1
EXHIBIT 99(b)
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim financial statements and notes (Interim Financial
Statements) contained in this Form 10-Q for the period ended
March 31, 1996 (Form 10-Q) are unaudited and condensed. Certain
notes and other information contained in the Combined Annual
Report on Form 10-K (File Nos. 1-7629 and 1-3187) for the year
ended December 31, 1995 (Form 10-K), of Houston Industries
Incorporated (Company) and Houston Lighting & Power Company
(HL&P) have been omitted in accordance with Rule 10-01 of
Regulation S-X under the Securities Exchange Act of 1934. The
information presented in the Interim Financial Statements should
be read in combination with the information presented in the
Form 10-K, including the financial statements and notes
contained therein. For information regarding the Company's
discontinued cable television operations, see Note 13 to the
financial statements contained in the Form 10-K.
(2) CERTAIN CONTINGENCIES
The following notes to the financial statements of the Form 10-K
(as updated by the notes contained in this Form 10-Q) are
incorporated herein by reference: Note 1(b) (System of Accounts
and Effects of Regulation), Note 2 (Jointly-Owned Nuclear
Plant), Note 3 (Rate Matters), Note 4 (Investments in Foreign
and Non-Regulated Entities) and Note 11 (Commitments and
Contingencies).
(3) JOINTLY-OWNED NUCLEAR PLANT
HL&P is the project manager (and one of four co-owners) of the
South Texas Project Electric Generating Station (South Texas
Project), which consists of two 1,250 megawatt nuclear
generating units. HL&P has a 30.8 percent interest in the
project.
On April 30, 1996, HL&P and the City of Austin (Austin), one of
the four co-owners of the South Texas Project, agreed to settle
a lawsuit in which Austin had alleged that outages occurring at
the South Texas Project between early 1993 and early 1994 were
due to HL&P's failure to perform certain obligations it owed
Austin under a Participation Agreement relating to the project.
For information regarding this settlement and a $13 million
(after-tax) charge to first quarter earnings resulting from the
settlement, see Note 7(a) to the Interim Financial Statements.
For information concerning a similar lawsuit filed against HL&P
by the City of San Antonio (San Antonio), another co-owner of
the South Texas Project, and San Antonio's pending arbitration
claims against HL&P with respect to the construction of the
South Texas Project, see Note 2(b) to the financial statements
contained in the Form 10-K. HL&P and San Antonio (acting
through the City Public Service Board of San Antonio (CPS)) have
agreed on the principles under which they would settle all
claims with respect to the South Texas Project. For information
regarding the proposed settlement and a $49 million (after-tax)
charge to first quarter earnings relating thereto, see Note 7(a)
to the Interim Financial Statements.
-13-
2
(4) RATE CASE PROCEEDINGS
For information concerning the settlement of HL&P's most recent
rate case (Docket No. 12065) and the continuing impact of that
settlement on HL&P's results of operations, see Note 3(a) to the
financial statements contained in the Form 10-K. The two Public
Utility Commission of Texas (Utility Commission) orders
concerning HL&P that are still subject to appellate review are:
Docket No. 8425 (HL&P's 1988 rate case) and Docket No. 6668 (an
inquiry into the prudence of the planning and construction of
the South Texas Project). For information regarding these
appeals, see Note 3(b) to the financial statements contained in
the Form 10-K.
(5) CAPITAL STOCK
Company. At March 31, 1996 and December 31, 1995, the Company
had 400,000,000 authorized shares of common stock, of which
248,556,370 and 248,316,710 shares, respectively, were
outstanding as of such dates. Outstanding shares exclude the
unallocated shares of the Company's Employee Stock Ownership
Plan, which as of March 31, 1996 and December 31, 1995 totaled
14,186,577 and 14,355,758, respectively. Earnings per common
share for the Company are computed by dividing net income by the
weighted average number of shares outstanding during the
respective period.
HL&P. All issued and outstanding shares of Class A voting
common stock of HL&P are held by the Company, and all issued and
outstanding shares of Class B non-voting common stock of HL&P
are held by Houston Industries (Delaware) Incorporated (HI
Delaware), a wholly owned subsidiary of the Company. Earnings
per share data for HL&P are not computed because all of its
common stock is held by the Company and HI Delaware.
On March 31, 1996 and December 31, 1995, HL&P had 10,000,000
authorized shares of preferred stock, of which 4,318,397 shares
were outstanding.
(6) LONG-TERM DEBT
HL&P. In January 1996, HL&P repaid upon maturity $100 million
principal amount of its Collateralized Medium-Term Notes Series
B and $10 million principal amount of its Collateralized
Medium-Term Notes Series A plus accrued interest on the two
issues.
In March 1996, HL&P deposited approximately $86 million in a
trust and irrevocably directed the trustee to redeem on May 8,
1996 all issued and outstanding principal amounts of HL&P's
7 1/4% first mortgage bonds due February 1, 2001 (at a redemption
price of 100.42% plus accrued interest) and 6 3/4% first
mortgage bonds due April 1, 1998 (at a redemption price of
100.15% plus accrued interest).
(7) SUBSEQUENT EVENTS
(a) South Texas Project Litigation. On April 30, 1996,
Houston Lighting & Power Company entered into a settlement
with Austin regarding City of Austin v. Houston Lighting &
Power Company, Cause No. 94-07946, in the 11th Judicial
District Court, Harris County, Texas. In that suit, filed
by Austin in May 1994, Austin asserted that HL&P had
mismanaged its responsibilities as Project Manager of the
South Texas Project. Austin contended that, because of
HL&P's mismanagement and negligence, the outage at the
South Texas Project during 1993-94 had caused Austin
damages of approximately $120 million.
Trial of Austin's suit began in March 1996, and the
settlement was reached in April 1996. Under the
settlement, HL&P agreed to pay Austin $20 million in cash
to resolve all pending disputes between HL&P and Austin,
and Austin agreed to
-14-
3
support the formation of a new operating company to
assume HL&P's role as project manager for the South Texas
Project. The Company and HL&P have recorded the $20
million ($13 million net of tax) payment to Austin on the
Company's Statements of Consolidated Income and HL&P's
Statements of Income as litigation settlements expense.
HL&P and CPS have agreed on the principles under which they
would settle all claims with respect to the South Texas
Project. Under the proposed settlement, HL&P and CPS would
enter into definitive agreements providing, among other
things, for (i) a cash payment by HL&P to CPS of $75
million ($25 million of which has already been paid), (ii)
an agreement to support formation of a new operating
company to replace HL&P as project manager of the South
Texas Project and (iii) the execution of a 10-year joint
operations agreement under which HL&P and CPS will share
savings resulting from the joint dispatching of their
respective generating assets in order to take advantage of
each system's lower cost resources. Under the terms of the
joint operations agreement, CPS will be guaranteed minimum
annual savings of $10 million with a minimum cumulative
savings of $150 million over the ten year term of the
agreement. Based on current forecasts and other assumptions
regarding the combined operation of the two generating
systems, HL&P anticipates that the savings resulting from
joint operations will equal or exceed the minimum savings
guaranteed under the joint operations agreement.
Although no assurance can be given as to the ultimate
resolution of negotiations, the proposed settlement will
resolve all claims, litigation and matters in arbitration
between the two parties with respect to the South Texas
Project. The proposed settlement has been reviewed by San
Antonio's city council but is still subject to approval by
CPS. In anticipation of the settlement, the Company and
HL&P have recorded a $49 million expense (net of tax) on
the Company's Statement of Consolidated Income and HL&P's
Statements of Income (reflected as litigation settlement
expense). The unpaid portion of the cash payment
contemplated by the settlement is shown in other deferred
credits on the Company's Consolidated and HL&P's Balance
Sheets.
(b) HI Energy. In May 1996, a subsidiary of Houston
Industries Energy, Inc. (HI Energy) purchased for
approximately $55 million an additional 39 percent of the
capital stock of Empresa Distribuidora la Plata (EDELAP),
an electric utility company operating in La Plata,
Argentina and surrounding regions. HI Energy also
indirectly owns 16.6 percent of the capital stock of
EDELAP, which shares were acquired in December 1992 for
$37 million. For additional information regarding HI
Energy's investments in foreign and non-regulated
entities, see Note 4 to the financial statements contained
in the Form 10-K. Beginning in the second quarter of
1996, EDELAP will be reflected in the Company's financial
statements on a consolidated basis.
(c) Redemption of HL&P Preferred Stock. In March 1996, HL&P
provided notice to the holders of its $9.375 preferred
stock that it would redeem 514,000 shares of such stock at
a cost of approximately $53 million ($102.34375 per share
including accrued dividends). On April 1, 1996, HL&P
redeemed 257,000 of such shares pursuant to a sinking fund
requirement and 257,000 shares pursuant to optional
redemption provisions. HL&P will record the redemptions
in the second quarter of 1996.
(8) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative of
results expected for the year due to the seasonal nature of
HL&P's business. In the opinion of management, the interim
information reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a full presentation of the
results for the interim periods. Certain amounts from the
previous year have been reclassified to conform to the 1996
presentation of financial statements. Such reclassifications do
not affect earnings.
-15-