total cumulative preferred stock.......................... 402,400 473,255
---------- ----------
LONG-TERM DEBT:
First mortgage bonds:
5 1/4% series, due 1996........................................... 40,000 40,000
5 1/4% series, due 1997........................................... 40,000 40,000
7 5/8% series, due 1997........................................... 150,000 150,000
6 3/4% series, due 1997........................................... 35,000 35,000
6 3/4% series, due 1998........................................... 35,000 35,000
7 1/4% series, due 2001........................................... 50,000 50,000
9.15 % series, due 2021........................................... 160,000 160,000
8 3/4% series, due 2022........................................... 62,275 100,000
7 3/4% series, due 2023........................................... 250,000 250,000
7 1/2% series, due 2023........................................... 200,000 200,000
4.90 % pollution control series, due 2003......................... 16,600 16,600
7 % pollution control series, due 2008......................... 19,200 19,200
6 3/8% pollution control series, due 2012......................... 33,470 33,470
6 3/8% pollution control series, due 2012......................... 12,100 12,100
8 1/4% pollution control series, due 2015......................... 90,000 90,000
5.80 % pollution control series, due 2015......................... 91,945
7 3/4% pollution control series, due 2015......................... 68,700 68,700
5.80 % pollution control series, due 2015......................... 58,905
7 7/8% pollution control series, due 2016......................... 68,000 68,000
6.70 % pollution control series, due 2017......................... 43,820 43,820
5.60 % pollution control series, due 2017......................... 83,565 83,565
7 7/8% pollution control series, due 2018......................... 50,000 50,000
7.20 % pollution control series, due 2018......................... 75,000 75,000
7.20 % pollution control series, due 2018......................... 100,000 100,000
(continued on next page)
29
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
(CONTINUED)
December 31,
------------------------
1995 1994
----------- -----------
7 7/8% pollution control series, due 2019.......... $ 29,685 $ 29,685
7.70 % pollution control series, due 2019.......... 75,000 75,000
8 1/4% pollution control series, due 2019.......... 100,000 100,000
8.10 % pollution control series, due 2019.......... 100,000 100,000
7 5/8% pollution control series, due 2019.......... 100,000 100,000
7 1/8% pollution control series, due 2019.......... 100,000 100,000
7.60 % pollution control series, due 2019.......... 70,315 70,315
6.70 % pollution control series, due 2027.......... 56,095 56,095
Medium-term notes series A, 9.80%-9.85%, due
1996-1999............................................ 180,500 180,500
Medium-term notes series B, 8 5/8%, due 1996.......... 100,000 100,000
Medium-term notes series C, 6.10%, due 2000........... 150,000 150,000
Medium-term notes series B, 8.15%, due 2002........... 100,000 100,000
Medium-term notes series C, 6.50%, due 2003........... 150,000 150,000
---------- ----------
Total first mortgage bonds..................... 3,145,175 3,032,050
---------- ----------
Pollution control revenue bonds:
Gulf Coast 1980-T series, floating rate, due 1998..... 5,000 5,000
Brazos River 1985 A2 series, 9 3/4%, due 2005......... 4,265
Brazos River 1985 A1 series, 9 7/8%, due 2015......... 87,680
Matagorda County 1985 series, 10%, due 2015........... 58,905
---------- ----------
Total pollution control revenue bonds............. 5,000 155,850
---------- ----------
Unamortized premium (discount) - net.................... (16,456) (12,253)
Capitalized lease obligations, discount rates of
5.2%-11.7%, due 1996-2018.............................. 8,560 12,403
Notes payable........................................... 981 1,129
---------- ----------
Subtotal.......................................... (6,915) 1,279
---------- ----------
Total.......................................... 3,143,260 3,189,179
Current maturities............................. (153,751) (3,775)
---------- ----------
Total long-term debt........................... 2,989,509 3,185,404
---------- ----------
Total capitalization......................... $7,217,922 $7,487,695
========== ==========
See Notes to Financial Statements.
30
HOUSTON LIGHTING & POWER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
Year Ended December 31,
------------------------------------------
1995 1994 1993
-------------- ------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 480,932 $ 486,764 $ 484,223
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 475,124 398,142 385,731
Amortization of nuclear fuel..................... 28,545 21,561 2,101
Deferred federal income taxes.................... 71,188 81,739 214,369
Investment tax credits........................... (19,427) (19,416) (19,797)
Allowance for other funds used during
construction.................................... (7,760) (4,115) (3,512)
Fuel refund...................................... (189,571)
Fuel cost over (under) recovery.................. 76,970 277,940 (91,863)
Cumulative effect of change in accounting
for postemployment benefits..................... 8,200
Regulatory tax asset - net....................... 6,876 11,300 (69,337)
Changes in other assets and liabilities:
Accounts receivable - net....................... (34,239) (17,827) 170,784
Materials and supplies.......................... 10,338 12,449 3,850
Fuel stock...................................... (2,988) 1,874 9,979
Accounts payable................................ (32,964) (40,054) (11,854)
Interest and taxes accrued...................... 17,721 (6,980) (20,035)
Other current liabilities....................... (7,816) (4,936) 18,040
Other - net..................................... (5,239) 20,270 63,721
--------- ---------- ----------
Net cash provided by operating activities........ 867,690 1,226,911 1,136,400
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital and nuclear fuel expenditures
(including allowance for borrowed funds
used during construction)........................ (396,242) (418,453) (332,797)
Other - net....................................... (10,618) (15,822) (13,067)
--------- ---------- ----------
Net cash used in investing activities............ (406,860) (434,275) (345,864)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from first mortgage bonds................ 142,972 840,427
Payment of matured bonds.......................... (19,500) (136,000)
Payment of dividends.............................. (485,793) (363,083) (378,528)
Increase (decrease) in notes payable.............. (171,100) 31,660
Decrease in notes payable to affiliated company... (120,001)
Redemption of preferred stock..................... (91,400) (20,000) (40,000)
Extinguishment of long-term debt.................. (195,224) (995,751)
Other - net....................................... 8,599 4,501 15,817
--------- ---------- ----------
Net cash used in financing activities............ (620,846) (569,182) (782,376)
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................................. (160,016) 223,454 8,160
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 235,867 12,413 4,253
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 75,851 $ 235,867 $ 12,413
========= ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized)............. $ 247,672 $ 251,245 $ 296,201
Income taxes...................................... 157,400 196,655 127,713
See Notes to Financial Statements.
31
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
32
plant. AFUDC represents the estimated debt and equity costs of capital funds
not already included in rates necessary to finance the construction of new
regulated facilities.
HL&P computes depreciation using the straight-line method. The depreciation
provision as a percentage of the depreciable cost of plant was 3.2 percent for
1995, 3.2 percent for 1994 and 3.1 percent for 1993.
(D) DEFERRED PLANT COSTS. Under a "deferred accounting" plan authorized by
the Utility Commission, HL&P was permitted for regulatory purposes to accrue
carrying costs in the form of AFUDC on its investment in the South Texas Project
and defer and capitalize depreciation and other operating costs on its
investment after commercial operation and until such costs were reflected in
rates. In addition, the Utility Commission authorized HL&P under a "qualified
phase-in plan" to capitalize allowable costs (including return) deferred for
future recovery as deferred charges.
In 1991, HL&P ceased all cost deferrals related to the South Texas Project and
began amortizing such amounts on a straight-line basis. The accumulated
deferrals for "deferred accounting" are being amortized over the estimated
depreciable life of the South Texas Project. The accumulated deferrals for the
"qualified phase-in plan" are being amortized over a ten-year phase-in period
that commenced in 1991. The amortization of these deferrals (which totaled
$25.8 million for each of the years 1995, 1994 and 1993) is included on the
Company's Statements of Consolidated Income and HL&P's Statements of Income as
depreciation and amortization expense.
(E) REVENUES. HL&P records electricity sales under the full accrual method,
whereby unbilled electricity sales are estimated and recorded each month in
order to better match revenues with expenses. Other revenues include
electricity sales of a foreign electric utility, which are also recorded under
the full accrual method. Other revenues also include management fees and other
sales and services, which are recorded when earned.
(F) INCOME TAXES. The Company and its subsidiaries file a consolidated
federal income tax return. The Company follows a policy of comprehensive
interperiod income tax allocation. Investment tax credits are deferred and
amortized over the estimated lives of the related property.
(G) EARNINGS PER COMMON SHARE. Earnings per common share for the Company are
computed by dividing net income by the weighted average number of shares
outstanding during the respective period. All earnings per common share amounts
reflect the two-for-one common stock split effected in the form of a stock
distribution on December 9, 1995.
The Company adopted SOP 93-6 effective January 1, 1994. Pursuant to the
adoption of SOP 93-6, the number of weighted average common shares outstanding
reflects a reduction for ESOP shares not yet committed for release to savings
plan participants (unallocated shares). In accordance with SOP 93-6, earnings
per common share for periods prior to January 1, 1994 have not been restated.
(H) STATEMENTS OF CONSOLIDATED CASH FLOWS. For purposes of reporting cash
flows, cash equivalents are considered to be short-term, highly liquid
investments readily convertible to cash.
(I) DISCONTINUED OPERATIONS. In July 1995, the Company sold KBLCOM, its cable
television subsidiary. The operations of KBLCOM are reflected as discontinued
operations for all periods presented. See Note 13.
(J) INVESTMENTS IN DEBT AND EQUITY SECURITIES. The Company owns one million
shares of Time Warner common stock and 11 million shares of non-publicly traded
Time Warner convertible preferred stock. The Company has recorded its investment
in these securities at a combined fair
33
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."
34
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
35
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.
36
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
37
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.
38
(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 December 31,
1995, 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.
39
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 year after the grant date, the options become exercisable in
one-third increments each year. The options expire ten years from the grant
date.
Performance-based restricted shares issued were 49,792; 100,524; and 146,564 for
1995, 1994 and 1993, respectively. Stock option activity for the years 1993
through 1995 is summarized below (as adjusted for the Company's two-for-one
stock distribution):
Option Price at
Number Date of Grant
of Shares or Exercise
--------- ---------------
Non-statutory stock options:
Outstanding at December 31, 1992.. 131,742
Options Granted................. 131,552 $23.125
Options Exercised............... (1,324) $21.75
Options Withheld for Taxes...... (34)
Options Canceled................ (10,038)
Outstanding at December 31, 1993.. 251,898
Options Granted................. 131,452 $23.25
Options Exercised...............
Options Withheld for Taxes......
Options Canceled................ (80,772)
Outstanding at December 31, 1994.. 302,578
Options Granted................. 133,324 $17.75; $21.25
Options Exercised...............
Options Withheld for Taxes......
Options Canceled................ (24,560)
Outstanding at December 31, 1995.. 411,342
Exercisable at:
December 31, 1995............... 181,924 $21.75-$23.25
December 31, 1994............... 107,672 $21.75-$23.125
(D) SHAREHOLDER RIGHTS PLAN. In July 1990, the Company adopted a shareholder
rights plan and declared a dividend of one right for each outstanding share of
the Company's common stock (including shares of common stock issued in the
Company's 1995 two-for-one stock split). The rights, which under certain
circumstances entitle their holders to purchase one two-hundredth of a share of
Series A Preference Stock for an exercise price of $42.50, will expire on July
11, 2000. The rights will become exercisable only if a person or entity acquires
20 percent or more of the Company's outstanding common stock or if a person or
entity commences a tender offer or exchange offer for 20 percent or more of the
outstanding common stock. At any time after the occurrence of such events, the
Company may exchange unexercised rights at an exchange ratio of one share of
common stock, or equity securities of the Company of equivalent value, per
right. The rights are redeemable by the Company for $.01 per right at any time
prior to the date the rights become exercisable.
40
When the rights become exercisable, each right will entitle the holder to
receive, in lieu of the right to purchase Series A Preference Stock, upon the
exercise of such right, a number of shares of the Company's common stock (or
under certain circumstances cash, property, other equity securities or debt of
the Company) having a current market price (as defined in the plan) equal to
twice the exercise price of the right, except pursuant to an offer for all
outstanding shares of common stock which a majority of the independent directors
of the Company determines to be a price which is in the best interests of the
Company and its shareholders (Permitted Offer).
In the event that the Company is a party to a merger or other business
combination (other than a merger that follows a Permitted Offer), rights holders
will be entitled to receive, upon the exercise of a right, a number of shares of
common stock of the acquiring company having a current market price (as defined
in the plan) equal to twice the exercise price of the right.
(E) INVESTOR'S CHOICE PLAN. The Company has registered four million shares of
its common stock under the Securities Act of 1933 for sale through the Company's
Investor's Choice Plan, a dividend reinvestment and stock purchase plan. The
plan is designed to provide investors with a way to buy common stock directly
from the Company and/or to arrange for reinvestment of cash dividends in the
Company's common stock.
(6) PREFERRED STOCK OF HL&P
At December 31, 1995, HL&P's cumulative preferred stock could be redeemed at the
following per share prices, plus any unpaid accrued dividends to the date of
redemption:
Redemption
Series Price Per Share
------ ---------------
Not Subject to Mandatory Redemption:
$4.00................................. $105.00
$6.72................................. 102.51
$7.52................................. 102.35
$8.12................................. 102.25
Variable Term Preferred A (a)......... 100.00
Variable Term Preferred B (a)......... 100.00
Variable Term Preferred C (a)......... 100.00
Variable Term Preferred D (a)......... 100.00
Subject to Mandatory Redemption:
$9.375 (b)............................ ---
(a) Rates for Variable Term Preferred Stock as of December 31, 1995 were as
follows:
Series Rate
-------- -----
Variable Term Preferred A 4.59%
Variable Term Preferred B 4.48%
Variable Term Preferred C 4.49%
Variable Term Preferred D 4.67%
(b) HL&P is required to redeem 257,000 shares annually.
In 1995, HL&P redeemed 514,000 shares of its $9.375 cumulative preferred stock
at $100 per share and the remaining 400,000 shares of its $8.50 cumulative
preferred stock at $100 per share. In 1994, HL&P redeemed 200,000 shares of its
$8.50 cumulative preferred stock at $100
41
per share. Annual mandatory redemptions of HL&P's preferred stock are $25.7
million in 1996, 1997 and 1998.
(7) LONG-TERM DEBT
(A) COMPANY. Consolidated annual maturities of long-term debt and minimum
capital lease payments for the Company are approximately $354 million in 1996,
$226 million in 1997, $40 million in 1998, $171 million in 1999 and $150 million
in 2000.
(B) HL&P. Sinking or improvement fund requirements of HL&P's first mortgage
bonds outstanding will be approximately $40 million for each of the years 1996
through 2000. Of such requirements, approximately $37 million for each of the
years 1996 through 2000 may be satisfied by certification of property additions
at 100 percent of the requirements, and the remainder through certification of
such property additions at 166-2/3 percent of the requirements. Sinking or
improvement fund requirements for 1995 and prior years have been satisfied by
certification of property additions.
HL&P has agreed to expend an amount each year for replacements and improvements
in respect of its depreciable mortgaged utility property equal to $1,450,000
plus 2 1/2 percent of net additions to such mortgaged property made after March
31, 1948 and before July 1 of the preceding year. Such requirement may be met
with cash, first mortgage bonds, gross property additions or expenditures for
repairs or replacements, or by taking credit for property additions at 100
percent of the requirements. With respect to first mortgage bonds of a series
subject to special redemption, HL&P has the option to use deposited cash to
redeem first mortgage bonds of such series at the applicable special redemption
price. The replacement fund requirement to be satisfied in 1996 is
approximately $296 million.
The amount of HL&P's first mortgage bonds is unlimited as to issuance, but
limited by property, earnings and other provisions of the Mortgage and Deed of
Trust dated as of November 1, 1944, between HL&P and South Texas Commercial
National Bank of Houston (Texas Commerce Bank National Association, as Successor
Trustee) and the supplemental indentures thereto. Substantially all properties
of HL&P are subject to liens securing HL&P's long-term debt under the mortgage.
In 1995, HL&P repurchased from a third party $37.7 million aggregate principal
amount of its 8 3/4% first mortgage bonds due 2022. The total purchase price for
those bonds was $42.2 million. In July 1995, HL&P caused to be issued $150.9
million aggregate principal amount of revenue refunding bonds collaterized by a
like amount of HL&P first mortgage bonds. The new bonds bear interest at 5.8%
variable at HL&P's option after a five-year, no-call period, and mature in 2015.
Proceeds from this issue were used to redeem $150.9 million of pollution control
revenue bonds (bearing a weighted average interest rate of 9.9%) at 102% of the
aggregate principal amount. HL&P's annual maturities of long-term debt and
minimum capital lease payments are approximately $154 million in 1996, $226
million in 1997, $40 million in 1998, $171 million in 1999 and $150 million in
2000.
(8) SHORT-TERM FINANCING
The interim financing requirements of the Company and its subsidiaries are met
through short-term bank loans, the issuance of commercial paper and short-term
advances from the Company. The Company and its subsidiaries had bank credit
facilities aggregating $1.5 billion at December 31, 1995 and $1 billion at
December 31, 1994, under which borrowings are classified as short-term
indebtedness. In the first quarter of 1996, the Company reduced its borrowing
capacity under these facilities to $1.15 billion. These bank facilities limit
total short-term borrowings and
42
provide for interest at rates generally less than the prime rate. The Company's
weighted average short-term borrowing rates for commercial paper for the year
ended December 31, 1995 and 1994 were 6.33% and 4.35%, respectively.
Outstanding commercial paper was $6 million at December 31, 1995 and $423
million at December 31, 1994. Facility fees are required on the credit
facilities.
(9) RETIREMENT PLANS
(A) PENSION. The Company has a noncontributory retirement plan covering
substantially all employees. The plan provides retirement benefits based on
years of service and compensation. The Company's funding policy is to contribute
amounts annually in accordance with applicable regulations in order to achieve
adequate funding of projected benefit obligations. The assets of the plan
consist principally of common stocks and high quality, interest-bearing
obligations.
Net pension cost for the Company attributable to continuing operations includes
the following components:
Year Ended December 31,
---------------------------------
1995 1994 1993
--------- ---------- ----------
(Thousands of Dollars)
Service cost - benefits earned during the period...... $ 22,852 $ 21,977 $ 25,282
Interest cost on projected benefit obligation......... 49,317 46,091 51,062
Actual (return) loss on plan assets................... (96,004) 5,357 (39,237)
Net amortization and deferrals........................ 50,889 (51,491) (558)
-------- --------- ---------
Net pension cost.................................... 27,054 21,934 36,549
SFAS No. 88 - curtailment expense..................... 5,645
-------- --------- ---------
Total pension cost.................................. $ 32,699 $ 21,934 $ 36,549
======== ========= =========
The funded status of the Company's retirement plans attributable to continuing
operations was as follows:
December 31,
-------------------------------
1995 1994
-------- ---------
(Thousands of Dollars)
Actuarial present value of:
Vested benefit obligation............................... $504,655 $ 439,668
======== =========
Accumulated benefit obligation.......................... $541,278 $ 471,987
======== =========
Plan assets at fair value................................ $595,192 $ 496,365
Projected benefit obligation............................. 704,871 632,546
-------- ---------
Assets less than projected benefit obligation............ (109,679) (136,181)
Unrecognized transitional asset.......................... (13,421) (15,340)
Unrecognized prior service cost.......................... 46,627 21,456
Unrecognized net loss.................................... 22,522 71,191
-------- ---------
Accrued pension cost..................................... $(53,951) $ (58,874)
======== =========
Net pension cost and funding attributable to discontinued operations was not
material.
The projected benefit obligation was determined using an assumed discount rate
of 7.5 percent in 1995 and 8 percent in 1994. A long-term rate of compensation
increase ranging from 4 percent to 6 percent was assumed for 1995 and ranging
from 4.5 percent to 6.5 percent was assumed
43
for 1994. The assumed long-term rate of return on plan assets was 9.5 percent
in 1995 and 1994. The transitional asset at January 1, 1986, is being
recognized over approximately 17 years, and the prior service cost is being
recognized over approximately 15 years.
In 1995, the Company offered eligible employees (excluding officers) of the
Company, HL&P and HI Energy, who were 55 years of age or older and had at least
10 years of service as of July 31, 1995 an incentive program to retire early.
For employees electing early retirement, the program would add five years of
service credit and five years in age up to 35 years of service and age 65,
respectively, in determining an employee's pension. Each participating employee
(under age 62) would also receive a supplemental benefit to age 62. During July
1995, the early retirement incentive was accepted by approximately 300
employees.
Pension benefits and supplemental benefits (if applicable) are being paid out
from the Houston Industries Incorporated Retirement Trust. Based on the
projected costs associated with the program, HL&P increased its retirement plan
and supplemental benefits by approximately $28 million and $5 million,
respectively. Pursuant to SFAS No. 71, HL&P deferred the costs associated with
the increases in these benefit obligations and is amortizing the costs through
the period ending December 31, 1997. In 1995, the Company and HL&P amortized
$5.6 million of those costs as a curtailment under SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," with regards to the Company's and HL&P's early
retirement program.
(B) SAVINGS PLAN. The Company has an employee savings plan that qualifies as
cash or deferred arrangements under Section 401(k) of the Internal Revenue Code
of 1986, as amended (IRC). Under the plan, participating employees may
contribute a portion of their compensation, pre-tax or after-tax, up to a
maximum of 16 percent of compensation limited by an annual deferral limit
($9,240 for calendar year 1995) prescribed by IRC Section 402(g) and the IRC
Section 415 annual additions limits. The Company matches 70 percent of the
first 6 percent of each employee's compensation contributed, subject to a
vesting schedule which entitles the employee to a percentage of the matching
contributions depending on years of service. Substantially all of the Company's
match is invested in the Company's common stock.
In October 1990, the Company amended its savings plan to add a leveraged ESOP
component. The Company may use ESOP shares to satisfy its obligation to make
matching contributions under the savings plan. Debt service on the ESOP loan is
paid using all dividends on shares in the ESOP, interest earnings on funds held
in the ESOP and cash contributions by the Company. Shares of the Company's
common stock are released from encumbrance of the ESOP loan based on the
proportion of debt service paid during the period.
The Company adopted SOP 93-6, effective January 1, 1994, which requires that the
Company recognize benefit expense for the ESOP equal to fair value of the ESOP
shares committed to be released. In accordance with SOP 93-6, the Company
credits to unearned ESOP shares the original purchase price of ESOP shares
committed to be released to plan participants with the difference between the
fair value of the shares and the original purchase price recorded to common
stock. Dividends on allocated ESOP shares are recorded as a reduction to
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt or accrued interest on the ESOP loan. SOP 93-6 is effective
only with respect to financial statements for periods after January 1, 1994.
The Company's savings plan benefit expense attributable to continuing operations
was $18.9 million, $17.0 million and $17.3 million in 1995, 1994 and 1993,
respectively. HL&P's portion of the savings plan benefit expense was $18.3
million, $16.5 million and $15.9 million in 1995, 1994
44
and 1993, respectively. Savings plan benefit expense attributable to
discontinued operations was not material.
The ESOP shares (after restatement for the two-for-one stock dividend
distribution) were as follows:
December 31,
--------------------------
1995 1994
------------ ------------
Allocated shares....................... 4,093,834 3,151,086
Unallocated shares..................... 14,355,758 15,540,626
------------ ------------
Total ESOP shares.................. 18,449,592 18,691,712
============ ============
Fair value of unallocated ESOP shares.. $348,127,132 $276,817,401
(C) POSTRETIREMENT BENEFITS. Effective January 1, 1993, the Company and HL&P
adopted SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other
Than Pensions," which requires that companies recognize the liability for
postretirement benefit plans other than pensions (primarily health care). In
accordance with SFAS No. 106, the Company and HL&P are amortizing over a 22 year
period approximately $213 million ($211 million for HL&P) to cover the
"transition cost" of adopting SFAS No. 106 (i.e., the Company and HL&P's
liability for post-retirement benefits payable with respect to employee service
years accrued prior to the adoption of SFAS No. 106).
As provided in the Rate Case Settlement, HL&P is required to fund during each
year in an irrevocable external trust approximately $22 million of
postretirement benefit costs which are included in rates. In December 1995,
HL&P commenced funding by contributing a total of $15.1 million to three
Voluntary Employees' Beneficiary Association (VEBA) trusts and one 401(h)
account of the retirement plan. This contribution represented the amount of
postretirement benefits included in HL&P's rates (which included HL&P's interest
in the South Texas Project costs) less the estimated pay-as-you-go amounts for
1995 plus interest as if the contributions had been made on a monthly basis
during the year. HL&P intends to fund, on a monthly basis beginning in 1996,
the amount included in its rates. The Company, excluding HL&P, will continue
funding its postretirement benefits on a pay-as-you-go basis.
The net postretirement benefit cost for the Company includes the following
components:
Year Ended December 31,
---------------------------------------
1995 1994 1993
----------- ----------- -------------
(Thousands of Dollars)
Service cost - benefits earned during the period $ 9,093 $ 9,131 $ 9,453
Interest cost on accumulated benefit obligation 11,143 10,265 18,354
Actual return on plan assets............ -- -- --
Net amortization and deferrals.......... 6,061 7,868 9,773
--------- --------- ----------
Net postretirement benefit cost......... $ 26,297 $ 27,264 $ 37,580
========= ========= ==========
45
The funded status of the Company's postretirement benefit costs was as follows:
December 31,
------------------------
1995 1994
--------- -----------
(Thousands of Dollars)
Accumulated benefit obligation:
Retirees............................... $(127,653) $ (98,828)
Fully eligible active plan participants (13,307) (22,251)
Other active plan participants......... (27,492) (23,378)
--------- ---------
Total................................. (168,452) (144,457)
Plan assets at fair market value........ 18,310
--------- ---------
Assets less than accumulated benefit
obligation............................. (150,142) (144,457)
Unrecognized transitional obligation.... 183,727 193,500
Unrecognized net gain................... (73,613) (91,477)
--------- ---------
Accrued postretirement benefit cost..... $ (40,028) $ (42,434)
========= =========
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation in 1995 are as follows:
Medical - under 65 8.1%
Medical - 65 and over 9.0%
Dental 8.0%
The assumed health care rates gradually decline to 5.4 percent for both medical
categories and 3.7 percent for dental by the year 2001. The accumulated
postretirement benefit obligation was determined using an assumed discount rate
of 7.5 percent for 1995 and 8 percent for 1994.
If the health care cost trend rate assumptions were increased by 1 percent, the
accumulated postretirement benefit obligation as of December 31, 1995 would be
increased by approximately 7 percent. The annual effect of the 1 percent
increase on the total of the service and interest costs would be an increase of
approximately 11 percent.
(D) POSTEMPLOYMENT BENEFITS. Effective January 1, 1994, the Company and HL&P
adopted SFAS No. 112, "Employer's Accounting for Postemployment Benefits," which
requires the recognition of a liability for benefits, not previously accounted
for on the accrual basis, provided to former or inactive employees, their
beneficiaries and covered dependents, after employment but before retirement
(primarily health care and life insurance benefits for participants in the long-
term disability plan). As required by SFAS No. 112, the Company and HL&P
expensed the transition obligation (liability from prior years) upon adoption
and recorded a one-time, after-tax charge to income of $8.2 million in the first
quarter of 1994. Ongoing charges to income were not material.
(10) INCOME TAXES
The Company and HL&P record income taxes under SFAS No. 109, "Accounting for
Income Taxes," which, among other things, (i) requires the liability method be
used in computing deferred taxes on all temporary differences between book and
tax bases of assets other than nondeductible goodwill; (ii) requires that
deferred tax liabilities and assets be adjusted for an enacted change in tax
laws or rates; and (iii) prohibits net-of-tax accounting and reporting. SFAS
No. 109 requires that regulated enterprises recognize such adjustments as
regulatory assets or liabilities if it is probable that such amounts will be
recovered from or returned to customers in future rates.
46
In 1993, the corporate tax rate applicable to the Company and HL&P increased
from 34% to 35%. The effects of the new law, which decreased the Company's net
income by $14.3 million (approximately half of which was attributed to
discontinued operations), were recognized as a component of income tax expense
in 1993. The effect on the Company's deferred taxes, primarily attributable to
discontinued operations, as a result of the change in the new law, was an
increase of $10.9 million in 1993.
The Company's current and deferred components of income tax expense from
continuing operations are as follows:
Year Ended December 31,
---------------------------
1995 1994 1993
------ ------ ------
(Thousands of Dollars)
Current..................... $119,435 $144,604 $109,078
Deferred.................... 80,120 85,820 119,785
-------- -------- --------
Income taxes for continuing
operations before cumulative
effect of change in
accounting............ $199,555 $230,424 $228,863
======== ======== ========
The Company's effective income tax rates are lower than statutory corporate
rates for each year as follows:
Year Ended December 31,
-------------------------------
1995 1994 1993
-------- -------- ----------
(Thousands of Dollars)
Income from continuing operations
before income taxes and cumulative
effect of change in accounting....... $596,955 $654,409 $669,394
Preferred dividends of subsidiary...... 29,955 33,583 34,473
-------- -------- --------
Total.............................. 626,910 687,992 703,867
Statutory rate......................... 35% 35% 35%
-------- -------- --------
Income taxes at statutory rate......... 219,419 240,797 246,353
-------- -------- --------
Net reduction in taxes resulting from:
AFUDC - other included in income.... 2,716 1,440 1,229
Amortization of investment tax
credit............................. 19,427 19,416 19,797
Excess deferred taxes............... 4,384 3,537 9,625
Difference between book and tax
depreciation for which deferred
taxes have not been normalized..... (15,211) (15,455) (12,976)
Equity dividend exclusion........... 4,932
Other - net......................... 3,616 1,435 (185)
-------- -------- --------
Total............................. 19,864 10,373 17,490
-------- -------- --------
Income taxes before cumulative effect
of change in accounting.............. $199,555 $230,424 $228,863
======== ======== ========
Effective rate......................... 31.8% 33.5% 32.5%
47
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.
48
(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.
49
As consideration for the sale of KBLCOM, the Company received 1 million shares
of Time Warner common stock and 11 million shares of non-publicly traded
convertible preferred stock. Time Warner also purchased from the Company for
cash approximately $619 million (after post closing adjustments) of KBLCOM's
intercompany indebtedness and assumed approximately $650 million of KBLCOM's
external debt and other liabilities. The convertible preferred stock has an
aggregate liquidation preference (redeemable after July 6, 2000) of $100 per
share (plus accrued and unpaid dividends), is entitled to cumulative annual
dividends of $3.75 per share until July 6, 1999, is currently convertible by the
Company and after four years is exchangeable by Time Warner into approximately
22.9 million shares of Time Warner common stock. Each share of preferred stock
is entitled to two votes (voting together with the holders of the Time Warner
common stock as a single class). Under the terms of the sale, the Company may
make up to four demands for registration of its shares of Time Warner common
stock. Subject to certain exceptions, the terms of the sale prohibit the
Company from acquiring additional shares of Time Warner securities or selling
shares of Time Warner securities to any holder of more than 5 percent of certain
classes of Time Warner voting securities.
Dividends on the Time Warner securities are recognized as income at the time
they are earned. In 1995, the Company recorded pre-tax dividend income of $20.1
million.
Operating results from discontinued operations for years ended December 31,
1995, 1994 and 1993 were as follows:
Year Ended December 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(Thousands of Dollars)
Revenues........................................ $143,925 $255,772 $244,067
Operating expenses (a).......................... 86,938 156,084 148,325
-------- -------- --------
Gross operating margin (a)...................... 56,987 99,688 95,742
Depreciation, amortization, interest and other.. 81,409 128,023 117,982
Income taxes (benefit).......................... (4,997) (11,811) 2,255
Deferred loss (b)............................... 19,425
-------- -------- --------
Loss from discontinued operations (c)........... $ 0 $(16,524) $(24,495)
======== ======== ========
(a) Exclusive of depreciation and amortization.
(b) The net loss for discontinued operations of KBLCOM through the date of sale
(July 6, 1995) was deferred by the Company. Upon closing of the sale, the
deferred loss was included as an adjustment to the gain on sale of cable
television subsidiary on the Company's Statements of Consolidated Income.
(c) Loss from discontinued operations of KBLCOM excludes the effects of
corporate overhead charges and includes interest expense relating to the
amount of intercompany debt that Time Warner purchased from the Company.
50
Net assets of discontinued operations were as follows:
December 31, 1994
-----------------
(Thousands of Dollars)
Assets:
Cable television property, net of
accumulated depreciation of $161,402.............. $ 276,624
Equity in cable television partnerships............. 160,363
Intangible assets................................... 1,029,440
Other assets........................................ 43,625
----------
Total assets...................................... 1,510,052
Less:
Cable television debt............................... (504,580)
Accumulated deferred income taxes................... (316,241)
Other liabilities................................... (70,249)
-----------
Net assets........................................ $ 618,982
===========
(14) RAILROAD SETTLEMENT PAYMENTS
In July 1994, HL&P contributed to a wholly owned subsidiary the right of HL&P to
receive certain receivables relating to a litigation settlement. This
subsidiary transferred the receivables to a trust, which in turn sold
certificates evidencing a senior interest in the trust to a commercial bank for
$66.1 million. The subsidiary retained a subordinate interest in the trust.
HL&P recorded the transaction as a $66.1 million reduction to reconcilable fuel
expense in July 1994. The reduction to reconcilable fuel expense had no effect
on earnings.
(15) UNAUDITED QUARTERLY INFORMATION
The following unaudited quarterly financial information includes, in the opinion
of management, all adjustments (which comprise only normal recurring accruals)
necessary for a fair presentation. Quarterly results are not necessarily
indicative of a full year's operations because of seasonality and other factors,
including rate increases and variations in operating expense patterns.
Year Ended December 31, 1994
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------
(Thousands of Dollars, except per share amounts)
Revenues.......................................... $824,133 $1,006,617 $1,152,667 $770,719
Operating income.................................. 145,497 292,886 451,839 78,393
Income from continuing operations (b)............. 41,599 134,308 242,239 5,839
Income (loss) from discontinued
operations....................................... (7,501) (7,583) (6,271) 4,831
Net income........................................ 25,898 126,725 235,968 10,670
Earnings per common share (a):
Income from continuing operations (b)............ $ .17 $ .55 $ .98 $ .02
Net income....................................... .11 .52 .96 .04
51
Year Ended December 31, 1995
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- ---------- ---------- ---------
(Thousands of Dollars, except per share amounts)
Revenues.......................................... $755,238 $ 989,843 $1,184,938 $800,154
Operating income.................................. 115,151 283,789 421,903 84,090
Income from continuing operations................. 23,849 133,260 235,861 4,430
Gain (loss) on sale of cable television
subsidiary....................................... 90,607 618,088 (571)
Net income........................................ 114,456 133,260 853,949 3,859
Earnings per common share (a):
Income from continuing operations................ $ .10 $ .54 $ .95 $ .02
Net income....................................... .46 .54 3.44 .02
(a) Quarterly earnings per common share are based on the weighted average number
of shares outstanding during the quarter, and the sum of the quarters may
not equal annual earnings per common share. See Note 5(a).
(b) Information for the first quarter of 1994 is before the cumulative effect
of a change in accounting for postemployment benefits of $8.2 million which
reduced earnings by $.03 per share.
52
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
Except as modified below, the Notes to the Company's Consolidated Financial
Statements are incorporated herein by reference insofar as they relate to HL&P:
(1) Summary of Significant Accounting Policies, (2) Jointly-Owned Nuclear Plant,
(3) Rate Matters, (6) Preferred Stock of HL&P, (7) Long-Term Debt, (9)
Retirement Plans, (10) Income Taxes, (11) Commitments and Contingencies, (12)
Estimated Fair Value of Financial Instruments and (14) Railroad Settlement
Payments.
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(G) EARNINGS PER COMMON SHARE. All issued and outstanding Class A voting
common stock of HL&P is held by the Company and all issued and outstanding Class
B non-voting common stock of HL&P is held by Houston Industries (Delaware)
Incorporated, a wholly owned subsidiary of the Company. Accordingly, earnings
per share are not computed.
(H) STATEMENTS OF CASH FLOWS. At December 31, 1995, HL&P had affiliate
investments (considered to be cash equivalents) of $75.5 million. At December
31, 1994, HL&P had affiliate investments of $227.6 million. At December 31,
1993, HL&P did not have any investments with affiliated companies.
(8) SHORT-TERM FINANCING
In 1994 and 1995, the interim financing requirements of HL&P were primarily met
through the issuance of commercial paper. HL&P had bank credit facilities of
$400 million at December 31, 1995 and 1994, which limited total short-term
borrowings and provided for interest at rates generally less than the prime
rate. HL&P's weighted average short-term borrowing rates for commercial paper
for the years ended December 31, 1995 and 1994 were 6.21% and 3.71%,
respectively. HL&P had no commercial paper outstanding at December 31, 1995 and
1994. Facility fees are required on HL&P's bank credit facility.
(9) RETIREMENT PLANS
(A) PENSION. Net pension cost for HL&P includes the following components:
Year Ended December 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
(Thousands of Dollars)
Service cost - benefits earned during the period..... $ 22,264 $ 21,335 $ 24,640
Interest cost on projected benefit obligation........ 48,144 45,064 49,950
Actual (return) loss on plan assets.................. (93,023) 4,737 (38,668)
Net amortization and deferrals....................... 48,696 (50,012) (683)
--------- --------- --------
Net pension cost................................... 26,081 21,124 35,239
SFAS No. 88 - curtailment expense.................... 5,645
--------- --------- --------
Total pension cost................................. $ 31,726 $ 21,124 $ 35,239
========= ========= ========
53
The funded status of HL&P's retirement plan was as follows:
December 31,
---------------------
1995 1994
--------- ---------
(Thousands of Dollars)
Actuarial present value of:
Vested benefit obligation........................... $ 493,006 $ 429,279
========= =========
Accumulated benefit obligation...................... $ 528,467 $ 460,760
========= =========
Plan assets at fair value............................ $ 581,194 $ 486,100
Projected benefit obligation......................... 687,420 617,690
--------- ---------
Assets less than projected benefit obligation........ (106,226) (131,590)
Unrecognized transitional asset...................... (13,252) (15,157)
Unrecognized prior service cost...................... 46,462 21,275
Unrecognized net loss................................ 19,343 67,093
--------- ---------
Accrued pension cost................................. $ (53,673) $ (58,379)
========= =========
(C) POSTRETIREMENT BENEFITS. The net postretirement benefit cost for HL&P
includes the following components:
Year Ended December 31,
----------------------------------
1995 1994 1993
----------- ---------- ---------
(Thousands of Dollars)
Service cost - benefits earned during the
period.................................... $ 8,779 $ 8,904 $ 9,297
Interest cost on projected benefit
obligation................................ 10,794 9,946 18,134
Actual return on plan assets............... ---- ---- ----
Net amortization and deferrals............. 5,893 7,757 9,658
--------- --------- ---------
Net postretirement benefit cost............ $ 25,466 $ 26,607 $ 37,089
========= ========= =========
The funded status of HL&P's postretirement benefit costs was as follows:
December 31,
---------------------
1995 1994
--------- ---------
(Thousands of Dollars)
Accumulated benefit obligation:
Retirees.................................. $(125,925) $ (97,200)
Fully eligible active plan participants... (10,532) (20,126)
Other active plan participants............ (26,515) (22,706)
--------- ---------
Total.................................... (162,972) (140,032)
Plan assets at fair market value........... 18,310 ----
--------- ---------
Assets less than accumulated benefit
obligation................................ (144,662) (140,032)
Unrecognized transitional obligation....... 181,567 191,225
Unrecognized net gain...................... (75,451) (92,786)
--------- ---------
Accrued postretirement benefit cost........ $(38,546) $(41,593)
========== =========
(10) INCOME TAXES
During 1993, federal tax legislation was enacted that changed the income tax
consequences for HL&P. A net regulatory asset and the related deferred income
tax liability of $71.3 million were recorded by HL&P in 1993. The effects of
the new law, which decreased HL&P's net income by
54
$8.0 million, were recognized as a component of income tax expense in 1993. The
effect on HL&P's deferred taxes as a result of the change in the new law was
$4.5 million in 1993.
HL&P's current and deferred components of income tax expense are as follows:
Year Ended December 31,
--------------------------------------
1995 1994 1993
---------- ------------ ------------
(Thousands of Dollars)
Current................................................ $188,104 $ 184,669 $ 115,745
Deferred............................................... 57,703 70,324 123,719
-------- ---------- ----------
Federal income tax expense............................. 245,807 254,993 239,464
Federal income taxes charged to other income........... (851) (836) (2,993)
-------- ---------- ----------
Income taxes before cumulative effect of change
in accounting..................................... $244,956 $ 254,157 $ 236,471
======== ========== ==========
HL&P's effective income tax rates are lower than statutory corporate rates for
each year as follows:
Year Ended December 31,
------------------------------------
1995 1994 1993
-------- ---------- ----------
(Thousands of Dollars)
Income before income taxes, preferred dividends
and cumulative effect of change in accounting................. $725,888 $ 749,121 $ 720,694
Statutory rate.................................................. 35% 35% 35%
-------- ---------- ----------
Income taxes at statutory rate.................................. 254,061 262,192 252,243
-------- ---------- ----------
Net reduction in taxes resulting from:
AFUDC - other included in income.............................. 2,716 1,440 1,229
Amortization of investment tax credit......................... 19,427 19,416 19,797
Difference between book and tax depreciation for
which deferred taxes have not been normalized............... (15,211) (15,455) (12,976)
Excess deferred taxes......................................... 4,384 3,537 9,625
Other - net................................................... (2,211) (903) (1,903)
-------- ---------- ----------
Total........................................................ 9,105 8,035 15,772
-------- ---------- ----------
Income taxes before cumulative effect of change
in accounting................................................ $244,956 $ 254,157 $ 236,471
======== ========== ==========
Effective rate................................................. 33.7% 33.9% 32.8%
55
Following are HL&P's tax effects of temporary differences resulting in deferred
tax assets and liabilities:
December 31,
-----------------------
1995 1994
---------- ----------
(Thousands of Dollars)
Deferred Tax Assets:
IRS audit assessment......................................... $ 48,513 $ 48,513
Disallowed plant cost - net.................................. 22,687 23,496
Other........................................................ 59,558 60,174
---------- ----------
Total deferred tax assets................................. 130,758 132,183
---------- ----------
Deferred Tax Liabilities:
Depreciation................................................. 1,391,277 1,335,265
Regulatory assets - net...................................... 228,587 235,463
Deferred plant costs - net................................... 200,028 207,746
Capitalized taxes, employee benefits and removal costs....... 110,177 111,681
Other........................................................ 148,177 118,328
---------- ----------
Total deferred tax liabilities............................ 2,078,246 2,008,483
---------- ----------
Accumulated deferred income taxes - net...................... $1,947,488 $1,876,300
========== ==========
(12) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of HL&P's cash and short-term
investments was $75.9 million for 1995 and $235.9 million for 1994. The
carrying amount and estimated fair value of investments in HL&P Nuclear
Decommissioning Trust was $44.5 million in 1995 and $25.1 million in 1994. See
Note 1(j).
56
(15) UNAUDITED QUARTERLY INFORMATION
The following unaudited quarterly financial information includes, in the opinion
of management, all adjustments (which comprise only normal recurring accruals)
necessary for a fair presentation. Quarterly results are not necessarily
indicative of a full year's operations because of seasonality and other factors,
including rate increases and variations in operating expense patterns.
Income After
Operating Preferred
Quarter Ended Revenues Income Dividends
- ---------------- ---------- --------- ------------
(Thousands of Dollars)
1994
- ----------------
March 31....... $ 821,581 $122,879 $ 41,686
June 30........ 1,004,906 216,842 142,478
September 30... 1,150,946 320,859 251,092
December 31.... 768,652 82,302 17,925
1995
- ----------------
March 31....... $ 746,166 $104,566 $ 33,909
June 30........ 978,225 217,419 141,873
September 30... 1,171,789 308,258 241,159
December 31.... 784,117 104,421 34,036
(16) PRINCIPAL AFFILIATE TRANSACTIONS
Year Ended December 31,
Affiliated -------------------------------
Company Description 1995 1994 1993
- ------------- ---------------------- --------- --------- ---------
(Thousands of Dollars)
Houston Dividends $454,000 $328,996 $342,982
Industries Service Fees (a) 26,582 26,913 21,864
Money Fund Income (b) 10,837 6,025 2,748
(a) Included in Operating Expenses.
(b) Included in Other Income (Expense).
57
INDEPENDENT AUDITORS' REPORT
HOUSTON INDUSTRIES INCORPORATED:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capitalization of Houston Industries Incorporated and
its subsidiaries as of December 31, 1995 and 1994, and the related statements of
consolidated income, consolidated retained earnings and consolidated cash flows
for each of the three years in the period ended December 31, 1995. Our audits
also included the Company's financial statement schedule listed in Item
14(a)(2). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries at
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Notes 9(b) and 9(d), respectively, to the consolidated
financial statements, the Company changed its method of accounting in 1994 for
(i) the Employee Stock Ownership Plan to conform with AICPA Statement of
Position 93-6 and (ii) postemployment benefits to conform with Statement of
Financial Accounting Standards No. 112.
DELOITTE & TOUCHE LLP
Houston, Texas
February 29, 1996 (March 26, 1996 as to Note 4)
58
INDEPENDENT AUDITORS' REPORT
HOUSTON LIGHTING & POWER COMPANY:
We have audited the accompanying balance sheets and the statements of
capitalization of Houston Lighting & Power Company (HL&P) as of December 31,
1995 and 1994, and the related statements of income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedule of HL&P listed in Item
14(a)(2). These financial statements and financial statement schedule are the
responsibility of HL&P's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of HL&P at December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 9(d) to the financial statements, HL&P changed its method
of accounting for postemployment benefits to conform with Statement of Financial
Accounting Standards No. 112 in 1994.
DELOITTE & TOUCHE LLP
Houston, Texas
February 29, 1996
59
INDEPENDENT AUDITORS' CONSENT
HOUSTON INDUSTRIES INCORPORATED:
We consent to the incorporation by reference in Houston Industries
Incorporated's (i) Registration Statements on Form S-3 Nos. 33-39921, 33-60756,
33-51431, 33-52207 and 33-55445 and (ii) Registration Statements on Form S-8
Nos. 33-37493, 33-50629, 33-52279, 33-55391 and 33-56855 of our report dated
February 29, 1996 (March 26, 1996 as to Note 4), appearing in this Annual Report
on Form 10-K of Houston Industries Incorporated for the year ended December 31,
1995.
DELOITTE & TOUCHE LLP
HOUSTON, TEXAS
MARCH 27, 1996
60
INDEPENDENT AUDITORS' CONSENT
HOUSTON LIGHTING & POWER COMPANY:
We consent to the incorporation by reference in Houston Lighting &
Power Company's (i) Registration Statements on Form S-3 Nos. 33-46368 and 33-
54228 and (ii) Post-Effective Amendment No. 1 to Registration Statement No. 33-
51417 on Form S-3 of our report dated February 29, 1996, appearing in this
Annual Report on Form 10-K of Houston Lighting & Power Company for the year
ended December 31, 1995.
DELOITTE & TOUCHE LLP
HOUSTON, TEXAS
MARCH 27, 1996
61
HOUSTON INDUSTRIES INCORPORATED
VOTING DIRECTIONS TO TRUSTEES - COMMON STOCK
The undersigned hereby directs the Trustees of the Houston Industries
Incorporated Savings Plan to vote as designated on the reverse side, all shares
of common stock attributable to the account of the undersigned at the annual
meeting of shareholders of Houston Industries incorporated to be held May 22,
1996, at 9 AM (CDT) in the Auditorium of Houston Industries Plaza, 1111
Louisiana Street, Houston, Texas, or any adjournments thereof, and with
discretionary authority to vote on all other matters that may properly come
before the meeting.
If you wish to vote in accordance with the
recommendations of the Board of Directors, you may
just sign and date below and mail in the postage-
paid envelope provided. Specific choices may be
made on the reverse side. In the absence of
instructions to the contrary, the shares
represented will be voted in accordance with the
Board's recommendation.
Dated: , 1996
---------------------------------------
Signature:
-----------------------------------------
Signature:
-----------------------------------------
(Note: Please sign exactly as name(s) appears
hereon. Joint owners should each sign. When signing
as attorney, executor, administrator, trustee or
guardian, please give that title.)
DETACH AND MAIL CARD
Fellow Shareholder:
Enclosed is the Houston Industries Summary Annual Report to Shareholders,
Notice of the Annual Meeting and Appendix A--1995 Financial Statements, together
with your proxy on which you are asked to vote for five director nominees,
adoption of a stock plan for outside directors, appointment of Deloitte & Touche
as independent accountants and auditors for 1996 and any other business that may
properly come before the meeting. I urge you to make your vote count by signing
and returning the proxy card as soon as possible.
We are privileged to have two outstanding nominees who have not previously
served as directors. Mr. James A. Baker III is former U.S. Secretary of State,
White House Chief of Staff and Senior Counselor to President George Bush and has
served as Secretary of the U.S. Treasury and as Chairman of the President's
Economic Policy Council, among other offices. Dr. Richard Balzhiser has had a
long and distinguished career as a research scientist in the electric power
industry and is now President and Chief Executive Officer of the Electric Power
Research Institute in Palo Alto, California. Both of these gentlemen bring the
highest levels of experience and expertise to our company.
Don D. Jordan
Chairman and Chief Executive Officer
HOUSTON INDUSTRIES INCORPORATED
PROXY (continued)
ANNUAL MEETING OF SHAREHOLDERS
The nominees for Class III directors are James A. Baker III, Richard E.
Balzhiser, Howard W. Horne, Don D. Jordan and Kenneth L. Schnitzer, Sr. Their
terms will expire in 1999. Your Board of Directors recommends that you vote FOR
all nominees for director, FOR adoption of the stock plan for outside directors
and FOR the appointment of Deloitte & Touche as independent accountants and
auditors for 1996. To withhold authority to vote for any individual nominee,
please write that nominee's name in the space provided below.
WITH- FOR ALL
FOR HOLD EXCEPT FOR AGAINST ABSTAIN
1. Election of nominees [ ] [ ] [ ] 2. Adopt stock plan for [ ] [ ] [ ]
for director in outside directors
Class III
Exceptions: 3. Appoint Deloitte & [ ] [ ] [ ]
------------------------------------ Touche as independent
- -------------------------------------------------- accountants and
- -------------------------------------------------- auditors for 1996
DETACH AND MAIL CARD
HOUSTON INDUSTRIES INCORPORATED
PROXY - COMMON STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints D.D. Jordan, D. D. Sykora and H.W. Horne, and
each of them as proxies, with full power of substitution, to vote as designated
on the reverse side, all shares of common stock held by the undersigned at the
annual meeting of shareholders of Houston Industries Incorporated to be held May
22, 1996, at 9 AM (CDT) in the Auditorium of Houston Industries Plaza, 1111
Louisiana Street, Houston, Texas, or any adjournments thereof, and with
discretionary authority to vote on all other matters that may properly come
before the meeting.
If you wish to vote in accordance with the
recommendations of the Board of Directors, you may
just sign and date below and mail in the postage-
paid envelope provided. Specific choices may be
made on the reverse side. In the absence of
instructions to the contrary, the shares
represented will be voted in accordance with the
Board's recommendation.
Dated: , 1996
---------------------------------------
Signature:
-----------------------------------------
Signature:
-----------------------------------------
(Note: Please sign exactly as name(s) appears
hereon. Joint owners should each sign. When signing
as attorney, executor, administrator, trustee or
guardian, please give that title.)
DO YOU PLAN TO ATTEND THE ANNUAL MEETING?
---------
DETACH AND MAIL CARD
Fellow Shareholder:
Enclosed is the Houston Industries Summary Annual Report to Shareholders,
Notice of the Annual Meeting and Appendix A--1995 Financial Statements, together
with your proxy on which you are asked to vote for five director nominees,
adoption of a stock plan for outside directors, appointment of Deloitte & Touche
as independent accountants and auditors for 1996 and any other business that may
properly come before the meeting. I urge you to make your vote count by signing
and returning the proxy card as soon as possible.
The 1996 Annual Meeting of Shareholders is being held for the first time in
the Auditorium of Houston Industries Plaza, new headquarters for the Houston
Industries companies. We encourage you to join us for the meeting to see and
hear what is going on at your company. There is a map of downtown Houston on the
back of this proxy that will direct you to Houston Industries Plaza and parking
in the Regency Garage.
We are also privileged to have two outstanding nominees who have not
previously served as directors. Mr. James A. Baker III is former U.S. Secretary
of State, White House Chief of Staff and Senior Counselor to President George
Bush and has served as Secretary of the U.S. Treasury and as Chairman of the
President's Economic Policy Council, among other offices. Dr. Richard Balzhiser
has had a long and distinguished career as a research scientist in the electric
power industry and is now President and Chief Executive Officer of the Electric
Power Research Institute in Palo Alto, California. Both of these gentlemen bring
the highest levels of experience and expertise to our company.
Don D. Jordan,
Chairman and Chief Executive Officer
HOUSTON INDUSTRIES INCORPORATED
PROXY (continued)
ANNUAL MEETING OF SHAREHOLDERS
The nominees for Class III directors are James A. Baker III, Richard E.
Balzhiser, Howard W. Horne, Don D. Jordan and Kenneth L. Schnitzer, Sr. Their
terms will expire in 1999. Your Board of Directors recommends that you vote FOR
all nominees for director, FOR adoption of the stock plan for outside directors
and FOR the appointment of Deloitte & Touche as independent accountants and
auditors for 1996. To withhold authority to vote for any individual nominee,
please write that nominee's name in the space provided below.
WITH- FOR ALL
FOR HOLD EXCEPT FOR AGAINST ABSTAIN
1. Election of nominees [ ] [ ] [ ] 2. Adopt stock plan for [ ] [ ] [ ]
for director in outside directors
Class III
Exceptions: 3. Appoint Deloitte & [ ] [ ] [ ]
------------------------------------ Touche as independent
- -------------------------------------------------- accountants and
- -------------------------------------------------- auditors for 1996
DETACH AND MAIL CARD
[MAP SHOWING LOCATION OF HOUSTON INDUSTRIES PLAZA APPEARS HERE]
HOUSTON INDUSTRIES INCORPORATED
PROXY - COMMON STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints D.D. Jordan, D. D. Sykora and H.W. Horne, and
each of them as proxies, with full power of substitution, to vote as designated
on the reverse side, all shares of common stock held by the undersigned at the
annual meeting of shareholders of Houston Industries Incorporated to be held May
22, 1996, at 9 AM (CDT) in the Auditorium of Houston Industries Plaza, 1111
Louisiana Street, Houston, Texas, or any adjournments thereof, and with
discretionary authority to vote on all other matters that may properly come
before the meeting.
If you wish to vote in accordance with the
recommendations of the Board of Directors, you may
just sign and date below and mail in the postage-
paid envelope provided. Specific choices may be
made on the reverse side. In the absence of
instructions to the contrary, the shares
represented will be voted in accordance with the
Board's recommendation.
Dated: , 1996
---------------------------------------
Signature:
-----------------------------------------
Signature:
-----------------------------------------
(Note: Please sign exactly as name(s) appears
hereon. Joint owners should each sign. When signing
as attorney, executor, administrator, trustee or
guardian, please give that title.)
DO YOU PLAN TO ATTEND THE ANNUAL MEETING?
---------
HOUSTON INDUSTRIES INCORPORATED
PROXY (continued)
ANNUAL MEETING OF SHAREHOLDERS
The nominees for Class III directors are James A. Baker III, Richard E.
Balzhiser, Howard W. Horne, Don D. Jordan and Kenneth L. Schnitzer, Sr. Their
terms will expire in 1999. Your Board of Directors recommends that you vote FOR
all nominees for director, FOR adoption of the stock plan for outside directors
and FOR the appointment of Deloitte & Touche as independent accountants and
auditors for 1996. To withhold authority to vote for any individual nominee,
please write that nominee's name in the space provided below.
WITH- FOR ALL
FOR HOLD EXCEPT FOR AGAINST ABSTAIN
1. Election of nominees [ ] [ ] [ ] 2. Adopt stock plan for [ ] [ ] [ ]
for director in outside directors
Class III
Exceptions: 3. Appoint Deloitte & [ ] [ ] [ ]
------------------------------------ Touche as independent
- -------------------------------------------------- accountants and
- -------------------------------------------------- auditors for 1996