1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
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Commission file number 1-3187
HOUSTON INDUSTRIES INCORPORATED
(FORMERLY HOUSTON LIGHTING & POWER COMPANY)
(Exact name of registrant as specified in its charter)
Texas 74-0694415
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-3000
(Registrant's telephone number, including area code)
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
As of October 31, 1997, Houston Industries Incorporated had 295,070,776 shares
of common stock outstanding, including 12,388,551 ESOP shares not deemed
outstanding for financial statement purposes and excluding 70,652 shares held as
treasury stock.
------------------------------
On August 6, 1997, Houston Industries Incorporated, the former parent
corporation of the registrant (Former HI), merged with and into Houston Lighting
& Power Company, which was renamed "Houston Industries Incorporated" on the date
of the merger. Pursuant to the merger, each outstanding share of Former HI
common stock was converted into one share of the registrant's common stock
(including associated preference stock purchase rights).
2
HOUSTON INDUSTRIES INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Part I. Financial Information Page No.
Item 1. Financial Statements
Statements of Consolidated Income
Three Months and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 4
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 1997 and 1996 6
Statements of Consolidated Retained Earnings
Three Months and Nine Months Ended
September 30, 1997 and 1996 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 31
Part II. Other Information
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 32
Signature 34
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
REVENUES:
Electric ................................................. $1,385,451 $1,230,298 $3,285,005 $3,142,234
Natural gas distribution.................................. 180,101 180,101
Interstate pipelines...................................... 23,821 23,821
Energy marketing and gathering............................ 533,284 533,284
International............................................. 21,458 16,906 61,386 38,201
Other..................................................... 14,436 3,821 17,503 6,236
---------- ---------- ---------- ----------
Total.................................................. 2,158,551 1,251,025 4,101,100 3,186,671
---------- ---------- ---------- ----------
EXPENSES:
Electric and natural gas:
Fuel .................................................. 895,012 319,548 1,361,374 817,836
Purchased power........................................ 99,298 71,762 278,922 224,078
Operation and maintenance.............................. 405,793 206,748 850,249 637,561
Taxes other than income taxes.......................... 85,588 63,280 207,008 191,148
International............................................. 14,036 13,207 44,530 57,324
Depreciation and amortization............................. 184,156 130,970 446,889 389,868
Other operating expenses.................................. 11,952 4,441 46,063 5,870
---------- ---------- ---------- ----------
Total.................................................. 1,695,835 809,956 3,235,035 2,323,685
---------- ---------- ---------- ----------
OPERATING INCOME.............................................. 462,716 441,069 866,065 862,986
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Litigation settlements.................................... (95,000)
Time Warner dividend income............................... 10,313 10,403 31,028 31,208
Interest income........................................... 3,696 770 5,387 3,482
Other - net............................................... 11,028 (322) 8,244 (1,523)
---------- ---------- ---------- ----------
Total.................................................. 25,037 10,851 44,659 (61,833)
---------- ---------- ---------- ----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt................................ 91,874 68,610 217,513 208,861
Other interest............................................ 18,667 11,475 51,826 22,810
Distribution on trust securities.......................... 7,055 18,728
Allowance for borrowed funds used
during construction.................................... (47) (583) (1,892) (1,939)
Preferred dividends of subsidiary......................... 33 5,373 2,255 17,318
---------- ---------- ---------- ----------
Total.................................................. 117,582 84,875 288,430 247,050
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.................................... 370,171 367,045 622,294 554,103
INCOME TAXES.................................................. 126,209 127,021 197,249 185,485
---------- ---------- ---------- ----------
NET INCOME.................................................... 243,962 240,024 425,045 368,618
---------- ---------- ---------- ----------
PREFERRED STOCK DIVIDEND...................................... 64 64
---------- ---------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK......................... $ 243,898 $ 240,024 $ 424,981 $ 368,618
=========== ========== ========== ==========
EARNINGS PER COMMON SHARE..................................... $ 0.93 $ 0.98 $ 1.74 $ 1.49
DIVIDENDS DECLARED PER COMMON SHARE........................... $ 0.375 $ 0.375 $ 1.125 $ 1.125
WEIGHTED AVERAGE COMMON SHARES
Outstanding (000)......................................... 263,373 245,889 243,769 247,664
See Notes to Consolidated Financial Statements.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
September 30, December 31,
1997 1996
------------ -------------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Plant in service............................................................ $ 12,576,498 $ 12,387,375
Construction work in progress............................................... 187,827 251,497
Nuclear fuel................................................................ 253,998 241,001
Plant held for future use................................................... 48,631 48,631
Gas Plant and Pipelines:
Natural gas distribution.................................................... 1,287,648
Interstate pipelines........................................................ 1,291,202
Energy marketing and gathering.............................................. 161,546
Other property................................................................. 142,537 86,969
------------ -------------
Total................................................................. 15,949,887 13,015,473
Less accumulated depreciation and amortization................................. 4,623,328 4,259,050
------------ -------------
Property, plant and equipment - net................................... 11,326,559 8,756,423
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents...................................................... 53,407 8,001
Accounts receivable - net...................................................... 538,385 36,277
Accrued unbilled revenues...................................................... 119,135 77,853
Time Warner dividends receivable............................................... 10,313 10,313
Fuel stock and petroleum products.............................................. 118,998 61,795
Materials and supplies, at average cost........................................ 158,681 130,380
Prepayments and other current assets........................................... 62,719 19,301
------------ -------------
Total current assets.................................................. 1,061,638 343,920
------------ -------------
OTHER ASSETS:
Investment in Time Warner securities........................................... 990,000 1,027,500
Goodwill - net................................................................. 1,955,788
Deferred plant costs - net..................................................... 571,641 587,352
Equity investments in and advances to foreign and
non-regulated affiliates - net.............................................. 677,565 501,991
Regulatory tax asset - net..................................................... 356,580 362,310
Deferred debits................................................................ 562,738 306,473
Recoverable project costs - net................................................ 113,634 163,630
Unamortized debt expense and premium on
reacquired debt............................................................. 215,498 153,823
Fuel-related debits............................................................ 182,178 84,435
------------ -------------
Total other assets.................................................... 5,625,622 3,187,514
------------ -------------
Total.............................................................. $ 18,013,819 $ 12,287,857
============ =============
See Notes to Consolidated Financial Statements.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
CAPITALIZATION AND LIABILITIES
September 30, December 31,
1997 1996
----------- -------------
CAPITALIZATION:
Common stock equity:
Common stock, no par value..................................................... $ 3,097,299 $ 2,446,754
Treasury stock, at cost........................................................ (1,090) (361,196)
Unearned ESOP shares........................................................... (233,437) (251,350)
Retained earnings.............................................................. 2,141,326 1,997,490
Currency translation adjustment................................................ (442)
Unrealized gain (loss) on equity securities.................................... 3,809 (3,737)
----------- -------------
Total common stock equity............................................... 5,007,465 3,827,961
----------- -------------
Cumulative preferred stock, no par
value, not subject to mandatory redemption..................................... 9,740 135,179
----------- -------------
HL&P/NorAm obligated mandatorily redeemable securities
of subsidiary trusts holding solely subordinated
debentures of HL&P/NorAm......................................................... 380,350
-----------
Long-Term Debt:
Automatic common exchange securities (ACES).................................... 1,052,384
Debentures..................................................................... 349,237 349,098
Long-term debt of HL&P and subsidiaries:
First mortgage bonds........................................................ 2,495,268 2,670,041
Debentures.................................................................. 405,600
Notes payable............................................................... 932,901
Pollution control revenue bonds............................................. 118,000 5,000
Other....................................................................... 15,936 1,511
----------- -------------
Total long-term debt.................................................... 5,369,326 3,025,650
----------- -------------
Total capitalization................................................ 10,766,881 6,988,790
----------- -------------
CURRENT LIABILITIES:
Notes payable..................................................................... 1,763,313 1,337,872
Accounts payable.................................................................. 592,717 157,682
Taxes accrued..................................................................... 287,709 191,011
Interest accrued.................................................................. 118,239 67,707
Dividends declared................................................................ 92,549 92,515
Customer deposits................................................................. 82,198 53,633
Current portion of long-term debt and preferred stock............................. 190,385 254,463
Other............................................................................. 241,742 89,238
----------- -------------
Total current liabilities........................................... 3,368,852 2,244,121
----------- -------------
DEFERRED CREDITS:
Accumulated deferred income taxes - net........................................... 2,757,698 2,265,031
Unamortized investment tax credit................................................. 354,109 373,749
Fuel-related credits.............................................................. 93,479 74,639
Benefit liabilities............................................................... 354,214 243,375
Other............................................................................. 318,586 98,152
----------- -------------
Total deferred credits.............................................. 3,878,086 3,054,946
----------- -------------
COMMITMENTS AND CONTINGENCIES
Total............................................................. $18,013,819 $ 12,287,857
=========== =============
See Notes to Consolidated Financial Statements.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Nine Months Ended
September 30,
-----------------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................... $ 425,045 $ 368,618
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization..................................................... 446,889 389,868
Amortization of nuclear fuel...................................................... 21,727 24,261
Deferred income taxes............................................................. 23,973 (5,127)
Investment tax credit............................................................. (14,740) (14,592)
Allowance for other funds used during construction ............................... (171) (3,093)
Contribution of marketable equity securities to
charitable trust............................................................... 19,463
Fuel cost and over/(under) recovery - net......................................... (67,171) (119,442)
Changes in other assets and liabilities:
Accounts receivable - net...................................................... 75,006 19,604
Inventory...................................................................... 21,260 9,061
Other current assets........................................................... (13,584) 1,328
Accounts payable............................................................... (95,054) (15,146)
Interest and taxes accrued..................................................... 73,724 105,746
Other current liabilities...................................................... 43,590 (73)
Other - net.................................................................... (13,457) 17,673
---------- ----------
Net cash provided by operating activities.................................. 946,500 778,686
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including allowance for
borrowed funds used during construction).......................................... (180,472) (226,783)
Purchase of NorAm Energy Corp., net of cash acquired................................. (1,422,672)
Non-regulated electric power project expenditures.................................... (215,020) (446,600)
Sale of Time Warner securities....................................................... 25,043
Other - net.......................................................................... (10,484) (37,984)
---------- ----------
Net cash used in investing activities...................................... (1,803,605) (711,367)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of ACES - net..................................................... 1,020,770
Proceeds from issuance of commercial paper........................................... 1,379,568
Payment to retire commercial paper................................................... (1,020,317)
Proceeds from sale of HL&P obligated mandatorily
redeemable securities of subsidiary trusts holding
solely subordinated debentures of HL&P............................................ 340,785
Purchase of treasury stock........................................................... (205,901)
Payment of matured bonds............................................................. (190,000) (150,000)
Proceeds from issuance of pollution control revenue
bonds............................................................................. 115,739
Redemption of preferred stock........................................................ (153,628) (51,400)
Payment of common and preferred stock dividends...................................... (281,009) (279,498)
Increase/(decrease)in notes payable - net............................................ (214,486) 691,531
Extinguishment of long-term debt..................................................... (190,338) (85,263)
Other - net.......................................................................... 95,427 9,131
---------- ----------
Net cash provided by/(used in) financing
activities............................................................... 902,511 (71,400)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 45,406 (4,081)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................................... 8,001 11,779
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................ $ 53,407 $ 7,698
========== ==========
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
CONT'D
Nine Months Ended
September 30,
------------------------------
1997 1996
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized)....................................... $ 274,560 $ 221,641
Income taxes................................................................ 113,128 91,867
The aggregate consideration paid to Former NorAm stockholders in connection
with the Merger consisted of $1.4 billion in cash and 47.8 million shares of
the Company's common stock valued at approximately $1.0 billion. The overall
transaction was valued at $4.0 billion consisting of $2.4 billion for Former
NorAm's common stock and common stock equivalents and $1.6 billion of NorAm
debt.
See Notes to Consolidated Financial Statements.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- -------
Balance at Beginning of Period................................ $2,003,194 $1,896,173 $1,997,490 $1,953,672
Net Income for the Period..................................... 243,962 240,024 425,045 368,618
---------- ---------- ---------- ----------
Total............................................... 2,247,156 2,136,197 2,422,535 2,322,290
Preferred Stock Dividends..................................... (64) (64)
Common Stock Dividends........................................ (105,766) (89,960) (281,145) (276,053)
---------- ---------- ---------- ----------
Balance at End of Period...................................... $2,141,326 $2,046,237 $2,141,326 $2,046.237
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
On August 6, 1997, Houston Industries Incorporated (Former HI) merged with
and into Houston Lighting & Power Company (HL&P), which was renamed
"Houston Industries Incorporated" (Company), and NorAm Energy Corp., a
natural gas gathering, transmission, marketing and distribution company
(Former NorAm), merged with and into a subsidiary of the Company, HI
Merger, Inc., which was renamed "NorAm Energy Corp." (NorAm). Effective
upon the mergers (collectively, the Merger), each outstanding share of
common stock of Former HI was converted into one share of common stock
(including associated preference stock purchase rights) of the Company, and
each outstanding share of common stock of Former NorAm was converted into
the right to receive $16.3051 cash or 0.74963 shares of common stock of the
Company. For additional information regarding the Merger, see Note 3 below.
The interim financial statements and notes (Interim Financial Statements)
in this Form 10-Q (Form 10-Q) include the accounts of the Company and its
wholly owned and majority owned subsidiaries including, effective as of
August 6, 1997, the accounts of NorAm and its wholly owned and majority
owned subsidiaries. The Interim Financial Statements are unaudited, omit
certain information included in financial statements prepared in accordance
with generally accepted accounting principles and should be read in
combination with the Combined Annual Report on Form 10-K of Former HI and
HL&P (Company's Form 10-K) for the year ended December 31, 1996 (File Nos.
1-7629 and 1-3187) and the Annual Report on Form 10-K of Former NorAm
(NorAm's Form 10-K) for the year ended December 31, 1996 (File No. 1-3751).
For additional information regarding the presentation of interim period
results, see Note 10 below.
The following notes to the financial statements in the Company's Form 10-K
and NorAm's Form 10-K relate to material contingencies. These notes, as
updated by the notes contained in this Form 10-Q and the notes contained in
the Quarterly Report on Form 10-Q of Former HI and HL&P for the quarter
ended March 31, 1997 (Company's First Quarter Form 10-Q) and for the
quarter ended June 30, 1997 (Company's Second Quarter Form 10-Q), and from
the Quarterly Report on Form 10-Q of Former NorAm for the quarter ended
March 31, 1997 (NorAm's First Quarter Form 10-Q) and for the quarter ended
June 30, 1997 (NorAm's Second Quarter Form 10-Q) are incorporated herein by
reference and include the following:
Company: Note 1(b) (System of Accounts and Effects of Regulation), Note
1(n) (Nature of Operations), Note 1(o) (Use of Estimates), Note 2
(Jointly-Owned Nuclear Plant), Note 3 (Rate Matters), Note 4 (Investments
in HI Energy) and Note 11 (Commitments and Contingencies).
NorAm: Note 1 (Accounting Policies and Components of Certain Financial
Statement Line Items) and Note 7 (Commitments and Contingencies).
(2) SIGNIFICANT ACCOUNTING POLICIES
For information regarding significant accounting policies of the Company
and its wholly owned subsidiary, NorAm, see Note 1 to the Company's Form
10-K and Note 1 to NorAm's Form 10-K, which notes, as updated by the
information contained in this note, are incorporated herein by reference.
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Accounting for Energy Risk Management Activities. The Company, through
NorAm and certain of its subsidiaries, utilizes a variety of derivative
financial instruments, including swaps and exchange-traded futures and
options (Derivatives) as part of its overall risk-management strategy and
for limited trading purposes as discussed below. To reduce the risk from
market fluctuations in the price of electric power, natural gas and related
transportation, NorAm and certain of its subsidiaries enter into futures
transactions, swaps and options (Energy Derivatives) in order to hedge
certain natural gas in storage, as well as certain expected purchases,
sales and transportation of natural gas and electric power (a portion of
which are firm commitments at the inception of the hedge). NorAm also
utilizes interest-rate derivatives (principally interest-rate swaps) in
order to adjust the portion of its overall borrowings which are subject to
interest-rate risk, and also has utilized such derivatives to effectively
fix the interest rate on debt expected to be issued for refunding purposes.
In addition, a subsidiary of NorAm maintains a portfolio of Energy
Derivatives for trading purposes.
The Company's accounting for activities involving derivative financial
instruments is in accordance with the concepts established in Statement of
Financial Accounting Standards (SFAS) No. 80, "Accounting for Futures
Contracts", American Institute of Certified Public Accountants Statement of
Position 86-2, "Accounting for Options" and various pronouncements of the
Emerging Issues Task Force of the Financial Accounting Standards Board
(FASB).
Unrealized changes in the market value of Energy Derivatives utilized as
hedges are not generally recognized in the Company's consolidated financial
statements. The cash impacts associated with such derivatives are (i)
recognized as an asset or liability in the case of options or other
derivatives for which money is exchanged either (A) at the inception of the
position or (B) as a result of margin calls, (ii) included in the
measurement of the transaction that satisfies the commitment in the case of
firm commitments and (iii) included in the measurement of the subsequent
transaction in the case of anticipated transactions, whether or not the
Energy Derivative position is closed out before the date of the anticipated
transaction. Once it becomes probable that an anticipated transaction will
not occur, deferred gains and losses are recognized. In general, the
financial impact of transactions involving these Energy Derivatives is
included in the Company's Statement of Consolidated Income under the
caption (i) "Fuel expenses" in the case of natural gas transactions and
(ii) "Operation and maintenance" in the case of electric power
transactions. Cash flows resulting from these transactions in Energy
Derivatives are included in the Company's Statements of Consolidated Cash
Flows in the same category as the item being hedged.
In the case of interest-rate swaps associated with existing obligations,
cash flows and expense associated with the interest-rate derivative
transactions are matched with the cash flows and interest expense of the
obligation being hedged, resulting in an adjustment to the effective
interest rate. When interest-rate swaps are utilized to effectively fix the
interest rate for an anticipated debt issuance, changes in the market value
of the interest-rate derivatives are deferred and recognized as an
adjustment to the effective interest rate on the newly-issued debt. If it
is determined that the anticipated issuance of debt will not occur, or that
the issuance will be for an amount or a term different from that
anticipated at the inception of the hedge, either all or a pro rata portion
(as applicable) of the deferred gain or loss is recognized concurrently
with such determination.
For transactions involving either Energy Derivatives or interest-rate
derivatives, hedge accounting is applied only if the derivative (i) reduces
the risk of the underlying hedged item and (ii) is designated as a hedge at
its inception. Additionally, the derivatives
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must be expected to result in financial impacts which are inversely
correlated to those of the item(s) to be hedged. This correlation (a
measure of hedge effectiveness) is measured both at the inception of the
hedge and on an ongoing basis, with an acceptable level of variation from
80% to 125% for hedge designation. If and when correlation ceases to exist
at an acceptable level, hedge accounting ceases and "mark-to-market"
accounting (as described below) is applied.
A subsidiary of NorAm maintains a portfolio of Energy Derivatives for
trading purposes, representing a small portion of the Company's overall
derivative positions. In addition, the total underlying notional amounts of
natural gas or electric power associated with these trading activities
represents a small fraction of NorAm's total notional transaction volume in
these energy commodities for any given period. This trading portfolio of
Energy Derivatives is "marked-to-market" on a daily basis, with unrealized
gains and losses included in income as they occur and reported in the
Company's consolidated financial statements under the same line items as
the impacts of the energy hedging transactions as described above.
(3) ACQUISITION OF NORAM
The aggregate consideration paid to Former NorAm stockholders in connection
with the Merger consisted of $1.4 billion in cash and 47.8 million shares
of the Company's common stock valued at approximately $1 billion. The
overall transaction was valued at $4.0 billion consisting of $2.4 billion
for Former NorAm's common stock and common stock equivalents and $1.6
billion of Former NorAm debt ($1.3 billion of which was long-term debt).
The Company has recorded the acquisition of NorAm under the purchase method
of accounting with assets and liabilities of NorAm reflected at their
estimated fair market values as of the date of the purchase. The Company
has recorded the $2 billion excess of the acquisition cost over the fair
value of the net assets acquired as goodwill and is amortizing this amount
over 40 years. On a preliminary basis, the Company's fair value adjustments
included increases in property, plant and equipment, long-term debt, and
unrecognized pension and post retirement benefits liabilities plus related
deferred taxes. The allocation of the purchase price is preliminary, since
valuation and other studies have not been finalized.
The Company's results of operations incorporate NorAm's results of
operations only for the period beginning August 6, 1997. The following
table presents certain unaudited pro forma information for the three and
nine month periods ended September 30, 1997 and 1996, as if the Merger
had occurred on January 1, 1997 or 1996, as applicable.
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Pro Forma Combined Results
of Operation
(In millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
Revenues $2,555 $2,150 $7,438 $6,395
Net Income Available for
Common Stock $ 215 $ 215 $ 431 $ 367
Earnings Per Share $ 0.76 $ 0.73 $ 1.53 $ 1.24
These and other pro forma results appearing in this Form 10-Q are based on
assumptions deemed appropriate by the Company's management, have been
prepared for informational purposes only and are not necessarily indicative
of the combined results that would have resulted had the Merger occurred at
the beginning of the periods indicated.
(4) CAPITAL STOCK
(a) Common Stock. At September 30, 1997, the Company had 282,346,858 shares of
common stock issued and outstanding (out of a total of 700,000,000
authorized shares). At December 31, 1996, the number of shares of
outstanding Common Stock of Former HI was 233,335,481. Outstanding common
shares excluded (i) shares pledged to secure a loan to the Company's
Employee Stock Ownership Plan (12,388,551 and 13,370,939 at September 30,
1997 and December 31, 1996, respectively) and (ii) treasury shares (50,747
and 16,042,027 at September 30, 1997, and December 31, 1996, respectively).
(b) Earnings Per Share. The Company calculates earnings per common share by
dividing net income by the weighted average common shares outstanding
during the relevant period. For information regarding the adoption of SFAS
No. 128, "Earnings Per Share" (Dual Presentation of Basic and Diluted
Earnings per Share Calculations for Financial Statements) with respect to
periods ending after December 15, 1997, see Note 5 to the Company's First
Quarter Form 10-Q. 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.
(c) Preferred Stock. At September 30, 1997 and December 31, 1996, the Company
had 10,000,000 authorized shares of preferred stock, of which 97,397 shares
were outstanding at September 30, 1997 and 1,604,397 shares were
outstanding at December 31, 1996.
As of September 30, 1997, the Company's only outstanding series of
preferred stock was its $4.00 Preferred Stock. The $4.00 Preferred Stock
pays an annual dividend of $4.00 per share, is redeemable at $105 per share
and has a liquidation price of $100 per share.
For information regarding the redemption during the first six months of
1997 of the Company's $6.72, $7.52, $8.12 and $9.375 cumulative preferred
stock, see Note 7 to
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the Company's First Quarter Form 10-Q and Note 3 to the Company's Second
Quarter Form 10-Q.
(d) Preference Stock. At September 30, 1997, the Company had 10,000,000
authorized shares of preference stock, of which 700,000 shares are
classified as Series A Preference Stock and 27,000 shares are classified as
Series B Preference Stock. As of September 30, 1997, there were no shares
of Series A Preference Stock issued and outstanding (such shares being
issuable in accordance with the Company's Shareholder Rights Agreement upon
the occurrence of certain events). The number of shares of Series B
Preference Stock issued and outstanding as of September 30, 1997 was
17,000. The sole holder of the Series B Preference Stock is a wholly owned
financing subsidiary of the Company.
(5) LONG-TERM DEBT AND SHORT-TERM FINANCING
(a) Overview. At September 30, 1997 and December 31, 1996, the Company had $7.3
billion and $4.6 billion, respectively, in long-term and short-term debt
outstanding. Of the amount of long-term and short-term debt outstanding as
of September 30, 1997, $1.8 billion represents debt of NorAm.
Consolidated Long-Term Debt and Short-Term Borrowings
-----------------------------------------------------
(In millions)
September 30, December 31,
1997 1996
------------- ------------
Short-Term Borrowings:
Commercial Paper $1,288 $1,332
Current Portion of Long-Term Debt 190 259
Lines of Credit 180
NorAm Sale of Receivables 295
Long-Term Debt:
Debentures(1) 756 350
First Mortgage Bonds(1) 2,510 2,685
Notes Payable 933
Pollution Control Revenue Bonds 118 5
Automatic Common Exchange Securities 1,052
Other 16 2
(1) Unamortized discount related to debentures was approximately
$1 million at September 30, 1997 and December 31, 1996. Unamortized
discount related to first mortgage bonds was approximately $15
million at September 30, 1997 and December 31, 1996.
Consolidated maturities of long-term debt for the Company (including NorAm)
are approximately $87 million for the remainder of 1997, $238 million in
1998, $378 million in 1999, $1.4 billion in 2000 and $401 million in 2001.
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(b) FinanceCo Credit Facility. In August 1997, a limited partnership special
purpose subsidiary of the Company (FinanceCo), established a five-year,
$1.644 billion revolving credit facility with a consortium of commercial
banks (FinanceCo Facility). The FinanceCo Facility supported $1.288 billion
in commercial paper borrowings by FinanceCo at September 30, 1997 recorded
as notes payable in the Consolidated Balance Sheet. The weighted average
interest rate of these borrowings at September 30, 1997, was 5.91%.
Proceeds from the initial issuances of commercial paper were used to fund
the cash portion of the consideration paid to Former NorAm stockholders
under the terms of the Merger.
Borrowings under the FinanceCo Facility, which bear interest at a rate
based upon either the London interbank offered rate (LIBOR) plus a margin
or a base rate plus a margin or at a rate determined through a bidding
process. The FinanceCo Facility may be used (i) to support the issuance of
commercial paper or other short-term indebtedness of FinanceCo, (ii)
subject to certain limitations, to finance repurchases of Company common
stock and (iii) subject to certain limitations, to provide funds for
general purposes of FinanceCo, including the making of intercompany loans
to, or securing letters of credit for the benefit of, FinanceCo's
affiliates.
The FinanceCo Facility requires the Company to maintain a ratio of
consolidated indebtedness for borrowed money to consolidated capitalization
that does not exceed 0.64:1.00 from October 1, 1997 through December 31,
1997; 0.62:1.00 from January 1, 1998 through December 31, 1998; and
0.60:1.00 from January 1, 1999 until termination of the FinanceCo Facility.
The FinanceCo Facility also contains restrictions applicable to the Company
with respect to, among other things, (i) liens, (ii) consolidations,
mergers and dispositions of assets, (iii) dividends and repurchases of
common stock, (iv) certain types of investments and (v) certain changes in
its business. The FinanceCo Facility contains customary covenants and
default provisions applicable to FinanceCo and its subsidiaries, including
limitations on, among other things, additional indebtedness (other than
certain permitted indebtedness), liens and certain investments or loans.
Subject to certain conditions and limitations, the Company is required to
make cash payments from time to time to FinanceCo from excess cash flow (as
defined in the FinanceCo Facility) to the extent necessary to enable
FinanceCo to meet its financial obligations. Borrowings under the FinanceCo
Facility are secured by pledges of (i) the shares of common stock of NorAm
held by the Company, (ii) all of the limited and general partner interests
of FinanceCo and all of the Company's interest in the general partner of
FinanceCo, (iii) the capital stock of HI Energy, (iv) the capital stock of
other significant subsidiaries of the Company, (v) the Series B Preference
Stock and (vi) certain intercompany notes held by FinanceCo. The
obligations under the FinanceCo Facility are not secured by the utility
assets of the Company or NorAm or by the Company's investment in Time
Warner Inc. (Time Warner).
(c) ACE Securities. The Company owns 11 million shares of non-publicly traded
Convertible Preferred Stock of Time Warner (Time Warner Preferred Stock).
In connection with the monetization of its investment in these securities,
Former HI sold in July 1997, 22,909,040 of its unsecured 7% Automatic
Common Exchange Securities due July 1, 2000 (ACE Securities), having a face
amount of $45.9375 per security.
At maturity, the principal amount of the ACE Securities will be mandatorily
exchangeable by the Company into either (i) a number of shares of common
stock of Time Warner based on an exchange rate or (ii) cash having an equal
value. Subject to adjustments that may result from certain dilution events,
the exchange rate for each
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ACE Security is determined as follows: (i) 0.8264 shares of Time Warner
common stock if the price of Time Warner common stock at maturity (Maturity
Price) is at least $55.5844 per share, (ii) a fractional share of Time
Warner common stock such that the fractional share will have a value equal
to $45.9375 if the Maturity Price is less than $55.5844 but greater than
$45.9375 and (iii) one share of Time Warner common stock if the Maturity
Price is not more than $45.9375.
Prior to maturity, the Company has the option of redeeming the ACE
Securities if (i) changes in federal tax regulations require recognition of
a taxable gain on the Company's Time Warner Preferred Stock and (ii) the
Company could defer such gain by redeeming the ACE Securities. The
redemption price is 105% of the closing sales price of the ACE Securities
as determined over a period prior to the redemption notice. The redemption
price may be paid in cash or in shares of Time Warner common stock or a
combination of the two.
Former HI used the net proceeds of the sale of the ACE Securities
(approximately $1.021 billion) to retire an equivalent amount of Former
HI's then outstanding commercial paper. For a description of the Company's
accounting treatment of the ACE Securities and its investment in Time
Warner (including the potential adverse impact on earnings that may be
caused by certain fluctuations in the market value of Time Warner
securities), see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors Affecting Future
Earnings -- Accounting Treatment of ACE Securities" in Item 2 of the Form
10-Q.
(6) COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS
HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY AND NORAM
For information regarding (i) $250 million of preferred securities and
$100 million of capital securities issued by statutory business trusts
formed by HL&P and (ii) $177.8 million of convertible preferred securities
issued by a statutory business trust formed by Former NorAm, of which
$30.5 million were outstanding at September 30, 1997, see Note 7 to the
Company's First Quarter Form 10-Q and Note 3 to the NorAm Form 10-K,
respectively. The sole asset of each trust consists of subordinated
debentures of the Company or NorAm (as the case may be) having principal
amounts, interest rates and maturity dates corresponding to each issue of
preferred or capital securities.
(7) DEPRECIATION
The Company calculates depreciation using the straight-line method. The
Company's depreciation expense for the third quarter of 1997 and the nine
months ended September 30, 1997 was $115 million and $296 million,
respectively, compared with $91 million and $269 million for the same
periods in 1996.
(8) CERTAIN RATE AND TAX MATTERS
(a) Rate Matters -- Company. For information about rate case proceedings
affecting the Company's electric operations division, see Note 3 (Rate
Matters) in the Company's Form 10-K, which note is incorporated herein by
reference.
In September 1997, the Company received a judgment dismissing all
outstanding appeals of the Public Utility Commission of Texas' (Utility
Commission) order in Docket No. 6668. As a result of this judgment, all
outstanding appeals of the Company's prior rate cases have now been
dismissed and such action is final.
For information regarding the Company's electric operations division's
proposed transition plan and price reduction agreement
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relating to the transition to retail access for utility customers (Proposed
Transition Plan), see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Factors Affecting Future
Earnings" in Item 2 of this Form 10-Q.
(b) Tax Refund Case. In July 1990, Former HI paid approximately $104.5 million
to the Internal Revenue Service (IRS) following an IRS audit of Former HI's
1983 and 1984 federal income tax returns. In November 1991, Former HI filed
a refund suit in the U.S. Court of Federal Claims seeking the return of
$52.1 million of tax and $36.3 million of accrued interest, plus interest
on both of those amounts accruing after July 1990. The major contested
issue in the refund case involved the IRS allegation that certain amounts
related to the over-recovery of fuel costs should have been included as
taxable income in 1983 and 1984 even though HL&P had an obligation to
refund the over-recoveries to its ratepayers.
In September 1997, the United States Court of Appeals for the Federal
Circuit upheld a lower court ruling that the Company (as successor
corporation to Former HI) was due a refund of federal income taxes assessed
on fuel over-recoveries during 1983 and 1984 that subsequently were
refunded to HL&P's customers. If the opinion is upheld in its current form,
the Company estimates that it will receive a refund of approximately $82
million in taxes and interest paid by Former HI in July 1990, plus interest
that has accrued since 1990 (approximately $138 million in total refund as
of September 30, 1997). Based on the Company's deferred recognition of the
1990 tax payment and after giving effect to federal income taxes due on the
accrued interest, the Company estimates that this refund would increase
earnings by approximately $30 million. The IRS has not yet indicated
whether it will ask the U.S. Supreme Court to review the Court of Appeals'
decision.
(9) SUBSEQUENT EVENTS
The Company and the other three owners of the South Texas Project (South
Texas Project) are executing agreements, to be effective in March 1997, to
transfer the Company's responsibility for operation of the South Texas
Project to a new Texas non-profit corporation formed by the four owners and
known as the STP Nuclear Operating Company. That new operating company was
formed exclusively for the purpose of operating the South Texas Project,
and the Company's officers and employees who have been responsible for
day-to-day operation and management of the South Texas Project were
transferred to the operating company effective as of October 1, 1997. The
operating company will be managed by a board of directors composed of one
director from each of the four owners, along with the chief executive
officer of the operating company. Formation of the operating company did
not affect the underlying ownership of the South Texas Project, which
continues as a tenancy in common among the four owners, with each owner
retaining its undivided ownership interest in the two nuclear-fueled
generating units and the electrical output from those units. The four
owners will continue to provide overall oversight of the operations of the
South Texas Project through an owners' committee composed of
representatives of each of the owners and through the board of directors of
the operating company. The formation of the operating company and the
transfer of employees and operations to the operating company are not
anticipated to have a material effect on the Company's earnings.
(10) INTERIM PERIOD RESULTS; RECLASSIFICATIONS
The Interim Financial Statements reflect all normal recurring adjustments
that are, in the opinion of management, necessary to present fairly the
financial position and results of operation for the respective periods.
Amounts reported in the Consolidated Statements of Income are not
necessarily indicative of amounts expected for a full year period due to
the effects of, among other things, (i) the acquisition of NorAm, (ii)
seasonal temperature variations in energy consumption and (iii) the timing
of maintenance and other expenditures. In addition, certain amounts from
the prior year have been reclassified to conform to the Company's
presentation of financial statements in the current year. Such
reclassifications do not affect earnings.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis should be read in combination with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of the Company's Form 10-K and NorAm's Form 10-K, the
financial statements and notes contained in Item 8 of the Company's Form 10-K
and NorAm's Form 10-K and the Interim Financial Statements contained in this
Form 10-Q.
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are based on management's beliefs
as well as assumptions made by and information currently available to
management. Because such statements are based on expectations as to future
economic performance and are not statements of fact, actual results may differ
materially from those projected. Important factors that could cause future
results to differ include (i) the effects of competition in the electric power
and natural gas industries, (ii) legislative and regulatory changes, (iii)
fluctuations in the weather, (iv) fluctuations in energy commodity prices, (v)
environmental liabilities, (vi) changes in the economy and (vii) other factors
discussed in this and other filings by the Company with the Securities and
Exchange Commission. When used in the Company's or NorAm's documents or oral
presentations, the words "anticipate," "estimate," "expect," "objective,"
"projection," "forecast," "goal" or similar words are intended to identify
forward-looking statements. The sections of Management's Discussion and Analysis
of Financial Condition and Results of Operations captioned "Results of
Operations by Business Segment" and "Certain Factors Affecting Future Earnings"
contain or incorporate by reference forward-looking statements.
HOUSTON INDUSTRIES INCORPORATED
The Company is a diversified international energy services company. It
operates the nation's tenth largest electric utility in terms of kilowatt-hour
sales and its three natural gas distribution divisions together form the
nation's third largest natural gas distribution operations in terms of customers
served. The Company also invests in electric utility privatizations, gas
distribution projects and the development of unregulated power generation
projects. The Company's unregulated retail businesses provide energy-related
products and services to consumers, small business customers and utilities. The
Company is also a major interstate natural gas pipeline and energy services
company, providing gas transportation, supply, gathering and storage, and
wholesale natural gas and electric power marketing services.
The Company is exempt from regulation as a public utility holding company
pursuant to Section 3(a)(2) of the Public Utility Holding Company Act of 1935,
as amended (1935 Act), except with respect to (i) the acquisition of certain
voting securities of other domestic public utility companies and utility holding
companies and (ii) the provisions of Section 33 of the 1935 Act regarding the
acquisition, ownership and financing of foreign utility companies.
CONSOLIDATED RESULTS OF OPERATIONS
On August 6, 1997, the Company completed its acquisition of NorAm, a
natural gas gathering, transmission, marketing and distribution company. The
acquisition was accounted for under the purchase method of accounting;
accordingly, the Company's actual results of operations for the three and nine
month periods ended September 30, 1997 incorporate NorAm's results of operations
only for periods beginning effective as of August 6, 1997.
To enhance comparability between reporting periods, the Company is
presenting consolidated results of operations data on both (i) an actual basis
and (ii) a pro forma basis as if the acquisition of NorAm had occurred on
January 1, 1996 or 1997, as applicable. Although pro forma results of operations
are not necessarily indicative of the combined results of operations that
actually would have occurred had the acquisition occurred on such dates, the
Company believes that the
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presentation of pro forma data provides a more meaningful comparative standard
for assessing changes in the Company's consolidated financial condition and
results of operations.
CONSOLIDATED RESULTS OF OPERATIONS
(in thousands, except per share data)
Actual Pro Forma
------------------------ --------------------------
Three Months Ended Three Months Ended
September 30, Percent September 30, Percent
1997 1996 Change 1997 1996 Change
------------------------ ------ ---------- ---------- ------
Revenues ............................. $2,158,551 $1,251,025 73 $2,555,419 $2,150,308 19
Operating Expenses ....................... 1,695,835 809,956 109 2,122,712 1,700,240 25
Operating Income.......................... 462,716 441,069 5 432,707 450,068 (4)
Other Expenses, Net....................... 218,754 201,045 9 217,615 235,127 (7)
Net Income from Continuing Operations 243,962 240,024 2 215,092 214,941 --
Preferred Dividends....................... 64 64 --
From Continuing Operations:
Net Income for Common Stock............ 243,898 240,024 2 215,028 214,941 --
Earnings Per Share..................... .93 .98 .76 .73
Weighted Average Number of
Common Shares Outstanding.............. 263,373 245,889 282,093 293,729
Actual Pro Forma
------------------------- --------------------------
Nine Months Ended Nine Months Ended
September 30, Percent September 30, Percent
1997 1996 Change 1997 1996 Change
------------------------- ------ ---------- ---------- ------
Revenues ............................. $4,101,100 $3,186,671 29 $7,438,148 $6,394,942 16
Operating Expenses ....................... 3,235,035 2,323,685 39 6,439,525 5,355,972 20
Operating Income.......................... 866,065 862,986 -- 998,623 1,038,970 (4)
Other Expenses, Net....................... 441,020 494,368 (11) 567,131 668,078 (15)
Net Income from Continuing Operations 425,045 368,618 15 431,492 370,892 16
Preferred Dividends....................... 64 64 3,597 (98)
From Continuing Operations:
Net Income for Common Stock............ 424,981 368,618 15 431,428 367,295 17
Earnings Per Share..................... 1.74 1.49 1.53 1.24
Weighted Average Number of
Common Shares Outstanding.............. 243,769 247,664 281,796 295,504
Actual. The Company's actual consolidated earnings for the three months
ended September 30, 1997, were $244 million compared with $240 million for the
third quarter of 1996. The $4 million increase in actual consolidated earnings
reflects (i) increased sales at the Company's electric utility division
(reflecting customer growth and warmer weather) and (ii) improved earnings at
the Company's international division, as described below. Partially offsetting
these factors was $19 million ($13 million after-tax) in additional amortization
of certain lignite reserves in the third quarter of 1997.
Although actual consolidated earnings increased by $4 million, the
Company's earnings per share declined from $.98 per share in the third quarter
of 1996 to $.93 per share in the third quarter of 1997. The decline in earnings
per share was caused by the issuance of approximately 47.8 million additional
shares of the Company's common stock as a portion of the consideration paid in
the Merger.
The Company's actual consolidated earnings for the nine months ended
September 30, 1997, were $425 million ($1.74 per share) compared with $369
million ($1.49 per share) for the same period in 1996. However, excluding
non-recurring charges, earnings for the first nine months
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of 1996 would have been $436 million, resulting in an $11 million decrease in
earnings between the two periods. This decrease is due in part to the effects of
the NorAm purchase including seasonal losses at the gas distribution segment,
amortization of goodwill and incremental interest costs related to the Merger.
The non-recurring charges excluded from adjusted earnings relate to the
settlement of South Texas Project litigation claims ($62 million recorded in the
first quarter of 1996) and the suspension by a subsidiary of the Company of
operations at two tire-to-energy plants in Illinois ($5 million recorded in the
first quarter of 1996).
Pro Forma. The Company's pro forma consolidated earnings for the three
months ended September 30, 1997, were $215 million ($.76 per share) compared
with $215 million ($.73 per share) for the same period in 1996.
The Company's pro forma consolidated earnings for the nine months ended
September 30, 1997, were $431 million ($1.53 per share) compared with $367
million ($1.24 per share) in the same period in 1996. Excluding the $67 million
in non-recurring charges described above, the Company's pro forma consolidated
earnings in 1996 would have been $434 million, resulting in a decrease of $3
million in pro forma earnings between the two periods (as compared to an $11
million decrease on an actual basis adjusted for non-recurring charges).
Pro forma consolidated earnings have been reduced by (i) additional
interest expense associated with debt incurred by the Company to finance the
Merger and (ii) purchase accounting adjustments associated with the Merger,
including the amortization of goodwill and the revaluation, on a preliminary
basis, of the fair market value of certain NorAm assets and liabilities.
For the nine months ended comparative results, pro forma consolidated
earnings are greater than actual earnings due to the net income associated with
NorAm operations for the period January 1, 1997 through August 5, 1997 (which is
not part of the reported actual results for the same period). Pro forma
consolidated earnings exceed actual consolidated earnings because merger
related costs were more than offset on a pro forma basis by NorAm's earnings
for the nine month period.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
In order to reflect the changes in the Company's business resulting from
the acquisition of NorAm, the Company has elected to present selected results of
operations and operational data for each of the following business segments:
Electric Operations, Natural Gas Distribution, Interstate Pipelines, Energy
Marketing and Gathering, International and Corporate. The business and
operations of each of these segments are described below.
Purchase related adjustments, including amortization of goodwill and the
revaluation on a preliminary basis of the fair market value of certain NorAm
assets and liabilities, have been recorded at the business segment level. All
business segment data (other than data relating to Electric Operations) is
presented on a pro forma basis as if the acquisition of NorAm had occurred on
January 1, 1996 or 1997, as applicable. Although pro forma results of operations
are not necessarily indicative of the combined results of operations that
actually would have occurred had the acquisition occurred on such date, the
Company believes that the presentation of pro forma data provides a more
meaningful comparative standard for assessing changes in the Company's
consolidated results of operations.
The following table presents on (i) an actual basis and (ii) a pro forma
basis operating income for each of the Company's business segments for the three
and nine month periods ended September 30, 1997 and 1996, as if the acquisition
of NorAm had occurred as of January 1, 1997 or 1996, as applicable.
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OPERATING INCOME (LOSS)
BY BUSINESS SEGMENT
(in millions)
Actual Pro Forma
------ ---------
Three Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- -------- -------- -------
Electric Operations $ 456.6 $ 438.9 $ 456.6 $ 438.9
Natural Gas Distribution (6.2) (14.6) (21.1)
Interstate Pipelines 13.7 19.3 24.0
Energy Marketing and Gathering 5.1 0.2 6.8
International 6.4 3.3 5.6 2.5
Corporate (12.9) (1.1) (34.4) (1.0)
-------- -------- ------- ---------
Total Consolidated $ 462.7 $ 441.1 $ 432.7 $ 450.1
======== ======== ======= =========
Actual Pro Forma
------ ---------
Nine Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- -------- --------- -------
Electric Operations $ 883.4 $ 883.7 $ 883.4 $ 883.7
Natural Gas Distribution (6.2) 92.8 95.3
Interstate Pipelines 13.7 77.1 72.9
Energy Marketing and Gathering 5.1 3.8 34.8
International 14.4 (19.6) 12.5 (21.8)
Corporate (44.3) (1.1) (71.0) (25.9)
------- ------- ------- ---------
Total Consolidated $ 866.1 $ 863.0 $ 998.6 $ 1,039.0
======= ======= ======= =========
ELECTRIC OPERATIONS
The Company's domestic electric operations are conducted under the name
"Houston Lighting & Power Company," an unincorporated division of the Company
(Electric Operations). Electric Operations provides electric generation,
transmission, distribution and sales to approximately 1.6 million customers in a
5,000 square mile area on the Texas Gulf Coast, including Houston (the nation's
fourth largest city). Electric Operations constitutes the Company's largest
business unit, representing 106% and 88%, respectively, of the Company's
consolidated pro forma operating income for the three month and nine month
periods ended September 30, 1997.
The following table provides summary data regarding the results of
operations of Electric Operations for the three and nine month periods ended
September 30, 1997 and 1996. Results of operations data for Electric Operations
are presented on an actual basis.
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ACTUAL
RESULTS OF OPERATION
(in millions)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Percent Percent
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
Base Revenues $ 916.2 $ 855.0 7 $ 2 ,160.2 $ 2,150.2 --
Transmission Revenues 21.5 -- 64.4 --
Reconcilable Fuel Revenues 449.6 375.3 20 1,062.2 992.0 7
Operating Expenses:
Fuel and Purchased Power 465.6 391.3 19 1,111.6 1,041.9 7
Operation and Maintenance 245.9 206.7 19 690.4 637.6 8
Depreciation and
Amortization 151.2 130.1 16 412.2 387.9 6
Other Taxes 68.0 63.3 7 189.2 191.1 (1)
Operating Income $ 456.6 $ 438.9 4 $ 883.4 $ 883.7 --
OPERATIONS DATA
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Percent Percent
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
Electric Sales (MWH):
Residential 7,633,159 6,520,694 17 15,557,785 15,297,424 2
Commercial 4,558,281 4,288,243 6 11,826,003 11,251,882 5
Industrial 7,837,044 8,047,587 (3) 22,574,240 22,481,860 --
Average Cost of Fuel
(Cents/MMBtu) 190.9 180.9 6 184.2 184.7 --
In the third quarter of 1997, operating income for Electric Operations
increased by $17.7 million over operating income for the third quarter of 1996.
Operating income for the first nine months of 1997 decreased slightly from
operating income for the same period in 1996. The increase in operating income
for the quarter is due to warmer weather in the third quarter of 1997 over the
same period in 1996 and steady customer growth. Partially offsetting these
effects were increased operation and amortization expense, as described below.
The decrease in operating income between the nine month period ended September
30, 1997, compared to the same period last year was due to milder weather and
increased amortization expense, partially offset by customer growth and
increased usage.
ELECTRIC OPERATIONS -- REVENUES
Total operating revenues for Electric Operations increased by $157.0
million during the three month period ended September 30, 1997, and increased by
$144.6 million for the nine months ended September 30, 1997 compared to the same
periods in 1996.
Base Revenues. Base revenues include electric sales (excluding fuel),
miscellaneous revenues (excluding transmission revenue), certain
non-reconcilable fuel, and certain purchased power related revenues. Base
revenues increased $61.2 million for the third quarter of 1997 and $10.0 million
for the first nine months of 1997 (7.2% and 0.5%, respectively) compared to the
same
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periods of 1996. The third quarter increase was primarily due to warmer weather
as compared to the same period in 1996 and steady customer growth. Base revenues
between the two nine month periods were relatively constant due to the net
effect of milder weather offset by steady customer growth, as mentioned above.
Transmission Revenues. Transmission revenues include revenues collected
through a pricing and billing mechanism implemented by the Utility Commission
for wholesale transmission services. During the three and nine month periods
ended September 30, 1997, Electric Operations recorded $21.5 million in revenues
(offset by $22.1 million in expenses) and $64.4 million in revenues (offset by
$66.3 million in expenses) associated with wholesale transmission services,
respectively. For additional information, see "-- Electric
Operations--Expenses--Operation and Maintenance Expense" below and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors Affecting Future Earnings of the Company and
HL&P--Competition--Competition in Wholesale Market" in the Company's Form 10-K.
Fuel Revenues. Fuel revenues include revenues generated by a fixed fuel
factor established by the Utility Commission and included in electric rates to
permit the Company to recover certain fuel and purchased power costs. The fixed
fuel factor is established during general rate proceedings or periodic fuel
factor proceedings. The fixed fuel factor is generally effective for a minimum
of six months. Since reconcilable fuel revenues are adjusted monthly to equal
expenses, fuel revenues and expenses have no effect on earnings unless the
Utility Commission subsequently determines that a utility's fuel costs are not
recoverable.
In 1997, the Company implemented (i) a $70 million temporary fuel surcharge
(inclusive of interest) effective for the first six months of 1997 and (ii) a
$62 million temporary fuel surcharge (inclusive of interest) effective for the
last six months of 1997. In October 1997, HL&P filed with the Utility Commission
a request to implement a $102 million temporary fuel surcharge, inclusive of
interest, beginning in January 1998 and extending from 8 months to 16 months
depending on the customer class. HL&P requested the surcharge in order to
recover its under-recovery of fuel expenses for the period March 1997 through
August 1997. Fuel surcharges have no effect on earnings. At September 30, 1997,
the Company's cumulative under-recovery of fuel costs was $154 million. The
adjusted over/under recovery of fuel costs is recorded on the Company's Balance
Sheets as fuel-related credits or fuel-related debits. For information regarding
the recovery of fuel costs, see "Business of HL&P--Fuel--Recovery of Fuel Costs"
in Item 1 of the Company's Form 10-K.
ELECTRIC OPERATIONS -- EXPENSES
Fuel and Purchased Power Expense. Electric Operations' fuel expenses for
the three and nine month periods ended September 30, 1997 increased $46.8
million and $14.9 million, respectively, compared with the same periods in 1996.
The third quarter increase is the result of an increase in kilowatt-hour (KWH)
sales due to warmer weather and an increase in the per unit cost of fuel. The
increase for the nine month period ended September 30, 1997 is primarily the
result of an increase in KWH sales.
Purchased power expense for the third quarter of 1997 increased $27.5
million compared with the same period in 1996. Purchased power expenses for the
nine month period ended September 30, 1997 increased $54.8 million compared with
the same period in 1996. The overall increase in purchased power expenses was in
part due to greater energy sales and a planned refueling outage at the South
Texas Project.
Operation and Maintenance Expense. Operation expense increased 11% for the
third quarter of 1997 and remained constant for the nine months ended September
30, 1997, compared to the same period in 1996, excluding $22.1 million in the
third quarter 1997 and $66.3 million in the
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nine months ended September 1997 due to transmission tariffs within the Electric
Reliability Council of Texas. As discussed above, in the nine months ended
September 30, 1997, the Company recorded $66.3 million of expenses which is
substantially offset by $64.4 million of revenue associated with wholesale
transmission services. These additional expenses do not reflect a significant
increase in HL&P's cost of providing transmission service.
Maintenance expense remained constant for the third quarter of 1997 and
decreased $15 million (8%) for the nine months ended September 30, 1997 compared
to the same periods in 1996. The decrease is primarily due to two outages at
solid fuel plants in 1996 compared to no corresponding outages in 1997. One
outage is planned for the fourth quarter of 1997.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased in the third quarter and first nine months of 1997 when
compared to the same period in 1996 primarily because of $19 million of
additional amortization of the Company's investment in lignite reserves
associated with a canceled generation project. For additional information
regarding these expenses, see Note 3(a) to the Financial Statements included in
the Company's Form 10-K.
NATURAL GAS DISTRIBUTION
The Company's domestic natural gas distribution operations are conducted by
NorAm (through its Arkla, Entex and Minnegasco divisions) and are included in
the Company's actual consolidated results of operations from August 6, 1997, the
effective date of the Merger. These operations consist of natural gas sales to,
and natural gas transportation for, residential, commercial and a limited number
of industrial customers in six states: Arkansas, Louisiana, Minnesota,
Mississippi, Oklahoma and Texas.
The following table provides summary data regarding the pro forma financial
results of operations of the Natural Gas Distribution segment, including
operating statistics, for the three and nine month periods ended September 30,
1997 and 1996. Results of operations data are presented on a pro forma basis as
if the Merger had occurred as of January 1, 1996 and 1997, as applicable.
PRO FORMA
RESULTS OF OPERATIONS
(in millions)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ---------------------
Percent Percent
1997 1996 Change 1997 1996 Change
---------- ----------- ------ --------- -------- ------
Operating Revenues $ 272.2 $ 256.5 6.1 $1,490.0 $1,417.5 5.1
Operating Expenses 286.8 277.6 3.3 1,397.2 1,322.2 5.7
--------- --------- -------- --------
Operating Income (Loss) $ (14.6) $ (21.1) 30.8 $ 92.8 $ 95.3 (2.6)
========= ========= ======== ========
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OPERATIONS DATA
(in Bcf)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Percent Percent
1997 1996 Change 1997 1996 Change
--------- ---------- ------ ------------ ----------- ------
--------- ---------- ------------ -----------
Residential and Commercial Sales 31.7 31.3 1.3 219.7 230.5 (4.7)
Industrial Sales 14.0 13.7 2.2 42.6 41.8 1.9
Transportation 8.9 9.5 (6.3) 30.8 32.5 (5.2)
-------- --------- ------- --------
Total Throughput 54.6 54.5 0.2 293.1 304.8 (3.8)
======== ========= ======= =========
For the third quarter of 1997, Natural Gas Distribution pro forma operating
loss was $14.6 million compared with a loss of $21.1 million for the same period
in 1996. The approximately $6.5 million increase in operating income in 1997
reflects the impact of rate increases, a small increase in sales volume and
reduced operating expenses. For additional information on rate increases, see
"Management Analysis--Material Changes in the Results of Continuing
Operations--Regulatory Matters" in NorAm's Form 10-K.
For the nine months ended September 30, 1997, Natural Gas Distribution had
pro forma operating income of $92.8 million compared with $95.3 million for the
same period in 1996. The approximately $2.5 million decrease (2.6%) in pro forma
operating income was principally due to a weather-related decline in residential
and commercial sales volumes and a small increase in 1997 operating expenses.
These negative factors were partially offset by an increased 1997 average margin
per unit of sales, principally due to rate increases in certain jurisdictions.
INTERSTATE PIPELINE
The Company's interstate natural gas pipeline operations (Interstate
Pipeline) are conducted through NorAm Gas Transmission Company (NGT) and
Mississippi River Transmission Corporation (MRT), two wholly owned subsidiaries
of NorAm. The NGT system consists of approximately 6,200 miles of natural gas
transmission lines located in portions of Arkansas, Louisiana, Mississippi,
Missouri, Kansas, Oklahoma, Tennessee and Texas. The MRT system consists of
approximately 2,000 miles of pipeline serving principally the greater St. Louis
area in Missouri and Illinois. The results of operations of Interstate Pipeline
are included in the Company's actual consolidated results of operations from
August 6, 1997, the effective date of the Merger.
The following table provides summary data regarding the pro forma results
of operations of the Interstate Pipeline segment, for the three and nine month
periods ended September 30, 1997 and 1996. Results of operations data are
presented on a pro forma basis as if the Merger had occurred as of January 1,
1996, and 1997, as applicable.
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PRO FORMA
RESULTS OF OPERATIONS
(in millions)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Percent Percent
1997 1996 Change 1997 1996 Change
---------- ----------- ------ ---------- ---------- ------
Operating Revenues $ 68.9 $ 84.9 (18.9) $ 225.7 $ 266.4 (15.2)
Operating Expenses 49.6 60.9 (18.6) 148.6 193.5 (23.2)
--------- ---------- --------- ---------
Operating Income $ 19.3 $ 24.0 (19.6) $ 77.1 $ 72.9 5.7
========= ========== ========= ==========
OPERATIONS DATA
(million MMBtu)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Percent Percent
1997 1996 Change 1997 1996 Change
------- ------- ------ ---------- -------- ------
Natural Gas Sales: 4.4 7.7 (42.9) 13.8 28.0 (50.7)
Transportation: 205.3 198.4 3.5 667.2 714.2 (6.6)
Elimination (4.2) (7.3) 42.5 (12.9) (26.4) 51.1
------- -------
Total Throughput 205.5 198.8 3.4 668.1 715.8 (6.7)
======= ======= ===== =====
Interstate Pipeline pro forma operating income for the third quarter of
1997 was $19.3 million compared with $24 million for the same period in 1996.
The approximately $4.7 million decrease (19.6%) in pro forma operating income is
primarily attributable to a decline in operating margins due to (i) the
elimination of margins on sales by Interstate Pipeline to Natural Gas
Distribution and (ii) a combination of lower electric generation load and
reductions in price differentials between Gulf Coast and Mid-Continent gas
supplies. The reduction in price differentials had the effect of increasing
competitive pressures on transportation rates thereby reducing the average
transportation margin.
The increase of approximately $4.2 million (5.7%) in pro forma Interstate
Pipeline's operating income (before the charge for early retirement and
severance) for the nine months ended September 30, 1997 in comparison to the
corresponding period of 1996 was principally due to reduced 1997 operating
expenses associated with cost reduction initiatives implemented in first quarter
1996, together with the 1996 incurrence of certain consulting and other
non-recurring costs associated with these initiatives. Operating margins
declined only modestly because (i) current year transportation revenues for
Natural Gas Distribution are at higher rates due to removal in late 1996 of a
rate cap and (ii) declines in transportation volume have a less than
proportional impact on margins due to Interstate Pipeline's rate design. For
additional information, see "Management Analysis--Material Changes in the
Results of Continuing Operations--Interstate Pipeline" in NorAm's Form 10-K.
ENERGY MARKETING AND GATHERING
The Company's Energy Marketing and Gathering segment (Energy Marketing)
includes the operations of the Company's wholesale and retail energy marketing
businesses (conducted, respectively, by NorAm Energy Services, Inc. (NES) and
NorAm Energy Management, Inc.) and natural gas gathering activities (conducted
by NorAm Field Services Corp.).
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The following table provides summary data regarding the pro forma results of
operations of the Energy Marketing segment, including operating statistics, for
the three and nine month periods ended September 30, 1997 and 1996. Results of
operations data are presented on a pro forma basis as if the Merger had occurred
as of January 1, 1997 and 1996, as applicable.
PRO FORMA
RESULTS OF OPERATIONS
(in millions)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Percent Percent
1997 1996 Change 1997 1996 Change
-------- --------- ------ --------- -------- ------
Operating Revenues $ 842.0 $ 636.3 32.3 $ 2,535.3 $ 1,835.6 38.1
Operating Expenses 841.8 629.5 33.7 2,531.5 1,800.8 40.6
-------- --------- --------- ---------
Operating Income $ 0.2 $ 6.8 (97.1) $ 3.8 $ 34.8 (89.1)
======== ========= ========= =========
OPERATIONS DATA
(in Bcf)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Percent Percent
1997 1996 Change 1997 1996 Change
-------- ------- ------ --------- --------- ------
Natural Gas Sales Volume 266.8 264.3 .9 846.0 749.8 12.8
Transportation Volumes 4.9 5.0 (2.0) 17.3 19.7 (12.2)
Gathering Volumes 59.6 58.0 2.8 181.5 170.0 6.8
------- ------ -------- ---------
Total 331.3 327.3 1.2 1,044.8 939.5 11.2
======= ====== ======== =========
For the third quarter of 1997, Energy Marketing pro forma operating income
was $0.2 million compared with $6.8 million for the same period in 1996. The
approximately $6.6 million decrease was primarily due to decreased margins and
increased general and administrative costs associated with increased staffing
levels.
Energy Marketing's pro forma operating income for the nine months ended
September 30, 1997 decreased approximately $31.0 million compared with the same
period in 1996. The decrease was principally due to (i) hedging losses
associated with anticipated first-quarter 1997 sales under peaking contracts and
(ii) losses from the sale of natural gas held in storage and unhedged in the
first quarter of 1997 for a total of $17.4 million. For additional information,
see "Management Analysis--Material Changes in the Results of Continuing
Operations--Wholesale Energy Marketing" in NorAm's Form 10-K. In addition,
Energy Marketing's general and administrative expenses for 1997 increased by
approximately $8 million primarily due to increased staffing and marketing
activities. Partially offsetting these unfavorable impacts were increased
margins from natural gas gathering and products extraction activities.
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INTERNATIONAL
The Company's international business segment (International) principally
includes the results of operations of Houston Industries Energy, Inc. (HI
Energy), a wholly owned subsidiary of the Company that participates in the
development and acquisition of foreign independent power projects and the
privatization of foreign generation and distribution facilities, and the
international operations of Former NorAm.
The following table provides summary data regarding the results of
operations of International for the three and nine month periods ended September
30, 1997 and 1996. Results of operations data for International are presented on
a pro forma basis as if the Merger had occurred as of January 1, 1997 and 1996,
as applicable.
PRO FORMA
RESULTS OF OPERATIONS
(in millions)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
Percent Percent
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
Equity Earnings 11.5 6.0 92 29.5 6.4 361
Operating Income (Loss) 5.6 2.5 124 12.5 (21.8) --
Net Income (Loss) 7.2 3.9 85 13.3 (8.4) --
During the third quarter and first nine months of 1997, International's pro
forma operating income was $5.6 million and $12.5 million, respectively,
compared to $2.5 million and a loss of $21.8 million in the same periods in
1996. Operating losses for the first nine months of 1996 included pre-tax
non-recurring charges of approximately $8 million associated with an investment
in two tire-to-energy plants in Illinois. Excluding non-recurring charges,
International's losses for the first nine months of 1996 would have been $13.8
million. The increase in operating income is due primarily to increased equity
earnings from entities in which HI Energy owns an interest.
Excluding the 1996 after-tax non-recurring charges related to the
tire-to-energy plant ($5 million), the increase in net income compared to
operating income each period is due to tax benefits related to International's
corporate expenses.
As of September 30, 1997, HI Energy's consolidated debt equaled $167.5
million. Substantially all of the debt is non-recourse to the Company and
limited recourse to HI Energy.
As disclosed in the Company's Form 10-K, HI Energy had expected to complete
development in late 1997 of a 160 MW cogeneration facility in Argentina. The
estimated cost of completion of the project was $100 million. In October 1997,
certain components that comprise the generating unit for this project suffered
extensive damage during testing. Based on current information, the delay in the
commercial operation date for the project could be substantial. However, it is
not anticipated that such delay will have a material adverse financial impact on
HI Energy because payments due from the construction consortium pursuant to the
construction contract relating to this project are expected to offset the cost
of liquidated damages owed by HI Energy to the host plant and the project fuel
supplier.
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CORPORATE
Corporate. The Company's Corporate and other business segment (Corporate)
includes the operations of HI Power Generation, Inc., which is engaged in the
development and operation of domestic power generation projects (HIPG), the
Company's unregulated retail electric services business, certain real estate
investments, corporate costs, and inter-unit eliminations.
Corporate pro forma operating loss increased by $33.4 million and $45.1
million for the third quarter and nine months ended September 30, 1997,
respectively, as compared to the same two periods in 1996. The increase in
operating losses for the third quarter ended September 30, 1997 as compared to
the same period last year was primarily due to merger related expenses incurred
by NorAm which were not capitalized and development costs associated with the
Company's utility services business; consumer services business; unregulated
retail electric services business; and expenses related to the development and
operation of domestic power generation projects. The increase in operating
losses for the nine months ended September 30, 1997 as compared to the same
period in 1996 was due to the same factors that affected the third quarter
results. In addition, pre-tax operating expenses increased $19 million due to
the establishment of a charitable foundation formed to fund certain charitable
activities previously funded by the Company.
HIPG. HIPG was formed in March 1997 to pursue the acquisition of domestic
electric generation assets as well as the development of new domestic
independent power generation facilities. Since its formation, HIPG has
participated in a number of sales of utility generation plants that have been
conducted in connection with various state initiatives to restructure the
electric utility industry. HIPG expects to spend approximately $200 to $260
million in 1997 pursuant to commitments entered into with respect to bids
previously awarded to HIPG and bids previously submitted by HIPG but pending
award. The bulk of this amount relates to bids already awarded to HIPG. The
Company expects that HIPG will continue to participate in a number of future
sales of generation assets. Depending on the timing and success of HIPG's future
bidding efforts, expenditures resulting from these sales could be significant.
HIPG is also participating in the development of several independent power
generation facilities, including, among others, the El Dorado Project located in
Boulder City, Nevada (El Dorado Project). The El Dorado Project is an
approximately 450 megawatt gas-fired power plant. Upon completion of
construction and subject to the successful negotiation of various project
development agreements, it is expected that the output of the El Dorado Project
will be sold on the wholesale market. The El Dorado Project is being developed
jointly with Enova Corp., the parent company of San Diego Gas & Electric Co.
Based on current information, it is anticipated that HIPG will spend
approximately $12 million in 1997 in connection with the El Dorado Project.
The Company believes that HIPG's efforts to develop or acquire generation
assets will complement its other operations, including the trading and marketing
activities of NES. For example, it is currently anticipated that NES will supply
approximately 50% of the gas requirements of the El Dorado Project and will
purchase approximately 50% of the electric output of the project.
The Company's estimates regarding HIPG expenditures are forward-looking
statements and are based on numerous assumptions, some of which may prove to be
incorrect. HIPG's actual capital requirements could vary because of changes in
economic conditions, changes in governmental regulations and other factors.
Although it is HIPG's intent to seek project financing where possible to fund
its projects there can be no assurance given concerning the cost, amount and
availability of such funding sources.
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LIQUIDITY AND CAPITAL RESOURCES
The Company generated $947 million in cash flow from operations during the
nine month period ended September 30, 1997. Substantially all of this cash flow
was produced from $425 million of income from continuing operations and $447
million of depreciation and amortization expense. The Company used this cash
flow to reinvest in its existing businesses, to meet its dividend requirements
and to contribute to the financing of business expansion.
Overall, the Company's cash flow from operating activities in the nine
month period ended September 30, 1997 exceeded its cash flow from
non-acquisition investing activities by $781 million. With respect to
acquisition activities, the Company invested $1.4 billion of cash in the
acquisition of NorAm and $215 million of cash in non-regulated electric power
project expenditures and advances during the nine month period ended September
30, 1997.
During the nine months ended September 30, 1997, the Company's financing
activities included the issuance of $1.052 billion aggregate face amount of ACE
Securities ($1.021 billion net of issuance costs). The Company used the proceeds
of the sale of the ACE Securities for general corporate purposes, including the
retirement of an equivalent amount of then outstanding Former HI commercial
paper. For additional information regarding the ACE Securities, see Note 5(c) to
the Interim Financial Statements.
In August 1997, FinanceCo, a limited partnership subsidiary of the Company,
entered into the FinanceCo Facility, a five-year, $1.6 billion revolving credit
facility. At September 30, 1997, the FinanceCo Facility supported $1.3 billion
in commercial paper borrowings having a weighted average interest rate of 5.91%.
Proceeds from the initial issuances of commercial paper by FinanceCo were used
to fund the cash portion of the consideration paid to stockholders of Former
NorAm under the terms of the Merger. For additional information regarding the
FinanceCo Facility, see Note 5(b) to the Interim Financial Statements.
At September 30, 1997, the Company, exclusive of subsidiaries, had a
revolving credit facility of $200 million with no borrowings outstanding. In
addition, at September 30, 1997, the Company had shelf registration statements
providing for the future issuance, subject to market and other conditions, of
$230 million aggregate liquidation value of its preferred stock and $580 million
aggregate principal amount of its debt securities.
At September 30, 1997, NorAm had (i) a $400 million revolving credit
facility under which loans of $135 million were outstanding, (ii) uncommitted
lines of credit under which loans of $45 million were outstanding, (iii) a trade
receivables facility of $300 million under which receivables of $295 million
have been sold and (iv) a shelf registration statement providing for the future
issuance of debt and equity securities of up to $213.9 million.
For information regarding the Company's maturing long-term debt (including
NorAm's long-term debt), see Note 5 to the Interim Financial Statements.
The Company believes that its current level of cash and borrowing
capability along with future cash flows from operations are sufficient to meet
the needs of its existing businesses. However, to achieve its objectives, the
Company may, when necessary, supplement its available cash resources by seeking
funds in the equity or debt markets.
The Company is currently evaluating its computer and software requirements
in light of changes in the electric utility and energy services industries and
the acquisition of NorAm and resulting expansions of the Company into energy
trading activities. The Company is also evaluating
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various alternatives intended to permit its existing computer programs to
accommodate the year 2000 and beyond, currently estimated to cost approximately
$15 million. In September 1997, the Company entered into an agreement with SAP
America, Inc. (SAP) to license SAP's proprietary R/3 enterprise software. The
licensed software includes financial and accounting, human resources, materials
management and service delivery components. Based on the current timetable for
completion of the SAP implementation and integration project (Project), the
Company estimates that the third party cost of the Project will be approximately
$95 million (including software license fees, fees for consulting and other
services and hardware acquisition costs). It is currently projected that these
costs would be incurred over a three-year period. The Company is also
considering installing a customer information system offered by SAP.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
For information on developments, factors, and trends that may have an
impact on the Company's future earnings, reference is made to (i) Item 7 of the
Company's Form 10-K, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--The Merger" and"--Certain Factors Affecting
Future Earnings of the Company and HL&P," Item 2 of the Company's First Quarter
10-Q, "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Recent Developments" and (ii) Item 7 of NorAm's Form 10-K
"Management Analysis--Commitments and Contingencies."
RATE MATTERS
ELECTRIC OPERATIONS. The Utility Commission has jurisdiction (or, in some
cases, appellate jurisdiction) over the electric rates of the Company's Electric
Operations Division (also known as HL&P) and as such monitors HL&P's earnings to
ensure that HL&P is not earning in excess of its permitted rate of return.
In October, 1997, HL&P announced a proposed transition plan and price
reduction plan relating to retail access to electric services for its customers
(Transition Plan).
Subject to the approval of the Transition Plan, HL&P would agree to support
legislation providing (i) retail customer choice effective December 31, 2001;
(ii) customer safeguards and rate reductions effective January 1, 2000 and
January 1, 2001; and (iii) securitization and stranded cost determination and
recovery provisions on terms substantially similar to those contained in the
final bill on electric deregulation as considered in the 1997 Texas legislative
session.
In addition, HL&P has proposed (i) granting residential customers a base
rate reduction of 4% effective January 1, 1998, with an additional 2% base
reduction effective January 1, 1999; (ii) granting commercial and small
industrial customers a base rate reduction of 2% effective January 1, 1998; and
(iii) implementing, subject to certain force majeure events, a freeze on HL&P's
retail and wholesale base rate tariffs (excluding fuel and purchased power cost
recovery). The rate freeze and rate credits would extend through the earlier of
December 31, 1999 or the effective date of certain legislative or regulatory
action resulting in amendments to Title 2 of the Utilities Code or HL&P's rates
(Rate Freeze Period).
During the Rate Freeze Period, HL&P's overall regulated rate of return on
invested capital would not exceed 10.03%. Any return above 10.03% would be
applied to reduce potentially stranded costs. In addition, HL&P would be allowed
to redirect depreciation expense from transmission and distribution investments
to generation production investments.
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The Transition Plan would be subject to the approval of the Utility
Commission upon the plan's formal submission to the Commission. At present, the
Company cannot predict what action the Utility Commission would take once the
Transition Plan is submitted for approval or the ultimate terms that such plan
might contain.
NorAm. A substantial portion of NorAm's earnings are derived from
operations, such as Natural Gas Distribution and Interstate Pipeline, that are
subject to state and federal rate regulation. For information regarding these
and other regulations affecting NorAm and its subsidiaries, see "Management
Analysis--Material Changes in the Results of Continuing Operations--Regulatory
Matters" in NorAm's Form 10-K.
ACCOUNTING TREATMENT OF ACE SECURITIES
The Company accounts for its investment in Time Warner Convertible
Preferred Stock under the cost method. As a result of the Company's issuance of
the ACE Securities, certain increases in the market value of Time Warner common
stock (the security into which the Time Warner Convertible Preferred Stock is
convertible) could result in an accounting loss to the Company, pending the
conversion of the Company's Time Warner Convertible Preferred Stock into Time
Warner common stock.
If, prior to the conversion of the Time Warner Convertible Preferred Stock
into Time Warner common stock, the market price of Time Warner common stock
were to increase above $55.5844, the Company would record in Other Income
(Expense) an accounting loss equal to (i) the aggregate amount of such increase
as applicable to all ACE Securities multiplied by (ii) 0.8264. In accordance
with generally accepted accounting principles, this accounting loss (which
reflects the unrealized increase in the Company's indebtedness with respect to
the ACE Securities) may not be offset by accounting recognition of the increase
in the market price of the Time Warner common stock. Upon conversion of the
Time Warner Convertible Preferred Stock, the Company would begin recording
unrealized net changes in the market prices of the Time Warner common stock and
the ACE Securities as a component of common stock equity.
If as of September 30, 1997, the market price of Time Warner common stock
had been $57 11/16 (the closing market price of Time Warner common stock on
October 31, 1997), the liability for the ACE Securities would have increased by
approximately $40 million. This unrealized loss for the ACE Securities is more
than economically hedged by the approximately $330 million unrecorded unrealized
gain relating to the increase in the fair value of the Time Warner common stock
underlying the investment in Time Warner Convertible Preferred Stock on the
date of its acquisition.
NEW ACCOUNTING ISSUES
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" effective for financial statements
issued for periods beginning after December 15, 1997. SFAS No. 130 requires that
all items that meet the definition of a component of comprehensive income be
reported in a financial statement for the period in which they are recognized
and the total amount of comprehensive income be prominently displayed in that
same financial statement. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. Currently, the Company does
not have any material items which require reporting of comprehensive income.
SFAS No. 131 requires that companies report financial and descriptive
information about reportable operating segments in financial statements.
Segment information to be reported is to be based upon the way management
organizes the segments for making operating decisions and assessing
performance. The Company will adopt SFAS No. 130 and SFAS No. 131 beginning the
first quarter of 1998.
For information regarding SFAS No. 128, "Earnings Per Share," which will
be effective for the Company's 1997 fiscal year, see Note 4(b) to the Interim
Financial Statements and Note 5 in the First Quarter 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not Applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company and its
subsidiaries, including NorAm and HI Energy, reference is made to the
information set forth in the following items and notes:
With respect to the Company, Item 3 of the Company's Form 10-K and
Notes 2(b), 3, 10 and 11(c) to the financial statements in the
Company's Form 10-K, which information, as qualified and updated by the
description of developments in regulatory and litigation matters
contained in Note 8 to the financial statements in the Company's First
Quarter Form 10-Q, Note 7 to the financial statements in the Company's
Second Quarter Form 10-Q and Note 8 to the Interim Financial Statements
in this Form 10-Q, is incorporated herein by reference.
With respect to NorAm and its subsidiaries, Item 3 of NorAm's Form
10-K, "Management Analysis--Material Changes in the Results of
Continuing Operations--Regulatory Matters" in Item 7 of NorAm's Form
10-K and Note 7 to the financial statements in NorAm's Form 10-K, which
information, as qualified and updated by the description of
developments in regulatory and litigation matters contained in Notes G
and H to the financial statements in NorAm's First Quarter Form 10-Q
and Notes K and L to the financial statements in NorAm's Second Quarter
Form 10-Q, is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. (Exhibits designated by an asterisk (*) are incorporated
herein by reference to a separate filing as indicated.)
Houston Industries Incorporated:
Exhibit 11 - Computation of Earnings per Common Share and Common
Equivalent Share.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a)- Notes 1-4, 10 and 11 to the Financial Statements
included on pages 60-66 and 74-77 of the Company's
Form 10-K and Item 3 included on page 21 of the
Company's Form 10-K.
Exhibit 99(b)- Note 8 to the Financial Statements included on pages
16 and 17 of the Company's First Quarter Form 10-Q.
Exhibit 99(c)- Note 7 to the Financial Statements included on pages
15 and 16 of the Company's Second Quarter Form 10-Q.
Exhibit 99(d)- Notes 1 and 7 to the Financial Statements included on
pages 64-69 and 83-88 of NorAm's Form 10-K (File No.
1-3751), Item 3 included on page 14 of NorAm's Form
10-K and "Item 7. Management Analysis--Material
Changes in the Results of Continuing
Operations--Regulatory Matters" included on
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pages 22-24 of NorAm's Form 10-K.
Exhibit 99(e)- Notes G and H to the Financial Statements included on
pages 11 and 12 of NorAm's First Quarter Form 10-Q.
Exhibit 99(f)- Notes K and L to the Financial Statements included on
pages 12-14 of NorAm's Second Quarter Form 10-Q.
(b) Reports on Form 8-K.
Report on Form 8-K of the Company and Former HI dated August 6, 1997
relating to the acquisition of NorAm (Item 2).
-33-
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSTON INDUSTRIES INCORPORATED
(Registrant)
/s/ Mary P. Ricciardello
--------------------------------------
Mary P. Ricciardello
Vice President and Comptroller
(Principal Accounting Officer)
Date: November 14, 1997
35
INDEX TO EXHIBITS
Exhibit 11 - Computation of Earnings per Common Share and Common
Equivalent Share.
Exhibit 27 - Financial Data Schedule.
Exhibit 99(a)- Notes 1-4, 10 and 11 to the Financial Statements
included on pages 60-66 and 84-77 of the Company's
Form 10-K and Item 3 included on page 21 of the
Company's Form 10-K.
Exhibit 99(b)- Note 8 to the Financial Statements included on pages
16 and 17 of the Company's First Quarter Form 10-Q.
Exhibit 99(c)- Note 7 to the Financial Statements included on pages
15 and 16 of the Company's Second Quarter Form 10-Q.
Exhibit 99(d)- Notes 1 and 7 to the Financial Statements included on
pages 64-69 and 83-88 of NorAm's Form 10-K (File No.
1-3751), Item 3 included on page 14 of NorAm's Form
10-K and "Item 7. Management Analysis--Material
Changes in the Results of Continuing
Operations--Regulatory Matters" included on
pages 22-24 of NorAm's Form 10-K.
Exhibit 99(e)- Notes G and H to the Financial Statements included on
pages 11 and 12 of NorAm's First Quarter Form 10-Q.
Exhibit 99(f)- Notes K and L to the Financial Statements included on
pages 12-14 of NorAm's Second Quarter Form 10-Q.