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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AND
HOUSTON LIGHTING & POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim financial statements and notes (Interim Financial
Statements) contained in this Form 10-Q for the period ended
March 31, 1997 (Form 10-Q) are unaudited and condensed. Certain
notes and other information contained in the Combined Annual
Report on Form 10-K (File Nos. 1-7629 and 1-3187) for the year
ended December 31, 1996 (Form 10-K) of Houston Industries
Incorporated (Company) and Houston Lighting & Power Company
(HL&P) have been omitted in accordance with Rule 10-01 of
Regulation S-X under the Securities Exchange Act of 1934. The
information presented in the Interim Financial Statements should
be read in combination with the information presented in the
Form 10-K, including the financial statements and notes
contained therein.
The following notes to the financial statements of the Form 10-K
(as updated by the notes contained in this Form 10-Q) are
incorporated herein by reference: Note 1(b) (System of Accounts
and Effects of Regulation), Note 1(n) (Nature of Operations),
Note 1(o) (Use of Estimates), Note 1(p) (Long-Lived Assets),
Note 2 (Jointly-Owned Nuclear Plant), Note 3 (Rate Matters),
Note 11 (Commitments and Contingencies) and Note 16 (NorAm
Merger).
(2) NORAM MERGER
In August 1996, the Company, HL&P and a newly formed Delaware
subsidiary of the Company entered into an Agreement and Plan of
Merger (Merger Agreement) with NorAm Energy Corp. (NorAm) under
which the Company will merge into HL&P, and NorAm will merge
into the newly-formed subsidiary. For information regarding the
mergers (Merger), reference is made to the Form 10-K and the
joint registration statement on Form S-4 filed by the Company
and HL&P with the Securities and Exchange Commission (SEC) (Reg.
No. 333-11329). Unless otherwise stated, the information in
this Form 10-Q relates solely to the Company and HL&P without
giving effect to the Merger.
Under the Merger Agreement, each outstanding share of common
stock of NorAm will be converted into the right to receive at the
effective time of The Merger cash and/or common stock of HL&P
(which will be renamed "Houston Industries Incorporated" after
the Merger). Commencing on May 11, 1997, the cash consideration
for each NorAm share ($16.00) will increase by two percent
(simple interest) per quarter until the consummation of the
Merger.
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The closing of the Merger is subject to the satisfaction or
waiver of various conditions in the Merger Agreement, including
the obtaining of all required governmental consents. The Company
and NorAm have received approvals from all state regulatory
commissions and municipalities whose prior approval is required
to close the Merger.
In February 1997, the Federal Energy Regulatory Commission
(FERC) issued an order directing NorAm Energy Services (NES), a
subsidiary of NorAm engaged in the power marketing business, to
set forth its views as to whether prior approval of the Merger
by FERC may be required because of NES' jurisdictional status as
a power marketer. In the alternative, FERC invited NES to
submit an application for approval of the Merger under Section
203 of the Federal Power Act of 1935.
On March 7, 1997, NES filed a response asserting that FERC
lacked jurisdiction over the Merger. On March 27, 1997, without
conceding FERC jurisdiction over the Merger, NES filed an
application with FERC for approval of the Merger. In its merger
policy statement, FERC indicated it intends to act on
applications within 60 to 90 days after the closing of the
applicable comment period where the proposed transaction does
not adversely affect competition, rates or regulations. NES'
application requests that FERC grant approval of the Merger
within 60 days of the closing of the comment period (expected to
occur on May 27, 1997) but, in any event, no later than August
1, 1997.
On April 30, 1997, FERC issued an order asserting jurisdiction
over the Merger and over similar transactions involving other
power marketers. The Company and HL&P understand that NES
intends to file a petition for rehearing of FERC's decision on
or prior to May 30, 1997.
In connection with the Merger, the Company and HL&P have filed
with the SEC an application requesting an exemption from
regulation as a registered public utility holding company under
Section 3(a)(2) of the Public Utility Holding Company Act of
1935 (1935 Act). The SEC is considering the application. If
the requested order is not granted, the Merger Agreement
provides that NorAm and the Company would both be merged into
HL&P, with HL&P being the surviving corporation. The primary
difference resulting from this alternative merger structure is
that NorAm would not be a subsidiary and all regulatory utility
assets would be held within the same corporation. Under such
circumstances, no public utility holding company would exist.
(3) DEPRECIATION
The Company and HL&P calculate depreciation using the
straight-line method. The Company's depreciation expense for
the first quarter of 1997 and 1996 was $90 million and $89
million, respectively. HL&P's depreciation expense for the
first quarter of 1997 and 1996 was $90 million and $88 million,
respectively.
(4) RATE CASE PROCEEDINGS
For information regarding the appeal of Docket No. 6668, an
inquiry into the prudence of the planning and construction of
the South Texas Project Electric Generating Station (South Texas
Project), see Note 3(b) to the financial statements contained in
the Form 10-K.
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(5) CAPITAL STOCK
Company. At March 31, 1997, and December 31, 1996, the Company
had 400,000,000 authorized shares of common stock. As of such
dates, 233,823,535 and 233,325,030 shares of common stock were
outstanding, respectively. Outstanding common shares exclude
(i) shares pledged to secure a loan to the Company's Employee
Stock Ownership Plan (12,969,969 and 13,370,939 at March 31,
1997, and December 31, 1996, respectively) and (ii) shares
repurchased by the Company under its common stock repurchase
program and held as treasury shares (16,042,027 at March 31,
1997 and December 31, 1996).
The Company calculates earnings per common share data by
dividing its net income by the weighted average number of its
common shares outstanding during the relevant period.
The Financial Accounting Standards Board (FASB) recently issued
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share." This new standard requires dual
presentation of basic and diluted earnings per share on the face
of the Statements of Consolidated Income and requires a
reconciliation of the numerators and denominators of basic and
diluted earnings per share calculations. The Company's current
earnings per share calculation conforms to basic earnings per
share. Diluted earnings per share are not expected to be
materially different from basic earnings per share. SFAS No. 128
is effective for financial statements issued for periods ending
after December 15, 1997, earlier adoption is not permitted.
HL&P. The Company owns all issued and outstanding shares of
Class A voting common stock of HL&P. Houston Industries
(Delaware) Incorporated, a wholly-owned subsidiary of the
Company, owns all issued and outstanding shares of Class B
non-voting common stock of HL&P. The financial statements do
not include earnings per share data for HL&P because the common
stock of HL&P is owned by the Company and its affiliates.
On March 31, 1997 and December 31, 1996, HL&P had 10,000,000
authorized shares of preferred stock. As of such dates, 354,397
and 1,604,397 shares of preferred stock were outstanding,
respectively. For information regarding the redemption of
certain series of HL&P's preferred stock in February 1997, see
Note 7 to the Interim Financial Statements.
(6) LONG-TERM DEBT
In January 1997, the Brazos River Authority (BRA) and the
Matagorda County Navigation District Number One (MCND) issued,
on behalf of HL&P, $118 million aggregate principal amount of
pollution control revenue bonds. The BRA and MCND bonds will
mature in 2018 and 2028, respectively. HL&P used the proceeds
from the sale of these securities to redeem all outstanding 7
7/8% BRA Series 1986A pollution control revenue bonds ($50
million) and 7 7/8% MCND Series 1986A pollution control revenue
bonds ($68 million) at a redemption price of 102% of the
aggregate principal amount of each series.
The new bonds initially will bear interest at a floating daily
rate. Subject to certain conditions, HL&P may change the method
of determining the interest rate on the bonds to a daily,
weekly, commercial paper or long-term interest rate. The bonds
are subject to a mandatory tender for purchase upon certain
events, including changes in the method of determining interest
rates on the bonds. When a daily or weekly rate is in effect
for the bonds, holders of the bonds of such issue have the
option to have their bonds purchased at 100% of principal amount
plus accrued interest to the date of purchase. Bonds tendered
prior to maturity may be remarketed. Although it is anticipated
that all bonds tendered will be purchased with proceeds from the
subsequent offer and sale of the
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tendered bonds, HL&P has entered into standby purchase
agreements with commercial banks to provide approximately $120
million for the purchase of tendered bonds in the event that
such proceeds are not available. Facility fees are payable in
connection with these facilities.
In January 1997, HL&P repaid upon maturity $40 million aggregate
principal amount of its 5 1/4% first mortgage bonds. In March
1997, HL&P repaid upon maturity $150 million aggregate principal
amount of its 7 5/8% first mortgage bonds.
(7) HL&P OBLIGATED MANDATORILY REDEEMABLE TRUST SECURITIES
In February 1997, two Delaware statutory business trusts
(Trusts) established by HL&P issued (i) $250 million of
preferred securities and (ii) $100 million of capital
securities, respectively. The preferred securities have a
distribution rate of 8.125%, a stated liquidation amount of $25
per preferred security and must be redeemed by March 2046. The
capital securities have a distribution rate of 8.257%, a stated
liquidation amount of $1,000 per capital security and must be
redeemed by February 2037.
The Trusts sold the preferred and capital securities to the
public and used the proceeds to purchase $350 million aggregate
principal amount of subordinated debentures (Debentures) from
HL&P having interest rates corresponding to the distribution
rates of the securities and maturity dates corresponding to the
mandatory redemption dates of the securities. The Trusts are
accounted for as wholly-owned consolidated subsidiaries of HL&P.
The Debentures are the Trusts' principal assets. Proceeds from
the sale of the Debentures were used by HL&P for general
corporate purposes, including the repayment of short-term debt
and the redemption of three series of HL&P's outstanding
cumulative preferred stock at the following redemption prices,
plus accrued dividends:
Number of Redemption Price
Series Shares Per Share
------- ------ ---------
$6.72 250,000 $102.51
$7.52 500,000 $102.35
$8.12 500,000 $102.25
HL&P has fully and unconditionally guaranteed, on a subordinated
basis, distributions and all other payments due on the preferred
and capital securities.
The preferred and capital securities are mandatorily redeemable
upon the repayment of the related Debentures at their stated
maturity or earlier redemption.
Subject to certain limitations, HL&P has the option of deferring
payments of interest on the Debentures held by the Trusts. If
and for as long as payments on the Debentures have been
deferred, or an event of default under the indenture relating
thereto has occurred and is continuing, HL&P may not pay
dividends on its capital stock.
(8) SUBSEQUENT EVENTS
In April 1997, HL&P redeemed all outstanding shares of its
$9.375 cumulative preferred stock in satisfaction of mandatory
sinking fund requirements.
In April 1997, a subsidiary of Houston Industries Energy, Inc.
(HI Energy) borrowed
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$167.5 million under a five-year term loan facility. The
proceeds of the loan, net of a $17.5 million debt reserve
account established for the benefit of the lenders, were used to
refinance a portion of the acquisition costs of Light-Servicos
de Eletricidade S.A. (Light). The loan, which is non-recourse
to the Company and HL&P, restricts payments of dividends if
Light fails to meet certain financial covenants. The loan is
secured by, among other things, a pledge of the shares of Light.
HI Energy acquired an 11.35 percent interest in Light in May
1996 for $392 million.
In February 1996, three Texas cities filed a lawsuit against
HL&P and Houston Industries Finance, Inc., formerly a
wholly-owned subsidiary of the Company, seeking recovery of
unspecified damages relating to the alleged underpayment of
municipal franchise fees. In April 1997, the plaintiffs amended
their pleadings to assert damages alleged to exceed $250
million. The Company and HL&P believe that the lawsuit is
without merit. The Company and HL&P cannot estimate a range of
possible losses, if any, from this lawsuit, nor can any
assurance be given as to its ultimate outcome. For additional
information regarding this lawsuit, reference is made to Note
11(c) to the financial statements included in the Form 10-K,
which Note is incorporated herein by reference.
In May 1997, the Company sold in open market transactions 550,000
shares of Time Warner Inc. (Time Warner) common stock for
approximately $25 million, representing an average sales price of
$45.49 per share, net of fees and other commissions . For
information regarding the Company's investment in Time Warner
securities, see Notes 1(j) and 13 to the financial statements
included in the Form 10-K.
(9) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
The results of interim periods are not necessarily indicative of
results expected for the year due to the seasonal nature of
HL&P's business. In the opinion of management, the interim
information reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a full presentation of the
results for the interim periods. Certain amounts from the
previous year have been reclassified to conform to the 1997
presentation of financial statements. Such reclassifications do
not affect earnings.
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